Common assumptions in damages disputes
It is well established that damages for breach of contract are usually measured by comparing:
- the actual position of the plaintiff; with
- the position of the plaintiff if the contract had been performed.
What happens, however, if the party that breached the contract could have performed the contract in different ways, with different consequences for the 'innocent' party? In Berry v CCL Secure Pty Ltd, the High Court confirmed the 'assumption' that the party in breach would have performed the contract in the manner that minimised its liability for damages. This is, however, only an assumption, and the court held that, on the evidence, the party in breach would not have exercised a contractual right to terminate.
A plaintiff may be concerned about their ability to provide that they would, in fact, have been in a better position if the contract had been performed. One option for a plaintiff in this case may be to seek 'reliance damages' (for losses incurred by a plaintiff in performing a contract), rather than 'expectation damages' (for profits lost as a result of the contract not being performed. In Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd, the appellant argued that 'reliance damages' were only available if it was not possible to calculate expectation damages (and that, on the facts of the case, expectation damages were zero). The court held, however, that:
- an 'innocent' party may choose to seek reliance damages, rather than expectation damages; and
- if such a choice is made, the party in breach bears the onus of proving that the reliance expenditure would have been wasted.
On the facts, the party in breach failed to discharge that burden.
Damages in the absence of financial harm
A plaintiff may also face difficulties proving loss where it is clear that no financial harm resulted from the breach. In Leeda Projects Pty Ltd v Zeng, the plaintiff was unable to occupy premises due to a breach of contract. The Victorian Court of Appeal held that it would be inappropriate to award damages by reference to the rental value of the property (being the usual measure of damages for not being able to occupy real property) because the plaintiff intended using the premises as a private art gallery. But how should damages be measured (if awarded at all)? The court's answer was to award damages in some respects similar to reliance damages: that is, damages calculated by reference to the amount spent by the plaintiff on the property during the period that she was not able to use it (although the court was reluctant to endorse a general principle that a plaintiff unable to use property could always recover wasted expenditure).
What happens, however, if the party that breached the contract could have performed the contract in different ways, with different consequences for the 'innocent' party?
The Bellgrove Principle
The usual measure of damages can create injustice where the cost of putting the plaintiff in the same position as if the contract had been performed is disproportionate to the loss caused by the breach. This can be a particular concern in building contracts, where the costs of rectification can be many times larger than the loss of value caused by the breach. This concern is addressed by the 'Bellgrove Principle', which prevents a plaintiff recovering the costs of rectification work if such work would not be a reasonable response to the defect. This principle was applied by the Full Court of the South Australian Supreme Court in Tincknell v Duthy Homes Pty Ltd to deny a plaintiff the costs of rectification. In that case, the Full Court also agreed with an argument that the 'prevention principle' (which applies when a defendant's breach of contract was caused by the plaintiff's own breach) does not apply where the plaintiff owner's breach entitled the defendant to an extension of time to complete the work.
25  HCA 27.
26  NSWCA 234.
27 Following the judgment of Chief Justice Mason and Justice Dawson in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 86-90.
28  VSCA 192.
29 And there is obligation on a plaintiff, having been awarded the costs of rectification, to actually carry out the rectification work.
30  SASCFC.
Berry v CCL Secure Pty Ltd  HCA 27
Calculation of damages for loss of contract where wrongdoer had a lawful right to terminate – burden of proving whether the contract would have been lawfully terminated
In this case, the High Court considered the calculation of damages for the loss of the claimant's contract, where that contract would have allowed the respondent to lawfully terminate, in any event.
The court held that the respondent had failed to prove that it would have exercised its contractual termination rights. The respondent had resorted to deception to terminate its contract, creating a natural inference it was not prepared to use its lawful means of termination, and its evidence failed to overcome this inference.
A respondent's right to terminate does not automatically reduce any damages payable for loss of a contract. A court must assess whether the respondent would, in fact, have used its termination rights. Where a respondent terminates a contract by fraud, it can be inferred they were not prepared to use their legal rights, and an evidential burden shifts to them to show otherwise.
CCL Secure Pty Ltd, then named Securency, manufactured polymer for the production of bank notes. In June 2006, Securency engaged Dr Berry and his company GSC as its sole agent to market polymer to Nigeria, and the parties entered into a written agency agreement. The agreement provided for a commission to Dr Berry and GSC on the sale of polymer.
The agreement was expressed to be valid until 30 June 2008, and to automatically renew for a further term every two years. The agreement could be terminated on 30 days' written notice before the renewal date by either party, or on 60 days' written notice by Securency.
In January 2008, the Nigerian Mint placed orders for polymer with Securency, which did not tell Dr Berry and GSC. Instead, by misleading and deceptive conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth) (the TPA), Securency misled Dr Berry into terminating the agreement with effect from 31 December 2007. He was unaware of his termination until 2009.
Dr Berry and GSC sued for damages under the TPA. The parties proceeded on the basis that damages were referable to the commissions that would have been payable over the term of the agreement had termination not occurred.
