When assessing contract damages, the nature of the breach may make it impossible to ascertain the financial outcome of the contract; if so, the plaintiff may recover wasted expenditure and the onus shifts to the defendant to show the expenditure would have been wasted in any event. There is no unfettered right to elect between expectation and reliance damages.
Later decisions that cite Commonwealth v Amann Aviation Pty Ltd
Decisions cited by Commonwealth v Amann Aviation Pty Ltd
THE COMMONWEALTH OF AUSTRALIA V. AMANN AVIATION PTY. LIMITED [1991] HCA 54; (1992) 174 CLR
64
F.C. 91/043
Contract
High Court of Australia
Mason C.J.(1), Brennan(2), Deane(3), Dawson(1), Toohey(4), Gaudron(5) and
McHugh(6) JJ.
CATCHWORDS
Contract - Breach - Damages - Wasted expenditure - Reliance damages - Impossibility of predicting innocent party's position if contract performed - Onus of proof - Whether innocent party may elect between recovering loss of profits and wasted expenditure - Government contract - Power of department head to require contractor to show cause why contract should not be cancelled where not carried out to his satisfaction - Power to cancel contract if cause not shown - Function of department head.
HEARING
1991, February 13, 14; December 12. 12:12:1991DECISION
MASON C.J. AND DAWSON J. Amann Aviation Pty. Limited ("Amann"), the respondent in these proceedings, brought an action in this Court's original jurisdiction for damages for breach of contract against the Commonwealth of Australia. The action, which was remitted for hearing to the Federal Court pursuant to s.44(1) of the Judiciary Act 1903 (Cth), was heard by Beaumont J. He delivered judgment in favour of Amann, assessed damages in the sum of $410,000 and ordered the Commonwealth to pay one half of Amann's costs. Amann appealed to the Full Court of the Federal Court on the grounds that Amann was entitled to a substantially higher award of damages than that awarded at first instance and that it should not have been deprived of one half of its costs. The Commonwealth cross-appealed on the grounds that judgment should have been given in its favour and, if not, that the damages awarded should have been nominal only.
2. The Full Court (Davies, Sheppard and Burchett JJ.) allowed the appeal and
varied the orders made by the trial judge by substituting
the following
orders:
(a) that the Commonwealth pay Amann the sum of $6,600,207; and
(b) that the Commonwealth pay 90 per cent of Amann's costs of the
proceedings before the trial judge.
and dismissed the cross-appeal with costs. The Commonwealth has appealed to
this Court seeking in effect that its cross-appeal to
the Full Court be
allowed.
The history of relevant events
3. For various purposes, of which the primary purpose is quarantine, the Commonwealth must maintain regular aerial surveillance of Australia's northern coastline from Karratha in Western Australia to Cairns in north Queensland. The object of the surveillance is the detection and reporting of vessels, aircraft and unauthorized landings. In recent times, the aerial surveillance has been undertaken, in accordance with government policy, by a private contractor.
4. Skywest Airlines Pty. Ltd. ("Skywest") had a contract for the provision of aerial surveillance of Australia's northern coastline which was due to expire on 31 March 1987. The Commonwealth decided that it would not renew the Skywest contract and that it would invite tenders for the provision of the service for a period of three years. After a lengthy process it decided to accept the tender submitted on behalf of Amann. The Commonwealth gave notice of acceptance of that tender on 12 March 1987. The parties contemplated, at the time of acceptance of the tender, a preparatory period of six months.
5. On receiving notice of the Commonwealth's acceptance of its tender, Amann set about the acquisition and fitting out in the United States of fourteen specially equipped aircraft which it proposed to commit to the performance of its contract. This was not an easy task as finance had to be obtained and suitable planes located, purchased and modified. The aircraft then had to be flown to Australia, checked and certified as meeting Australian requirements. Delays inevitably occurred so that Amann took longer than was expected in assembling its fleet of planes. Amann did not disclose accurately the state of its preparation.
6. In the meantime, Skywest pressed the Commonwealth to terminate the Amann contract and reinstate it (Skywest) as the contractor. On 12 September 1987, Amann commenced coastwatch flights, having received from the Commonwealth a programme of what was required for that day and for the ensuing days. But Amann did not then have all its aircraft ready to perform its contractual obligations, nor did any of its planes then comply in every respect with the specifications prescribed by the contract. It had been apparent for some considerable time before 12 September 1987 that this would be so and it appears to be common ground that the Commonwealth had already decided to give immediate notice of termination of the contract upon verifying Amann's non-compliance with the contract. Skywest had threatened that, unless the Commonwealth acted promptly to terminate its contract with Amann, it (Skywest) would dispose of its own planes, with the result that the Commonwealth would be left in a position in which it was entirely dependent on Amann for the provision of coastal surveillance. Skywest had agreed to extend its operations, first to 30 June 1987 and subsequently to 11 September 1987. Such extensions were made necessary by reason of the shortness of time between the communication by the Commonwealth of its acceptance of Amann's tender and the date on which the Skywest contract was due to expire.
7. On 12 September 1987 the Commonwealth gave notice that it regarded the contract as terminated. The notice was given in the afternoon of 12 September 1987 and it specified in some detail Amann's failure on that day to comply with its contractual obligations. At the trial and before the Full Court of the Federal Court, the primary question was whether this notice was effective or whether (as held by the trial judge and the Full Court) it amounted to a repudiation of the contract, entitling Amann to elect to terminate the contract and sue for damages. On 15 September 1987 Amann so elected. The question whether the notice was effective to terminate the contract is no longer an issue in this Court as the Commonwealth accepts that this notice of termination was not valid.
8. The only questions which now arise for decision in this Court concern the assessment of damages but, as will appear, the questions are such as to require a consideration of the terms of the contract. By way of explanation of this statement, we should point out that the Commonwealth submits that, in the assessment of damages, account must be taken of the likelihood that the Commonwealth would, in any event, have validly exercised its right to terminate the contract for breach some time after 12 September 1987.
9. The trial judge assessed damages on the basis of lost profits and arrived at an amount very substantially less than that claimed by Amann. Amann contended that it was entitled to damages on a "reliance" basis as it had incurred heavy expenditure in equipping itself to carry out its contractual obligations, this expenditure having been wasted by virtue of the Commonwealth's repudiation of the contract. By 12 September, apart from incurring pre-operational expenditure of $854,943, Amann had arranged for the acquisition and fitting out of aircraft at a cost of $5,281,521. It was common ground between the parties that the resale value of the aircraft was only $917,329, a difference of $4,364,192. This large discrepancy is to be explained both by the fact that the aircraft had been adapted to a special use for which there was a very limited demand and by the cost of transporting them to an available market.
10. Amann's prospects of making a substantial profit rested on its prospect
of securing a renewal of the contract. The cost and
value of the aircraft
were such that a period of operation significantly longer than three years was
needed in order to generate
a substantial profit. The prospect of the
contractor securing a renewal was strong because it would be fully equipped
with the cost
of its aircraft written down. It would be very difficult for a
competitor to match this advantage.
The trial
11. It is convenient to restate the summary of conclusions which is set out
in the judgment of Beaumont J. His Honour summarized
his conclusions in this
way:
"(1) The contract obliged (Amann) to provide at least 11Two further conclusions, not included in the summary, should be mentioned. First, his Honour considered that cl.2.24, on its true construction, did not require the Secretary to act fairly between the parties and that the Secretary was at liberty to exercise the power to cancel the contract in the best interests of the Commonwealth. Secondly, his Honour considered that Amann's breaches of contract as at 12 September 1987 did not go to the root of the contract and did not deprive the Commonwealth of substantially the whole benefit of the contract.
suitable fully equipped aircraft on 12 September.
(2) On 12 September, (Amann) provided only seven aircraft.
They were not fully equipped and, in particular, the
majority of those aircraft then lacked the endurance
required by the contract.
(3) (Amann) then (i.e. on 12 September) proposed to
increase its fleet of aircraft and to carry out a
number of structural modifications to its aircraft.
In particular, (Amann) proposed to install long
range fuel tanks in its turboprop aircraft. It is
probable that (Amann) could have carried out all
the structural modifications within approximately
two months of 12 September and, in the meantime,
provide a limited coastwatch service using its
other aircraft.
(4) On 12 September, the Commonwealth attempted to
terminate the contract on common law grounds. However,
by cl.2.24 of the contract, there was laid down a
procedure for the cancellation of the contract. The
procedure under cl.2.24 required the Commonwealth,
in case of a breach of the contract, to give (Amann)
a notice requiring it to show cause why the contract
should not be cancelled. It was then a matter for the
Commonwealth to decide whether it would, or would not,
cancel. However, cl.2.24 laid down an exclusive code
in the field of termination so that the Commonwealth
no longer had any power to terminate on common law
grounds. The Commonwealth could only proceed, if at
all, under the show cause provision.
(5) Thus, the attempt by the Commonwealth to terminate
on 12 September on common law grounds was unlawful
and constituted a repudiation of the contract by the
Commonwealth.
(6) If the contract had subsisted for its full term of
three years, (Amann) would have earned a profit of
$820,000.00.
(7) However, in assessing the measure of (Amann's) loss,
it is appropriate to take into account the chance
that, in any event, it was open to the Commonwealth
to proceed under cl.2.24. In my opinion, there was
a 50 per cent chance that the Commonwealth would do
this. The consequence is that (Amann's) claim must
be reduced by one-half.
(8) I assess (Amman's) damages for breach of contract as
$410,000.00."
12. His Honour's assessment of damages in the sum of $410,000 was arrived at by finding that Amann's net profit under the contract would have been $819,099 which, rounded off, resulted in a figure of $820,000. His Honour then found Amann's claim must be reduced by one half to allow for the contingency of cancellation under cl.2.24, resulting in a net figure of $410,000.
13. The figure of $819,099 was arrived at as follows:
"Income $17,107,462
Expenditure -
Pre-operational
expenditure 854,943
Salaries, wages and
associated costs 4,000,000
Maintenance 4,000,000
Facility expenses 400,000
Motor vehicles,
licences, travel,
miscellaneous items,
legal and accounting
fees 408,000
Insurance 410,000
Fuel 2,825,420
Interest or hiring fee 3,390,000 $16,288,363
NET PROFIT: $819,099"
14. Beaumont J. did not accept that Amann was entitled to "reliance" damages. Nor did his Honour accept that Amann was entitled to be compensated on the footing that it was probable that it would have secured a renewal of the contract when it expired. Further, it will be seen that, in calculating profits, his Honour allowed for interest or hiring charges of $3,390,000. This item arose out of the arrangements made for the acquisition of the aircraft. Title to the aircraft was vested in an associated company, CVC Investments Pty. Limited ("CVC").
15. The arrangement between Amann and CVC was not spelled out in detail. The
substance of it appears in a minute of a meeting of
directors of CVC on 12
April 1987 which was as follows:
"CVC INVESTMENTS It was agreed that CVC InvestmentsThe minute accords with evidence given by Mr Amann to the effect that CVC would hold title only until such time as Amann had made arrangements for bank or other lease finance. It was contemplated that this would occur when the contract was in operation. Beaumont J. held:
TRUST & AMANN Pty Limited would act as Trustee
AVIATION PTY LIMITED: of moneys provided by Wenola Pty
Limited and, if necessary, from
Southsea Investments Pty Limited
which companies were providing the
loan funds to enable the purchase
of aircraft in the name of CVC
Investments Pty Limited. These
aircraft would be hired to Amann
Aviation so that an interest rate
of 20% was derived by the Trust
as bridging finance until the
Commonwealth Bank took over the
debt on the safe arrival of the
aircraft in Australia and the
finance contract with the
Commonwealth being available."
"From the minute of the meeting held on 12 April ..., it
appears that there was an understanding between (Amann)
and CVC that (Amann) would take over the aircraft from
CVC once the Commonwealth Bank finance had been arranged.
From the note at the foot of (Amann's) balance sheet as
at 19 September ..., it seems that (Amann) had also agreed
to indemnify CVC against any loss in connection with the
coastwatch contract."
16. Beaumont J. was of the view that, notwithstanding the close relationship
between CVC and Amann and the indemnity agreement between
those two companies,
they were nevertheless separate corporate identities and should be treated as
such for the purposes of assessing
damages. In practical terms, as has been
seen, this meant that Beaumont J. did not treat the acquisition of the
aircraft and the
associated costs of fitting those aircraft as pre-operational
expenditure incurred by Amann.
The appeal to the Full Court
17. As we have already mentioned, the Full Court upheld the trial judge's finding that the notice of 12 September 1987 was ineffective to terminate the contract and that it constituted a repudiation by the Commonwealth entitling Amann to terminate the contract and sue for damages. The Full Court, unlike the trial judge, concluded that Amann was entitled to have its damages assessed on the basis of its expenditure rendered futile by the Commonwealth's repudiation; in other words, to be compensated for the expenses it had incurred in reliance on the contract and in equipping itself for the contract. Their Honours acknowledged that such a loss could not be claimed where, even if the breach of contract had not occurred, the returns from the contract would not have been sufficient to recoup the expenditure. However, the Full Court was of the view that the onus of establishing such insufficiency was on the defaulting party. And, in the view of Davies and Burchett JJ., the value of the prospect of future extensions of the contract must be taken into account in assessing whether the returns from the contract would have been sufficient to recover expenditure, as they were within the contemplation of the parties. In the event, this factor rendered the task of the Commonwealth in discharging the onus which confronted it insuperable.
18. The Full Court concluded that, if the Commonwealth had not given notice of termination on 12 September 1987, it was possible, but not probable, that the Secretary of the Department of Transport would terminate the contract under cl.2.24. Davies J., though agreeing that the clause made exclusive provision governing the termination of the contract, rejected, like Sheppard J., the interpretation of the clause favoured by the trial judge, namely, that the Secretary was entitled to act in the best interests of the Commonwealth and that there was no duty of fairness to the contractor. According to Davies J., "(a)s the Secretary was not a party to the contract, he was bound to act without actual bias and not capriciously and only after giving due attention to the interests of both parties." Burchett J. expressed no opinion upon this point. However, he and Davies J. concluded that the trial judge's estimate that there was a 50 per cent chance of termination of the contract under the clause was excessive. Their Honours, taking into account the fact that the Commonwealth was anxious to terminate the contract, considered that there was a 20 per cent chance of such termination. Their Honours did not, however, allow any discount for that 20 per cent possibility. In this respect, their Honours departed from the approach adopted by the trial judge who allowed a discount of the amount of damages payable commensurate with what he estimated to be the 50 per cent chance of early termination. In taking this approach, Beaumont J. followed what he conceived to have been decided by the English Court of Appeal in The Mihalis Angelos (1971) 1 QB 164. Davies J. treated that decision as underlining the preference of the common law for reasonable certainty rather than speculation in the assessment of damages and as providing no support for discounting a proved loss by reference to an event which was unlikely to occur.
19. Their Honours concluded that the trial judge was correct in finding that an indemnity was given by Amann to CVC in respect of the cost of the aircraft acquired by it. Unlike Beaumont J., however, all members of the Full Court expressed the view that Amann's liability to indemnify CVC was a liability that had been incurred and which should therefore be taken into account in the assessment of Amann's damages. It was a liability that was incurred in reliance on the Commonwealth's promise of performance of the contract. Davies and Burchett JJ. held that it was proper to take into account, in the assessment of damages, the difference between the sum paid for the aircraft ($5,281,521) and their agreed value ($917,329), that is $4,364,192. To this they added the pre-operational expenditure of $854,943, the termination payments to employees of $143,049 and the security deposit of $113,000. The total was $5,475,184, on which interest was allowed under s.51A of the Federal Court of Australia Act 1976 (Cth), resulting in judgment for $6,600,207.
20. Sheppard J. considered that, even if the common law applied concurrently with cl.2.24, Amann's breaches were not such as to go to the root of the contract. With respect to the measure of damages, his Honour was of the view that Amann was entitled to recoup the expenditure which it incurred in consequence of its entry into the contract and its reliance upon the Commonwealth's performance of the contract. Accordingly, he also concluded that Amann should recover its pre-operational expenditure, the cost of acquisition of the aircraft less their value at the termination of the contract, the amount of termination payments to employees and the security deposit.
21. However, his Honour held that it was necessary to make allowance for the
possibility that the Secretary might terminate the
contract under cl.2.24, the
possibility that the contract might not be renewed and the contingency that
Amann might be required in
a later contract to refit, modify or replace
existing aircraft or equipment. Further, his Honour considered that a
discount should
be made for the early receipt of compensation in lieu of
receipts extending over nine or ten years. In the result, Sheppard J.
concluded
that Amann should be awarded one half of the four components of the
award, namely, $2,737,592, together with interest under s.51A.
The case for the appellant
22. The Commonwealth argues that Amann was not entitled to an award of
damages calculated on a reliance basis. The award of damages
for breach of
contract on that basis is only justified, so the argument runs, where the
nature of the breach, having regard to the
subject-matter of the contract, is
such as to render proof of the loss caused by the breach impossible. Absent
such impossibility,
damages should be calculated on the ordinary basis of loss
of profits. The Commonwealth then submits that, in any event, an award
for
reliance damages should not be made where it is established, as here, that the
plaintiff would have made a loss on the contract.
In this respect, the
Commonwealth contends that it was wrong to include in the assessment of
damages an estimate of what Amann would
have earned if it had obtained a
renewal or extension of the contract. There was no commitment by the
Commonwealth to renew or extend
and, accordingly, Amann was not entitled to
compensation on that footing. Furthermore, according to the Commonwealth's
argument,
to assess damages by reference to the prospect of renewal is
inconsistent with the rule, said to be established in The Mihalis Angelos,
that damages should be assessed on the footing that the defaulting party will
not act so as to increase its liability.
The award of damages for breach of contract
23. The general rule at common law, as stated by Parke B. in Robinson v.
Harman [1848] EngR 135; (1848) 1 Ex 850, at p 855 [1848] EngR 135; (154 ER 363, at p 365),
is:
"that where a party sustains a loss by reason of a breachThis statement of principle has been accepted and applied in Australia: see Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, per Gibbs J. at p 471.
of contract, he is, so far as money can do it, to be placed
in the same situation, with respect to damages, as if the
contract had been performed".
24. The award of damages for breach of contract protects a plaintiff's expectation of receiving the defendant's performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as "expectation damages". The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff's expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation.
25. In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profits. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit.
26. The expression "damages for loss of profits" should not be understood as carrying with it the implication that no damages are recoverable either in the case of a contract in which no net profit would have been generated or in the case of a contract in which the amount of profit cannot be demonstrated. It would be an invitation to the repudiation of contractual obligations if the law were to deny to an innocent plaintiff the right to recoupment by an award of damages of expenditure justifiably incurred for the purpose of discharging contractual obligations simply on the ground that the contract breached would not have been or could not be shown to have been profitable. If the performance of a contract would have resulted in a plaintiff, while not making a profit, nevertheless recovering costs incurred in the course of performing contractual obligations, then that plaintiff is entitled to recover damages in an amount equal to those costs in accordance with Robinson v. Harman, as those costs would have been recovered had the contract been fully performed. Similarly, where it is not possible for a plaintiff to demonstrate whether or to what extent the performance of a contract would have resulted in a profit for the plaintiff, it will be open to a plaintiff to seek to recoup expenses incurred, damages in such a case being described as reliance damages or damages for wasted expenditure.
27. A further example of the application of Robinson v. Harman which will result in a plaintiff being entitled to claim damages for wasted expenditure is in a contract for services such as that between a solicitor and a client. Where a solicitor has breached his or her contractual duty of care, the measure of damages to which a client will be entitled will be such an amount as would put the client in the position he or she would have been in had the contract of retainer been performed without negligence. In cases where, had non-negligent advice been given, the client would not have entered into a subsequent transaction, for example a purchase of real property, then, in conformity with Robinson v. Harman, the client will be entitled to recover as damages expenditure wasted on account of the negligent advice, less anything subsequently recovered and given reasonable acts of mitigation: Hayes v. Dodd [1988] EWCA Civ 8; (1990) 2 All ER 815, per Staughton LJ. at p 820. The amount of wasted expenditure will be the appropriate measure of damages in such a situation because, it having been established that the client would not have entered into the subsequent contract if proper advice had been given, it is not sensible to speak of loss of profits. Hayes v. Dodd is a useful illustration of the statement that the expressions "expectation damages", "damages for loss of profits", "reliance damages" and "damages for wasted expenditure" are simply manifestations of the central principle enunciated in Robinson v. Harman rather than discrete and truly alternative measures of damages which a party not in breach may elect to claim.
28. The corollary of the principle in Robinson v. Harman is that a plaintiff
is not entitled, by the award of damages upon breach,
to be placed in a
superior position to that which he or she would have been in had the contract
been performed. In L. Albert and
Son v. Armstrong Rubber Co. (1949) 178 F 2d
182, Learned Hand C.J. said (at p 189):
"(O)n those occasions in which the performance wouldLearned Hand C.J. went on (at p 191) to approve the statement made by Fuller and Perdue in their celebrated article, "The Reliance Interest in Contract Damages", (1936) 46 Yale Law Journal 52, at p 79:
not have covered the promisee's outlay, such a result
imposes the risk of the promisee's contract upon the
promisor. We cannot agree that the promisor's default
in performance should under this guise make him an insurer
of the promisee's venture".
"We will not in a suit for reimbursement for losses incurred
in reliance on a contract knowingly put the plaintiff in a
better position than he would have occupied had the contract
been fully performed."
29. In similar vein, the Restatement of the Law: Contracts, 2nd ed. (1981),
section 349 states:
"As an alternative to the measure of damages stated inAccording to the comment, the plaintiff may choose to sue for damages based on his reliance interest
section 347 (expectation damages), the injured party has a right
to damages based on his reliance interest, including
expenditures made in preparation for performance or in
performance, less any loss that the party in breach can
prove with reasonable certainty the injured party would
have suffered had the contract been performed."
"if he cannot prove his profit with reasonable certainty.To the same effect is Corbin on Contracts, vol.5, (1964), section 1031. Corbin says:
He may also choose to do this in the case of a losing
contract, one under which he would have had a loss rather
than a profit."
"The fact that profits are too uncertain for recovery does
not prevent a judgment in favor of the plaintiff for the
amount of his expenditures."
30. The United States references in the decided cases and in the texts to the availability of reliance damages where loss of profits cannot be proved with reasonable certainty must be treated with some reserve. As early as 1858 it was decided that damages for breach of contract must "be shown, by clear and satisfactory evidence, to have been actually sustained" and to "be shown with certainty, and not left to speculation or conjecture": Griffin v. Colver (1858) 16 NY 489, at p 491. The burden thus imposed upon the party not in breach was more onerous than the balance of probabilities test traditionally applied in Australia and England.
31. The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can: Fink v. Fink [1946] HCA 54; (1946) 74 CLR 127, at p 143; McRae v. Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377, at pp 411-412; Chaplin v. Hicks (1911) 2 KB 786, at p 792. Indeed, in Jones v. Schiffmann [1971] HCA 52; (1971) 124 CLR 303, Menzies J. went so far as to say that the "assessment of damages ... does sometimes, of necessity involve what is guess work rather than estimation": at p 308. Where precise evidence is not available the court must do the best it can: Biggin and Co. Ltd. v. Permanite Ltd. (1951) 1 KB 422, per Devlin J. at p 438. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages: see McGregor on Damages, 15th ed. (1988), pars 357-359.
32. In the United States, in recent years, there has been a relaxation of the requirement of certainty so that "reasonable certainty" rather than "certainty" is insisted upon: Farnsworth on Contracts, (1990), section 12.15; Restatement of the Law: Contracts, section 352. Again, it is said that courts are less demanding if it appears that, as in claims for loss of goodwill, proof with precision is impossible: Farnsworth on Contracts, section 12.15, p 254. It follows nonetheless that in the United States the requirement of "reasonable certainty" may compel a plaintiff to confine a claim for compensation to wasted expenditure in circumstances where it would still be possible for a plaintiff to succeed in maintaining a claim for loss of profits on the balance of probabilities.
33. The approach to the assessment of damages in Canada is to similar effect,
though the "reasonable certainty" requirement may
not be an element in the
Canadian approach. See, generally, Sunshine Vacation Villas Ltd. v. The Bay
(1984) 13 DLR (4th) 93; Bowlay
Logging Ltd. v. Domtar Ltd. (1978) 87 DLR (3d)
325; affd (1982) 135 DLR (3d) 179. In Bowlay Logging Ltd., at first instance,
Berger
J. rejected the submission that the plaintiff's reliance damages should
not include any losses that would have been incurred if the
contract had been
fully performed. Berger J. endorsed (at p 335) the statement in Corbin on
Contracts, at pp 205-206:
"If, on the other hand, it is proved that fullThus, if a plaintiff's expenditure would not have been fully recouped had the contract been performed, then full compensation for the wasted expenditure would not be awarded. A plaintiff is only entitled to damages for an amount equivalent to that which would have been earned had the contract been fully performed. In this way, the award of damages assessed by reference to a plaintiff's expenditure is in complete conformity with the principle that an award of damages for breach of contract should place a plaintiff in the same position as if the contract had been performed.
performance would have resulted in a net loss to the
plaintiff, the recoverable damages should not include the
amount of this loss. If the amount of his expenditure at
the date of breach is less than the expected net loss, he
should be given judgment for nominal damages only. If the
expenditures exceed this loss, he should be given judgment
for the excess."
34. In Anglia Television Ltd. v. Reed (1972) 1 QB 60 Lord Denning M.R.
considered that a plaintiff could claim expenditure thrown
away when he has
not suffered any loss of profits or if he cannot prove what his profits would
have been. His Lordship observed
(at pp 63-64):
"It seems to me that a plaintiff in such a case as this hasSubsequently, in CCC Films Ltd. v. Impact Quadrant Films Ltd. (1985) QB 16, Hutchison J. said that "a plaintiff may always frame his claim in the alternative way if he chooses": at p 32. See also Sunshine Vacation Villas Ltd., at pp 99-100.
an election: he can either claim for loss of profits; or
for his wasted expenditure. But he must elect between them.
He cannot claim both. If he has not suffered any loss of
profits - or if he cannot prove what his profits would have
been - he can claim in the alternative the expenditure which
has been thrown away, that is, wasted, by reason of the
breach. That is shown by Cullinane v. British 'Rema'
Manufacturing Co. Ltd. (1954) 1 QB 292, 303, 308."
35. We do not regard the language of election or the notion that alternative ways are open to a plaintiff in which to frame a claim for relief as appropriate in a discussion of the measure of damages for breach of contract. In truth, as has been seen, damages for loss of profits and damages for expenditure reasonably incurred are simply two manifestations of the general principle enunciated in Robinson v. Harman. So much at least emerges from the judgment of this Court in TC Industrial Plant Pty. Ltd. v. Robert's Queensland Pty. Ltd. [1963] HCA 57; (1963) 37 ALJR 289, per Kitto, Windeyer and Owen JJ. at pp 292-294. There the Court did not accede to the submission that the plaintiff was bound to elect whether it would pursue its claim for expenditure uselessly incurred as a result of the defendants' breaches of contract or, in the alternative, its claim to recover for the loss of profits it would have earned had the crusher been fit for the purpose.
36. Naturally, the categories of case in which a plaintiff is likely to make a claim for the recovery of expenditure incurred are those in which the plaintiff has not suffered a loss of profits and those in which it is impossible to assess what would have been the outcome had the contract been performed or those in which that outcome is otherwise uncertain. So much is acknowledged by Lord Denning in the passage from Anglia Television already cited. The manner in which a plaintiff frames his or her claim for damages will be dictated not so much by a choice of alternatives giving rise to an election but simply according to whether the contract, if fully performed, would have been and could be shown to have been profitable (even if the actual amount of profit is not readily ascertainable). If this can be demonstrated, a plaintiff's expectation of a profit, objectively made out, will be protected by the award of damages. Otherwise, subject to it being demonstrated that a plaintiff would not even have recovered any or all of his or her reasonable expenses, a plaintiff's objectively determined expectation of recoupment of expenses incurred will be protected by the award of damages.
