High Court facilitates wasted expenditure claims in breach of contract cases

What you need to know

• The High Court has delivered an important decision on damages for breach of contract, clarifying long-debated and uncertain principles about when and how "reliance losses" or wasted expenditure can be recovered following a breach of contract.
• While the judges expressed different views in four separate judgments, the decision clarifies that "reliance losses" are not a separate category from "expectation losses" (compensation for the benefit the party would have received under the contract), which a claimant can elect between. Wasted expenditure can be recovered where it is impossible or difficult to assess what the claimant would have obtained if the contract had been performed.
• Wasted expenditure can be claimed not just where expenditure is incurred to perform or required under the contract, but where the expenditure was incurred in anticipation or reliance on the performance of the contract.
• The legal onus remains on the claimant to prove that they would have recouped the expenditure had the contract been performed. However, the "facilitation principle" may lead the court to assume or infer that the claimant would have recovered the expenditure where the respondent's breach results in uncertainty or difficulty of proof. The principle is flexible and its strength will depend on the circumstances and the nature of the breach, but it cannot lightly be dismissed by evidence of a mere possibility of non-recoupment.
• While these principles are flexible, their practical impact may be that it is more straightforward to recover reliance losses for wasted expenditure in cases where there are a number of contingencies which would have impacted whether, had the contract been performed, it would have been profitable or expenses would have been recouped.

What you need to do 

• When negotiating contracts, consider how to address the risks of a party incurring reliance losses or wasted expenditure, including making clear through limitation or other clauses what losses may be recoverable for breach or whether one party is relying on another party's performance of an obligation (such as a reasonable endeavours obligation) in incurring expenditure. This is particularly important where the contract supports a more speculative business outcome.
• When assessing potential claims for breach of contract, consider the possibility of claims for wasted expenditure, including whether the facilitation principle could be relied on and what evidence might be required to support your position.

Damages for wasted expenditure – new principles

Working out what damages could be payable for breach of contract is critical to assessing risks in drafting contracts and pursuing claims when things go wrong. The traditional measure of damages is "expectation loss" (such as loss of profits) where a party is compensated for gains they would have made under a contract, but in uncertain circumstances parties may also claim "reliance losses". This is essentially wasted expenditure in reliance on the other party's assumed performance of the contract.

The High Court has today clarified the circumstances in which reliance losses for wasted expenditure can be recovered, in Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17. The Court unanimously upheld a claim for wasted expenditure of $3.7 million incurred in reliance on a contractual promise by a Council.

A key issue in reliance loss cases is that the claimant generally cannot prove that, had the contract been performed, they would have profited. Otherwise, they could have pursued an expectation loss claim. This is often the case where, because of the breach, a contingent business opportunity cannot be pursued, or the outcome had the contract been performed is uncertain. Following Commonwealth v Amann Aviation (1991) 174 CLR 64, there has been uncertainty about when reliance loss can be recovered.

While there were four separate judgments and different views were expressed, the majority took a relatively broad approach to the recovery of reliance losses. The key principles were:

• "Reliance losses" are not a separate category from "expectation losses", which a claimant can elect between. The underlying principle is that contract damages put the claimant in the position they would have been in, had the contract been performed. Reliance losses may therefore be recovered only where the claimant would have recovered its expenditure had the contract been performed.
• It follows that there is no right to elect between reliance losses and expectation losses.
• Wasted expenditure can be recovered where it is impossible or difficult to assess what the claimant would have obtained if the contract had been performed.
• Wasted expenditure can be claimed not just where expenditure is incurred to perform or required under the contract, but where the expenditure was incurred in anticipation or reliance on the performance of the contract. This has important implications. In the case, the contract was an agreement for lease which included in the contract that the Council would take all reasonable actions to register a plan for a subdivision. The agreement was not for the development of business ventures on the land and made clear that the plaintiff bore the risk of those ventures. Nonetheless, substantial expenditure incurred developing a business venture, in reliance on the Council's promise, was recovered.
• The legal onus remains on the claimant to prove that they would have recouped the expenditure had the contract been performed. However, the "facilitation principle" may assist the claimant to prove its loss where the respondent's breach results in uncertainty or difficulty of proof. The principle is flexible and will depend on the circumstances and the nature of the breach, but it cannot lightly be dismissed by evidence of a mere possibility of non-recoupment. While the business ventures in question were not profitable prior to the breach, and the recoupment of the costs depended on a range of contingencies, the claim was nonetheless upheld.
• Wasted expenditure can be recovered even if it was incurred before the contract was entered into provided it is established that it was within the contemplation of the parties at the time of entering the contract, that this expenditure would be recouped in performance of the contract.

Gageler CJ took a different approach, appearing to suggest that a claimant could choose between reliance damages and expectation damages, without a requirement to establish difficulty or impossibility in assessing a claim for expectation damages, and that in such cases the legal onus rested on the defendant to show the costs would not have been recouped. Jagot J agreed with the latter point. Given the long-running controversy about these principles, we expect that their decisions will spark further consideration and the principles may continue to evolve as they are applied in the future.