Securency argued it would have exercised its unhindered right to terminate on 60 days' notice, or would have, at least, given 30 days' notice expiring on 30 June 2008. Before the High Court, it was not disputed that the agreement would have been terminated at the latest by Securency in 2010, when it terminated all of its agency agreements worldwide.
In the Federal Court, the trial judge found that the agreement would have continued through 2010 but for Securency's deception. The Full Court overturned this finding and considered, in the absence of evidence of Dr Berry's substantial involvement in Securency's business after February 2008, there was no reason to assume Securency would not have lawfully terminated by 30 June 2008.
Dr Berry and GSC appealed to the High Court.
Although this was a s52 case, Justices Bell, Keane and Nettle explained that where a contract is wrongfully terminated, a claimant for damages bears the burden of establishing the objective value of the contract had it not been terminated. If a wrongdoer would have lawfully terminated by another path, then a claimant's lost contractual rights must be valued accordingly.
The majority emphasised that the existence of a right to terminate does not automatically reduce a claimant's damages. The question is whether the wrongdoer would have lawfully terminated had there been no unlawful termination, which requires all the facts and circumstances of a case to be considered.
The majority considered that, although a claimant bears the ultimate burden of establishing its case, the practical burden of introducing evidence can shift. In this case, it was established that Securency deliberately deceived Dr Berry. The natural inference from this was that Securency was not willing to use its lawful termination rights, given courts assume people do not resort to fraud without sufficient motivation. The burden shifted to Securency to adduce evidence that it would have lawfully terminated.
The majority held that the Full Court incorrectly reversed the onus of proof by assuming that the reasons for Securency removing Dr Berry as agent by fraud were also strong enough for it to use its contractual termination rights. The majority considered that Securency led no evidence establishing a real possibility that it would have lawfully terminated, and thus failed to discharge its evidential onus.
Furthermore, the majority considered that, on the evidence, it was highly improbable Securency would have terminated without deceiving Dr Berry, including because Dr Berry being aware of his termination would have risked Securency damaging its relationship with the Nigerian Government.
Justices Gageler and Edelman agreed with the majority that Securency failed to discharge its evidential burden. They considered that, on the case as pleaded, it was sufficient for Dr Berry and GSC to point to the agreement's automatic renewal. The evidential burden was then on Securency to establish it would have terminated, but it relied in its pleaded defence on reasons for termination that the trial judge ultimately did not accept on the evidence. On the pleadings, no further factual inquiry was required, and so the Full Court erred by assuming Securency would have terminated, in the absence of evidence from Dr Berry and GSC.
Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd  NSWCA 234
Damages for wasted expenditure – interdependent contracts – force majeure
In this case, the NSW Court of Appeal considered whether the loss of a head franchise agreement constituted a force majeure event, whether poor business performance could negate a claim for wasted expenditure, and whether franchise and licence agreements were interdependent such that a party's breach of one agreement prevented its enforcement of the other.
The court held that the loss of the head franchise agreement was not outside the franchiser's reasonable power and control and therefore was not a force majeure event. The court found that poor business performance in the first two years of operation did not establish that expenditure would have been wasted had the contract been fully performed and did not defeat a claim for wasted expenditure. Finally, the court held that the franchise and licence agreements in question were interdependent because they were clearly inextricably linked. The appellant's breach of the franchise agreement excused the respondent from meeting its obligations under the licence agreement.
This case is significant because it examines a typical force majeure clause formulation and damages for wasted expenditure in a common commercial context. Further, it shows that in the doctrine of interdependent contracts, references to another contract, the annexing of documents, interconnected obligations and even the content of recitals can serve as indicators of interdependence.
On 9 July 2015, the first respondent, Ivanman Pty Ltd, contracted to purchase a Meet Fresh franchise business selling traditional Taiwanese desserts, beverages and snacks operating at premises in Burwood. The owner of the Meet Fresh intellectual property, Easy Way Station Co Ltd, granted the right to grant franchises to carry on the business in Australia to Meetfresh Australia Pty Ltd, which in turn granted that right to the appellant, Meetfresh Franchising Pty Ltd. Ivanman obtained from the appellant a franchise agreement and a licence to conduct the business at the premises. Both were due to expire in late 2017.
In January 2016, the appellant required Ivanman to undertake a new fit out of the premises. The appellant represented to Ivanman that:
- it would not renew the franchise and licence agreements unless the fit out was completed; and
- the agreements would not be affected by any termination of the head franchise agreement held by the appellant.
Ivanman completed the fit out at a cost of $119,580 and the parties entered into the second franchise agreement for a five-year term.
The first and second franchising agreements contained a force majeure clause, which provided that the appellant was not liable for loss caused by events beyond the appellant's reasonable control.