37. An award of damages for expenditure reasonably incurred under a contract in which no net profit would have been realized, while placing the plaintiff in the position he or she would have been in had the contract been fully performed, also restores the plaintiff to the position he or she would have been in had the contract not been entered into. In this particular situation it will be noted that there is a coincidence, but no more than a coincidence, between the measure of damages recoverable both in contract and in tort.
38. It should be observed that, in a case where it is not possible to predict
what position a plaintiff would have been in had the
contract been fully
performed, as was the case in both McRae and Anglia Television, it is not
possible as a matter of strict logic
to assess damages in accordance with the
principle in Robinson v. Harman. But the law considers the just result in such
a case is
to allow a plaintiff to recover such expenditure as is reasonably
incurred in reliance on the defendant's promise. In this case,
the law
assumes that a plaintiff would at least have recovered his or her expenditure
had the contract been fully performed. It
will still be open to a defendant,
however, to argue that, notwithstanding the fact that it is impossible to
assess what profits,
if any, the plaintiff would have made had the contract
been fully performed, the expenditure claimed by a plaintiff would
nevertheless
not have been recovered even if, to use the examples of McRae and
Anglia Television, the tanker had existed or the defendant actor,
Oliver Reed,
had participated in the production of the film. In essence, such an argument
is to the effect that, far from being
impossible to predict what the result of
the contract would have been, if fully performed, it is possible to
demonstrate that performance
of the contract would not even have resulted in
the recovery by the plaintiff of reasonable expenses incurred.
Onus of proof
39. Why the law appears to assume that a plaintiff would at least have recovered reasonable expenses incurred in the case both of contracts not resulting in a net profit and of contracts in which a plaintiff maintains that it is not possible to determine what position the plaintiff would have been in had the contract been fully performed, and why the law puts the burden of displacing this assumption on a defendant are questions to which we now turn.
40. In other jurisdictions there is strong authority to the effect that,
where a plaintiff claims damages for expenditure reasonably
incurred, it is
prima facie sufficient for that plaintiff to prove his or her expenditure and
that it was reasonably incurred. The
onus then shifts to the party in breach
of contract to establish that such expenditure would not have been recouped
even if the contract
had been fully performed. If this onus is not
discharged, a plaintiff's entitlement to reliance damages remains intact. In
L. Albert
and Son v. Armstrong Rubber Co., Learned Hand C.J., after noting
that the basis for the award of damages was not predicated on the
notion that
a defaulting promisor was an insurer for a promisee's venture, went on to
observe (at p 189):
"(I)t does not follow that the breach should not throw uponSee also Restatement of the Law: Contracts, section 349, where it is stated that, where a plaintiff seeks reliance damages, "it is open to the party in breach to prove the amount of the loss, to the extent that he can do so with reasonable certainty ... and have it subtracted from the injured party's damages".
(the defaulting party) the duty of showing that the value
of the performance would in fact have been less than the
promisee's outlay. It is often very hard to learn what the
value of the performance would have been; and it is a common
expedient, and a just one, in such situations to put the
peril of the answer upon that party who by his wrong has
made the issue relevant to the rights of the other. On
principle therefore the proper solution would seem to be
that the promisee may recover his outlay in preparation for
the performance, subject to the privilege of the promisor to
reduce it by as much as he can show that the promisee would
have lost, if the contract had been performed."
41. In Bowlay Logging Ltd., Berger J. expressed his agreement with the American approach: at pp 334-335. His Honour held that the onus rested on the defendant to establish that, even if the contract had been fully performed, the plaintiff would not have even recovered his reasonable expenditure. In C.C.C. Films Ltd., Hutchison J. adopted the reasoning of Learned Hand C.J. in L. Albert and Son v. Armstrong Rubber Co. in holding (at pp 39-40) that the onus lies on a defendant to establish that a plaintiff is not entitled to reliance damages because the expenditure incurred would not have been recouped, even if the contract had been fully performed. Hutchison J. described the fact that the onus in this regard should fall on a defendant as "eminently fair".
42. The placing of the onus of proof on a defendant in the manner described amounts to the erection of a presumption that a party would not enter into a contract in which its costs were not recoverable. Cases such as Bowlay Logging Ltd. illustrate that such a presumption is not irrebuttable but, until that presumption is rebutted, a plaintiff may rely on it to recover his or her reasonable expenses both in the case of a contract which would not have been profitable and in the case of a contract where the outcome of the contract, if it had been fully performed, cannot be demonstrated, whether at all or with any certainty. This last type of contract, of which McRae and Anglia Television have been cited as examples, is to be distinguished from a purely aleatory contract where, almost by definition, it would not be appropriate to apply the presumption we have described for the reason that inherent in the entry into such a contract is the contingency that not even the slightest expenditure will be recovered, let alone the securing of any net profit. In the case of aleatory contracts, damages are awarded for loss of a chance and the burden of establishing the existence and loss of this chance as a result of the defendant's breach lies on a plaintiff although, as has already been observed, mere difficulty of estimation does not relieve a court or jury, in appropriate cases, of the task and responsibility of placing a value on the chance lost. The case of Aldwell v. Bundey (1876) 10 SALR 118 in which reliance damages were recovered for breach of a purely aleatory contract must be explained on the basis that that case predated Chaplin v. Hicks and, although it was recognized that what the plaintiffs lost was the chance of winning a boat race, the case proceeded on the assumption that it was not possible to assess damages for loss of such a chance: at p 132.
43. In the context of the discussion of onus of proof and the presumption relating to recovery of reasonable expenditure incurred which we have described, it is necessary to consider the decision of this Court in McRae. There, the plaintiffs recovered as damages the amount of the agreed purchase price together with the expenditure wasted in reliance on the promise that there was an oil tanker at the locality given, there being no oil tanker anywhere in that locality. The expenditure wasted was incurred by the plaintiffs in taking steps to see whether there was a tanker in the locality given and, if so, whether any and what things should be done to turn her to account. Dixon and Fullagar JJ. (with whose conclusions McTiernan J. agreed) considered that the steps taken by the plaintiffs were not unreasonable and that they were such as the defendant would naturally expect them to take. Their Honours concluded (at p 413) that the case fell within the second rule in Hadley v. Baxendale [1854] EngR 296; (1854) 9 Ex 341 (156 ER 145). The plaintiffs were therefore entitled to recover damages "measured by reference to expenditure incurred and wasted in reliance on the Commission's promise that a tanker existed at the place specified": at p 415.
44. Their Honours pointed out (at p 414) that the plaintiffs had a prima facie case for recovery of wasted expenditure because (1) the expense was incurred; (2) it was incurred in reliance on the promise that there was a tanker; and (3) the fact that there was no tanker meant that the expense was wasted. This threw the burden on the defendant "of establishing that, if there had been a tanker, the expense incurred would equally have been wasted". But it was impossible to assess damages on the basis of a comparison between what was promised and what was delivered, "not because what was promised was valueless but because it is impossible to value a non-existent thing": at p 414.
45. Accordingly, McRae illustrates the proposition that a plaintiff has a prima facie case for recovery of wasted expenditure once it is established that the expense was incurred in reliance on the promise of the party in breach, there being a failure of performance by that party. By reason of its facts, the reasoning in McRae does not depend upon the presumption that an innocent party would not have entered into the contract unless it would at least have recovered its reliance expenditure under the contract had it been performed. But the reasoning is not inconsistent with the application, in appropriate cases, of that presumption which, in our view, has much to commend it. Indeed, it is just and fair that the repudiating party should bear the onus of showing that the party not in breach would have made a loss on the contract.
46. The present case differs from McRae in that it was not impossible, as a matter of theory, for Amann to establish what its profits (if any) would have been had the Commonwealth not repudiated the contract. Indeed, the trial judge's assessment of damages proceeded on that footing although, significantly, he did not take into account the value to Amann of the prospects of renewal of the contract. But the difficulties attending that undertaking were legion, as appears from the judgments in the Full Court. Not the least of those difficulties were the problems of assessing what were the prospects of early termination of the contract by the Commonwealth had the contract proceeded and, more importantly, the prospects of Amann securing a renewal of the contract. Add to those uncertainties the fact that, on any view, the most substantial part of Amann's damages flowing from the Commonwealth's breach of the original contract was represented by the wasted expenditure.
47. In this respect it is significant that the contract was of such a kind
that the parties clearly contemplated that the contractor
would be in an
advantageous and preferred position to secure a renewal of the contract had it
run its expected course. In that event
Amann would, subject to any variations
in the Commonwealth's requirements, have had the necessary equipment (written
down in value),
facilities and personnel in place at the relevant time. The
prospect of renewal was an important commercial benefit which would
then have
accrued to the contractor. Amann was looking to that commercial benefit as
well as revenue receipts arising under the
original contract as the reward
which it would obtain under that contract. In other words, it was a contract
which enabled the contractor
to recoup part, if not all, of its expenditure
during the currency of the original contract and placed the contractor in a
favourable
position to secure a renewal of the contract and earn substantial
profits under any renewed contract. On this score alone it was
a case in
which, it being natural and appropriate for Amann to sue to recover its wasted
expenditure by way of reliance damages,
the onus rested on the Commonwealth of
establishing that the reliance expenditure would have been wasted even if the
contract had
been performed.
The prospect of renewal of the contract and discharge of the onus
48. In seeking to discharge this onus, the Commonwealth submits that it is irrelevant, when considering the position Amann would have been in had the contract been fully performed, to have regard to the value of Amann's prospects of renewal of the contract. This is because, so the argument runs, the Commonwealth was under no legal obligation to renew the contract. According to the argument, a defendant is not liable for that which he or she has not promised to do; a plaintiff is not entitled to recover compensation for the non-realization of his or her expectation that the defendant would provide him or her with a benefit when the defendant has not assumed a legal obligation to do so. A variation of this argument is that to take into account loss arising from deprivation of the prospects of renewal is to take into account a loss arising from non-performance of an act which the Commonwealth was under no legal obligation to perform. Damages for the loss of a chance or an opportunity to secure a benefit may be awarded but, argues the Commonwealth, only in those cases in which there is a legal obligation to provide a chance or an opportunity of obtaining that benefit. Chaplin v. Hicks is the classic illustration of just such a case.
49. Amann relies upon Richardson v. Mellish [1824] EngR 715; (1824) 2 Bing 229 (130 ER 294) in support of the contrary argument that damages for breach of contract may be assessed so as to include the prospect that the contract will be renewed even though the defendant is under no legal obligation to renew the contract. In Richardson v. Mellish the plaintiff recovered damages on the footing that he would be employed as master of the "Minerva" for two remaining voyages. In fact, the defendant had promised the plaintiff to appoint him for the two voyages subject to certain contingencies. Those contingencies included the East India Company approving the master of the ship for each individual voyage. It was argued that the Company might withhold its approval of the plaintiff's appointment for the second voyage as approval for that voyage had not yet been given and that, therefore, the damages in respect of the second voyage should not have been awarded. However, it was established that the Company's approval of a renewal of an appointment of a master for a second voyage was "almost to a certainty". Accordingly, the case was one in which the value to the plaintiff of the defendant's promise depended in part upon the occurrence of an event extraneous to the contract, the approval of the Company, and the probability of its occurrence was relevant to the assessment of the value of the promise. The award of damages to the plaintiff for the loss of two voyages was upheld.
50. Richardson v. Mellish does not support Amann's submission, however, because in that case there was a promise by the defendant to appoint the plaintiff for two voyages. So understood, the case is consistent with the firmly established rule that, in an action for breach of contract, a defendant is not liable in damages for not doing that which he or she has not promised to do: Abrahams v. Herbert Reiach Ltd. (1922) 1 KB 477, per Scrutton LJ. at p 482; Lavarack v. Woods of Colchester Ltd. (1967) 1 QB 278. In Lavarack, the English Court of Appeal (Diplock and Russell LJJ.; Lord Denning M.R. dissenting) rejected the submission that damages for wrongful dismissal could include extra benefits which the contract did not oblige the employer to confer upon the plaintiff but which he might reasonably expect the employer to have conferred upon him otherwise than in performance of the contract.
51. However, the rule that the defendant is not liable in damages for not doing that which he or she has not promised to do is necessarily subject to the rule in Hadley v. Baxendale. According to Alderson B.'s renowned formulation, the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach: at p 354 (p 151 of ER). It is now accepted that this is the statement of a single principle and that its application may depend on the degree of relevant knowledge possessed by the defendant in the particular case: C. Czarnikow Ltd. v. Koufos [1967] UKHL 4; (1969) 1 AC 350, per Lord Reid at p 385; Lord Upjohn at p 421; The "Pegase" (1981) 1 Lloyd's Rep 175, per Robert Goff J. at p 182.
52. However, in the present case, the application of the rule in Hadley v. Baxendale turns not on the degree of knowledge possessed by the defendant but on what may reasonably be supposed to have been in the contemplation of the parties as the probable result of the breach. If it be right to suppose that the loss of the prospect of securing a renewal of the contract was within the contemplation of the parties as a probable result of the breach, then, notwithstanding the principle established by Abrahams and Lavarack, Amann is entitled to compensation which takes into account the value of the loss of the prospect of securing a renewal of the contract.
53. What was in the contemplation of the parties depends upon a consideration of the terms of the contract in the light of the matrix of circumstances in which it was made. As we have seen, performance of the contract by Amann would have placed it in an advantageous position to secure a renewal of the contract with the benefits that would entail. The prospect of renewal was a distinct commercial benefit, inevitably contemplated by the parties as enuring to the advantage of Amann on, and by reason of, its performance of the contract. It was not an advantage which would accrue to Amann independently of performance of the contract or incidentally. The corollary is that the parties necessarily contemplated the loss of that prospect as the probable result of a repudiation or fundamental breach of the contract on the part of the Commonwealth.
54. The Commonwealth also submits that the Full Court of the Federal Court was wrong in taking into account the prospect of renewal of the contract because to do so infringed the rule that, where there are two or more ways in which a defendant might perform the contract, the court, in assessing damages, adopts the mode of performance which is most beneficial to the defendant. That rule, which is a manifestation of the principle that damages will not be awarded for not doing that which there is no legal obligation to do, is well supported by authority: Cockburn v. Alexander [1848] EngR 1009; (1848) 6 CB 791, per Maule J. at p 814 [1848] EngR 1009; (136 ER 1459, at pp 1468-1469); Withers v. General Theatre Corporation (1933) 2 KB 536, per Scrutton L.J. at p 551; TCN Channel 9 v. Hayden Enterprises (1989) 16 NSWLR 130, per Hope J.A at pp 150-156.
55. The Commonwealth contended that The Mihalis Angelos is an instance of the rule. It was a case in which the plaintiff shipowners suffered no loss by reason of the defendant charterers' repudiation of the charterparty because the charterers would have cancelled the contract shortly thereafter pursuant to an option in the charterparty to cancel in the event that the vessel was not ready to load in Haiphong by a stipulated date. It was found as a fact that the vessel would not have been ready to load by that date had she proceeded to Haiphong. The decision in The Mihalis Angelos is of no assistance on the aspect of the case now under consideration; it has more application to another argument, which we shall mention later, that Amann suffered no substantial loss because the original contract would have been terminated pursuant to cl.2.24 in any event.
56. Where compensation is sought in respect of the deprivation of a possible benefit which is dependent upon the unrestricted volition of another it may be impossible to say that any assessable loss results from the breach: Fink v. Fink, per Dixon and McTiernan JJ. at p 143; Chaplin v. Hicks, per Vaughan Williams LJ. at pp 792-793. However, this statement must be understood in the light of the principle that the mere existence of a contractual right in a party to terminate does not operate automatically to restrict the damages that can be awarded. The court does not reach a conclusion by reference to an improbable factual hypothesis. The court must have regard to the facts and evaluate the possible exercise of the right in all the relevant circumstances of the case: TCN Channel 9, per Hope J.A. at p 154. Moreover, in determining what is or would be beneficial for the defendant, the court does not confine its attention to the relationship between the plaintiff and the defendant; it would be wrong to reduce the defendant's legal obligations to the plaintiff on the footing that he or she would incur greater loss in other respects: Lavarack, per Diplock L.J. at pp 295-296.
57. If we make the assumption that the contract would have proceeded to completion, which is a necessary assumption for present purposes, it would be wrong, in the circumstances of the case, to conclude that the Commonwealth would have refused to renew the contract simply because that outcome would reduce the Commonwealth's liability in damages to Amann in the light of the events as they have actually fallen out. In assessing damages, the Court is necessarily engaged in a hypothetical exercise, that is, ascertaining how the contract would have turned out had it not been brought to an end by Amann's acceptance of the Commonwealth's wrongful repudiation. On the assumption that the contract would have proceeded to completion, it would have been to the Commonwealth's advantage to have agreed to a renewal, rather than to have negotiated a fresh contract with a third party who would have been in the position of starting from scratch and thus have sought and insisted upon large financial rewards in order to compensate for heavy initial expenditure of the kind incurred by Amann. Accordingly, there would have been a strong prospect of renewal.
58. This being so, the value of the prospect of a renewal of the contract was a matter to be taken into account in determining whether Amann would or would not have recouped its expenditure. As in a case such as Richardson v. Mellish where the value of the legal obligation to the plaintiff depends upon the occurrence of an event extraneous to the contract, the probability of the occurrence is relevant to the estimate: Lavarack, per Diplock L.J. at p 294. As we have said, there was a strong prospect of such an occurrence in this case.
59. It follows that we consider that the Full Court was correct in taking
into account the prospect of renewal of the contract as
a factor relevant to
the assessment of damages. The consequence of this conclusion, in view of the
onus cast upon the Commonwealth
as the party in breach, is that the
Commonwealth must demonstrate that the value to Amann of the prospect of
renewal of the contract
when combined with those expenses that would have been
recovered by way of gross receipts was less than the total expenses to be
incurred by Amann in the performance of its contractual obligations. If the
Commonwealth was able to demonstrate that this would
have been the result, had
the contract been fully performed, then, in conformity with Robinson v.
Harman, Amann would not be entitled
to all of its expenditure incurred in
reliance on the Commonwealth's promise to perform and wasted as a result of
the Commonwealth's
breach. The Commonwealth was unable, however, to
demonstrate this and so discharge the onus. Accordingly, the presumption that
Amann
would not have entered into a contract in which it would not recover the
value of its expenditure incurred remains undisturbed.
We agree with the Full
Court's conclusion that Amann was entitled to recover as damages an amount
commensurate with what it had expended
in reliance upon the Commonwealth's
promise to perform its contractual obligations.
Discount in the quantum of damages by reference to the prospect of termination
of the contract pursuant to cl.2.24
60. The Commonwealth mounts another argument to the effect that no damages should be awarded and that, if damages are awarded, any damages should not be substantial. This argument is put on the footing that the Commonwealth would have validly terminated the contract in any event for breach pursuant to cl.2.24. The Commonwealth argues that the amount of damages awarded should have been discounted in accordance with the prospect of valid termination by the Commonwealth and that, in assessing this prospect, it should be presumed that the Commonwealth would have acted so as to minimize its liability in conformity with The Mihalis Angelos. The Commonwealth argues that both Davies J. and Burchett J. erred in failing to discount the damages they assessed.
61. Clause 2.24 provides:
"2.24 TERMINATIONThe expression "Secretary" was defined by the contract in these terms:
Whenever and so often as the Contractor fails to carry out
the Contract or comply with a condition of the Contract to
the satisfaction of the Secretary then in either of these
events the Secretary may, by notice in writing, require the
Contractor to show cause in writing to the satisfaction of
the Secretary, why the Contract or any specified portion
thereof should not be cancelled. If the Contractor fails
to show cause in writing, as so required, the Secretary
shall be entitled to treat the Contract or any specified
portion thereof as having been cancelled and may declare the
whole or any part of the security lodged by the Contractor
forfeited to the Commonwealth, and thereupon the amount so
declared to be forfeited shall become the property of the
Commonwealth absolutely.
The Commonwealth shall, in addition, be entitled to recover
from the Contractor any damages, losses costs and expenses
which the Commonwealth may sustain, or incur in consequence
of such cancellation of the Contract or portion thereof as
the case may be. A certificate by the Secretary stating
the amount of any damages, losses, costs and expenses
sustained or incurred by the Commonwealth in consequence
of the cancellation of the Contract or portion thereof shall
be conclusive evidence of the matter stated.
The Secretary will likewise be entitled to treat the
Contract as having been cancelled if the Contractor
commits an act of bankruptcy or enters into a composition
with creditors or assigns his estate for the benefit of
creditors or, if the Contractor, being a company, goes
into liquidation otherwise than for the purpose of
reconstruction."
"'Secretary' shall mean, except where otherwise stated,
the person for the time being holding the office acting
in or performing the duties of Secretary of the Department
of Transport or his authorised representative".
62. The Commonwealth submits that cl.2.24 gave to the Secretary, subject to observance of the "show cause" procedure, a very wide power of cancellation and that the Secretary was not under a duty to act impartially, as the Full Court held, but was entitled to view the matter from the Commonwealth's perspective and act accordingly. In this Court that submission, though made, was not developed. That is not surprising; the notice of appeal does not challenge the interpretation given to cl.2.24 by the Full Court. And the prescription of the "show cause" procedure, coupled with the references to "the satisfaction" of the Secretary, indicate that the decision-making function of the Secretary under the clause called for something more on his part than a mere pursuit of what was to the advantage, or in the interests, of the Commonwealth. In other words, the Secretary was required to arrive at a decision after weighing in the balance the matters that led him to invoke the "show cause" procedure, such case as Amann might wish to present in accordance with that procedure and such other matters as might bear upon the issue of cancellation. Accordingly, we are not persuaded that this Court should depart from the interpretation placed upon cl.2.24 by the Full Court of the Federal Court.
63. Even so, the Commonwealth contends that substantial damages should not
have been awarded on the ground that the breaches of
contract found by
Beaumont J. were such as to have entitled the Secretary to have cancelled the
contract pursuant to cl.2.24 on the
interpretation of it favoured by the Full
Court. Beaumont J. found that Amann breached the contract on 12 September in
four respects:
(1) it failed to provide sufficient aircraft;The breaches were not trivial and, with the exception of the fourth, they would have continued for some time.
(2) the aircraft provided were not then suitable for the work
required by the contract to be undertaken;
(3) the aircraft provided were not fully equipped in conformity
with the contract; and
(4) Amann failed to carry out all the scheduled flights on
12 September.
64. With respect to the first breach, Beaumont J. found that, although Amann
proposed to add further aircraft to its fleet to bring
it up to the prescribed
strength, Amann also proposed to carry out structural modifications to most of
its aircraft so that they
would need to be taken out of service for this
purpose. This, so the Commonwealth submits, would mean that Amann's fleet
would be
under strength for two months. With respect to the second and third
breaches, his Honour found that they would have taken two months
to rectify.
In the result his Honour concluded that "the coastwatch service would not be
fully provided until about the middle of
November and this could lead to
serious complications". This, as his Honour observed, was the principal
argument in favour of cancellation.
He went on to say:
"The main argument against cancellation, and just asBeaumont J. resolved these competing arguments by holding that there was a 50 per cent possibility of cancellation pursuant to cl.2.24. But, in arriving at this conclusion, his Honour proceeded on the footing that the Secretary in exercising the power of cancellation was free to pursue the interests of the Commonwealth without any relevant qualification. The Full Court did not agree with that interpretation of the clause. The Full Court's more restricted view of the Secretary's power of cancellation led, quite naturally, to that Court assessing the possibility of cancellation at 20 per cent.
compelling as the previous consideration, was the
circumstance that, by 12 September, (Amann) or CVC had
spent approximately 96 per cent of the expenditure required
to establish the service. (Amann) or CVC (principally
CVC) had by then incurred expenditure of approximately
$6,000,000.00 on this account."
65. We are not persuaded that this was an erroneous estimate. The
Commonwealth's interim arrangement with Skywest to stay on so
as to provide a
"back-up" facility expired on 11 September. What prospects the Commonwealth
had of inducing Skywest to extend that
arrangement, in what circumstances and
on what conditions must remain matters of conjecture. True it is that the
Commonwealth wanted
to terminate the contract before 12 September. But it
does not follow that the Commonwealth would have maintained that attitude
after 12 September once it appreciated what would be the consequences of
attempting to invoke the "show cause" procedure and that
Amann would be in a
position to comply in all respects with the contract by November. Unless the
Commonwealth could extend its interim
arrangement with Skywest, there was no
practical way in which the Commonwealth could, to its own advantage, bring
about a cancellation
of the contract without prejudicing its essential
interests in maintaining a regime of surveillance of Australia's northern
coastline.
Consequently, we are not persuaded that the Full Court was wrong
in either its estimate or its conclusion that the amount of damages
to be
awarded should not be discounted on account of an event which was unlikely to
occur. It goes, virtually without saying, that
we reject entirely the
Commonwealth's contention that no damages should have been awarded on the
ground that termination was probable.
Conclusion
66. Having dealt with the arguments of principle advanced by the Commonwealth in conformity with its grounds of appeal, there being no challenge, independently of those grounds of appeal, to the calculation of damages made by the Full Court of the Federal Court, we would dismiss the appeal.
BRENNAN J. The facts are set out in the judgment of the Chief Justice and
Dawson J. To analyse those facts, I would first state
the principles which I
apprehend to apply in this case.
The measure of damages for breach of contract.
2. The general principle governing the measure of damages for breach of
contract is stated in Robinson v. Harman [1848] EngR 135; (1848) 1 Ex 850,
per Parke B. at p
855 [1848] EngR 135; (154 ER 363, at p 365):
"The rule of the common law is, that where a party sustainsIt is common ground that that principle, which was applied in Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, at p 471, governs this case. Robinson v. Harman identifies both the subject of compensation (loss sustained by reason of a breach of contract) and the measure of damages (the amount required to place the innocent party in the same situation as if the contract had been performed). Where a contract is rescinded for breach, the innocent party loses the benefit of performance of the contract so far as the contract remains unperformed. And there may be other losses resulting from the breach. The rule in Hadley v. Baxendale [1854] EngR 296; (1854) 9 Ex 341, at p 354 (156 ER 145, at p 151) prescribes the condition on which damages can be awarded in respect of a loss sustained by reason of a breach of contract:
a loss by reason of a breach of contract, he is, so far as
money can do it, to be placed in the same situation, with
respect to damages, as if the contract had been performed."
"Where two parties have made a contract which one of themApplying the rule in C. Czarnikow Ltd. v. Koufos [1967] UKHL 4; (1969) 1 AC 350, at p 385, Lord Reid said that:
has broken, the damages which the other party ought to
receive in respect of such breach of contract should be
such as may fairly and reasonably be considered either
arising naturally, i.e., according to the usual course of
things, from such breach of contract itself, or such as may
reasonably be supposed to have been in the contemplation of
both parties, at the time they made the contract, as the
probable result of the breach of it."
"The crucial question is whether, on the informationI respectfully agree. A plaintiff (as I shall call the party not in breach) seeking damages from a defendant (as I shall call the party in breach) bears the onus of proving both the loss sustained by reason of the breach and the damages for the loss.
available to the defendant when the contract was made, he
should, or the reasonable man in his position would, have
realised that such loss was sufficiently likely to result
from the breach of contract to make it proper to hold that
the loss flowed naturally from the breach or that loss of
that kind should have been within his contemplation."