Although not argued in this appeal, it is of interest to note the plurality commented on a recent English Court of Appeal decision in Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] 2 All ER (Comm) 1082, in which the Court of Appeal held that wasted expenditure was a "direct loss" rather than a "consequential loss" for the purposes of an exclusion clause, suggesting that consequential loss exclusions may not be sufficient for parties to exclude claims for wasted expenditure.

Application of the principles

The facts of the case demonstrate the potential benefit of these principles for claimants, particularly in cases where there are many contingencies in the way of proving that the contract would have been profitable.

Cessnock City Council (Council) and Cutty Sark Pty Ltd (Cutty Sark) entered into an agreement to grant a lease for 30 years over a subdivided part of the Cessnock Airport. The agreement for lease was granted in the context of the Council's plans to develop Cessnock Airport. The agreement required the Council to take all reasonable actions to apply for and obtain registration of the subdivision. Prior to the lease being granted, Cutty Sark was granted a license to occupy the area. Cutty Sark then constructed an aircraft hangar at a cost of over $3.7 million.

Cutty Sark operated businesses at the airport site, including adventure flights, advanced flight aerobatic training and an aviation museum. All the businesses proved unprofitable.

Ultimately, the Council advised it was not prepared to register the subdivision, because of the high cost of sewerage works at the site. This was found to have beached the Council's reasonable endeavours obligation. Around this time, Cutty Sark fell into arrears on its license fees and subsequently abandoned the site.

Cutty Sark sued the Council for breach of the obligation to take all reasonable action to register the subdivision. It did not seek to prove that the lease would have been profitable but rather sought to recover the expenditure incurred in developing the site.

The trial judge (Adamson J) found that although in breach, the Council was not liable to Cutty Sark for its wasted expenditure in building the hangar. This was because Cutty Sark would have remained unprofitable given it was losing money as a licensee and there was limited prospect of the airport development that Cutty Sark was relying on being developed. Her Honour considered this was therefore not a case where it was appropriate to award reliance damages.

Justice Brereton (Macfarlan and Mitchelmore JJA agreeing) overturned the trial judge's decision, on the basis the decision had misapplied both the facts and the principles regarding claims for reliance damages. The Court of Appeal considered there was a presumption in favour of Cutty Sark that it may have recouped its costs if the Council had granted it a 30 year lease and that the Council had failed to adduce sufficient evidence to rebut that presumption.

The High Court after setting out principles considered that Cutty Sark was entitled to claim reliance damages. Each judgment considered that the Council had failed to adduce sufficient evidence to establish that Cutty Sark would not have been able to recoup expenses if the Council had performed its obligations and granted it a 30 year lease.

This result may seem surprising, given the Council had established that Cutty Sark's business ventures had been unprofitable before the breach, that Cutty Sark as licensee was already in arrears on its rent and that Cutty Sark had turned down a lease on similar term for 25 years around the time of the breach. There were plainly substantial obstacles to Cutty Sark developing a successful business venture and recouping the very substantial costs incurred in developing the hangar. In the view of the majority, while this raised the possibility that the contract could have been unprofitable or the expenditure not recouped, it was not sufficient to displace the "facilitation principle". There is a suggestion by the majority that the result may have been different had the Council adduced more evidence as to what would have occurred had the planned subdivision been registered and the lease been granted, but that would have required complex counterfactual evidence on its part.

The Council had also tried to rely on arguments about its contractual allocation of risk under the contract, including that the risk of the airport development not proceeding was to be borne by Cutty Sark. The Court was not persuaded that had any significance because it was not evidence of how things might have been different if the subdivision had been registered and Cutty Sark granted a 30 year lease.

What you need to do in response

The decision has implications for parties negotiating contracts involving unknown contingencies, where one party may incur significant expenses in the hope the contingency will be fulfilled.

Parties negotiating or drafting contracts based on contingent outcomes should consider the types of costs that are likely to be incurred and whether it is appropriate to draft clauses addressing those costs. An example might be to define or limit the expenditure one party contemplates in reliance on another party's performance.

It may also be important to consider the likely operation of exclusion clauses, contractual allocation of risk clauses and any other general limitations on recovery of damages. Without bespoke drafting, general clauses such as a broad exclusion for consequential loss or a general contractual allocation of risk may not be effective in excluding expensive wasted expenditure claims.

For parties considering or facing the prospect of claims, the decision establishes a principle that the courts will take a flexible approach in deciding whether to award damages for wasted expenditure. Given the flexibility, if framing or responding to such claims it is important to consider the circumstances of the potential breach, whether the facilitation principle might operate and what arguments are available to support or displace it.

Authors: Mark Bradley, Partner; Andrew Westcott, Expertise Counsel; Kyle Dolbey, Senior Associate; and Alexander Swebeck, Graduate.