3. The measure of damages prescribed by Robinson v. Harman ensures that the
parties to the contract are kept to the benefits and
the burdens of the
contract they have made: the plaintiff recovers no more than the net benefit
he would have received under the
contract; the defendant acquires no right to
profit by his breach. The measure of damages for breach of contract is
governed by
the contract itself. As the contract determines the measure of
damages for losses caused by its breach, there is a difference between
the
measure of damages in contract and the measure of damages in tort, though the
purpose of damages in both is the award of compensation.
The general
principle on which compensatory damages are assessed was stated by Taylor and
Owen JJ. in Butler v. Egg and Egg Pulp
Marketing Board (1966) [1966] HCA 38; 114 CLR 185, at
p 191:
"That principle is that the injured party should receiveIf a contract be profitable and is rescinded for breach, the profits lost and the costs actually and reasonably incurred in performance are proper subjects of compensation. If a contract be a loss contract, the costs actually and reasonably incurred in performance are the subject of compensation, but only to the extent that those losses would have been recovered had the contract been performed.
compensation in a sum which, so far as money can do so,
will put him in the same position as he would have been
in if the contract had been performed or the tort had not
been committed". (Emphasis added.)
4. The situation of a plaintiff "if the contract had been performed" is, of course, a hypothetical situation with which the plaintiff's actual situation is compared. When a contract is rescinded for breach by a defendant, the hypothesis postulates that the contract is still on foot. On that hypothesis, the benefits to which the plaintiff would have been entitled had the contract been performed (let the benefits have a value of $B) can be apportioned among three components: the amount expended by the plaintiff in performing or preparing to perform the contract prior to rescission ($x); the further amount which the plaintiff would have had to expend to perform the contract ($y); and the amount of profit or loss that would have eventuated had the contract been performed ($z). The cost of capital equipment properly to be apportioned to the contract must be taken into account whether by way of hiring charges, depreciation or amortization, else the profit component is falsely inflated or the loss component falsely reduced or eliminated, but care must be taken to ensure that, in an action to recover damages for costs and lost profits, there is no duplication of this item: see the explanation of Cullinane v. British "Rema" Manufacturing Co. Ld. (1954) 1 QB 292 by this Court in TC Industrial Plant Pty. Ltd. v. Robert's Queensland Pty. Ltd. [1963] HCA 57; (1963) 37 ALJR 289. The components of the calculated profit considered in TC Industrial Plant, at p 294, show that the remuneration payable under a contract plus the value of all other benefits to which a plaintiff would have been entitled had the contract been performed equals the costs incurred and to be incurred in performing the contract plus the profit or minus the loss, as the case may be. An equation can therefore be stated: $B = $x + $y +- $z.
5. In this case, the principal item of loss which the respondent ("Amann") is seeking to recover is the net amount expended by it in preparing to perform the contract ($x), forgoing any profits which it submits it would have earned but which it is unable to quantify. The amount so expended (net of its remainder value) was wasted by the repudiation of the contract by the appellant (the Commonwealth). It is a loss that falls comfortably within the rule in Hadley v. Baxendale. The question is: what is the measure of damages for that loss?
6. The Commonwealth contends that there were no profits to be made; to the
contrary, it contends that there was a demonstrable loss
to be expected from
performance of the contract. The resolution of this controversy depends on
the value to be attributed to the
rights which the contract conferred on Amann
or, more precisely, on the value to be attributed to the benefits to which
Amann would
have been entitled under the contract had the contract been
performed: Foran v. Wight [1989] HCA 51; (1989) 168 CLR 385, at p 430.
If the value
of those
benefits ($B) less the amount which Amann would have had to expend but is now
dispensed from expending in
performance of
any of its unperformed obligations
under the contract ($y) exceeds the expenditure incurred
by Amann in preparing
to perform the
contract ($x), Amann is entitled to recover $x; if the net
benefit ($B - $y) is less than the
expenditure incurred
($x), Amann is
entitled to recover no more than the net benefit, for that is all that it
would have recouped
had the contract been
performed. The
measure of Amann's
damages thus depends on the value of the benefits which Amann would have
been
entitled to receive
had the contract
been performed ($B), $x and $y being
agreed amounts. If $B cannot be quantified, the problem
is this: does Amann
fail because it
has not proved that $B - $y is sufficient to cover the $x it
expended, or does the Commonwealth
fail because it has
not proved that
$B - $y
is insufficient to cover the $x or has not proved the amount of the
insufficiency?
A plaintiff's contractual benefits: $B.
7. Where a contract rescinded for breach is conditional or contingent, the benefits to which a plaintiff would have been entitled had the contract been performed are affected by the possibility that performance of the contract might have been dispensed with or abbreviated by non-fulfilment of the condition or the occurrence of the contingency. To apply the hypothesis that "the contract had been performed" in such a case, it is necessary to find whether the condition would have been fulfilled or whether the contingency would have occurred or, if the fact cannot be found, to make some estimate of the possibility of non-fulfilment of the condition or the occurrence of the contingency. Where damages are assessed after the time for fulfilling the condition or for the occurrence of the contingency has arrived (if there be a stipulated time), the court may be able to determine with some precision the benefits to which the plaintiff would have been entitled had the contract been performed: Wenham v. Ella, at p 473. But, if no time be stipulated or if damages be assessed before the stipulated time has arrived, some estimate must be made as to the possibility of non-fulfilment of the condition or of the occurrence of the contingency. The estimate must be taken into account in assessing a plaintiff's damages. In this case, the manner in which account is to be taken of the possibility of early termination of the contract will have to be considered. It must always be assumed in assessing a plaintiff's damages that the defendant would have committed no further breach of the contract. (That assumption eliminates the need to consider the possibility that further breaches might have been committed by the defendant and the countervailing possibility that compensatory damages for those breaches would have been recovered by the plaintiff.)
8. In evaluating a plaintiff's benefits under a contract, the court does not look solely at the express terms of the contract but evaluates the plaintiff's rights to benefits of any kind, whether those benefits are expressed by the terms of the contract or are ascertainable by reference to circumstances extrinsic to those terms. Thus a hairdresser's assistant who was wrongfully dismissed was held entitled to recover not only damages for lost wages but also a sum representing the tips which he would have received (Manubens v. Leon (1919) 1 KB 208), and an artist's opportunity of gaining fame and reputation by performing a theatrical engagement must be evaluated in assessing damages when the engagement is wrongfully terminated: Herbert Clayton and Jack Waller, Ld. v. Oliver (1930) AC 209. In cases of this kind, the contract is found to contain by implication a promise to give the plaintiff an opportunity to acquire the unexpressed benefit (White v. Australian and New Zealand Theatres Ltd. [1943] HCA 6; (1943) 67 CLR 266, at pp 271, 273, 281; Withers v. General Theatre Corporation (1933) 2 KB 536, at p 554), and damages are awarded for breach of that promise. They are not awarded in respect of benefits which the plaintiff has no contractual right to receive: Abrahams v. Herbert Reiach, Ld. (1922) 1 KB 477, at p 482.
9. Unexpressed benefits are frequently of an intangible kind or are otherwise
of uncertain value but difficulty in evaluating a
contractual benefit is no
barrier to recovery of damages where the defendant is bound to provide the
benefit but has failed to do
so: see Chaplin v. Hicks (1911) 2 KB 786, at pp
796, 799, where, as Dixon and Fullagar JJ. said in McRae v. Commonwealth
Disposals
Commission [1951] HCA 79; (1951) 84 CLR 377, at p 412, the broken promise "was, in
effect, 'to give the plaintiff a chance'". Their
Honours observed
that
-
"if the contract had been performed, the plaintiff wouldIn Fink v. Fink [1946] HCA 54; (1946) 74 CLR 127, at p 143, Dixon and McTiernan JJ. said:
have had a real chance of winning the prize, and it seems
proper enough to say that that chance was worth something".
"Where there has been an actual loss of some sort, the
common law does not permit difficulties of estimating the
loss in money to defeat the only remedy it provided for
breach of contract, an award of damages."
10. When a commercial contract is breached, it would be erroneous to evaluate the benefits which a plaintiff would have been entitled to receive had the contract been performed by reference solely to the stipulated remuneration for performance if the plaintiff is entitled to acquire, by performance of the contract, other commercial advantages. The hairdresser's assistant in Manubens v. Leon was contractually entitled to be employed and it would not have been full compensation for his loss of employment to give him his wages without giving him his tips. An evaluation limited to benefits expressly stipulated would not truly reflect the situation in which the plaintiff would have been if the contract had been performed, nor would it lead to an award of damages which would place the plaintiff in that situation. The other commercial advantages must be evaluated, and evaluation may require consideration of the nature of the plaintiff's business, the opportunities available to the plaintiff to exploit the advantage and, if there be a market for a particular advantage, that market.
11. Among the commercial advantages to which a plaintiff might be entitled as
of right by performing a contract is an opportunity
to obtain a profitable
engagement under another contract, an opportunity not amounting to a right to
a further engagement. Thus,
in T.C. Industrial Plant, where the plaintiff
sought damages for breach of warranty of fitness of a stone crushing machine
and the
plaintiff's principal loss consisted in the cancellation of a contract
with the Commonwealth for the supply of crushed aggregate
to be produced by
using the crusher, the plaintiff was held entitled to recover the profit which
would have been earned under a probable
extension of the supply contract had
the plaintiff been able to perform the original supply contract. This Court
held that the damages
could be assessed in this way (at p 294):
"It may of course be that the learned judge will findIn T.C. Industrial Plant, the second contract was almost certain to follow on successful performance of the first contract, but the underlying principle does not depend on the certainty of securing a second contract. Certainty is relevant to the value of the opportunity of obtaining a profitable engagement under a second contract, but the benefits to which a plaintiff is entitled under a contract may include an uncertain prospect of obtaining such an engagement provided the prospect is sufficiently substantial to stamp it as a real commercial advantage. The relevant principle is that when performance of a contract by a defendant (including the permitting of the plaintiff to perform his obligations under the contract) would have resulted in the plaintiff's acquiring a particular commercial advantage but the advantage is lost by reason of the defendant's breach, the loss of the advantage is compensable and its value is to be taken into account in assessing a plaintiff's damages. If the advantage in question is a certain opportunity to secure a profitable second contract, the profits of the second contract can be recovered. Such an advantage is worth more than a merely preferential chance of securing such a contract but such a chance, like the chance in Chaplin v. Hicks, has a value and the loss of the chance is a proper subject of compensatory damages.
it preferable to work out a single calculation, taking
the whole of the actual and probable expenditure which
the plaintiff would have incurred in performing its
contract with the Commonwealth and the probable extension
thereof had the crusher been of the warranted fitness, and
subtracting the resulting figure from the total receipts
the plaintiff would have obtained under the contract and
the extension." (Emphasis added.)
12. However, to attribute a value to such a chance the court might have to
engage in a degree of speculation, speculating as to
the likelihood that a
profitable contract would be available, what the likely profits would be and
the likelihood that the plaintiff
would secure the contract against
competition by others. The value of the plaintiff's lost contractual benefits
are then shrouded
in uncertainty. In that event, who bears the onus of
proving that the net value of the benefits ($B - $y) are or are not sufficient
to cover the expenditure incurred by the plaintiff prior to the breach of the
first contract or, when the contract is rescinded for
breach, prior to
rescission?
The doctrine of reliance damages: an alternative method of assessment.
13. Where a contract has been rescinded for breach, the amount which a plaintiff has reasonably expended in reliance on the defendant's promise and which is wasted by reason of the defendant's breach of his promise is a proper subject of damages for breach of contract: McRae v. Commonwealth Disposals Commission, at pp 412, 414. Damages assessed for wasted expenditure incurred in reliance on the defendant's promise may be described as reliance damages to distinguish them from damages assessed for loss of the benefits which the plaintiff expected from performance of the contract (expectation damages). A plaintiff who seeks to recover reliance damages must ordinarily prove that the net value of the benefits to which he would have been entitled if the contract had been performed ($B - $y) would have exceeded the wasted expenditure incurred in reliance on the defendant's promise ($x) and, to the extent that he fails to do so, his claim will fail. To discharge the onus of proof, however, the plaintiff may be able to raise and rely on an inference that a party would not incur expenditure in reliance on the other party's promise without a reasonable expectation that, on performance of the contract, the expenditure would be recouped. That is an inference of varying strength according to the circumstances. Sometimes, the inference would be of sufficient strength to enable the plaintiff to discharge the onus; sometimes, the inference would be too weak.
14. However, when a contract is rescinded for breach and that breach, by
preventing the performance of the contract, has made it
impossible for the
plaintiff to prove that the net value of his contractual benefits ($B - $y)
exceeds the wasted expenditure incurred
in reliance on the defendant's promise
prior to rescission ($x), it is just to shift to the defendant the ultimate
onus of proving
that, had the contract been performed, the net value of the
plaintiff's benefits would not have covered the expenditure he had incurred
before rescission. This was the basis on which Learned Hand C.J. placed the
imposition of such an onus on the defendant in L Albert
& Son v. Armstrong
Rubber Co. (1949) 178 F 2d 182, at p 189:
"Normally a promisee's damages for breach of contract areThe sufficient and necessary justification for shifting the onus to the party in breach in the assessment of damages for wasted expenditure incurred in reliance on the defendant's promise before rescission for breach is that the breach of the contract itself makes it impossible to undertake an assessment on the ordinary basis. Pitney Ch in Holt v. United Security Life Ins. and Trust Co. (1909) 72 Atlantic Reporter 301, at pp 305-306, explained the reason for reversing the onus thus:
the value of the promised performance, less his outlay,
which includes, not only what he must pay to the promisor,
but any expenses necessary to prepare for the performance
... The Buyer ... asserts that it is nonetheless entitled
to recover the cost of the (expenses necessary to prepare
for performance) upon the theory that what it expended in
reliance upon the Seller's performance was a recoverable
loss. In cases where the venture would have proved
profitable to the promisee, there is no reason why he
should not recover his expenses. On the other hand, on
those occasions in which the performance would not have
covered the promisee's outlay, such a result imposes the
risk of the promisee's contract upon the promisor. We
cannot agree that the promisor's default in performance
should under this guise make him an insurer of the
promisee's venture; yet it does not follow that the breach
should not throw upon him the duty of showing that the
value of the performance would in fact have been less than
the promisee's outlay. It is often very hard to learn what
the value of the performance would have been; and it is a
common expedient, and a just one, in such situations to put
the peril of the answer upon that party who by his wrong
has made the issue relevant to the rights of the other. On
principle therefore the proper solution would seem to be
that the promisee may recover his outlay in preparation for
the performance, subject to the privilege of the promisor
to reduce it by as much as he can show that the promisee
would have lost, if the contract had been performed."
" The fundamental and cardinal principle that underlies
all rules for the admeasurement of damages is that the
injured party shall have compensation for that which he
has directly lost by reason of the act of the other party,
so far as such loss was or ought to have been in the
contemplation of the parties. This includes the loss
of anticipated profits where these are capable of legal
ascertainment. But, where the profits are not capable of
ascertainment, or are remote and speculative, and therefore
not proper to be adopted as a legal measure of damage, it
does not follow that the injured party is remediless. ...
Losses directly incurred, as well as gains prevented, may
furnish a legitimate basis for compensation to the injured
party. And, among such immediate losses, expenditures
fairly incurred in preparation for performance or in part
performance of the agreement, where such expenditures
are not otherwise reimbursed, form a proper subject for
consideration where the party injured, while relying upon
his contract, makes such expenditures in anticipation
of the advantage that will come to him from completed
performance. ... where one party repudiates, and thus
prevents the other from gaining the contemplated profit,
it is not, we think, to be presumed in favor of the
wrongdoer (in the absence of evidence) that complete
performance of the agreement would not have resulted in
at least reimbursing the injured party for his outlay
fairly made in part performance of it. Ordinarily, the
performance of agreements results in advantage to both
parties over and above that with which they part in the
course of its performance; otherwise there would soon be
an end of contracting. And it seems to us, upon general
principles of justice, that, if he who, by repudiation,
has prevented performance, asserts that the other party
would not even have regained his outlay, the wrongdoer
ought at least to be put upon his proof."
15. A plaintiff's inability to quantify his lost benefits is no justification
by itself for casting on the defendant an onus to
prove that the plaintiff
would not have recouped reliance damages had the contract been performed.
What justifies the reversal of
the onus is the defendant's repudiation or
breach which denies, prevents or precludes the existence of circumstances
which would
have determined the value of the plaintiff's contractual benefits.
Thus, in McRae's Case, where the breach assigned was that there
was no oil
tanker on Jourmaund Reef where the contract of sale warranted a tanker to be,
the salvager purchasers who had wasted expenditure
in reliance on the
defendant's promise recovered reliance damages. Dixon and Fullagar JJ.
explained the reversal of the onus (at
p 414) thus:
"The fact that the expense was wasted flowed primaIn CCC Films Ltd. v. Impact Quadrant Films Ltd. (1985) QB 16 Hutchison J. acknowledged (at p 38) that McRae's Case supports -
facie from the fact that there was no tanker; and the
first fact is damage, and the second fact is breach of
contract. The burden is now thrown on the Commission
of establishing that, if there had been a tanker, the
expense incurred would equally have been wasted. This,
of course, the Commission cannot establish. The fact
is that the impossibility of assessing damages on
the basis of a comparison between what was promised
and what was delivered arises not because what was
promised was valueless but because it is impossible to
value a non-existent thing. It is the breach of contract
itself which makes it impossible even to undertake an
assessment on that basis. It is not impossible, however,
to undertake an assessment on another basis, and, in so
far as the Commission's breach of contract itself reduces
the possibility of an accurate assessment, it is not for
the Commission to complain."
"the proposition ... that it is only where the breach itself
makes it impossible to assess whether there would have
been any returns sufficient to recoup the expenditure that
the defendant is debarred from relying, to defeat the
plaintiff's claim, on the normal rule that it is for the
plaintiff to prove all ingredients of his claim for
damages, including the fact that the expenditure he
incurred would, had there been no breach, have been
recouped".
16. The point of distinction between the method of assessment of expectation damages and the method of assessment of reliance damages is the reversal in the case of reliance damages of the onus of proof of the net value of the plaintiff's contractual benefits. There can be no duplication of reliance damages and expectation damages. The compensable losses in reliance damages do not include possible lost profits but both cover expenditure reasonably incurred in preparing to perform and in performing the contract within the limits prescribed by Robinson v. Harman. The measure of damages prescribed by Robinson v. Harman governs each method of assessment.
17. Where justification for reversing the onus exists, reliance damages may be recovered; absent that justification, the plaintiff must recover expectation damages, if any, by proof of the value of benefits and the cost of performance; that is, by proof that $B - $y is greater than $x. These are alternative methods of assessing damages, but the plaintiff does not have an election as to the method. The plaintiff who seeks recovery of reliance damages must show that justification for reversing the onus of proof exists. Otherwise, he must endeavour to prove his damages on the ordinary basis.
18. The recovery of reliance damages has been sanctioned by courts in the United States (the cases are noted by Corbin on Contracts, vol.5, (1964), section 1031, n.17; and see American Law Institute, Restatement of the Law: Contracts, 2nd ed. (1981), section 349); in Canada (Bowlay Logging Ltd. v. Domtar Ltd. (1978) 87 DLR (3d) 325 (affirmed, but on other grounds: (1982) 135 DLR (3d) 179); Sunshine Vacation Villas Ltd. v. The Bay (1984) 13 DLR (4th) 93, at p 99; Reg. v. Canamerican Auto Lease & Rental Ltd. (1987) 37 DLR (4th) 591, at pp 608-609); and in New Zealand (Ware v. Johnson (1984) 2 NZLR 518, at pp 545-546; Herbison v. Papakura Video Ltd (No.2) (1987) 2 NZLR 720). In England, Cullinane v. British "Rema" Manufacturing Co. Ld.; Anglia Television Ltd. v. Reed (1972) 1 QB 60; C & P Haulage v. Middleton [1983] EWCA Civ 5; (1983) 1 WLR 1461; (1983) 3 All ER 94 and CCC Films Ltd. v. Impact Quadrant Films Ltd. are consistent with the principles stated, except that, in the first two of those cases, the courts spoke of the plaintiff's inability to prove what his profits would have been rather than the value of his net contractual benefits.
19. Of course, when a plaintiff advances a prima facie case for an assessment
of reliance damages, the defendant may destroy or
diminish the plaintiff's
claim by proving that, had the contract been performed, the plaintiff's
benefits after payment of the further
costs of performance ($B - $y) would not
have been sufficient to cover the expenses reasonably incurred by the
plaintiff prior to
rescission in reliance on the contract. The defendant
discharged the onus of proof and reduced the plaintiff's award to nominal
damages in Bowlay Logging. That case illustrates that the assessment of
damages for losses suffered by reason of a breach of contract
is limited by
Robinson v. Harman, whichever method of assessment of damages be adopted.
The present case.
20. The breach consisted in the Commonwealth's unjustified repudiation of the contract on 12 September 1987. At 12 September 1987, Amann had committed itself (as the Full Court found and as the Commonwealth accepts) to expend $5,281,521 in the purchase of special coastal surveillance aircraft which had a remainder value of only $917,329 when no longer required for coastal surveillance, and it had incurred other preliminary costs of $854,943. The reasonableness of Amann's incurring this expenditure is not challenged. The Full Court of the Federal Court based its assessment of damages on the net expenditure thus incurred ($5,219,135) together with $143,049 paid to employees whose services were terminated consequent on the rescission of the contract and $113,000 paid to the Commonwealth under a clause of the contract requiring a deposit to secure due performance. Liability for each of these latter amounts is accepted, subject to an argument based on cl.2.24 of the contract presently to be considered. Accordingly, that Court awarded $5,475,184 damages plus interest. Amann had looked to the contract to recoup the costs it had incurred and the question is whether the net benefits to which Amann was entitled under the contract would have been sufficient to recoup its losses as thus assessed.
21. Amann sought to establish that the contract was profitable, that is to say, a contract under which Amann would have obtained benefits greater in value than the expenditure it had incurred and would incur in performing its obligations under the contract. If this were the fact, Amann's entitlement to damages would exceed the expenditure it had incurred at 12 September in equipping itself to perform the contract. On the other hand, if the value of Amann's benefits had the contract been performed (net of the further costs of performance) fallen short of $5,219,135, Amann must fail to the extent of the shortfall.
22. The total of the payments to which Amann would have been entitled under the contract had it been fully performed was $17,107,462 together with a refund of the security deposit ($113,000) but, in order to perform the contract fully, Amann would have had to expend a further $15,801,899 to defray further capital expenditure, operating costs and borrowing costs. On these figures, the contract would not have yielded to Amann an amount sufficient to cover the costs it had incurred in equipping itself to perform the contract. The Commonwealth submits that, had the contract been fully performed, no more would have been available to Amann to cover the costs it had incurred on 12 September 1987 than the surplus of the total payable under the contract over the further expenditure Amann would have had to incur to perform the contract fully. The Commonwealth submits that Amann's damages could not exceed the amount of that surplus ($1,418,563) supplemented by the $143,049 termination pay which Amann would not have paid if the contract had proceeded. On this argument, and on the hypothesis that the contract would have been fully performed, Amann's damages could not exceed $1,561,612.
23. I see no answer to this submission if the premiss on which it is based is accepted; that is, that the only benefit of value to which Amann was entitled by performing the contract consisted in the amounts payable to it by the Commonwealth under the contract. If that be the true position, Amann would have suffered a loss even if the contract had been fully performed and the Commonwealth cannot be held liable as insurer of Amann's expenditure under a loss contract.
24. Moreover, the Commonwealth submits that it is too generous to treat Amann as being entitled to $1,561,612, for that leaves out of account the possibility that the Secretary of the Department of Transport or his representative, exercising a power conferred on him by cl.2.24 of the contract, might have called on Amann to show cause why the contract should not be cancelled for failing to carry out the contract or to comply with a condition of the contract to the satisfaction of the Secretary and might have cancelled the contract and forfeited the security deposit. Had that power been exercised adversely to Amann within a short time after 12 September 1987, Amann would have been left with no right to the stipulated remuneration and itself would have had to carry the costs it had incurred in equipping itself to perform the contract. If this submission be accepted Amann is entitled only to nominal damages.
25. Alternatively, the Commonwealth submits that, whatever damages might otherwise be assessed, the amount awarded should be reduced by a proportion that reflects the possibility that the power to terminate the contract under cl.2.24 would have been exercised. Even if the submissions based on cl.2.24 should fail, it is submitted that the Full Court of the Federal Court was in error in assessing damages in any amount above $1,561,612.
26. For its part, Amann submits that by performing the contract it would have acquired a substantial commercial advantage in tendering for the next coastal surveillance contract and that that advantage enhances the value of the first contract to it either directly, by adding the value of the commercial advantage to the stipulated remuneration and thus increasing the value of the total benefits to which it would have been entitled under the contract, or indirectly, by enhancing the value of the aircraft used in coastal surveillance at the end of the first contract period and thus reducing the costs attributable to performance of the first contract. Even if it cannot be demonstrated that the present contract would be profitable after taking that commercial advantage into account, it is submitted that reliance damages can be recovered and that the Commonwealth cannot discharge the onus of showing that the value of Amann's net benefits would not cover the expenditure incurred. As to the prospect of an adverse exercise of the power to terminate the contract under cl.2.24, Amann submits that it was unlikely that the Secretary would have exercised the power and that its damages should not be reduced because of the contingency that the power might have been exercised. The percentage possibility that the power would have been exercised was determined by a majority of the Full Court to be 20% and it is submitted that this is a question of fact which should not be reviewed on appeal and, if need be, that the grant of special leave should be amended to exclude that question.
27. It is convenient to consider these contentions under the following
headings:
(i) Was Amann contractually entitled to more than remuneration?
28. A contract for coastal surveillance had been let by the Commonwealth from
time to time and there was nothing to suggest that
the Commonwealth had any
intention of undertaking itself the task of coastal surveillance. It was a
specialized service calling
for costly capital equipment, notably aircraft,
with little remainder value for any other use. Amann had tendered in
competition
with Skywest Airlines Pty. Ltd. ("Skywest") and Skywest had
threatened to dispose of its aircraft if Amann were permitted to continue
the
surveillance service after 12 September 1987. Skywest would probably have
carried out its threat if the Commonwealth had not
given Amann notice of
termination on 12 September 1987. The commercial position was such that any
successful tenderer who performed
the contract for the stipulated period
(three years) would be in a strong, if not unassailable, position to become
the successful
tenderer for a surveillance contract for the following period.
Indeed, the pressure which Skywest was able to bring to bear to secure
re-engagement despite having failed in its tender demonstrates the commercial
advantage possessed by a contractor who is equipped
to provide and has been
providing the service. The Commonwealth must have appreciated the nature of
the advantage which the contract
conferred on Amann when it entered into the
contract with Amann. The Commonwealth's promise to engage Amann to provide
the service
for three years carried with it the promise that Amann, by
performing the contract, could work itself into a secure position as an
equipped and established provider of the service and could thereby acquire a
most substantial advantage in tendering for any succeeding
contract. This was
not an incidental benefit flowing merely from a trader's reputation as a
successful contractor; it was a benefit
which was implicit in Amann's right to
perform the particular contract, having regard to the nature of the work, the
capital and
equipment required to perform it, the Commonwealth's practice of
letting tenders for the work and the limited competition among tenderers
to do
it. By repudiating the contract, the Commonwealth caused Amann to lose the
commercial advantage it would have gained had the
contract been performed. The
loss of that advantage is compensable. The case is in this respect
indistinguishable in principle from
T.C. Industrial Plant, Manubens v. Leon
and Herbert Clayton and Jack Waller, Ld. v. Oliver. The commercial advantage
which Amann
lost is not to be mistaken for a right to renewal of its contract.
Had there been a right to renewal, the loss of that right would
have to be
taken into account (as in Richardson v. Mellish [1824] EngR 715; (1824) 2 Bing 229, at p 239
[1824] EngR 715; (130 ER 294, at p 298)). But the Commonwealth
cannot be held liable for the
loss of a benefit which it had not expressly or impliedly
promised Amann. It
had not promised renewal;
it had promised that Amann should be the provider of
the service for three years. It
is the commercial advantage inherent in being
the provider of the service for three years that is the benefit to be valued.
(ii) What was the commercial advantage worth to Amann?
29. The period and conditions offered by the Commonwealth to tenderers for any subsequent contract, the possibility of renewed competition, the risk of damage to aircraft during the currency of the first contract, the vicissitudes of industrial relations, not to mention the possibility of radical changes in government policy, are among the factors which make an attempt to ascertain the value of the advantage by reference to circumstances which exclude three years of contract performance a speculative exercise. That is not to say that the advantage was valueless in 1987. To the contrary, the value of the advantage would have been substantial, but it cannot be quantified with any degree of accuracy. It follows that it is impossible to say whether or not the value of all the benefits to which Amann would have been entitled had the contract been performed ($B) would have exceeded the cost of performance by Amann ($x + $y). Nor is it possible to say whether there would have been a sufficient net value of the benefits to which Amann would have been entitled (that is, $B - $y) to cover any more than $1,561,612 of the expenditure which Amann had already incurred ($x).
30. The value of the commercial advantage that Amann would have acquired and
could have exploited when the contract had been performed
could be ascertained
only at or near the end of the contract period and only in the light of the
history of Amann's performance of
the contract. The course of events by
reference to which the value of that commercial advantage could be determined
was aborted
by the Commonwealth's repudiation of the contract. Of course,
even if the contract had been performed, the value would have had
to be
assessed as a prospect of securing a profitable contract, not as a right to
secure such a contract. Some estimate of that
prospect would have had to be
formed. Any uncertainty in the value of the advantage arising from the need
to form such an estimate
is not attributable to the Commonwealth's
repudiation, but the repudiation did preclude the occurrence of the events
which would
have permitted in due time a true assessment of the value of the
commercial advantage lost by reason of the repudiation. Amann is
therefore
entitled to an assessment of its damages as reliance damages and to cast upon
the Commonwealth the onus of showing that,
had the contract been performed,
Amann would not have been entitled to benefits of sufficient net value to
cover any part of the
expenditure it had incurred prior to rescission or,
alternatively, any part of that expenditure exceeding $1,561,612.
(iii) Would the power conferred by cl.2.24
have been exercised to terminate the contract?
31. The Commonwealth submits that there is a rule that, for the purpose of
assessing damages, a party in default should be assumed
not to act so as to
increase its liability. In the present case, so the argument runs, that rule
requires a finding that the Secretary
would have terminated Amann's contract
under cl.2.24. The rule is said to be recognized by the judgments in The
Mihalis Angelos
(1971) 1 QB 164. With respect, The Mihalis Angelos does not
support the submission. Megaw L.J. stated the relevant principle in
this way
(at pp 209-210):
" In my view, where there is an anticipatory breach ofClearly enough, this principle applies when it is found as a fact that the relevant events "were, at the date of acceptance of the repudiation, predestined to happen". There was no such finding in this case. Here, the trial judge (Beaumont J.) found that there was a 50% chance that the power to terminate under cl.2.24 would have been exercised; in the Full Court, a majority thought that there was only a 20% chance. For substantially the same reasons as those stated by the Chief Justice and Dawson J., I would agree that the Commonwealth failed to show that, if the contract had not been repudiated on 12 September 1987, the contract would have been terminated thereafter under cl.2.24. I would add two further observations, one of which confirms me in that conclusion, the other stating the manner in which discounting for uncertainty may affect the assessment of expectation damages. The inference that I would draw from the events of 12 September 1987 is that the Commonwealth, faced on the one hand with the threat by Skywest to dispose of their aircraft if Amann's contract were not terminated, and faced on the other with a relatively protracted procedure for termination under cl.2.24 which might have led ultimately to an arbitration, chose to repudiate Amann's contract in order to preserve the service which Skywest could provide but which Skywest would not provide if Amann should be permitted to continue any longer. Had Skywest disposed of its aircraft, the Commonwealth would have had no alternative but to permit Amann to continue to provide the service.
contract, the breach is the repudiation once it has been
accepted, and the other party is entitled to recover by
way of damages the true value of the contractual rights
which he has thereby lost, subject to his duty to mitigate.
If the contractual rights which he has lost were capable
by the terms of the contract of being rendered either less
valuable or valueless in certain events, and if it can be
shown that those events were, at the date of acceptance
of the repudiation, predestined to happen, then in my view
the damages which he can recover are not more than the
true value, if any, of the rights which he has lost, having
regard to those predestined events."
32. In my view, the Commonwealth has failed to discharge that onus of showing that the Secretary would have terminated Amann's contract under cl.2.24. If the Commonwealth cannot establish that that contingency would have occurred, it cannot discharge the onus of proving that the net benefits to which Amann would have been entitled under the contract would not have covered the expenditure it had incurred in reliance on the contract prior to rescission.
33. Had Amann borne the onus of proving its damages as expectation damages,
the assessment would have had to allow for the possibility
that the power to
terminate under cl.2.24 would have been exercised. That possibility, assessed
at 20% by the Full Court, would have
reduced those damages. In the assessment
of reliance damages, the possibility remains relevant to the value of Amann's
contractual
benefits. But the Commonwealth bears the onus of proving that the
possibility of termination under cl.2.24 reduces the net value
of Amann's
benefits to an amount less than its expectation damages. Had the contract not
been repudiated, the circumstances would
have revealed whether or not the
contract would have been terminated under cl.2.24. The repudiation leaves
that possibility uncertain
and the Commonwealth must bear the consequences.
Even if the Commonwealth be held to have proved that there was a 20%
possibility
that the contract would have been terminated under cl.2.24, that
finding does not enable the Commonwealth to discharge its onus.
The
Commonwealth remains unable to prove either that $B - $y is less than $x or
that 80% of ($B - $y) is less than $x.
(iv) Has the Commonwealth proved that Amann's net benefits would not have
covered its expenditure?
34. The Commonwealth's principal argument was that it is impermissible to include in Amann's damages any allowance for benefits to be obtained under a second contract, for a loss of those benefits would flow not from repudiation of the first contract but from a decision not to enter into the second contract. However, Amann's situation is not to be assessed by attempting to quantify benefits under a second contract: it is right to say that the first contract confers no right to those benefits. But, for the reasons already given, the first contract did confer a right to acquire, by performance of the contract, a commercial advantage in tendering for a second contract and that advantage must be evaluated.
35. The value of that advantage does reflect some expectation of profits to be earned under a second contract, and such an expectation, which would have value in the eyes of those engaged in the business of providing a surveillance service, is relevant to the evaluation of the tendering advantage to which Amann was contractually entitled. At all events, the Commonwealth has not shown that the advantage was valueless or was of insufficient value when added to the contractual remuneration to provide sufficient net benefits to cover the expenditure incurred by Amann prior to rescission. As the Commonwealth has failed to discharge its onus of proof, Amann is entitled to recover the expenditure incurred prior to rescission in preparing to perform and in performing the contract. That expenditure is the amount found by the Federal Court.
36. The appeal should be dismissed.
DEANE J. This appeal gives rise to some important questions relating to the
assessment of damages for repudiation or breach of contract.
It is convenient
to deal initially with the identification of the relevant principles and then
to apply those principles to the facts
of the case.
Damages in Contract
2. The general principle governing the assessment of compensatory damages in both contract and tort is that the plaintiff should receive the monetary sum which, so far as money can, represents fair and adequate compensation for the loss or injury sustained by reason of the defendant's wrongful conduct. The application of that general principle ordinarily involves a comparison, sometimes implicit, between a hypothetical and an actual state of affairs: what relevantly represents the position in which the plaintiff would have been if the wrongful act (i.e. the repudiation or breach of contract or the tort) had not occurred and what relevantly represents the position in which the plaintiff is or will be after the occurrence of the wrongful act (see, e.g., Livingstone v. Rawyards Coal Company (1880) 5 App Cas 25, at p 39; Monarch Steamship Co. Ltd. v. Karlshamns Oljefabriker (A/B) (1949) AC 196, at p 221; Butler v. Egg and Egg Pulp Marketing Board [1966] HCA 38; (1966) 114 CLR 185, at p 191). While the general principle is the same in both contract and tort, the rules governing its application in the two areas may differ in some circumstances. Those differences are largely the result of historical considerations in that they reflect distinctions between causes of action rather than reasoned development or exegesis of the law (see, e.g., Cartledge v. E. Jopling and Sons Ltd. (1963) AC 758, at pp 771-772, 782-784; Hawkins v. Clayton (1988) 164 CLR 539, at pp 583-584). They are of diminishing significance for most purposes (note, for example, the gradual assimilation of the tests of "within the contemplation of the parties" (in contract) and "reasonably foreseeable" (in tort): see, e.g., Parsons Ltd. v. Uttley Ingham & Co. [1977] EWCA Civ 13; (1978) QB 791, at pp 802, 806; B.D.C. Ltd. v. Hofstrand Farms Ltd. (1986) 26 DLR (4th) 1, at pp 13-15; Hungerfords v. Walker [1989] HCA 8; (1989) 171 CLR 125, at pp 141-142; but cf., e.g., C. Czarnikow Ltd. v. Koufos [1967] UKHL 4; (1969) 1 AC 350, at pp 383-387, 425). Nonetheless, the stage has not been reached where they can be ignored and it is arguable that the fact that actual damage is not an element of a cause of action in contract is important in relation to some aspects of the present case (see Coote, "Chance and the Burden of Proof in Contract and Tort", Australian Law Journal (1988), vol.62, 761, at pp 771-772). For that reason, the discussion of principle in this judgment should be read as confined to such an action and as not necessarily applying to a cause of action in, for example, negligence notwithstanding that much of the reasoning is applicable to a cause of action in tort and that some of the authorities referred to (including Malec v. J.C. Hutton Pty. Ltd. [1990] HCA 20; (1990) 169 CLR 638) are negligence cases. I should acknowledge at the outset my indebtedness to the judgments of the learned trial judge (Beaumont J.) and the members of the Full Federal Court (Davies, Sheppard and Burchett JJ.) and to the many helpful academic writings in relevant areas of the law, including Owen, "Some Aspects of the Recovery of Reliance Damages in the Law of Contract", Oxford Journal of Legal Studies (1984), vol.4, 393 and Fleming, "Probabilistic Causation in Tort Law", The Canadian Bar Review (1989), vol.68, 661.
3. The hypothetical position in which a plaintiff would have been if a breach
or repudiation of a contract had not occurred is not,
of course, the
hypothetical situation which would have existed if there had been no contract
at all. To the contrary, in a case
where it does not appear that the contract
would not have been performed in any event, it is customary to treat that
position as
corresponding to that which would have existed if the contract had
been fully performed (see Robinson v. Harman [1848] EngR 135; (1848) 1 Ex 850,
at p 855 (154 ER
363, at p 365)). That being so, the breach or repudiation of a contract by a
defendant does not
ordinarily entitle
the plaintiff directly to recover wasted
expenditure incurred by her in procuring or performing it. In that sense,
the
assessment
of damages for repudiation or breach of contract is not directed to
the restitutio in integrum for which equity strives
in, for example,
a case
where a contract is rescinded for fraud. There are, however, circumstances in
which the doctrine of restitution
or unjust
enrichment overlays the ordinary
general rule as to the assessment of damages and gives rise to a direct right
of action
to recover
from the other party money paid under the contract to
that other party for a consideration which has failed completely.
Even in
a
case where the consideration has not failed completely, it would seem that
that doctrine will found a direct action for
the excess
of money paid by the
innocent party to the other party over the value of any consideration actually
received if the circumstances
are such that it would be unconscionable conduct
on the part of the guilty party to retain the excess. It is unnecessary to
pursue
that question in the present case since it has not been suggested that
the repudiating party (i.e. the Commonwealth) derived or retained
any
substantial benefit for itself at the expense of the other party (i.e. Amann
Aviation Pty. Limited). It is, however, desirable
to keep in mind the
importance of the doctrine of restitution or unjust enrichment as the rational
basis of significant parts of
the common law in determining the content of
particular rules in some of the persistently grey areas of the law of
damages.
Loss of a Chance
4. The frequent inability of curial procedures to determine with certainty what has happened in the past, let alone what would have been or what will be, necessarily gives rise to a need for a number of subsidiary rules governing the determination of the loss or injury which a plaintiff has actually sustained by reason of a wrongful act. One such subsidiary rule is that, even in an action for repudiation or breach of contract where damage is not an element of the cause of action, a plaintiff bears the onus of establishing the extent of her loss or injury on the balance of probabilities. To satisfy the requirements of that rule, a plaintiff must, if she is to recover more than a nominal amount in such an action, affirmatively establish assessable damage, that is to say, loss or injury which is capable of being measured in monetary terms (see, e.g, Luna Park (N.S.W.) Ltd. v. Tramways Advertising Pty. Ltd. [1938] HCA 66; (1938) 61 CLR 286, at pp 301, 307, 311, 312). In many cases, proof of the full extent of the loss or injury sustained will involve establishing an evidentiary foundation for positive and detailed ultimate findings by the court upon the balance of probabilities. There are, however, cases where considerations of justice or the limitations of curial method render ultimate findings, about what would have been or will be, impracticable or inappropriate. In such cases, damages must be assessed on some basis other than findings about what would have ultimately happened if the repudiation or breach had not occurred or about the precise ultimate implications of the situation which exists after the repudiation or breach. In particular, it may be appropriate that damages be assessed by reference to the probabilities or the possibilities of what would have happened or will happen rather than on the basis of speculation that probabilities would have or will come to pass and that possibilities would not have or will not. If, for example, what the plaintiff has lost by reason of the defendant's repudiation or breach of contract is a less than fifty percent but nonetheless real and valuable chance of winning some contest or prize, of being the successful tenderer for some commercial undertaking or of deriving some other advantage, in circumstances where a court can decide that a proportionate figure precisely or approximately reflects the chance of success but can do no more than speculate about whether, but for the defendant's wrongful act, the plaintiff would have actually won the contest, prize or tender or derived the advantage, it would affront justice for the court to hold that the plaintiff was entitled to no compensation at all for the lost chance of competing or striving or for the wasted expenditure which was incurred in obtaining or performing the contract. In such a case, considerations of justice require that the plaintiff be entitled to recover the value of the lost chance itself and that the defendant be not allowed to take advantage of the effects of her own wrongful act to escape liability by pointing to the obvious, namely, that it is theoretically more probable than not that a less than fifty percent chance of success would have resulted in failure. Thus, for example, a plaintiff whose action against a third party has become statute barred by reason of a defendant solicitor's breach of contract may recover damages by reference to the court's assessment of what the chance of success in the action against the third party would have been even though that assessment is fifty percent or less.
5. It is not only the positive value of a chance of a benefit which may, in appropriate circumstances, require to be taken into account in the assessment of damages for a repudiation or breach of contract. The injury involved in being subjected to a significant possibility of future detriment may also, of itself, found an award of damages. If, for example, a plaintiff has sustained physical injury caused by the repudiation or breach and there is a significant chance or possibility that a particular adverse complication may result in the future but a court can do more than speculate about what will in fact occur, the plaintiff may recover damages for that chance or possibility of future detriment even though the evidence would not sustain a finding that there is a more than fifty percent chance that the complication will in fact ensue.
6. It has been truly said that the assessment of damages in contract and tort is "a pragmatic subject ... (which) does not lend itself to hard-and-fast rules" (per Cooke J., Takaro Properties Ltd. v. Rowling (1986) 1 NZLR 22, at p 69; and see, e.g., Johnson v. Agnew (1980) AC 367, at pp 400-401). The explanation of that is to be found in the fact that the assessment of common law damages for breach of contract or tort was traditionally seen as a matter for the good sense of the jury (see, e.g., Chaplin v. Hicks (1911) 2 KB 786, at pp 792-793, 796). Within the context of the principles laid down in Hadley v. Baxendale [1854] EngR 296; (1854) 9 Ex 341 (156 ER 145), the more particular rules for assessing damages for repudiation or breach of contract should be treated not "as rigid rules of universal application" but "as prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation ... without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept" (per Walsh J., Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, at p 466). That being so, it is neither desirable nor practicable to seek to formulate an exhaustive comprehensive rule defining the circumstances in which it is appropriate for a court to assess damages on the basis that what has been lost or inflicted is the probability or possibility of benefit or detriment as distinct from the benefit or detriment itself. It suffices for the purposes of the present case to say that damages should be assessed on that basis in a case where the extent of the final loss or injury actually sustained by reason of the repudiation or breach depends upon what would have happened or what will happen and the circumstances are such that the court can identify or estimate a precise or approximate proportionate chance of benefit or detriment but can do no more than speculate, on the basis of probabilities and possibilities, about what would have or will actually come about. Some examples of such cases are: (i) cases where the repudiation or breach deprived the plaintiff of an opportunity to succeed in a wagering contest or game of chance ("such as are habitually made the subject of the calculation of odds, or, at all events, of the giving and taking of odds": per Dixon and McTiernan JJ., Fink v. Fink [1946] HCA 54; (1946) 74 CLR 127, at p 143) or in a sporting or other contest ("the claim of one of a very limited number of competitors to receive the consideration to which he is contractually entitled in the distributive award of definite and material benefits, as in Chaplin v. Hicks": per Dixon and McTiernan JJ., ibid.); (ii) cases where the extent of the lost benefit or eventual detriment depends wholly or partly upon how a discretionary decision or power would have been or will be made or exercised; (iii) cases where the extent of the lost benefit or eventual detriment depends wholly or partly upon the extent to which a commercial opportunity, activity or undertaking would have been or will be successful or unsuccessful (see, e.g., Takaro Properties Ltd. v. Rowling, at pp 64, 69); and (iv) other cases where lack of information, insufficiency of current knowledge or the unpredictability of hypothetical or future conduct or events precludes a non-speculative finding about what would have actually occurred or will actually occur but evidence (e.g. expert opinion evidence), common sense or common experience enables an estimate of the approximate extent of the chance that a particular benefit would have been or will be actually obtained or that a particular detriment will be or would have been actually sustained.
7. The first three of those four categories require no further explanation
(see, for a concise catalogue of decided cases, Coote,
op.cit., at pp
767-768). An example of the fourth is a case of a type to which reference has
already been made, namely, a case where
a person has sustained physical injury
caused by a wrongful act but the inadequacy of current medical skills or
knowledge enables
no more than a conclusion about probabilities or
possibilities based on clinical observation of other cases (i.e. what
Professor
Fleming has described as a "probabilistic" assessment "based
primarily on epidemiological or other statistics": op.cit., at p 662;
and
see, generally, Callaghan v. Wm. C. Lynch Pty. Ltd. (1961) 79 WN (N.S.W.) 830,
at p 834; Ivkovic v. Aust. Iron and Steel Ltd.
(1963) SR (N.S.W.) 598, at pp
603-604). Thus, in Malec v. J.C. Hutton Pty. Ltd., the question arose whether
a plaintiff was entitled
to be compensated for future economic loss flowing
from a disease contracted as a result of the defendant employer's negligence
in
circumstances where it was more probable than not (but far from certain)
that any future economic loss would have been sustained
in any event by reason
of factors unconnected with that negligence. In deciding that the plaintiff
was entitled to be compensated
by reference to degrees of probability or
possibility, Brennan and Dawson JJ. wrote (at pp 639-640):
"The fact that the plaintiff did not work is a matterTo the same effect were the comments of Gaudron and McHugh JJ. and myself (at pp 642-643):
of history, and facts of that kind are ascertained for
the purposes of civil litigation on the balance of
probabilities: if the court attains the required degree of
satisfaction as to the occurrence of an historical fact,
that fact is accepted as having occurred. By contrast,
earning capacity can be assessed only upon the hypothesis
that the plaintiff had not been tortiously injured: what
would he have been able to earn if he had not been
tortiously injured? To answer that question, the court must
speculate to some extent. As the hypothesis is false - for
the plaintiff has been injured - the ascertainment of
earning capacity involves an evaluation of possibilities,
not establishing a fact as a matter of history.
Hypothetical situations of the past are analogous to future
possibilities: in one case the court must form an estimate
of the likelihood that the hypothetical situation would have
occurred, in the other the court must form an estimate of
the likelihood that the possibility will occur. Both are to
be distinguished from events which are alleged to have
actually occurred in the past."
"When liability has been established and a common law(See, also, Jones v. Schiffmann [1971] HCA 52; (1971) 124 CLR 303, at pp 308-309, 316; McIntosh v. Williams (1979) 2 NSWLR 543, at pp 550-551.)
court has to assess damages, its approach to events that
allegedly would have occurred, but cannot now occur, or that
allegedly might occur, is different from its approach to
events which allegedly have occurred. A common law court
determines on the balance of probabilities whether an event
has occurred. If the probability of the event having
occurred is greater than it not having occurred, the
occurrence of the event is treated as certain; if the
probability of it having occurred is less than it not having
occurred, it is treated as not having occurred. Hence, in
respect of events which have or have not occurred, damages
are assessed on an all or nothing approach. But in the case
of an event which it is alleged would or would not have
occurred, or might or might not yet occur, the approach of
the court is different. The future may be predicted and
the hypothetical may be conjectured. But questions as to
the future or hypothetical effect of physical injury or
degeneration are not commonly susceptible of scientific
demonstration or proof. If the law is to take account of
future or hypothetical events in assessing damages, it can
only do so in terms of the degree of probability of those
events occurring. The probability may be very high - 99.9
per cent - or very low - 0.1 per cent. But unless the
chance is so low as to be regarded as speculative - say less
than 1 per cent - or so high as to be practically certain -
say over 99 per cent - the court will take that chance into
account in assessing the damages."
8. As the above passages from the judgments in Malec v. J.C. Hutton Pty. Ltd.
point out, there is an obvious contrast to be drawn
between the assessment of
damages by reference to a court's view of the proportionate chances that a
benefit or detriment would have
been or will be obtained or sustained and the
approach ordinarily adopted by the courts in determining what has occurred in
the past.
That point had already been made by Lord Diplock in Mallett v.
McMonagle (1970) AC 166, at p 176:
"The role of the court in making an assessment ofThe fact that, in determining what has actually occurred in the past, a court acts on the basis that a more than fifty percent probability is certain and a less than fifty percent probability is irrelevant does not provide any acceptable reason for adopting a similar approach to determining what will happen in the future or what would have happened in the hypothetical situation that something which has occurred had not. The determination of future and hypothetical events is more likely to involve unavoidable speculation than the determination of what has actually happened in the past and the approach that a fifty percent probability represents a dividing line between certainty and non-existence or irrelevance would inevitably lead to injustice and a degree of absurdity if applied to the hypothetical or the future. Thus, in Davies v. Taylor (1974) AC 207, at p 213, Lord Reid explained why a "balance of probability" test should be rejected in a case where a plaintiff's claim was that, by reason of the defendant's wrongful conduct, she had lost the chance of the financial benefits which would have been derived by her from her deceased husband if there had been a reconciliation between them:
damages which depends upon its view as to what will be and
what would have been is to be contrasted with its ordinary
function in civil actions of determining what was. In
determining what did happen in the past a court decides
on the balance of probabilities. Anything that is more
probable than not it treats as certain. But in assessing
damages which depend upon its view as to what will happen in
the future or would have happened in the future if something
had not happened in the past, the court must make an
estimate as to what are the chances that a particular thing
will or would have happened and reflect those chances,
whether they are more or less than even, in the amount of
damages which it awards."
"If the balance of probability were the proper testIt is true that Lord Reid's reasons for rejecting the balance of probability test in the circumstances of Davies v. Taylor could be applied equally to some categories of case in which a court is concerned with the determination of past events. That does not mean, however, that the traditional approach for determining past facts should be applied to a case requiring the assessment of damages on the basis of what would have happened or will happen. To the contrary, it lends support for the view that there is a need for modification or reassessment in some categories of case of the conventional approach that, in assessing damages for what has occurred in the past, a court decides on the balance of probabilities and assumes certainty where none in truth exists (see, e.g., Snell v. Farrell (1990) 72 DLR (4th) 289, at p 299; Herskovits v. Group Health Co-op. (1983) 664 P 2d 474, at pp 486-487; and see, generally, Fleming, op.cit., and "Probabilistic Causation in Tort Law: A Postscript", The Canadian Bar Review (1991), vol.70, 136; King, "Causation, Valuation, and Chance in Personal Injury Torts Involving Preexisting Conditions and Future Consequences", The Yale Law Journal (1981), vol.90, 1353; but note Hotson v. East Berkshire H.A [1988] UKHL 1; (1987) AC 750 (an action in negligence: see pp 765, 774-775) at pp 782-783, 789-790, 792-794). However, it is unnecessary to pursue that question here since, as will be seen, the questions involved in the present case concern the approach to be adopted, in the assessment of damages, in relation to what would have happened in a hypothetical situation which would have existed if a repudiation of a contract had not taken place.
what is to happen in the two cases which I have supposed of
a 60 per cent. and a 40 per cent. probability. The 40 per
cent. case will get nothing but what about the 60 per cent.
case. Is it to get a full award on the basis that it has
been proved that the wife would have returned to her
husband? That would be the logical result. I can see no
ground at all for saying that the 40 per cent. case fails
altogether but the 60 per cent. case gets 100 per cent. But
it would be almost absurd to say that the 40 per cent. case
gets nothing while the 60 per cent. case award is scaled
down to that proportion of what the award would have been
if the spouses had been living together. That would be
applying two different rules to the two cases. So I reject
the balance of probability test in this case."
9. In the assessment of damages, as in all other matters, it is the duty of a
court to administer justice without favouring either
party. It follows that,
in a case where it is, on the material before a court, appropriate to assess
damages by reference to a proportionate
chance or possibility, it is not open
to a plaintiff to elect that the court do what is inappropriate and award
damages assessed
on the false basis that everything that is more than fifty
percent likely would have or will come about and anything that is not
more
than fifty percent likely can be ignored as irrelevant (see, e.g., Jones v.
Schiffmann, at p 316; Otter v. Church, Adams, Tatham
and Co. (1953) Ch 280, at
pp 290-291; Hall v. Meyrick (1957) 2 QB 455, at pp 470-471; but cf. Sykes v.
Midland Bank Executor Co.
(1971) 1 QB 113, at p 130). The point can be
illustrated by example. If, for example, the first party to a tripartite
agreement
has lost a fifty-one percent chance of a benefit by reason of a
wrongful breach of the agreement by the second party and the third
party to
the agreement has lost an alternative forty-nine percent chance of the same
benefit by reason of the same breach, it would
be unreasonable if the law were
to entitle the first party to recover damages from the second party for the
value of the whole benefit.
If the third party was also entitled to recover
forty-nine percent of the value of the whole benefit, that would be quite
unfair
from the point of view of the second party who would be required to pay
damages equal to one hundred and forty-nine percent of the
total value of what
had been really lost on any approach. If the third party was entitled to
claim nothing, that would be patently
unjust from her point of view. If a
further example is needed, it is provided in the above extract from the speech
of Lord Reid
in Davies v. Taylor. In Malec v. J.C. Hutton Pty. Ltd., Gaudron
and McHugh JJ. and I indicated our acceptance of the view that a
plaintiff is
not entitled to elect to rely on the balance of probability test in a case
where it is appropriate to assess damages
by reference to hypothetical or
future probabilities or possibilities when we said (at p 643):
"Where proof is necessarily unattainable, it would beA similar view appears to me to be implicit in the passage from the judgment of Brennan and Dawson JJ. which I have quoted above.
unfair to treat as certain a prediction which has a 51 per
cent probability of occurring, but to ignore altogether a
prediction which has a 49 per cent probability of occurring.
Thus, the court assesses the degree of probability that an
event would have occurred, or might occur, and adjusts its
award of damages to reflect the degree of probability. The
adjustment may increase or decrease the amount of damages
otherwise to be awarded. ... The approach is the same
whether it is alleged that the event would have occurred
before or might occur after the assessment of damages takes
place."
10. In some circumstances, the determination of what proportionate figure
represents the extent of the chance or possibility of
benefit or detriment and
the assessment of what would represent fair and just compensation for an
actual loss of that benefit or
an actual sustaining of that detriment is
relatively straightforward. Where that is so, there is little difficulty in
assessing
damages for the loss of the chance of the benefit or for the
existence of the possibility of detriment (see, e.g., as to the
straightforward
process of valuing such a chance, Takaro Properties Ltd. v.
Rowling, at pp 62-65; and cf., generally, King, op.cit., at pp 1381-1387).
In
other circumstances, the assessment of damages for the loss of such a chance
or for the existence of such a possibility may be
fraught with difficulty and
attended by uncertainty. The mere fact that damages cannot be assessed
without difficulty and uncertainty
does not, however, relieve a court from the
responsibility of attempting to assess them as best it can (see, e.g., Howe v.
Teefy
(1927) 27 SR (N.S.W.) 301, at p 306; McRae v. Commonwealth Disposals
Commission [1951] HCA 79; (1951) 84 CLR 377, at pp 411-412).
As was pointed
out by Dixon and
McTiernan JJ. in Fink v. Fink, at p 143: "Where there has been
an actual loss
of some sort, the
common law does
not permit difficulties of estimating the
loss in money to defeat the only remedy
it provided for breach of contract,
an
award of
damages." There are, however, extreme cases in which curial
procedures are simply
inadequate to determine whether there
was any
real or
significant chance that an alleged benefit would actually have been obtained
but for the repudiation or breach of
contract
or to assess the intrinsic worth
of a particular suggested "benefit". The profit which
one experienced
commercial person
may see
as lying at the end of some commercial undertaking
might be seen as an inevitable and disastrous
loss by another. What seems
to
one person to be a benefit may be thought by other and wiser people to be
valueless or even a detriment.
The nature of what would
have been obtained if
the contract had been performed may be so completely speculative that "it is
quite
impossible to place any
value" upon it (see, e.g., McRae, at p 411; Fink
v. Fink, at pp 134-135, 143). In such cases, recovery of
other than nominal
damages
by the plaintiff will depend either upon the applicability of
principles of restitution to enable the
direct recovery of a benefit
obtained
by the defendant or upon the presumption of value referred to in the following
paragraph to
enable the recovery of wasted
expenditure.
Reliance Damages
11. In a case where a plaintiff has incurred expenditure either in procuring the contract or in its performance but it is impossible or difficult to establish the value of any benefits which the plaintiff would have derived from performance by the defendant, considerations of justice dictate that the plaintiff may rely on a presumption that the value of those benefits would have been at least equal to the total detriment which has been or would have been sustained by the plaintiff in doing whatever was reasonably necessary to procure and perform the contract (see, e.g., McRae, at p 414; Holt v. United Security Life Ins. and Trust Co. (1909) 72 Atlantic Reporter 301, at pp 305-306; L. Albert and Son v. Armstrong Rubber Co. (1949) 178 F 2d 182, at pp 188-189). In my view, the rational basis of that presumption is that that total detriment represents what would reasonably have been in the contemplation of the parties themselves as the cost to the plaintiff of full performance by the defendant and constitutes some evidence, in proceedings between them, of the value of the total benefits which would have been derived by the plaintiff from such performance. It follows from it that, at least in a case where proof of value is impossible or difficult, it is presumed in the plaintiff's favour that the future net benefits (i.e. excess of future benefit over future detriment) which would have been derived from performance of the contract would have been of a value sufficient to recoup the past net expenditure reasonably incurred in procuring or performing it. Where that presumption is operative, it enables the recovery by a plaintiff of what are commonly referred to as "reliance damages", that is to say, damages equivalent to the wasted expenditure which has been reasonably incurred in reliance upon the assumption that the contractual promises of the defendant would be honoured. The presumption will be rebutted if it be self-evident or established that the plaintiff would have derived no financial or other benefit from performance of the contract or that any financial or other benefit which would have been derived from future performance would not have been sufficient in value to counterbalance the past expenditure. The presumption will not, however, be displaced merely by the circumstance that the benefits which the plaintiff would have obtained from performance by the defendant included the chance of some more remote benefit and it is a matter of speculation whether that ultimate benefit would have in fact been obtained or by the circumstance that the perceived "benefit" which the plaintiff sought and for which she incurred the past expenditure is something which is of value only to the plaintiff or which, for some other reason, is not capable of being objectively valued in monetary terms (see, e.g., McRae, at p 414; Fink v. Fink, at pp 134-135, 143). If it be established that the plaintiff would not, in any event, have derived the "benefit" which she sought from performance by the defendant or that any "benefit" which would have been derived is capable of being valued in monetary terms and would, when so valued, have been inadequate to recoup the expenditure, the plaintiff's recovery will be limited to the extent (if at all) to which it has not been established that that expenditure would not have been recouped (see, e.g., Bowlay Logging Ltd. v. Domtar Ltd. (1978) 87 DLR (3d) 325, at pp 332-335; affd 135 DLR (3d) 179). Even in a case where it is established that the plaintiff would have incurred a loss if the contract had been fully performed, reliance damages can be recovered in respect of wasted expenditure to the extent (if at all) that the past net expenditure exceeds that ultimate loss since, to that extent, the expenditure would have been recouped if there had been no breach (see, e.g., Sunshine Vacation Villas Ltd. v. The Bay (1984) 13 DLR (4th) 93, at pp 102-103).
12. It should be apparent from what has been said above that an award of reliance damages does not represent the direct recovery of the wasted net expenditure. The basis of an award of reliance damages is the ordinary one in an action for repudiation or breach, namely, that the plaintiff is, so far as money can do it, to be placed in the same situation with respect to damages as if the repudiation or breach had not occurred. Such an award represents the recovery of the wasted net expenditure only in the indirect sense that, in the assessment of damages, the net benefits which would have been derived but for the repudiation or breach are quantified in monetary terms by reference to the presumption that their value would have at least equalled that wasted expenditure. In other words, the wasted expenditure represents "an alternative measure of gains prevented" (see Corbin on Contracts, vol.5, (1964), p 192).
13. The general statements in the two preceding paragraphs may be susceptible
of criticism on the grounds that they are dogmatic
about some matters which
still remain the subject of learned discussion and differences of opinion
(see, e.g., Owen, op.cit.; Slawson,
"The Role of Reliance in Contract
Damages", Cornell Law Review (1990), vol.76, 197). They have been framed with
the circumstances
of the present case in mind and are not comprehensive in
that they will be inadequate to deal with some particular problems which
might
arise in the assessment of damages in some of the circumstances to which they
apply. Where, for example, the repudiation or
breach of contract directly
results in a detriment, such as an enforced expenditure of money, which would
not otherwise have been
sustained, the amount of that detriment will also be
recoverable in a case where reliance damages are assessed on the presumption
that the value of the benefits which the plaintiff would have derived from
performance of the contract should be treated as at least
equal in value to
the total detriment which had been or would have been sustained by the
plaintiff in doing whatever was reasonably
necessary to procure and perform
the contract. The reason why that is so is that when one compares the
position which would have
existed if the contract had been performed and the
position which exists after its breach or repudiation, the comparison will
disclose
that, but for the breach or repudiation, net expenditure in procuring
or performing the contract would (on the basis of the presumption)
have been
counterbalanced by the benefits resulting from performance, while expenditure
consequent upon the repudiation or breach
would not have been incurred at
all.
The Appeal: Facts, Issues and Two Problems
14. The detailed facts of the present case, the relevant contractual provisions and the issues involved in the appeal are set out in the joint judgment of Mason C.J. and Dawson J. Except to the extent necessary for the purposes of discussion, it is unnecessary that I repeat them. It is now common ground between the parties that the conduct of the Commonwealth constituted a repudiation of the contract between itself and Amann Aviation Pty. Limited ("Amann") and that Amann validly rescinded the contract on the ground of that repudiation. It would also seem to be common ground that the construction of cl.2.24 of the contract favoured by the Full Court should be accepted and that the power of the Secretary of the Commonwealth Department of Transport ("the Secretary") to cancel the contract in the event of breach by Amann was not conferred upon him merely as agent for the Commonwealth and could not be exercised capriciously or unfairly. Under the contract, Amann had agreed to provide aerial surveillance of the northern coastline of Australia for a period of three years. Prior to the repudiation, it had incurred substantial expenditure (including liability to an associated company) in equipping itself to provide surveillance services under the contract. The effect of the Commonwealth's repudiation was that the benefit of that expenditure was largely wasted. The present appeal is by the Commonwealth from the decision of the majority of the Full Court of the Federal Court of Australia to the effect that Amann was entitled to recover from the Commonwealth reliance damages equal to the whole of the net detriment it sustained by reason of incurring wasted expenditure in reliance upon the assumption that the Commonwealth would honour its contractual promises. Ultimately, the critical questions on the appeal are whether the Full Court's conclusion that Amann was entitled to recover reliance damages in the circumstances of the case was correct and whether, if it was, the Full Court was in error in awarding damages equivalent to the whole of its assessment of the amount of Amann's wasted net expenditure.
15. There are two major problems involved in the comparison of the position
in which Amann would have been placed if the Commonwealth
had not repudiated
the contract and the position in which it was placed after it had rescinded
the contract on the ground of the
Commonwealth's repudiation. The first
problem is that, at the time of the Commonwealth's repudiation, Amann was
itself in breach
of the contract. Like the majority of the Full Federal
Court, I consider that that existing breach of contract on the part of Amann
was sufficient to found a proper exercise of the power of cancellation
conferred upon the Secretary by cl.2.24 and that there was
a significant
possibility that, if the contract had not been repudiated by the Commonwealth,
it would have been validly "cancelled"
by the Secretary pursuant to that
clause. If it had been so "cancelled", Amann would not have been entitled to
the performance of
the contract by the Commonwealth or to claim damages for
non-performance. The second problem also relates to the hypothetical
situation
which would have existed if the contract had not been repudiated.
If the contract had turned out to represent a one-off involvement
by Amann in
aerial surveillance in this country and the aircraft acquired for performance
of the contract could not, at the expiry
of the contract, be sold locally at a
value which reflected their special suitability for surveillance purposes, the
contract would
not have been a profitable one from Amann's point of view. In
fact, however, Amann did not regard its involvement in aerial surveillance
in
this country as a one-off activity. To the contrary, a significant commercial
advantage which Amann sought, and would have derived,
from the contract if it
had run its full course would have been the favourable position in which it
would have been placed for obtaining
a new contract with the Commonwealth for
a further period of aerial surveillance of the northern coast. There are
obvious difficulties
about placing a value in monetary terms upon that
favourable position.
Amann's Claim for Reliance Damages
16. It is convenient, for the moment, to put to one side the first of the
above-mentioned problems, that is, the significant possibility
that the
contract would, if it had not been repudiated by the Commonwealth, have been
cancelled in any event by the Secretary. There
are two aspects of the second
problem which are of present significance. The first is that it is impossible
to do more than speculate
about what Amann's approximate proportionate chance
of obtaining a further contract after the expiry of the existing contract
would
have been if the contract had run its course. The most that can be said
is that, at the end of the existing contract, Amann would
have almost
certainly enjoyed substantial advantages, in terms of experienced personnel
and equipment held at depreciated values,
over any potential new supplier of
the relevant surveillance services and that, even if it had not itself won a
further contract,
there would have been a significant chance that it could
sell its local undertaking or its aircraft to its successor for a price
which
reflected the special value of the aircraft (by reason of their equipment) to
a supplier of coastal surveillance services.
The second aspect is that one
can also do no more than speculate about how advantageous to Amann any such
future contract would
have been if it had eventuated. The result is that it
is impossible to do more than speculate about either the value to Amann of
the
chance of a further contract which would have existed at the end of the
contract period or the price it would have obtained for
its equipment if the
contract had been fully performed by the Commonwealth. It follows from the
earlier discussion of relevant principles
that, in these circumstances, Amann
is entitled to found its claim for damages upon the presumption that the value
of the contractual
benefits which it would have derived from full performance
by the Commonwealth would have at least equalled the expenditure incurred
in
obtaining the contract and in performance of it on its part. Clearly enough,
the difficulty of assessing the value of the chance
of a further contract or
the resale value of the equipment makes it impossible for the Commonwealth to
demonstrate that the total
monetary value of any benefits which would have
been derived by Amann from full performance would have been less than the
total of
its net expenditure. That being so, and subject to one important
qualification, Amann is entitled to recover reliance damages equivalent
to its
wasted expenditure.
Amann's Loss of an 80% Chance
17. The qualification referred to in the preceding paragraph relates to the
problem which was put to one side, namely, the significant
possibility that
the contract would, in any event, have been cancelled by the Secretary
pursuant to cl.2.24 on the ground of Amann's
now admitted breach of contract.
The majority of the Full Court of the Federal Court concluded that there was a
twenty percent chance
of such cancellation, that is to say, that the effect of
the Commonwealth's repudiation of the contract was that Amann lost an eighty
percent chance of obtaining the benefits which it would have derived from full
performance on the part of the Commonwealth. The
twenty percent chance that
the contract would have been cancelled in any event is of a different nature
from the chance that Amann
may have obtained a further contract. The chance
of a further contract was itself an ingredient of the net benefits which Amann
would have obtained from performance of the contract by the Commonwealth and,
as such, is accounted for by the presumption that the
total value of those
benefits would have at least equalled wasted net expenditure. In contrast,
the twenty percent chance of cancellation
is not a contingency which has been
factored into the net benefits which would have been derived from future
performance of the contract
for the purposes of that presumption. It is a
superimposed risk which would have flowed not from performance of the contract
but
from Amann's own breach of the contract. That means that the combined
effect of that presumption and the superimposed risk of cancellation
is that
what Amann lost by reason of the Commonwealth's repudiation was an eighty
percent chance of recovering its wasted expenditure.
In circumstances where
damages are being assessed on the basis of what would have happened in a
hypothetical situation and where
it is a matter of speculation whether the
Secretary would, in the exercise of the wide discretionary power entrusted to
him, have
actually cancelled the contract (see category (ii) above), it would
be inappropriate and unjust to go beyond the determination that
what Amann
lost was an eighty percent chance and, by reference to a balance of
probability test, require the Commonwealth to pay
damages assessed on the
basis that there had been no possibility of cancellation and that Amann had
lost not an eighty percent but
a one hundred percent chance of recoupment. In
other words, the effect of the principles examined earlier in this judgment is
that
the case is one in which "the court must make an estimate as to what are
the chances that a particular thing ... would have happened
and reflect those
chances, whether they are more or less than even, in the amount of damages
which it awards" (per Lord Diplock,
Mallett v. McMonagle, at p 176; and see,
also, Malec v. J.C. Hutton Pty. Ltd., at pp 642-643). That being so, the
damages which
Amann is entitled to recover from the Commonwealth are, for the
reasons which I have endeavoured to explain in this judgment, limited
to the
value of an eighty percent chance of recouping its wasted expenditure, that is
to say, to eighty percent of the value of that
expenditure.
The Rule in The Mihalis Angelos
18. There is one further matter which should be mentioned. It is that it was
submitted on behalf of the Commonwealth that to assess
damages on the basis
that there was an eighty percent chance that the contract would not have been
cancelled by the Secretary or
on the basis that Amann lost a chance of a
further contract is to assume that the defaulting party would have acted "so
as to increase
its liability" and that that assumption is "contrary to the
rule recognized in such cases as The Mihalis Angelos (1971) 1 QB 164"
(see,
generally, McGregor on Damages, 15th ed. (1988) pars 366-367). That submission
can be shortly answered. In so far as the possibility
of cancellation is
concerned, the answer to the submission is that the effect of the conclusion
that the power of cancellation conferred
by cl.2.24 was vested in the
Secretary personally and could not be exercised capriciously or unfairly is
that the power of cancellation
was not a power which was exercisable by the
Commonwealth itself. It was exercisable by a third party (cf. Richardson v.
Mellish
[1824] EngR 715; (1824) 2 Bing 229 (130 ER 294)). In so far as the chance of a further
contract which Amann would have enjoyed if the contract had
been fully
performed is concerned, that chance would have existed not because the
Commonwealth acted in a way which would have increased
its liability but
because of the advantageous position which Amann would occupy regardless of
the manner in which the Commonwealth
performed the contract. The "rule"
recognized in cases such as The Mihalis Angelos does not require an assumption
that, after full
performance of a contract, the defaulting party would have
acted against her own interests and obligations by, for example, declining
to
accept the most favourable tender for a further contract. It is no more an
answer to Amann's claims to say that the Commonwealth
might, at the end of the
day, have arbitrarily refused to deal with Amann than was the possibility that
the defendant might have
arbitrarily refused to give the plaintiff a prize an
answer to the claim in Chaplin v. Hicks or the possibility that the defendant
might have acted unreasonably an answer to the plaintiffs' claim in Abrahams
v. Herbert Reiach Ltd. (1922) 1 KB 477. In any event,
as has been mentioned,
the impossibility or difficulty of ascertaining the value of the benefits
which Amann would have derived from
performance of the contract flowed not
only from the chance of a further contract. It also flowed from the
alternative chance that,
in the event that Amann did not obtain a further
contract, it would have succeeded in selling either its local business
(including
its planes) or the planes themselves to a new operator at a price
which reflected the value of the planes' special equipment to a
supplier of
the relevant coastal surveillance services.
Conclusion
19. In the result, the amount of the primary damages awarded to Amann by the Full Court of the Federal Court must be reduced by one-fifth or twenty percent. It will be necessary that a consequential adjustment be made in the amount of interest included in the overall award. The matter should be stood over to afford the parties an opportunity of agreeing on the form of the appropriate orders to effect that result. In so far as costs are concerned, the Commonwealth has failed on its principal argument which was to the effect that Amann was not entitled to an award of reliance damages at all. In all the circumstances, the Commonwealth should pay two-thirds of Amann's costs of the appeal to this Court and the order as to costs made by the Full Court of the Federal Court should remain undisturbed.
TOOHEY J. The circumstances giving rise to this appeal are set out in the judgment of the Chief Justice and Dawson J. As will appear, I am in general agreement with the principles enunciated in that judgment leading to a conclusion that reliance damages are appropriate in the assessment of the respondent's claim. But on some questions, in particular the onus of proof where reliance damages are claimed and the application of the relevant principles to the facts of this case, I take a different view which leads to allowing the appeal and reducing the amount of damages awarded to the respondent ("Amann") by the Full Court of the Federal Court.
2. I take, as a convenient starting point in a consideration of the damages
to which Amann is entitled, the statement by Parke B.
in Robinson v. Harman
[1848] EngR 135; (1848) 1 Ex 850, at p 855 [1848] EngR 135; (154 ER 363, at p 365):
"that where a party sustains a loss by reason of a breach ofThe time at which Parke B. wrote is not without significance. The award of damages was still very much one for the jury, based on its assessment of what was fair and reasonable in the circumstances. "It was only with the decline in the use of juries in actions for breach of contract ... that the judge was required to articulate the principles upon which damages for the breach were to be assessed": Davis, "Damages" in Finn (ed.), Essays on Contract, (1987), pp 200-201.
contract, he is, so far as money can do it, to be placed in
the same situation, with respect to damages, as if the
contract had been performed".
3. The principle enunciated in Robinson v. Harman is well entrenched in this country: Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, at p 471; Pennant Hills Restaurants Pty. Ltd. v. Barrell Insurances Pty. Ltd. [1981] HCA 3; (1981) 145 CLR 625, at pp 637-638; Gates v. City Mutual Life Assurance Society Ltd. (1986) 160 CLR 1, at pp 11-12. It was Fuller and Perdue who in 1936 identified the purposes to be pursued in awarding contract damages by reference to restitution interest, reliance interest and expectation interest: Fuller and Perdue, "The Reliance Interest in Contract Damages", (1936-1937) 46 Yale Law Journal 52, 373. We may put aside any question of restitution in the present case. The terms "expectation loss", "expectation damages", "reliance loss" and "reliance damages" are now part of the vocabulary of the courts: see, for instance, Gates v. City Mutual Life Assurance Society Ltd., at p 12. These expressions do not represent new principles; they are intended to reflect the loss which the party to a contract may have suffered by reason of a breach by the other party. They represent the working out of the principle in Robinson v. Harman.
4. Where it is clear that a profit would have been made by the plaintiff and the extent of that profit is ascertainable, the simplest means of measuring the loss suffered as a result of the breach is to determine the amount of lost profits attributable to the breach. But where the contract would not have resulted in a profit for the plaintiff or where profits are indeterminate or the outcome of the contract uncertain, the plaintiff is not thereby denied recovery. The principle of Robinson v. Harman still operates though some other mechanism must be employed to enable it to do so. That no profit would have been made does not mean that no loss has been incurred by the plaintiff as a result of the breach. And mere difficulty in assessing damages does not relieve a court of the responsibility of estimating them as accurately as possible: Fink v. Fink [1946] HCA 54; (1946) 74 CLR 127, at p 143; McRae v. Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377, at pp 411-412; Chaplin v. Hicks (1911) 2 KB 786, at p 792. Damages are recoverable but, rather than prospective profits, expenditure incurred in the partial performance of or preparation for the contract may be a more appropriate yardstick for quantifying the loss suffered. Where the loss is quantified in this way, the plaintiff is awarded "reliance damages".
5. Equally, however, if the rule in Robinson v. Harman is to be applied
properly, where a contract would have resulted in a loss
to the plaintiff he
is only entitled to damages equal to expenditure discounted according to that
loss. If that loss would have been
greater than the expenditure, only nominal
damages can be awarded. In Bowlay Logging Ltd. v. Domtar Ltd. (1978) 87 DLR
(3d) 325,
Berger J., at p 335, adopted this statement in Corbin on Contracts,
vol.5, (1964), at pp 205-206:
"If, on the other hand, it is proved that full performanceIf reliance damages are considered in this way, the quantification of damages by reference to expenditure is, as Mason C.J. and Dawson J. say, fully consistent with the primary rule that a successful plaintiff should be placed in the same position as if the contract had been performed.
would have resulted in a net loss to the plaintiff, the
recoverable damages should not include the amount of this
loss. If the amount of his expenditure at the date of
breach is less than the expected net loss, he should be
given judgment for nominal damages only. If the
expenditures exceed this loss, he should be given judgment
for the excess." (emphasis in Bowlay Logging Ltd. v. Domtar
Ltd.)
6. It is appropriate at this point to mention Hadley v. Baxendale [1854] EngR 296; (1854) 9 Ex
341 (156 ER 145). The date of this decision places
it within a few years of
Robinson v. Harman. It will be remembered
that the plaintiff was suing for
damages for breach of a contract
to carry a shaft to the plaintiff's mill, the
plaintiff claiming
loss of profits for delay in delivery. The following
passage from
the judgment of Alderson B., at p 354 (p 151 of ER), has been
referred to many times:
"(T)he damages ... should be such as may fairly and
reasonably be considered either arising naturally,
i.e., according to the usual course of things, from such
breach of contract itself, or such as may reasonably be
supposed to have been in the contemplation of both parties,
at the time they made the contract, as the probable result
of the breach of it."
7. Hadley v. Baxendale does not detract from the principle in Robinson v.
Harman. It is concerned with the question of remoteness
and marks out the
limits of the heads of damage for which a plaintiff is entitled to be
compensated. Fuller and Perdue, at p 84,
thought that the case stood for two
propositions:
"(1) that it is not always wise to make the defaultingI mention Hadley v. Baxendale at this stage of these reasons only to make clear that it does not touch the basic question of whether a plaintiff is confined to expectation loss or may recover reliance loss.
promisor pay for all the damage which follows as a
consequence of his breach, and (2) that specifically the
proper test for determining whether particular items of
damage should be compensable is to inquire whether they
should have been foreseen by the promisor at the time of
the contract".
8. In what has been written so far, I am not to be taken as implying that a plaintiff may opt to rely upon expectation loss or reliance loss or that a plaintiff who cannot demonstrate any loss of profits may, without more, recover expenditure incurred in preparation for or performance of the contract. Equally, a defendant may not force a plaintiff to choose an approach destined to result in an award of no more than nominal damages. The task of the court remains one of placing the plaintiff, so far as can be done by an award of damages, in the position he would have been had the contract been performed. The plaintiff cannot be put in a better position than he would have been if the contract had been performed; the defendant is not an insurer of the venture on which the plaintiff embarked: L. Albert and Son v. Armstrong Rubber Co. (1949) 178 F 2d 182, at p 189. It follows that, if the plaintiff would not have recouped his outlay in any event, he is not entitled to reliance damages. I agree with the Chief Justice and Dawson J. that opinions expressed in decisions such as Anglia Television Ltd. v. Reed (1972) 1 QB 60, at pp 63-64, and CCC Films Ltd. v. Impact Quadrant Films Ltd. (1985) QB 16, at p 32, that a plaintiff may, at his option, claim for loss of profits or wasted expenditure are not appropriate ways of looking at the question. Reliance damages are a means of compensating the plaintiff where there has been no loss of profits or, more likely, where the plaintiff cannot prove loss of profits with any certainty. In Carr v. J.A Berriman Pty. Ltd. [1953] HCA 31; (1953) 89 CLR 327 this Court upheld an award of damages that included both lost profit and expenditure incurred. But the Court was not called upon to consider in any detail the recoverability of these items. In T.C. Industrial Plant Pty. Ltd. v. Robert's Queensland Pty. Ltd. [1963] HCA 57; (1963) 37 ALJR 289 this Court accepted the appropriateness of damages assessed by reference to expenditure and liabilities incurred by the plaintiff in carrying out another contract with a third party, the existence of which the defendant had been told about when the contract between the parties was made.
9. In the present case the Full Court held that wasted expenditure was the
appropriate way of approaching the assessment of Amann's
damages. Burchett J.
said, [1990] FCA 55; (1990) 22 FCR 527, at p 569:
"there is ample authority to support a claim of thatThis was such a case and, as the reasons of the Chief Justice and Dawson J. demonstrate, Amann was entitled to damages on a reliance basis.
nature in cases where a breach of contract has cut short
contractual expectations so as to prevent an assessment, or
a reasonably accurate assessment, being made in the normal
way".
10. It is at this point that I depart from the approach taken by the Chief
Justice and Dawson J. Where damages are most appropriately
assessed by
reference to expenditure incurred (that is, where profits are difficult or
impossible to quantify or where the outcome
of the contract is not
predictable), it is said that the defendant may show that the plaintiff would
not have recovered his outlay
even if the contract had been fully performed.
Stated that way, there is an onus cast upon the defendant. But the primary
rule is
that it is for the plaintiff to establish the damages to which he is
entitled. McGregor on Damages, 15th ed. (1988), par.1779, n.2
observes:
" Statements that the plaintiff has the burden of proofBecause reliance damages and expectation damages are reflections of a general principle, there is no warrant for singling out one (in this case reliance damages) and, in that instance, placing the burden of proof on the defendant. Indeed, as the relevant information is likely to be in the hands of the plaintiff rather than the defendant, such a burden may be an almost impossible one for the defendant to discharge.
of damage are infrequent in the cases since the rule is
beyond doubt."
11. However, to say as a general proposition that it is for the plaintiff to
prove his damages is not to say that, in some instances,
damage may not be
inferred or presumed: see McGregor on Damages, par.1785 in relation to
damages in tort. Nor is it to fail to
recognise that the quantification of
damages is "in many cases no more than an approximation lacking in
mathematical or economic
accuracy or sufficiency" (Pennant Hills Restaurants,
at p 636) or even that the assessment of damages "does sometimes, of
necessity,
involve what is guess work rather than estimation": Jones v.
Schiffmann [1971] HCA 52; (1971) 124 CLR 303, at p 308. It is now
almost a century
since
Bowen LJ. said in Ratcliffe v. Evans (1892) 2 QB 524, at pp 532-533:
"As much certainty and particularity must be insisted on ...
in ... proof of damage, as is reasonable, having regard to
the circumstances and to the nature of the acts themselves
by which the damage is done. To insist upon less would be
to relax old and intelligible principles. To insist upon
more would be the vainest pedantry."
12. Authority for the proposition that the onus rests on the appellant ("the
Commonwealth") in the present circumstances to prove
that Amann would not have
recovered expenses had the contract been performed is derived mainly from
other jurisdictions. In L. Albert
and Son, the question arose in the context
of a counterclaim in which the defendant alleged that the plaintiff was in
breach of a
sales contract. Learned Hand C.J., speaking for the United States
Court of Appeals, said that, where a contract would have proved
profitable to
a party not in breach, expenses were recoverable. He then went on to say, at
p 189:
"On the other hand, on those occasions in which theAnd in Bowlay Logging Ltd v. Domtar Ltd, Berger J. said, at p 334, after referring to L Albert and Son:
performance would not have covered the promisee's outlay,
such a result imposes the risk of the promisee's contract
upon the promisor. We cannot agree that the promisor's
default in performance should under this guise make him an
insurer of the promisee's venture; yet it does not follow
that the breach should not throw upon him the duty of
showing that the value of the performance would in fact
have been less than the promisee's outlay. It is often
very hard to learn what the value of the performance would
have been; and it is a common expedient, and a just one, in
such situations to put the peril of the answer upon that
party who by his wrong has made the issue relevant to the
rights of the other. On principle therefore the proper
solution would seem to be that the promisee may recover his
outlay in preparation for the performance, subject to the
privilege of the promisor to reduce it by as much as he can
show that the promisee would have lost, if the contract had
been performed."
" It has been said by the United States Circuit Court ofBerger J. accepted this allocation of the burden of proof and proceeded to find, on the basis that the plaintiff's losses would have continued at the rate that figures showed they had been running in the past, that the defendant had discharged its onus.
Appeals in Dade County, Florida v. Palmer and Baker
Engineers, Inc. [1964] USCA5 811; ((1965) 339 F 2d 208) that where the
defendant alleges that full performance by the plaintiff
would have resulted in a net loss to the plaintiff, the
burden of proof is on the defendant."
13. In C.C.C. Films Ltd., Hutchison J. chose to adopt the reasoning of
Learned Hand C.J. in L. Albert and Son in accepting that
the onus of proving
that expenses would not have been recouped lay with the defendant. But no
evidence at all was adduced by the
defendant in C.C.C. Films Ltd. to show that
the plaintiff would have failed to recoup its expenditure.
The Australian decision said to be supportive of the proposition as to onus
is McRae. That case concerned a contract for sale by
the Commonwealth of a
sunken oil tanker which turned out not to exist. This Court held that McRae
was entitled to recover as damages
the expenditure wasted in reliance on the
promise that there was an oil tanker at the locality specified. The decision
in McRae
is not inconsistent with the proposition for which Amann contends in
relation to onus since the Court said that McRae had a "prima-facie"
case for
recovery of expenditure because (1) the expense was incurred; (2) it was
incurred because the Commonwealth promised that
there was a tanker; and (3)
the fact that there was no tanker made it certain that the expense would be
wasted: p 414. Furthermore,
Dixon and Fullagar JJ. (with whom McTiernan J.
agreed) continued, at p 414:
"The fact that the expense was wasted flowed prima facieThese statements were made, however, in the context of considering whether or not the plaintiff had a "starting-point" for recovery of damages, not in relation to the question whether the defendant had, in a strict sense (that is, in more than an evidentiary sense), an onus to prove the relevant facts on the balance of probabilities. That question, which is the question now before the Court, was not directly considered. The primary issue in McRae was whether damages could, as a matter of principle, be assessed by reference to expenditure when the facts of the case did not amount to an ordinary case of breach by non-delivery. Their Honours went on to say, again at p 414:
from the fact that there was no tanker; and the first fact
is damage, and the second fact is breach of contract. The
burden is now thrown on the Commission of establishing
that, if there had been a tanker, the expense incurred
would equally have been wasted. This, of course, the
Commission cannot establish."
"The fact is that the impossibility of assessing damages on
the basis of a comparison between what was promised and
what was delivered arises not because what was promised
was valueless but because it is impossible to value a
non-existent thing. It is the breach of contract itself
which makes it impossible even to undertake an assessment
on that basis. It is not impossible, however, to undertake
an assessment on another basis".
14. In the circumstances of McRae the defendant could not even discharge an
evidentiary onus. The nature of the breach made it,
in a logical sense,
impossible for the defendant to adduce evidence of what return the plaintiffs
would or might have received.
There was no evidence, as there was in the
present case, of the possibility of alternative, future events. In the
absence of evidence,
the question was who should bear all the wasted cost;
there was certainly no objective basis on which to discount the expenditure.
(See Hutchison J.'s analysis of McRae in C.C.C. Films Ltd., at p 38.) At the
same page their Honours said:
"If we regard the case as a simple and normal case of breachTherefore, since the primary question before the Court in McRae was whether damages could, in principle, be assessed by reference to expenditure at all and since it was theoretically impossible for the defendant to adduce any evidence as to expenditure, that case is not, in my view, authority for a general proposition that an onus of proof in the strict sense rests on the defendant to show that, even without his breach, the plaintiff would not have recovered the expenditure.
by non-delivery, the plaintiffs have no starting-point.
The burden of proof is on them, and they cannot establish
that they have suffered any damage unless they can show
that a tanker delivered in performance of the contract
would have had some value, and this they cannot show. But
when the contract alleged is a contract that there was a
tanker in a particular place, and the breach assigned is
that there was no tanker there, and the damages claimed
are measured by expenditure incurred on the faith of
the promise that there was a tanker in that place, the
plaintiffs are in a very different position. They have now
a starting-point."
15. None of the cases referred to above, apart from McRae, is binding on this
Court though their authority is persuasive. And,
as I have already suggested,
McRae does not stand for the proposition contended for by Amann. However,
since the proposition that
the onus is on the defendant can only be justified
in so far as it furthers the application of the general rule that a
non-defaulting
party be put in the same position as if the contract had been
performed and since, also, such a proposition represents a divergence
from the
normally incontestable rule that the onus of proving loss from breach of
contract lies with the party alleging the breach,
the basis on which these
authorities assert the proposition needs be examined. The imposition of a
strict civil standard of proof
on the defendant is sought to be justified on
the basis that, where calculation of the plaintiff's loss is difficult or
impossible,
the burden of the uncertainty should, in fairness, rest on the
defaulting party. For example, Hutchison J. in C.C.C. Films Ltd.
said, at p
40:
"It appears to me to be eminently fair that in such cases
... the general rule as to the onus of proof of damage
should be modified in this manner."
16. But an approach which makes either the plaintiff or the defendant wholly responsible for any item of expenditure (which is the result of casting a strict onus on either party) may not be fair in all circumstances. Although speaking of probability in terms of percentages is generally not helpful, it is useful to do so here in order to illustrate a concept. The imposition of an onus on the defendant may well not produce a fair result where, for example, the defendant can show a forty-nine per cent likelihood of an event occurring, but no more, particularly where, as in the present case, initial expenditure by Amann was disproportionately high. Equally, and perhaps more pertinently, if a defendant manages just to tip the balance of probabilities (a fifty-one per cent likelihood) of an event occurring this may, depending on the nature of the event, prevent a plaintiff recovering any expenditure even though it was reasonably incurred: see Davies v. Taylor (1974) AC 207, per Lord Simon of Glaisdale at p 220.
17. Another difficulty with imposing a strict onus on the defendant lies in the presumption on which the onus rests, that a plaintiff would not have entered into the contract if costs, at least, were not recoverable. This presumption also arises out of, or is implicit in, the idea that the defaulting party should, as a matter of fairness, bear the burden of uncertainty. But such a presumption is not imperative, either practically or as a matter of theory. One need not look far to see examples of contracts which produce losses for one or both parties; these are not exceptions but part of economic reality. Moreover, it is reasonable to observe that the risk of loss is the corollary of a chance of profit and that different contracts entail different risks (of both outcomes), even as between the parties. Placing the onus on a defendant may, indeed, in Learned Hand C.J.'s words, impose the risk of the plaintiff's contract on the defendant where serious uncertainty and evidentiary difficulty are produced by the breach but where the risk (of profit or loss) was far greater on the plaintiff's part than on that of the defendant.
18. In civil matters the standard of proof is that of the balance of probabilities. In criminal matters the Crown must prove material facts beyond reasonable doubt. But "the law is sometimes concerned with categories of probability which do not coincide with these broad ones": Lord Simon of Glaisdale in Davies v. Taylor, at p 220; and see Eggleston, Evidence, Proof and Probability, 2nd ed. (1983), p 210. The task of a court in assessing damages as opposed to determining liability for breach is, in an objective sense, to identify and quantify the loss on the available evidence. It is only in this way that effect can be given to the principle in Robinson v. Harman. The defendant, if found liable, is responsible for the breach and the resulting loss but not necessarily, as a matter of theory, is he responsible for difficulty in prediction or assessment. It would be putting it too high to say that a shift in onus to a defendant introduces a punitive element. But, for the reasons given above, such a shift is by no means the best mechanism for ensuring the application of the overriding compensatory principle inherent in the assessment of all contractual damages nor does it necessarily produce the fairest result.
19. On the other hand, to say that no strict onus is imposed on a defendant does not mean that, in circumstances of uncertainty, the burden remains throughout with the plaintiff. There is, in effect, an evidentiary onus on the defendant to show that receipts would not have equalled outlay by the plaintiff, though ultimately the aim is to determine what loss has occurred on the basis of all available evidence. It may be assumed, in the absence of evidence to the contrary, that the plaintiff would have recovered his costs. Whether this is based on a presumption that persons would not enter into a contract if they were not able to recover at least their costs or on the basis of the proposition that, as a matter of policy, the party not in breach should in the absence of evidence be favoured does not matter. But there is no strict onus of proof on a defendant to demonstrate that the plaintiff would not have recovered his outlay, even if the contract had been fully performed.
20. It follows from what has been said that the fairest method of assessing damages, and the method most appropriate for the implementation of the concept of compensation in circumstances of uncertainty, is to balance contingencies which are significant. "You must take into account all contingencies which might have reduced or extinguished the loss": Lord Denning M.R. in The Mihalis Angelos (1971) 1 QB 164, at p 196. In The Mihalis Angelos damages were assessed by reference to the course of events most favourable to the defendant, the charterer of the vessel. At the time the defendant breached the terms of the charterparty, circumstances had arisen which would have entitled the defendant to cancel the contract. The award of damages was therefore made on the basis that the plaintiff suffered no loss by reason of the defendant's breach. The plaintiff was awarded nominal damages only because the defendant would, "beyond doubt", have exercised its right to cancel the contract had the breach in question not occurred: at pp 196-197. In TCN Channel 9 v. Hayden Enterprises (1989) 16 NSWLR 130 the award of damages was unaffected by the contractual right in the defendant to terminate the production and transmission of the television show in question. But that was in circumstances where it would have been "absurd to deal with the matter on the basis that Channel 9 would give up its television licence" in order that it might exercise that right: at p 154; cf. Hope J.A., at p 159.
21. As appears from these two decisions, there may be circumstances where a particular course of events is so probable that no other course could reasonably be taken into account. But where contingencies are significant their likelihood should be taken into account. This was the approach taken by Sheppard J. in the Full Court of the Federal Court in the present case. It is true that such an approach is likely to produce a result, in terms of the measure of damages, which never would have occurred because the relevant event either would or would not have happened. But any other approach is, in circumstances of substantial uncertainty, unrealistic and fails to account for the difference between a certain past and a future or hypothetical sequence of events. Subject to proof, it can be said that an event either did or did not occur in the past. And, as a matter of proof, if an event is more likely than not to have occurred the law treats its occurrence as a certainty. But to apply that logic to the assessment of the effect of future unknown events is inappropriate. Assessing events which might or might not have occurred is not simply a matter of proof. It involves prediction and conjecture: Malec v. J.C. Hutton Pty. Ltd. [1990] HCA 20; (1990) 169 CLR 638, at pp 642-643; Mallett v. McMonagle (1970) AC 166, at p 176.
22. Applying these conclusions to the present case, it is clear that the prospects of both termination and, more importantly, renewal (or non-renewal) of the contract were significant contingencies to be taken into account in determining where the burden of the expenditure should lie.
23. As to the prospect of renewal of the contract, there is cogent evidence
to support both possible occurrences. The prospect
of renewal was an
important benefit which would have accrued to Amann through performance of the
three-year contract and it is the
case that the commercial base of the
contract involved a likely renewal. That this was so is reflected in the
understanding that
Amann would incur far greater expenditure during the course
of the three-year contract than it could reasonably expect to recover
during
that period. On their own these circumstances point strongly to the
likelihood of renewal. There is, however, evidence to
the opposite effect.
That the contract ran for only three years is of itself evidence of the
possibility of non-renewal after that
time. Furthermore, the type of contract
which existed between the parties required, for its successful performance, a
high degree
of skill. To be prepared to enter into a further contract, the
Commonwealth would need to be satisfied as to the competence and
expertise of
Amann, not merely that certain acts requiring little or no skill had been
executed. This would have increased the possibility
of the Commonwealth
choosing not to renew the contract. Also, as Sheppard J. suggested, the pace
of technological change during
the three-year contract may have affected the
extent of the commercial advantage which would have been enjoyed by Amann at
the end
of the contract. His Honour observed:
"Much speculation is involved but, if one is to give proper
attention to all the implications of renewal, it is
difficult to do so unless one has regard to possibilities
that the specifications of further contracts might have
required the replacement, or at least the substantial
refitting, of the aircraft and a degree of modification or
replacement of the equipment installed in them": at p 547.
24. One more factor should be considered when weighing contingencies. It is that the Commonwealth, in entering a contract for three years, notwithstanding a clear commercial base for the contract, had the incontestable right to act in a commercially perverse way. This is not to say that such a right renders the commercial reality of a contract irrelevant because, as I have said, the advantage accruing to Amann by being the most viable contractor at the end of the initial three years is a benefit arising from its contractual rights. However, it is to say that such a right - to act contrary to commercial prudence - must be given weight when determining the likelihood of non-renewal.
25. Moreover, to say that the accepted rule that the defendant is not liable in damages for not doing that which he has not promised to do is necessarily subject to the rule in Hadley v. Baxendale may mislead. It tends to cloud the operation of the former rule by emphasising what the parties contemplated, in terms of Hadley v. Baxendale. The rule in Hadley v. Baxendale functions to limit the extent of damages by determining whether a kind of loss is too remote. But it does not preclude the operation of other rules of law or the need for examination of the precise nature of the promise which has been broken. The fact remains that the Commonwealth had not committed itself contractually beyond a period of three years. It is true that commercial advantage would be a benefit accruing to Amann but the risk of that benefit (the risk of acquiring it and the risk of losing it) was, to the extent of the likelihood of non-renewal, for Amann to bear. That is to say, to the extent of the likelihood that the Commonwealth would have decided not to renew the contract - because Amann did not perform the contract to the satisfaction of the Commonwealth, because of altered commercial or technological circumstances or because the Commonwealth, for its own reasons, chose to forgo its own advantage in a renewal - the risk involved in Amann's disproportionate expenditure was its own. The same kind of reasoning would not apply, of course, if Amann had a conditional right of renewal, as in Richardson v. Mellish [1824] EngR 715; (1824) 2 Bing 229 (130 ER 294). The exercise of the right not to continue relations with Amann was, unlike the right held by the plaintiff in that case and unlike merely a right under certain circumstances to terminate a contract, dependent, ultimately, solely on the Commonwealth's choice.
26. Considering the above factors, the prospect of the Commonwealth choosing to exercise its right not to enter into a further contract with Amann may have been unlikely but there was, nevertheless, a distinct possibility that that would have occurred.
27. Since most contracts include a termination clause, the mere presence of such a clause in an agreement does not indicate any significant likelihood of it being successfully invoked. However, in the present case, there was, in the opinion of Davies and Sheppard JJ. in the Full Court, a twenty per cent likelihood of a successful invocation of cl.2.24, the termination clause, as a result of breaches of the contract which had already been committed by Amann: Davies J., at pp 535-536; Sheppard J., at p 546. That estimate was based on a construction of cl.2.24 to the effect that the clause could be invoked in circumstances other than those involving a fundamental breach in terms of the common law but that it involved, on the part of the Secretary of the Department of Transport, a duty to act fairly as between the parties in the process of the termination of the contract. I agree with that conclusion and see no reason to disagree with the judges' estimate.
28. As Sheppard J. said, at p 549, once the onus of proof is transferred to the Commonwealth to prove that Amann would not have recovered its expenses, the result must be that Amann recovers all its expenses because the Commonwealth has not been able to prove that on the balance of probabilities. However, for the reasons already given, in my view it is not helpful to speak of a strict onus imposed on either party once a plaintiff has shown, in circumstances where it is appropriate to award damages by reference to expenditure, that the expenditure was reasonably incurred in pursuance of the contract. In those circumstances, so long as the defendant has satisfied an onus to adduce evidence that the plaintiff would or may not have recovered expenses, there is every reason to take account, as Sheppard J. did, of significant contingencies and to give effect to them by discounting the award of damages. Regard to contingencies, favourable and unfavourable, is commonplace in assessing damages for the commission of a tort: see, for instance, Mallett v. McMonagle, at p 174; Davies v. Taylor, at pp 212, 219-220; McIntosh v. Williams (1979) 2 NSWLR 543, at pp 550-551; Cullen v. Trappell [1980] HCA 10; (1980) 146 CLR 1, at pp 27, 34; Campbell v. Nangle (1985) 40 SASR 161, at pp 186-187.
29. Sheppard J. said, at p 549:
"That, in the ordinary run of cases calling for theHowever, there does not seem to have been much discussion of the place of contingencies in the quantification of damages for breach of contract - the matter is adverted to in Coote, "Chance and the Burden of Proof in Contract and Tort", (1988) 62 Australian Law Journal 761, at p 771. In part this may be because of the focus of attention on a plaintiff's well-recognised obligation to mitigate his or her damages, making this the focus for any possible reduction in the quantum. This is particularly evident in the area of wrongful dismissal, though in Edwards v. Society of Graphical and Allied Trades (1970) 1 WLR 379, at p 387; (1970) 1 All ER 905, at p 912, Buckley J. spoke of taking a particular consideration into account "in assessing the likelihood of (the plaintiff) obtaining suitable work in the future". Consistent with the principles enunciated in this judgment, there is no reason to put damages in contract and, in particular, reliance damages into a category of their own: see Hardware Services Pty. Ltd. v. Primac Association Ltd. (1988) 1 Qd R 393, at pp 400-401 and the references cited there. A court should have regard to contingencies in assessing such damages. This was the approach taken by the Court of Appeal of New South Wales in Custom Credit Corporation Ltd. v. Cenepro Pty. Ltd. (unreported, Court of Appeal of New South Wales, 7 August 1991): see per Kirby P at p 56; per Mahoney J.A at pp 8-9; per Clarke J.A at pp 36-40.
assessment of damages for breach of contract, contingencies
should be taken into account, does not require any
substantial reference to authority. It is trite law."
30. Although, in the application of this principle, there is a need to weigh
various factors, there is no requirement of a mathematical
appraisal of the
likelihood of every possible future occurrence. In this case, two judges of
the Full Court considered successful
invocation of cl.2.24 to be a
significant, not a far-fetched, possibility, though this led to a different
conclusion in each case
because of a different application of principle with
respect to onus. And, as I have said, non-renewal, although it may have been
unlikely, was nevertheless a significant possibility. No doubt, views will
differ as to how these possibilities should be reflected
in the quantification
of Amann's damages. But I have come to the conclusion, as Sheppard J. did in
the Full Court, that the loss
suffered by Amann is most fairly represented by
an award of damages which amounts to one half of its expenditure. In this
regard,
it is important to set out his Honour's conclusion, at p 547:
" The amount to be awarded comprises four components,
pre-paid expenditure other than the amount incurred
in respect of the aircraft, the amount incurred in
their acquisition, termination payments made to staff
and the amount of the security deposit. The first of
the contingencies to which I have referred - early
termination - applies in relation to each of the
components. The possibility that the contract would not
have been renewed and considerations arising from a
possible need to replace aircraft and equipment, and also
the fact that the amount will be paid now in one lump sum,
apply only in relation to the component of the award which
represents the cost of acquisition of the aircraft."
31. It follows that the appeal should succeed to the extent of reducing the assessment of damages from $5,475,184 to $2,737,592, to which must be added an amount for interest calculated in accordance with s.51A of the Federal Court of Australia Act 1976 (Cth).
GAUDRON J. The facts and the relevant contractual provisions are set out in the joint judgment of Mason C.J. and Dawson J. The questions that arise by reference to those facts and provisions are whether Amann Aviation Pty. Limited ("Amann") is entitled to other than nominal damages by reason of the repudiation by the Commonwealth of Australia of a contract for the provision of aerial surveillance services by Amann and, if so, on what basis they should be calculated.
2. Repudiation of a contract, if accepted, entitles the other party to compensation for the contractual rights which are thereby lost; or, in terms used by Brennan J. in Foran v. Wight [1989] HCA 51; (1989) 168 CLR 385, at p 430, "for the loss of the benefit to which, had the contract been performed, he would have been entitled".
3. The practical consequences of the acceptance of repudiation are ordinarily the same as those which would follow a breach constituted by refusal or failure to perform the contract. That is invariably the case if the contract is to be performed by a single act to be carried out in a particular manner. Thus, it is convenient to speak of the right of a party who has accepted repudiation in terms of a right to damages for breach of contract. However, on occasions, it is necessary to bear in mind that a party who has elected to accept repudiation is to be compensated for the loss of his or her contractual rights, rather than for breach of contract. The distinction is not without all significance.
4. The fundamental rule with respect to damages for breach of contract is
that stated by Parke B. in Robinson v. Harman [1848] EngR 135; (1848) 1
Ex 850, at p 855 (154
ER 363, at p 365), namely:
"where a party sustains a loss by reason of a breach ofOn the other hand, there are cases of repudiation, of which The Mihalis Angelos (1971) 1 QB 164 is a prime example, where damages are assessed, not as if the contract had been performed, but on the basis that the contract would, in any event, have been brought to an end without full performance.
contract, he is, so far as money can do it, to be placed
in the same situation, with respect to damages, as if the
contract had been performed".
5. The principle which sustains the decision in The Mihalis Angelos was
stated by Megaw L.J. (at p 210) in these terms:
"If the contractual rights which (the plaintiff) has lostSee also per Lord Denning M.R. at pp 196-197, and per Edmund Davies L.J. at p 203.
were capable by the terms of the contract of being rendered
either less valuable or valueless in certain events, and
if it can be shown that those events were, at the date of
acceptance of the repudiation, predestined to happen, then
in my view the damages which he can recover are not more
than the true value, if any, of the rights which he has
lost, having regard to those predestined events."
6. The Mihalis Angelos was invoked by the Commonwealth in its second ground
of appeal which asserts:
"The Full Court erred in failing to apply correctly the
principle in The Mihalis Angelos ... in that Davies and
Sheppard JJ. considered that the award of damages should
be reduced by 20% to allow for the possibility of early
termination ... when the Full Court should have presumed
that the contract breaker would have so acted as to minimise
its liability."
7. It should be noted that Davies and Sheppard JJ. did not consider that "the award of damages should be reduced by 20% to allow for the possibility of early termination". Their Honours each considered that there was a 20% chance of early termination. However, Davies J. considered that, even allowing for a chance of that magnitude, early termination was unlikely and, like Burchett J., his Honour held that that possibility should not be taken into account. And Sheppard J., in dissent, would have reduced the award of damages by 50% to allow for a number of matters, including a 20% chance of early termination.
8. It was said by Lord Denning M.R. in The Mihalis Angelos (at p 196) that "if the defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed that he would exercise it". But there is nothing in The Mihalis Angelos or elsewhere to suggest, as is impliedly asserted in the Commonwealth's second ground of appeal, that it is to be conclusively presumed that a repudiating party, if he or she had not then repudiated, would have acted to bring the contract to an end by other means if they were later to become available. What was decided in The Mihalis Angelos is that contractual rights should be valued having regard to the known facts and, if the facts allow, it may be assumed that the contract would have been performed in the manner which most reduces the damages payable. But, and as a matter of common sense, in no case is an assumption to be made or maintained in the face of evidence pointing to the contrary.
9. The contract between the Commonwealth and Amann was one which, although expressed to be for a fixed term, might earlier be brought to an end by cancellation in the circumstances and in accordance with the procedure specified in cl.2.24. Thus, Amann's contractual rights were not to performance of the contract during its specified term, but to performance unless and until the contract was brought to an end in accordance with cl.2.24 or by the expiry of its term.
10. It was held in the Full Court and it is now accepted by the Commonwealth that cl.2.24 permitted cancellation by the Secretary of the Department of Transport only after he had fairly considered those matters which might be put in opposition to that course. When that clause is viewed in the light of the known facts, what is revealed is that, whatever the probability of the occurrence of some circumstance capable of triggering the cancellation procedure, the probability of cancellation was much reduced by the specialized nature of the aerial surveillance to be performed, the necessity for it to be performed regularly, routinely and systematically, and the general inability of any other person or body to provide the service, save for Skywest Airlines Pty. Ltd. ("Skywest"), the company with which the Commonwealth had previously contracted.
11. The best estimate of the chance of Amann's contract being cancelled could be no more than an informed guess made in the light of the known facts. Of its nature, it was a matter on which different minds might properly reach different conclusions. However, given the Commonwealth's needs with respect to aerial surveillance, the chance of cancellation was not uniform throughout the contract period. It was at its highest at the very beginning. It would diminish to insignificance once Skywest disbanded its operations, the immediate prospect of which was threatened if the Commonwealth did not repudiate when it did. If and when Skywest disbanded its operations, the chance of cancellation could be expected to remain insignificant, but, perhaps, increasing to some slight extent towards the end if the Commonwealth were then minded to select a new operator. In these circumstances, it was open to the Full Court to conclude, as the majority (Davies and Burchett JJ.) did, that had the Commonwealth not repudiated when it did, cancellation was unlikely. And that was so even if the chance of cancellation was assessed, as it was by Davies J., at 20%.
12. Had the Full Court undertaken a precise valuation of Amann's contractual rights, it would have been necessary for it to have regard to the terms of cl.2.24 and to the chance of cancellation. Had that chance been considered to be of such significance as to bear on the value of those rights (again, a matter on which minds might differ), it would have been necessary to take it into account. That might be done by a number of different processes involving different degrees of sophistication and reflecting, with more or less accuracy, the different chances of cancellation at different times during the contract period. On any view, a process directed to that end would involve an even greater degree of uncertainty than is ordinarily involved in cases of repudiation where it may be necessary to take account of matters that may or may not have happened had the contract not been repudiated when it was. See, as to the general nature of the uncertainty involved in such cases, Carter, "The Effect of Discharge of a Contract on the Assessment of Damages for Breach or Repudiation", (1988) 1 Journal of Contract Law 113, at pp 129-133.
13. Quite apart from the speculative nature of any exercise undertaken to value Amann's contractual rights by allowing for the prospect of cancellation, it would be no easy task to value those rights on the basis that the contract would run for its full term. In this Court it was argued on behalf of the Commonwealth, as it had been below, that, on that hypothesis, the rights should be valued without regard to the prospect that the Commonwealth and Amann would enter into a further contract which would almost certainly be highly profitable, for, at that stage, Amann would have substantially recouped the cost of acquiring and equipping its planes from the first contract.
14. It is common ground that, whatever the preliminary arrangements made for the purchase of the planes required to carry out the contract, they would at some stage, shortly thereafter, have come into the beneficial ownership of Amann. On the basis that the prospect of a further contract should be ignored, it was put that, at the end of the contract period, Amann's planes would have only a minimal value, or at the very least a much depreciated value, corresponding, more or less, with their then written-down book value. It was then put that the contract would not have been profitable because the cost of acquiring the planes and the cost of performing the contract would together exceed the sum of the money to be paid by the Commonwealth and the value of the planes at the end of the contract period.
15. It is fundamental that, in an action on a contract, a defendant is not liable in damages for failing to do that which he or she has not promised. See The Mihalis Angelos, per Edmund Davies L.J. at p 203. See also Abrahams v. Herbert Reiach Ltd. (1922) 1 KB 477, per Scrutton LJ. at p 482; and Lavarack v. Woods of Colchester Ltd. (1967) 1 QB 278, per Diplock LJ. at p 293. And, as is pointed out by Mason C.J. and Dawson J. in the present case, Richardson v. Mellish [1824] EngR 715; (1824) 2 Bing 229 (130 ER 294) is not authority to the contrary. Rather, that case is an illustration of the principle applied in The Mihalis Angelos, namely, that contractual rights should be valued having regard to the known facts.
16. It would be wrong to assess the value of Amann's contractual rights on the basis of a promised chance of a further contract - a chance of the kind considered in Chaplin v. Hicks (1911) 2 KB 786 and described by Dixon and Fullagar JJ. in McRae v. Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377, at p 412, as "a real chance". However, it would be equally wrong, and contrary to common sense, to assign a value to Amann's planes at the end of the contract period without regard to the Commonwealth's likely need for aerial surveillance. That is what is involved in the submission that, at the end of the contract period, the planes would have only a minimal or significantly depreciated value.
17. By reason of the Commonwealth's need for aerial surveillance, the planes could be expected to have a much greater value at the end of the contract period than their written-down book value. Their value would reflect the fact that they would give Amann a special advantage in tendering for a further contract and also that, if its tender were not successful, its successor would probably need planes of that type. Of course, it would be necessary, in assessing that value, to have regard to certain contingencies, including some of those adverted to by Sheppard J. in the Full Court, namely, the possibility that Amann might not be successful in securing a further contract and, even if it were, the possibility that the planes might need to be replaced, re-equipped or modified. But even allowing for contingencies, it is not possible to conclude, as was argued on behalf of the Commonwealth, that performance would have resulted in a loss.
18. Given the need for Amann to acquire the planes to carry out the contract, the usual method of valuing its contractual rights would be to calculate first the difference between the amount to be received under the contract and the moneys outlaid to purchase the planes and to be outlaid in providing the promised service, and then to add the amount representing the difference between the value of the planes at the end of the contract period and the amount owing in respect of their purchase. And, if there were a significant chance of early termination, it would be necessary to discount for it. The calculation of the difference between receipts and outlays presents no difficulty. Nor is it difficult to calculate the amount that would be owing on the planes at the end of the contract period. However, the residual value of the planes is a matter of uncertainty and, as already indicated, the significance of the chance of early termination is a matter on which minds might be expected to differ. Thus, it would not be possible, applying that usual method of valuation, to make a reliable estimate of the value of Amann's contractual rights.
19. A contracting party who is unable to establish the precise measure of his
or her loss is not thereby deprived of his or her
right to recover damages.
In some cases a court will make the best estimate it can. See Fink v. Fink
[1946] HCA 54; (1946) 74 CLR
127, at p 143;
and McRae, at pp 411-412. In other cases a court
may proceed on the basis that "a starting-point"
for the calculation
of loss
is
the "expenditure incurred and wasted in reliance on the ... promise":
McRae, at p 415. It was on that
latter basis that
the Full
Court calculated
and awarded damages in the present case. That award is challenged in the
Commonwealth's
first and only
other ground
of appeal which asserts:
"The Full Court erred in its purported application of
the principle recognised in McRae ... in that it wrongly
considered that the respondent was entitled to an award
of damages which would put it in the position it would
have been in had the contract not been made, when such
entitlement arises only in cases where the nature of the
defaulting party's breach renders assessment of damages
according to the principle in Robinson v. Harman ...
impossible."
20. The argument made by reference to the Commonwealth's first ground of appeal extended to include the proposition that, if the principle in McRae were applicable, nevertheless the damages should be reduced by reason that the contract would not have been profitable. However, and as already indicated, when regard is had to the value that would attach to the planes at the end of the contract period, it is not possible to reach that conclusion.
21. It was impossible to assess damages in McRae because, as was said in that case (at p 414), "it is impossible to value a non-existent thing". However, non-existence of the subject matter of a contract is not the only circumstance making the assessment of damages impossible. That was recognized in Anglia Television Ltd. v. Reed (1972) 1 QB 60 where it was said by Lord Denning M.R. (at p 64) that "(i)f (a plaintiff) has not suffered any loss of profits - or if he cannot prove what his profits would have been - he can claim in the alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach."
22. The present case is one in which the uncertainties are such that it is not possible to make any reliable estimate of the value of Amann's contractual rights. Thus, it is one in which the assessment of damages might properly be approached having regard to Amann's wasted expenditure.
23. Damages which are assessed by reference to wasted expenditure are often referred to as "reliance damages", reflecting the description usually given to them, as it was in McRae, by reference to expenses having been incurred in reliance upon a promise. See Gates v. City Mutual Life Assurance Society Ltd. (1986) 160 CLR 1, at p 12; and L Albert and Son v. Armstrong Rubber Co. (1949) 178 F 2d 182, per Learned Hand C.J. at pp 189, 191. See also Fuller and Perdue, "The Reliance Interest in Contract Damages", (1936-1937) 46 Yale Law Journal 52 and 373.
24. The expression "reliance damages" is apt to give the erroneous impression that damages are to be awarded on some basis other than compensation for the loss of contractual rights or, which is often the same thing in practice, for loss of profits. It may suggest that compensation is to be awarded on the basis that the plaintiff is to be put in the position in which he or she would have been if the contract had not been made. On that basis, a question necessarily arises, as it did in Anglia Television, whether damages should include preliminary expenses incurred before the contract was made. It was decided in that case that they should. And, on that basis, two further questions arise, namely, whether damages should be reduced for any loss which would have been sustained if the contract had been fully performed and whether the plaintiff must elect between damages assessed by reference to wasted expenditure and damages assessed in the usual manner.
25. It has been held in the United Kingdom (C. and P Haulage v. Middleton [1983] EWCA Civ 5; (1983) 1 WLR 1461; (1983) 3 All ER 94), in Canada (Bowlay Logging Ltd. v. Domtar Ltd. (1978) 87 DLR (3d) 325) and in the United States (L. Albert and Son v. Armstrong Rubber Co. and Dade County, Florida v. Palmer and Baker Engineers, Inc. [1964] USCA5 811; (1964) 339 F 2d 208) that damages awarded by reference to wasted expenditure must allow for any loss which would result from performance of the contract.
26. It has been held in the United Kingdom (Cullinane v. British "Rema" Manufacturing Co. Ltd. (1954) 1 QB 292) and in Canada (Sunshine Vacation Villas Ltd. v. The Bay (1984) 13 DLR (4th) 93, at pp 99-100) that a plaintiff must elect between a claim for damages calculated by reference to wasted expenditure and a claim for loss of profits, or must frame a claim for wasted expenditure in the alternative to a claim for loss of profits. See also Anglia Television, at pp 63-64; and CCC Films Ltd. v. Impact Quadrant Films Ltd. (1985) QB 16, at p 32. However, it is clear from the decision of this Court in TC Industrial Plant Pty. Ltd. v. Robert's Queensland Pty. Ltd. [1963] HCA 57; (1963) 37 ALJR 289 that moneys outlaid and wasted are made the subject of an award of damages because, in an action on a contract, the cost of performance is ordinarily returned, in one form or another, to a successful plaintiff. Thus, it was held in that case that, subject to proof of damage over and above the cost of equipment, damages might be assessed on the basis of cost plus profit. And much the same view appears to have been taken in Ware v. Johnson (1984) 2 NZLR 518, at pp 545-546.
27. It is also clear from T.C. Industrial Plant Pty. Ltd. that damages which are assessed by reference to wasted expenditure are awarded to compensate for loss of contractual rights or loss of profits and, despite any coincidence in effect, not to put the contracting party in the position in which he or she would have been if the contract had not been made. It follows that any loss which would have been involved in performing the contract must be brought to account. Were it otherwise, the plaintiff would be put in a better position than if the contract had been performed. It also follows that it is not correct to characterize damages assessed by reference to wasted expenditure as damages to be claimed by election or in the alternative to damages for loss of profits. However, as damages are assessed on that basis because the contract would not have a produced a profit or it is impossible to prove what the profit would have been, it may be expected that a claim for wasted expenditure will ordinarily be framed as an independent claim or in the alternative to a claim for damages for loss of profits.
28. Once it is appreciated that damages assessed by reference to wasted expenditure are awarded to compensate for the loss of contractual rights or for loss of profits, it is apparent that what is involved is an assumption (referred to in McRae, at p 414, as "a starting-point") that the loss is no less than that which has been outlaid and wasted by reason of repudiation or breach. An assumption to that effect is no more than the recognition of the ordinary expectations of the world of commerce that the value of a contract will be no less than the cost of its performance. That assumption necessarily contemplates that damages will include preliminary expenses, as was held in Anglia Television.
29. The assumption which underlies the award of damages by reference to wasted expenditure, like all assumptions, is one which, once made, will ordinarily be maintained unless displaced by evidence pointing to the contrary. In a practical sense that may mean that the assumption will often be made and maintained unless the defendant proves otherwise. However, save in that limited and practical sense, I do not think it right to say, as was held in C.C.C. Films Ltd. (at p 40), that the onus is on a defendant "to prove that the expenditure ... is irrecoverable because (the plaintiff) would not have recouped (his) expenditure".
30. So far as it concerned the question of onus of proof, the decision in C.C.C. Films Ltd. was reached in the light of the reasoning in L. Albert and Son v. Armstrong Rubber Co., Dade County and Bowlay Logging. And, in McRae, at p 414, it was said that, the plaintiffs having made a prima facie case by establishing that their expenditure was wasted, "(t)he burden is now thrown on the (defendant) of establishing that, if there had been a tanker, the expense incurred would equally have been wasted."
31. There is nothing in McRae to suggest that a defendant bears anything other than a practical or evidentiary onus of the kind which arises because, in the absence of evidence to the contrary, some particular thing is assumed to be the case. See, as to assumptions and the resulting evidentiary burden in a criminal trial, Reg. v. Falconer [1990] HCA 49; (1990) 171 CLR 30, at p 83. And, there is nothing in L. Albert and Son v. Armstrong Rubber Co. to suggest that Learned Hand C.J. had something different in mind. The reasoning in Dade County, in Bowlay Logging and in CCC Films Ltd. does not advance the matter beyond what was said in L. Albert and Son v. Armstrong Rubber Co.
32. An assumption is no more than what was described in McRae as "a starting-point". And, as has already been said, an assumption must give way if there is evidence to the contrary. Given that an assumption has only a limited role to play, I see no reason to impose on a defendant the formal burden of establishing that a plaintiff would not have recouped his or her wasted expenditure. Moreover, in a context in which it is impossible to prove what the profit would have been, it is equally impossible to prove that there would have been a loss. The law does not operate so as to impose a burden of proving what is impossible of proof.
33. One other thing should be said in relation to the burden of proof and the assumption that the loss occasioned by repudiation or breach of contract is no less than the expenditure that has been wasted. In a particular case the circumstances may be such as to preclude any assumption to that effect. Thus, the assumption will not be made if it appears that receipts would have been less than the amount of the wasted expenditure. And the same is true if it appears that the receipts would have been less than the sum of that expenditure and other costs which would be involved in carrying out the contract. In such cases, the assumption is that the value of the contractual rights is the difference between that expenditure and the loss that would have been involved in performance. And, there are special problems if the expenditure is for plant or equipment. It would not ordinarily be assumed that expenditure on plant or equipment would be entirely recouped from one contract, or that breach or repudiation would result in significant wastage of that expenditure.
34. The present case is one in which the receipts under the contract would have been less than the combined cost of acquiring and equipping the planes and of operating them in performance of the contract. If the evidence were simply to that effect it could not be assumed that Amann's loss was no less than the amount of its wasted expenditure, which of course included, indirectly, a significant component for the purchase of the planes. However, the evidence also reveals that, unless terminated pursuant to cl.2.24, the contract would have yielded receipts enabling Amann to recoup operating expenses and to substantially recoup the cost of acquiring and equipping its planes. As already indicated, the value of the planes at the end of the contract period would reflect the Commonwealth's need to contract for future aerial surveillance and, even though the planes would not then have been fully paid for, that value makes it impossible to say that the contract would have been unprofitable. However, and more significantly, that value supports and is capable of sustaining the assumption that the value of Amann's contractual rights was no less than the expenditure which was wasted.
35. The assumption that the value of Amann's contractual rights was no less than the amount of its wasted expenditure was consistent with the evidence when proper account is taken of the value which would have attached to its planes if the contract had run for its full term. There was no error on the part of the Full Court in making that assumption the starting point for its assessment of damages. The only matter which was really capable of calling that assumption into question was the possibility of cancellation under cl.2.24. Once the Full Court decided that early cancellation was unlikely, the proper course was for it to assess damages in the manner that it did. And, of course, an assessment made on the basis that the loss involved is no less than the amount of wasted expenditure neither allows nor requires that damages be reduced for contingencies.
36. The appeal should be dismissed.
McHUGH J. This appeal is brought by the Commonwealth of Australia against an
order of the Full Court of the Federal Court that it
pay Amann Aviation Pty.
Limited the sum of $6,600,207 for damages for breach of a contract made
between them and for interest on
those damages. The principal question in the
appeal is whether, in the particular circumstances of the case, the damages
should
be assessed by reference to the expenditure incurred by Amann instead
of the position that it would have been in if the contract
had been performed.
The Full Court (Davies, Sheppard and Burchett JJ.) held that the breach had
resulted in Amann losing the chance
of making profits under a renewal of the
contract. Consequently, their Honours held that, because it was impossible to
assess what
profits would have been made under a renewed contract, Amann was
entitled to have its "loss" assessed by reference to expenditure
incurred in
reliance on the Commonwealth's promise and wasted as the result of its
breach.
The background to the appeal
2. The contract, the subject of the action, was entered into on 12 March 1987 ("the 1987 contract") when the Commonwealth accepted a tender by Amann to carry out regular aerial surveillance of the northern coastline of Australia for a period of three years. As at that date, Skywest Airlines Pty. Ltd. had a contract to carry out that type of work for the Commonwealth, but Skywest's contract was due to expire on 31 March 1987. Because Amann was not in a position to commence the surveillance work on 1 April 1987, Skywest agreed with the Commonwealth to extend its operations to 30 June 1987. Later it agreed to extend them until 11 September 1987. As a result, the Commonwealth did not require Amann to commence the coastwatch operations until 12 September 1987. However, as at that date, Amann was still not in a position to perform its obligations in accordance with the contract. Indeed, the Commonwealth had known since August that Amann would not be able to meet all its obligations when the contract commenced because it would not have sufficient aircraft available in Australia by 12 September 1987. On the afternoon of that day, the Commonwealth served a notice on Amann purporting to terminate the contract. Skywest, which had been an unsuccessful tenderer for the 1987 contract, then resumed carrying out the surveillance operations.
3. Beaumont J., the learned trial judge, held that the notice had not terminated the contract between Amann and the Commonwealth because the contract could only be terminated for breach by the Secretary of the Department of Transport after he had given Amann notice in writing requiring it to show cause why the contract should not be cancelled pursuant to the provisions of cl.2.24 of the contract. His Honour held that the contract was not terminated until 15 September 1987 when Amann accepted the Commonwealth's notice as a repudiation of the contract. The Full Court upheld his Honour's decision on this point. In this Court, the liability of the Commonwealth to pay damages for the repudiation was not in issue.
4. Beaumont J. held that Amann would have made a profit of $819,099 if the contract had been performed for the three-year period. However, his Honour held that there was a 50 per cent chance that the contract would have been lawfully terminated pursuant to cl.2.24 before it expired and that the damages should be reduced by that percentage to take account of that contingency. His Honour rejected a claim for loss of goodwill. He also rejected a claim that the award of damages should take into account the chance that when the contract expired Amann would have obtained a contract for the surveillance of the northern coastline for a further term and would have made substantial profits under such a contract. His Honour said that it "may be accepted that such a claim could be maintained if an economic value could be placed on the chance". But the learned judge said that the claim for the chance of profits under a further contract must fail because it was "impossible to estimate the profit margin, if there was any, under such a contract".
5. The Full Court took a radically different approach to the assessment of
damages. The members of that Court took the view that
the damages had to be
assessed on the basis that the expenditure which Amann had incurred in
reliance on the contract would be recouped
out of future profits. Davies J.
thought that, having regard to the cost and value of the aircraft, Amann could
not have made a
significant profit from a three-year contract; any substantial
profit lay in future extensions of the contract. Amann's expenditure,
therefore, had been directed in part to the chance of making a profit in the
future. His Honour thought that future extensions of
the contract were not
only in contemplation of the parties but probable. Burchett J. said that
"where parties have entered into a
contract, freely negotiated in the ordinary
course of commerce, it seems reasonable to treat proof of the incurring of
expenditure
appropriate to the performance of the contract as raising a prima
facie inference that the expenditure would be recouped by the carrying
out of
the contract". His Honour said that, although the contract was for the
comparatively short period of three years, it required
a vast expenditure on
highly specialised equipment, as well as on the setting up of bases, a great
proportion of which could not
be recovered unless further coastwatch contracts
were obtained. The learned judge said that, unless a further contract could
be
obtained, over 80 per cent of the cost of the aircraft would have to be
written off against revenue during the three-year period
of the contract. His
Honour said that the parties did not contemplate that that would happen. What
made the contract a commercial
venture, though one not without risks, was the
prospect of renewal at the end of three years. Burchett J. went on to say
that, while
Amann could not show that performance of the contract would
ultimately have led to the profits it hoped to gain, equally the Commonwealth
could not show that Amann "would not in fact have recouped the whole of the
expenditure it incurred on the faith of the contract".
Davies and Burchett JJ.
ordered the Commonwealth to pay the sum of $5,475,184 as damages together with
interest of $1,125,023 making
a total sum of $6,600,207. The sum of $5,475,184
comprised:
Amount of pre-operational expenditure wasted $ 854,943 Cost of
acquisition and fitting out of
aircraft, less value at termination ofalso would have assessed the damages of Amann in the sum of $5,475,184 but his Honour would have discounted that figure by 50 per cent because of various contingencies. Those contingencies included the chance that, before the expiry date of the 1987 contract, the contract might have been terminated pursuant to the provisions of cl.2.24 and the chance that Amann would not obtain a contract with the Commonwealth for a further term.
contract $4,364,192
Amount of termination payments made to
employees $ 143,049
Amount of security deposit $ 113,000 Sheppard J.
6. Damages for breach of contract are awarded to place the plaintiff, so far as money can do it, in the same position as that person would be in if the defendant had performed the contract: see Butler v. Egg and Egg Pulp Marketing Board [1966] HCA 38; (1966) 114 CLR 185, at p 191; Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, at pp 460, 466, 471; Pennant Hills Restaurants Pty. Ltd. v. Barrell Insurances Pty. Ltd. [1981] HCA 3; (1981) 145 CLR 625, at p 637. The function of an award of damages is compensatory: Whitfeld v. De Lauret and Co. Ltd. [1920] HCA 75; (1920) 29 CLR 71, at p 80. Ordinarily, damages are assessed on the basis of the plaintiff's loss and not the defendant's gain: Tito v. Waddell (No.2) (1977) Ch 106, at p 332. The classic statement of the common law is found in the judgment of Parke B. in Robinson v. Harman [1848] EngR 135; (1848) 1 Ex 850, at p 855 [1848] EngR 135; (154 ER 363, at p 365) - "where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed". Superior courts have endorsed this statement on many occasions.
7. For the purpose of assessing the plaintiff's damages, loss includes "any harm to the person or property of the plaintiff, and any other injury to his economic position": Treitel, The Law of Contract, 8th ed. (1991), p 826. In most cases, the plaintiff is compensated for the loss of the benefits which, as at the date of breach, it expected to receive in exchange for its own promise (expectation damages). But in a few cases, it is compensated for the wasted expenditure which it incurred in reliance on the defendant's promise to perform its obligations under the contract (reliance damages). In the ordinary case, a claim for reliance damages cannot be made because the application of the principle in Robinson v. Harman makes any expenditure incurred in reliance on the defendant's promise irrelevant.
8. Where the breach of contract occurs after the plaintiff has incurred expense in preparing or performing the contract, the plaintiff's loss is ordinarily the difference between the value of the benefits which it would have received under the contract, as and from the date of breach, and the expense which the plaintiff would have incurred, as and from that date, in performing its own contractual obligations. In the ordinary case of repudiation, any expense which the plaintiff has incurred in preparing to perform or in performing the contract prior to breach is irrelevant to the assessment of the damages to be awarded: see Banks v. Williams (1910) 10 SR (N.S.W.) 220, per Cullen C.J. at pp 229-230. Except in very special circumstances, damages for breach of contract are assessed by reference to the circumstances which existed at the date of breach: Wenham, at p 473; Miliangos v. Frank (Textiles) Ltd. (1976) AC 443, at p 468; Johnson v. Agnew (1980) AC 367, at pp 400-401. If a plaintiff has expended or incurred liabilities of $100,000 prior to breach and would have received $200,000 in the future if the defendant had performed its contractual obligations, the amount of the plaintiff's damages is the difference between the $200,000 and the expenditure which the plaintiff would have incurred in performing its future obligations. The $100,000 already expended or incurred is irrelevant. Of course, if the breach itself causes the plaintiff some additional expense, it is entitled to recover that expense as part of its "loss".
9. In Anglia Television Ltd. v. Reed (1972) 1 QB 60, however, Lord Denning
M.R. said (at pp 63-64) that a plaintiff can claim either
loss of profits or
wasted expenditure but must elect between them. His Lordship went on to say
(at p 64):
"If he has not suffered any loss of profits - or if heIn CCC Films Ltd. v. Impact Quadrant Films Ltd. (1985) QB 16, Hutchison J. interpreted (at p 32) Lord Denning's judgment in Anglia Television to mean that the plaintiff has an unfettered choice to sue for loss of profits or wasted expenditure and that the choice of suing for wasted expenditure was not limited to "those cases where he establishes by evidence that he cannot prove loss of profit or that such loss of profits as he can prove is small". If such an option exists, it would sometimes enable the plaintiff to obtain damages which would exceed the benefit which it would have obtained if the contract had been performed.
cannot prove what his profits would have been - he can claim
in the alternative the expenditure which has been thrown
away, that is, wasted, by reason of the breach."
10. With great respect to the views expressed by Lord Denning M.R. and
Hutchison J., it is a mistake to speak of the plaintiff having
a right to
elect between expectation damages and reliance damages. The object of an
award of damages for breach of contract is to
compensate the plaintiff for its
loss by placing it, so far as money can do it, in the same position that it
would have been in if
the contract had been fully performed on both sides. A
plaintiff's loss from a breach of contract may be manifested in one or more
of
a number of ways. It may consist in a loss of profits or future benefits, in
the difference in value between the price of an
asset purchased under the
contract and the market value of the asset at the date of breach, in the
inability to recoup in whole or
in part expenditure incurred in reliance on
the defendant performing its part of the contract or in expenditure which will
have to
be incurred if the plaintiff is to be placed in the same position as
it would have been in if the defendant had performed its obligations.
In the
majority of cases, expenditure incurred before breach is irrelevant. But in
some it is not. If, for example, in reasonable
reliance on the defendant's
promise, the plaintiff has incurred expenditure which has been wasted because
of the defendant's breach
and it is impossible to determine the financial
outcome of the contract or the value of the defendant's promise, it will
usually
be the case that the plaintiff's loss is commensurate with the
expenditure thrown away as the result of the breach. In such cases,
the
damages will be assessed by reference to the wasted expenditure. But this does
not mean that the plaintiff had a right to elect
to claim the wasted
expenditure. It simply means that in that class of case the plaintiff's loss
was the same as the expenditure
wasted by reason of the defendant's breach. If
it appeared that, although the plaintiff had wasted expenditure as the result
of the
breach, it would have lost a greater sum after the date of the breach
if the contract had been fully performed, the plaintiff has
suffered no loss
and is not entitled to any damages. In C. and P Haulage v. Middleton [1983] EWCA Civ 5; (1983) 1
WLR 1461; (1983)
3 All ER 94, the
English Court of Appeal held that a licensee
whose licence to use premises for his business
had been wrongly terminated
could not
recover damages for expenditure wasted in fitting out the premises
because after the breach
he had been able to carry on
his business
from his
own premises without the cost of rent and without any other loss. Ackner L.J.
said (at pp 1467-1468; p 99
of All ER):
"It is not the function of the courts where there is aWhether or not a plaintiff can claim for wasted expenditure, therefore, depends on the facts of the case and not on any right of election.
breach of contract knowingly, as this would be the case,
to put a plaintiff in a better financial position than if
the contract had been properly performed."
11. Sometimes, as Treitel points out (at p 831), a contract "may give rise to two quite separate expectations: that of receiving the promised performance and that of being able to put it to some particular use". In such a case, a plaintiff may be able to recover for both moneys expended and loss of profit, although great care needs to be taken that double counting does not occur. Thus, when the defendant has warranted that a machine is suitable for carrying out a particular contractual obligation of the plaintiff, breach of the warranty may entitle the plaintiff to recoup the net capital loss incurred in purchasing and installing the machine together with any excess of the estimated profits over that capital loss: T.C. Industrial Plant Pty. Ltd. v. Robert's Queensland Pty. Ltd. [1963] HCA 57; (1963) 37 ALJR 289.
12. Moreover, in some cases, the plaintiff's only recoverable loss is the expenditure thrown away by the defendant's breach. Thus, a purchaser of land is able to recover the costs thrown away in investigating the title to the land, although, by an anomalous rule of the common law, the vendor is not liable for damages for loss of the bargain if its failure to prove and make title has occurred bona fide and without fault on its part. If the vendor fails to complete for reasons other than a defect in title, the purchaser will be able to recover any expenditure thrown away by the vendor's breach even though the purchaser would not have made any profit if the sale had been completed: Wallington v. Townsend (1939) Ch 588, at pp 592-593; Lloyd v. Stanbury (1971) 1 WLR 535, at p 546; (1971) 2 All ER 267, at p 275. Likewise, if a purchaser incurs expense in arranging for the delivery of goods, it will be entitled to recover the cost of any wasted expenditure even though the goods are otherwise obtainable at the contract price.
13. However, the most important class of case where the plaintiff is entitled
to recover wasted expenditure is the one where the
plaintiff cannot prove any
loss of profit because the nature of the breach makes it impossible or too
uncertain to ascertain whether
the plaintiff would have made any profit or, if
it would have, what the amount of that profit would have been. In McRae v.
Commonwealth
Disposals Commission [1951] HCA 79; (1951) 84 CLR 377, this Court held (at p
415) that, where the defendant had contracted to sell
an "OIL TANKER
lying on
JOURMAUND
REEF" and no such tanker existed, the plaintiff's damages were "to
be measured by reference to
expenditure incurred
and wasted in
reliance on the
Commission's promise that a tanker existed at the place specified". Dixon and
Fullagar JJ. said (at
p 414):
"If we regard the case as a simple and normal case of breach
by non-delivery, the plaintiffs have no starting-point. The
burden of proof is on them, and they cannot establish that
they have suffered any damage unless they can show that a
tanker delivered in performance of the contract would have
had some value, and this they cannot show. But when the
contract alleged is a contract that there was a tanker in a
particular place, and the breach assigned is that there was
no tanker there, and the damages claimed are measured by
expenditure incurred on the faith of the promise that there
was a tanker in that place, the plaintiffs are in a very
different position. They have now a starting-point. They
can say: (1) this expense was incurred; (2) it was incurred
because you promised us that there was a tanker; (3) the
fact that there was no tanker made it certain that this
expense would be wasted. The plaintiffs have in this way
a starting-point. They make a prima-facie case. The fact
that the expense was wasted flowed prima facie from the fact
that there was no tanker; and the first fact is damage, and
the second fact is breach of contract. The burden is now
thrown on the Commission of establishing that, if there had
been a tanker, the expense incurred would equally have been
wasted. This, of course, the Commission cannot establish.
The fact is that the impossibility of assessing damages
on the basis of a comparison between what was promised and
what was delivered arises not because what was promised
was valueless but because it is impossible to value a
non-existent thing. It is the breach of contract itself
which makes it impossible even to undertake an assessment
on that basis. It is not impossible, however, to undertake
an assessment on another basis, and, in so far as the
Commission's breach of contract itself reduces the
possibility of an accurate assessment, it is not for the
Commission to complain."
14. In the Full Court in the present case, Burchett J. took the view that the basis of decisions such as McRae is that, where parties have freely negotiated a contract in the ordinary course of commerce, proof of the incurring of expenditure appropriate to the performance of the contract raises a "prima facie inference" that it will be recouped from carrying out the contract. It would seem likely that, by "prima facie inference", his Honour meant that in the absence of further evidence the tribunal of fact was entitled to act on the inference. But pressed to its logical conclusion, this proposition would mean that, in every commercial case, proof of expenditure raises an inference - upon which the court can act - that the plaintiff's loss for the purpose of the assessment of damages was no less than the amount of that expenditure. It would have the result that, unless the defendant discharged the evidentiary onus of showing that the expenditure would not be recouped, the plaintiff in a commercial case would be entitled to damages commensurate with its expenditure.
15. With great respect to his Honour, I think that no such inference arises in commercial cases as a matter either of law or of commercial experience. No doubt the majority of commercial contracts are profitable. But many are not. Business people frequently make bad bargains; there is no a priori reason for thinking that a plaintiff would have recovered the expenditure incurred if the contract had been fully performed. A prima facie inference of the kind suggested by his Honour could only arise if the experience of the commercial world was that expenditure incurred in preparation for or in the performance of any commercial contract was always recovered in the absence of some very exceptional circumstance arising. The experience of commerce, and not merely its recent experience, contradicts such a proposition. Moreover, the history of the law of evidence has seen an increasing rejection of presumptions and other artificial forms of reasoning in favour of allowing tribunals of fact to give such probative force to evidentiary materials as they think fit having regard to all the circumstances of the case. To now formulate such a presumption in a commercial case would be inconsistent with that historical development.
16. I would reject the explanation that the basis of cases such as McRae is or ought to be that proof of expenditure gives rise to a prima facie inference that it will be recouped by the carrying out of the contract. The rule in McRae is satisfactorily based on the broad principle of justice that, if the breach of the defendant has made it impossible to ascertain whether or not the plaintiff would have made a profit from the performance of the contract, it is only fair that the defendant should reimburse the plaintiff for expenditure which it has wasted as the result of the breach.
17. In McRae, Dixon and Fullagar JJ. said that the burden of showing that
"the expense incurred would ... have been wasted" was
on the defendant. A
similar approach to the question of burden of proof is to be found in the
United States in the judgment of the
Court of Appeals for the Second Circuit
in L Albert and Son v. Armstrong Rubber Co. (1949) 178 F 2d 182 and in Canada
in the judgment
of Berger J. in Bowlay Logging Ltd. v. Domtar Ltd. (1978) 87
DLR (3d) 325. But, unless it is the law that the plaintiff has an
unfettered choice to claim either loss of profits or wasted expenditure, it is
not easy to understand how any question can arise
of the onus being on the
defendant to show that the expense incurred would have been wasted in any
event. In a case like McRae,
the plaintiff can only claim for expenditure
which has been wasted if the nature of the breach makes it impossible to
assess what
the outcome of the contract would have been if it had been
performed. No question of an onus being on the defendant can arise.
Ex
hypothesi, once it is proved that it is impossible to assess the outcome of
the contract, no issue can arise as to whether "the
expense incurred would
equally have been wasted". In a case like McRae, until the plaintiff proves
that the defendant's breach has
made it impossible to prove the outcome of the
contract or the value of the defendant's promise, expenditure wasted in
reliance on
the defendant's promise is not recoverable. But once the
plaintiff discharges that burden of proof, it is entitled to be compensated
for all expenditure wasted in reasonable reliance on the defendant's promise
to perform its side of the contract.
Amann's loss
18. It needs to be kept firmly in mind that, for the purpose of the principle in Robinson v. Harman, the "loss" which Amann suffered as the result of the breach by the Commonwealth is not the same thing as any profit that it may have made under the contract or even any profit which it might have made on its operations in the post-breach period. In assessing any "profit" of Amann, any revenue obtained under the contract could properly be charged, wholly or proportionately, with costs and expenses already incurred as at the date of breach. But in assessing Amann's loss as the result of the breach, the only consideration is: what sum of money will place Amann "in the same situation ... as if the contract had been performed"?
19. As at the date of breach, Amann had already paid or incurred a liability to pay $6,136,464 in acquiring aircraft and in other establishment costs. It appears that, if the contract had continued, Amann would have been liable to pay another $368,479 in respect of the acquisition of aircraft. Whether or not it had already incurred liability in respect of that payment is not clear. But the better view would seem to be that it was a liability which would be incurred in the future. I shall act on that basis. The learned trial judge also found that the cost to Amann of borrowing money to purchase the aircraft was $3,390,000. It was a liability, however, that had been incurred as at the date of breach. On the Full Court's findings of fact, Amann was liable to indemnify another company for the cost of the aircraft and would have to borrow to fund that liability. It is immaterial whether the precise sum would have been $3,390,000 or a larger or smaller sum. The important point is that, as at the date of breach, Amann had paid or had a liability to pay $6,136,464, part of which gave rise to a further liability in the form of interest payments or its equivalent of $3,390,000. The liability to pay the $3,390,000 or some equivalent sum had been incurred as at the date of breach. It was not a liability to be incurred in the future, as the figures put forward by the Commonwealth assumed. So as at the date of breach, Amann had paid or was liable to pay $9,526,464 ($6,136,464 + $3,390,000). Those payments and liabilities had to be recouped or met by Amann from the revenue generated by the contract or from its own or other sources. They had to be recouped or met whether the contract ran until its expiry date or was sooner terminated by Amann, the Commonwealth, the consent of the parties or frustration of law. But they are irrelevant in determining how much better off Amann would have been if both parties had continued to perform their obligations under the contract: see Banks v. Williams, at pp 229-230. If Amann had abandoned the contract the moment before breach, those payments and liabilities would have existed. They were not liabilities which had to be incurred after 12 September 1987 if Amann was to earn the $17,107,462 in revenue to which it was entitled under the contract. Likewise, questions concerning the value of the aircraft are irrelevant to the computation of Amann's loss. Once those aircraft were committed to the surveillance contract and fitted out for that purpose, they had an intrinsic value of only $917,329. From Amann's point of view, after conversion their residual value was $917,329. And even if Amann had obtained any contract awarded in 1990 that would have been their value at the commencement of that contract. As at the date of breach, therefore, Amann had already lost the difference between the cost of acquiring those aircraft and their residual value.
20. If there had been no breach of contract by the Commonwealth, Amann had only two expenditures to incur in the future to obtain the $17,107,462 revenue which it would have derived under the contract. They were its operating costs, which Beaumont J. assessed at $12,043,420, and the sum of $368,479 to be paid in respect of the acquisition of aircraft. It may be that three years of operations would have meant some small decline in the residual value of the aircraft. But no point was made about this, and it can be ignored.
21. Accordingly, in my opinion, if the contract had continued instead of being breached and terminated, Amann would have been $4,695,563 ($17,107,462 - ($12,043,420 + $368,479)) better off than it was immediately before the breach. As the result of the breach, Amann was also required to pay the sum of $143,049 in termination payments to its employees and a security deposit of $113,000 was wrongly forfeited. Both these amounts are recoverable as part of Amann's loss which, therefore, totals $4,951,612.
22. The correctness of the sum of $4,695,563 as the measure of Amann's loss,
apart from the forfeiture of the deposit and the termination
payments, can be
demonstrated by comparing Amann's position, if the contract had been
performed, with its present position without
an award of damages.
A. The contract performed
Cost of aircraft and establishment costs $ 6,136,464without damages
Further cost for acquisition of aircraft $ 368,479
Borrowing costs $ 3,390,000
Operating costs $12,043,420
___________
Total expenditure or liability $21,938,363
Less
Revenue $17,107,462
Value of aircraft $ 917,329 $18,024,791
___________
Loss = $(3,913,572) B. Position
Cost of aircraft and establishment costs $ 6,136,464between A and B = $ 4,695,563
Borrowing costs $ 3,390,000
___________
Total expenditure or liability $ 9,526,464
Less Value of aircraft $ 917,329
___________
Loss = $(8,609,135) C. Difference
23. Amann would be entitled therefore to recover the sum of $4,951,612 as its
prima facie loss by reason of the non-performance
of the Commonwealth of its
contractual promise. The Commonwealth contended, however, that the amount of
damages which Amann was
entitled to recover was only $1,561,612. The
difference between that figure and the figure of $4,951,612 is, of course, the
sum
of $3,390,000 which the Commonwealth charged as a cost of earning the
revenue sum of $17,107,462. But, as I have pointed out, the
liability to pay
interest of $3,390,000 or some equivalent amount was a liability already
incurred as at the date of breach. That
liability was a concomitant of
Amann's indemnity to pay for the cost of the aircraft. It was not a liability
which would arise in
the future when Amann sought to earn the revenue sum of
$17,107,462. It existed at the date of breach. Amann's prima facie loss,
therefore, is the sum of $4,951,612. I say prima facie because Amann says
that it was also entitled to damages for the loss of the
chance to earn
profits under any contract let in 1990. Since it is common ground that, in
the circumstances of the case, damages
for loss of the chance are impossible
to assess, Amann concedes that it could not obtain any expectation damages for
that loss of
chance but says that it is entitled to reliance damages in
accordance with the principle of McRae's Case. Consequently, Amann says
its
loss is not $4,951,612 or whatever sum represents what can be calculated as
expectation damages. Its loss is the pre-breach
expenditure. On the other
hand, the Commonwealth contends that Amann's prima facie loss must be
discounted to allow for the contingency
that the 1987 contract might have been
terminated before its expiration because of Amann's own breaches of contract.
Reliance damages in this case
24. If reliance damages are to be awarded to Amann, it can only be on one of
two possible grounds: first, that the Commonwealth
expressly or impliedly
promised Amann that, if it performed the 1987 contract, it would obtain a
commercial advantage which would
enable it to earn profits under any contract
let in 1990 and the value of that commercial advantage cannot be assessed
because of
the breach; second, that although the Commonwealth made no promise
concerning the 1990 contract, one of the consequences of the breach
of the
1987 contract is so uncertain or impossible to assess that it is just and
proper to award reliance damages.
The promise of a commercial advantage
25. If the Commonwealth promised Amann that performance of the 1987 contract would confer a commercial advantage on it and that, by reason of the breach of contract, the value of the commercial advantage could not be assessed, there would be no difficulty in applying McRae's Case and holding that Amann was entitled to reliance damages. Amann's pre-breach expenditure would have been incurred in reliance on the Commonwealth's promise that a commercial benefit would flow from the performance of the contract. The claim by Amann would, therefore, be firmly rooted in reliance damages doctrine. But the evidence does not establish any express or implied promise by the Commonwealth that the 1987 contract would confer any implied commercial advantage on Amann.
26. In the absence of an express or implied contractual stipulation, the common law rejects the notion that a plaintiff claiming damages for breach of contract is entitled to be compensated for, or have taken into account, a commercial advantage or loss of opportunity to display business or professional skills or to enhance a professional or business reputation. Where the contract of an actor, producer or author has been wrongly terminated, damages may be recovered for the loss of the opportunity to enhance his or her reputation: Marbe v. George Edwardes (Daly's Theatre) Ltd. (1928) 1 KB 269; Herbert Clayton and Jack Waller Ltd. v. Oliver (1930) AC 209; White v. Australian and New Zealand Theatres Ltd. [1943] HCA 6; (1943) 67 CLR 266; Joseph v. National Magazine Co. Ltd. (1959) Ch 14. But the true explanation of these cases is that there is an implied promise on the part of the employer to afford the actor, producer or author such an opportunity: see Oliver, per Lord Buckmaster at p 218; White, at pp 271, 273, 281-282; and cf. Re Golomb (1931) 144 LT 583, per Greer LJ. at pp 590-591. Whether the promise in these cases arises from business necessity or is implied by law, those cases are in a special category. They provide no foundation for supposing that there is any general rule that contractual promises in a business or professional context give rise to a further implied promise that the promisee will obtain the commercial advantages which are expected to flow from the performance of the contract. The fulfilment of such expectations is at the promisee's risk. In the absence of special facts peculiar to the contract in question, there is no ground for implying such a term into an ordinary commercial or professional contract as a matter of either fact or law. The contrary view would have far-reaching effects. It would mean, for example, that the householder who wrongly terminated a contract with an interior decorator would be liable for damages for depriving the decorator of the opportunity to enhance his or her reputation with the householder's friends and neighbours. In Re Golomb, in dismissing a claim "to recover damages for loss of prestige and (or) publicity" by a person who had not been appointed as a company director, Scrutton LJ. said (at p 587) that the claim was "one which has startled me very much".
27. Amann's claim is not supported by Richardson v. Mellish [1824] EngR 715; (1824) 2 Bing 229 (130 ER 294) where the defendant had promised to appoint the plaintiff master of a ship for two voyages subject to certain events, one of which was the East India Company approving the master for each voyage. No appointment was made for the second voyage. The defendant argued that damages should not be given for the second voyage since the Company might have withheld its approval. But since the approval was "almost to a certainty", damages were given for the second voyage. In Richardson, the loss of profits from the second voyage was directly caused by the defendant's breach of its promise.
28. Nor is its claim supported by T.C. Industrial Plant where this Court said (at p 294) that, in assessing damages for breach of warranty of fitness, regard could be had to the receipts and expenditure which the plaintiff would have obtained or incurred under a contract with the Commonwealth "and the probable extension thereof". Since the promisor had warranted that the machine was fit for the purpose of carrying out work of the relevant kind, the damages included what could be earned under the contract and what might have been earned under the extension in performing the work which the promisor had warranted the machine was fit to carry out.
29. There was no express promise and there were no facts peculiar to the 1987
contract which gave rise to an implied promise that
if Amann performed the
1987 contract, it would obtain a commercial advantage which would enable it to
earn profits under any contract
let in 1990. Accordingly, Amannn is not
entitled to damages for breach of such a promise. This basis for claiming
reliance damages
must be rejected.
Reliance damages where a consequence of the breach is uncertain
30. If reliance damages are to be awarded, it can only be upon the second ground to which I have referred, that is, that one of the consequences of the breach of contract by the Commonwealth is so uncertain or impossible to assess that it is just and proper to award Amann reliance damages. In other words, the claim for reliance damages is not because there is any claim that there has been a breach of any promise in relation to any contract to be let in 1990; it is because the breach of the promises made in the 1987 contract has caused a consequential loss to Amann which is impossible to assess. The claim, therefore, goes beyond the claim which this Court accepted in McRae.
31. It is one thing to assess damages on a reliance basis when it is impossible or too uncertain to determine what the value of the defendant's promise would have been. It is another matter altogether to say that, although the value of the defendant's promise can be fully and accurately determined, reliance damages can be awarded because a consequence of the defendant's breach is too uncertain or impossible to evaluate. If the promise of the defendant can be valued, an award of expectation damages, based on the estimated outcome of the contract, gives the plaintiff all that it was entitled to receive in return for any moneys expended in reliance on the defendant's promise. Consequently, if Amann can be awarded "reliance" damages in this case - where the value of the Commonwealth's promise can be fully determined - it means that "reliance" damages can be awarded, not because money was expended in reliance on the defendant's promise and that promise cannot be valued, but because the defendant's breach of promise may have caused a consequential loss to the plaintiff. To award "reliance" damages on such a basis would be contrary to the rationale of the reliance damages doctrine.
32. Consequently, I would reject the claim that reliance damages should be awarded in this case because Amann was entitled to have the loss of the chance of future profits taken into account in assessing damages. The loss of that chance flows from its expectations and not the Commonwealth's promise. Indeed, the fact that it was a Commonwealth contract under which there was a chance to make profits seems accidental. If the claim for reliance damages could succeed in this case, it would seem to make no difference that the breach had caused the loss of a chance to earn profits under some other contract to which the Commonwealth was not a party.
33. Moreover, even if, contrary to my view, reliance damages can be awarded
in a case where the outcome of the contract and the
value of the defendant's
promise can be accurately determined, I would reject the claim on the facts of
this case.
Causation
34. The Commonwealth contended that the Full Court was not justified in attaching significance to Amann's prospects of obtaining a renewal or extension of the contract because "to include in the assessment of damages an allowance for that which would have been obtained under a renewed or extended contract is to compensate the contractor for loss resulting from a decision not to renew or extend rather than for loss resulting from the breach" (my emphasis). The Commonwealth argued that the breach did not prevent Amann from tendering for any further contract beyond 12 September 1990. The contention of the Commonwealth raises the question whether its breach of contract caused the loss of the chance of obtaining profits from any renewal or extension of the 1987 contract.
35. Absent any contrary contractual stipulation, a plaintiff is entitled to be compensated only for loss or damage which is the result of the defendant's breach. Loss or damage which flows from the plaintiff's inability to perform or obtain another contract is recoverable only if that loss or damage resulted from the breach and was reasonably foreseeable as likely to result from the breach: see Reg. Glass Pty. Ltd. v. Rivers Locking Systems Pty. Ltd. [1968] HCA 64; (1968) 120 CLR 516, at p 523. It is not enough that the parties contemplated that the contract would probably be renewed or that loss or damage to the plaintiff might occur if the contract was not renewed. When the defendant has refused to promise that the contract would be renewed and the issue of renewal is at the risk of the plaintiff, it seems almost paradoxical to find that the defendant should have to pay damages to the plaintiff when the risk has been realised. Nevertheless, accepting for the purpose of the argument that, although the Commonwealth did not promise to renew the contract, it may have to pay damages for the loss of the chance of earning profits under a renewed contract, Amann could not succeed in that claim unless it proved that the Commonwealth's breach caused the loss of that chance.
36. In the Full Court, it appears to have been taken for granted that the breach caused the loss of the chance that the contract would be renewed. At all events, the members of the Full Court did not discuss the matter. They appear to have acted on the assumption that, if the parties contemplated that the contract would probably be renewed, Amann was entitled to have its damages assessed on the basis that it had lost the chance of earning profits under a renewal of the contract. But the contemplation of the parties goes to the issue of remoteness, not causation. Foreseeability is not relevant to the issue of causation in a civil case: Chapman v. Hearse [1961] HCA 46; (1961) 106 CLR 112, at p 122. The assumption made in the Full Court reflects the rule concerning remoteness of damage which is to be found in such cases as Hadley v. Baxendale [1854] EngR 296; (1854) 9 Ex 341 (156 ER 145). That rule is an exclusionary rule. The contemplation of the parties marks the boundary of the liability for loss or damage caused by a breach of contract. It is a limit on, and not a ground of, liability. Consequently, the finding of Davies J. that future "extensions of the contract were not only in the contemplation of both parties but probable" is not decisive of the issue of causation. The probability of renewal could have no relevance to that issue unless it also be found that the Commonwealth's breach of contract destroyed that probability. Under the issue of causation, the question is not whether the contract was likely to be renewed or whether the parties contemplated its renewal but whether any failure to renew it would be the result of the defendant's breach of contract.
37. In March v. Stramare (E and M.H.) Pty. Ltd. [1991] HCA 12; (1991) 171 CLR 506, this Court held that, for the purpose of the law of negligence, the test for determining whether a negligent act or omission was the cause of a particular occurrence is a question of fact which, in the words of Lord Reid in Stapley v. Gypsum Mines Ltd. [1953] UKHL 4; (1953) AC 663, at p 681, "must be determined by applying common sense to the facts of each particular case". Deane J. said (at p 524) that "the question whether conduct is a 'cause' of injury remains to be determined by a value judgment involving ordinary notions of language and common sense". The majority of the Court rejected the proposition that the "but for" test is the exclusive test of common law causation. The reasoning in March requires that the same test of causation be applied in determining whether a breach of contract is the cause of a particular loss for the purpose of assessing the damages recoverable for that breach.
38. In Smith, Hogg and Co. v. Black Sea and Baltic General Insurance Co.
(1940) AC 997, Lord Wright pointed out (at pp 1003-1004)
that:
"There is always a combination of co-operating causes, outSince the purpose of the inquiry involved in the causation issue is to fix legal responsibility "and not to find ultimate explanations, the factor chosen by the common law is that which common sense fixes upon as relevant to responsibility in a particular case": The National Insurance Co. of New Zealand Ltd. v. Espagne [1961] HCA 15; (1961) 105 CLR 569, per Windeyer J. at p 592. But, as Taylor J. pointed out in The Commonwealth v. Butler [1958] HCA 56; (1958) 102 CLR 465, at pp 476-477:
of which the law, employing its empirical or common sense
view of causation, will select the one or more which it
finds material for its special purpose of deciding the
particular case."
"the cause of an event is not established in the legal
sense by showing, without more, that in the absence of a
proved set of circumstances the event would or may not have
happened, or, that a proved set of circumstances, in the
widest sense, contributed to the happening of the event".
39. If the Commonwealth's breach of contract caused the loss of the chance of obtaining profits under a renewal or extension of the 1987 contract, it must be because it either prevented Amann from tendering for or effectively destroyed its chance of being awarded that contract. But nothing resulting from the Commonwealth's breach of contract prevented Amann from tendering for any contract offered in September 1990. The breach of contract did not affect Amann's capacity to tender for that contract. The capacity of its aircraft to carry out that contract was unaffected by the breach. Since Amann was entitled to recover damages for any loss arising under the 1987 contract, it would be in no worse financial position when tendering for any 1990 contract than it would have been if there had been no breach. Of course, in the three-year period before any 1990 contract came up for tender, Amann may have elected to sell its aircraft, disband its personnel or abandon the business. But, if it did, any or all of those acts would be the result of a voluntary choice made by Amann. And, unless constrained by the conduct of the wrongdoer, a result which occurs because of the subsequent voluntary act of the plaintiff or a third party is not "caused" by the wrongdoer for the purposes of the common law doctrine of damages.
40. The present case is different, for example, from a case of a negligently caused injury which has resulted in a plaintiff suffering damage by reason of losing a chance of promotion. In such a case, the injury constrains the employer to reject any application for promotion and is rightly seen as a cause of the loss of the chance of promotion. But nothing in the Commonwealth's breach or anything directly flowing from it could dictate the result of or affect the tendering process for any contract offered in 1990. Even if any tender by Amann was rejected out of hand without any real consideration, it could be safely inferred that the cause of the rejection was not the Commonwealth's breach of contract but its perception of Amann's capacity and reliability.
41. Accordingly, in my opinion, Amann was not entitled to have its damages assessed on the basis that it should be compensated for the loss of the chance of obtaining profits under any further contracts. Both as a matter of principle and, in any event, on the facts of the case Amann's claim to have its damages assessed on a reliance basis fails.
42. Subject to the discount argument considered below, Amann's loss for the
purpose of the principle in Robinson v. Harman was the
sum of $4,695,563
together with the sum of $256,049 in respect of the security deposit forfeited
and the termination expenses incurred.
Discount for the prospect of termination under cl.2.24
43. When Amann accepted the repudiation of the Commonwealth, it was itself in breach of contract. In the Full Court, Davies J. held that there was a 20 per cent chance that the contract would have been cancelled pursuant to the provisions of cl.2.24. However, his Honour thought that such a chance should not be taken into account in assessing damages. I agree with his Honour's construction of cl.2.24 and with his reasons for the conclusion that there was a 20 per cent chance that the Secretary would have terminated the contract by reason of Amann's breaches. In my opinion, however, since Amann had only an 80 per cent chance of recovering the sum of $4,695,563 and the sum of $113,000 representing the security deposit, its damages should be reduced accordingly: see Malec v. J.C. Hutton Pty. Ltd. (1990) [1990] HCA 20; 169 CLR 638, at pp 642-643. Just as in a personal injury case, the plaintiff's damages must be discounted for the general and specific contingencies applicable to his or her case, so in a contract case the plaintiff's damages must be discounted to cover any specific contingencies that may have prevented the plaintiff from recovering all the moneys which it had been promised.
44. Amann's damages, therefore, are 80 per cent of $4,808,563 ($4,695,563 and
$113,000), which equals $3,846,850, together with
the sum of $143,049 for
termination payments to employees. That makes a total of $3,989,899. In
addition, Amann is entitled to
interest pursuant to s.51A of the Federal Court
of Australia Act 1976 (Cth). The sum of $4,695,563 would have been earned over
and not at the beginning of the three-year period of the contract. It is
appropriate, therefore, that Amann should receive interest on only one-half of
80 per cent of that sum for the period 12 September
1987 to 12 September 1990.
Thereafter, it should receive interest on 80 per cent of $4,695,563 to the
date of this judgment. It
should also receive interest on 80 per cent of the
sum of $113,000 (the security deposit) and on all of the sum of $143,049 (the
termination payments) from 15 September 1987, the date of the termination of
the contract.
Order
45. The appeal should be allowed. In lieu of par.2(a) of the order of the Full Court, there should be substituted such sum as represents the sum of $3,989,899 damages and interest calculated in accordance with this judgment. The judgment should take effect as from today. The respondent should pay the costs of, and incidental to, this appeal.
ORDER
Appeal dismissed with costs.