On 10 January 2017, Ivanman received notice from Easy Way that Meetfresh Australia, and, as a consequence, its sub-franchisees, were no longer entitled to use the Meet Fresh intellectual property. On 27 July 2017, the appellant advised Ivanman that it could no longer use the Meet Fresh intellectual property. The appellant did not offer a renewal or extension of the licence and, on 10 November 2017, served on Ivanman a notice of termination of any 'holding over' licence or franchise agreement.
Ivanman surrendered possession of the premises to the appellant and brought proceedings against the appellant in the District Court. The primary judge found that:
- the first franchise agreement contained the implied terms alleged by Ivanman: in particular, the warranty that Ivanman would be authorised by Easy Way to conduct the franchise throughout the term of the franchise agreement;
- those terms had been breached;
- the force majeure clause did not exempt the appellant from liability because the appellant was in a position of control and power; and
- Ivanman was entitled to recover the amount it spent refitting the premises, on the basis it was wasted expenditure made in the expectation of the benefit of the second franchise agreement for its full term.
The issues on appeal were:
- whether the force majeure clause in the franchise agreements excused the appellant's breaches of contract;
- the quantum of damages; and
- regarding the cross claim, whether the franchise and licence agreements were interdependent such that the appellant was precluded from recovering amounts due under the licence agreement when it did not fulfil its obligations under the franchise agreements.
The court found that rather than qualifying the scope of the appellant's obligation, the force majeure clause operated as an exception to it. This was a matter of construction. The obligations were set out in a broad and relevantly unqualified fashion, and the force majeure clause was included among incidental clauses at the end of the contract. Thus, the appellant bore the onus of demonstrating the applicability of the force majeure clause. The appellant failed to do so because of an absence of evidence to establish how the force majeure event (the loss of the appellant's right to use the intellectual property) came about and the appellant's lack of control to prevent that event.
Damages for wasted expenditure
The court made it plain that Ivanman's claim was not for loss of profits amounting to expectation damages but, rather, for what has been described as wasted expenditure or reliance damages. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64;  HCA 54 established that for such a claim:
- the law assumes a plaintiff would at least have recovered their expenditure had the contract been fully performed;
- the onus of proof rests on the defendant to establish that the reliance expenditure would have been wasted even if the contract had been performed (in this case, over the course of the first and second franchise agreements); and
- the court may award reliance damages where the evidence does not establish any loss of profits.
To establish that the expenditure would have been wasted in any case, the appellant sought to rely on the poor performance of the business over the first two years of its operation. The court found this was insufficient to discharge the appellant's onus. Ivanman's decision to seek a second franchise agreement indicated it had reasonably anticipated it would cover its costs or make profits in the future. Expert evidence also projected Ivanman would earn substantial profits from the beginning of the second franchise term.
The appellant submitted that Ivanman did not incur the costs of the refit as a result of the appellant's breach of contract, but because it was obliged under the franchise agreement to refurbish the premises at its own expense when the appellant reasonably required it to do so. The court held the appellant had not established its request was reasonable for the purposes of the clause, most notably because only five months of the first two-year term had expired.
By its cross claim, the appellant sought $41,575 for licence fees and other monies payable under the licence agreement after its expiry in August 2017. The appellant alleged the agreement had continued on a month-to-month basis. The court agreed with the primary judge that the franchise and licence agreements were interdependent. The court held that the agreements were inextricably linked because:
- the premises were licenced to Ivanman for the sole purpose of carrying on the franchise business there;
- the franchise agreements provided that Ivanman was to licence the premises from the appellant and conduct the business from the premises; and
- the licence agreement referred to the franchise agreement in its recitals and annexed the appellant's lease under which the permitted use was specified to be 'Taiwanese dessert house.'
The appellant's failure to comply with the franchise agreements therefore excused Ivanman from meeting its obligations under the licence agreement.
Other than a small reduction in damages owing to a concession given by Ivanman, the primary judgment was upheld.
Leeda Projects Pty Ltd v Zeng  VSCA 192
Damages for loss of use and enjoyment of asset — method of valuing loss
In this case, the Victorian Court of Appeal considered whether a landowner can be compensated by a contractor for loss of use and enjoyment of their property as a result of a breach of contract, and, if so, the method of valuing such an intangible loss.
The court held that a person could be compensated for the loss of use and enjoyment of property as a result of a breach of contract. The court held that, in this case, the loss was not to be measured by the lost rental value during the period when the property could not be used, but instead by the wasted expenditure related to the property the landowner incurred during the period they could not use or enjoy the property.
This case confirms that a person may recover substantial damages as a result of a breach of contract that causes a party to lose the use of their property, but that there is no universal rule for valuing a person's loss of use and enjoyment of their property, and each claim for loss must be approached on a case-by-case basis. This highlights the uncertainty in the liability of a party who breaches a contract that causes an intangible loss to the other party.
Ms Zeng and her husband engaged Leeda Projects Pty Ltd to perform building works to fit out their apartment in Melbourne as a private art gallery with a separate two-bedroom residential component. Ms Zeng and her husband did not intend to lease the property, and had access to a number of other residences in Melbourne.
Leeda Projects breached an implied term of the contract to complete the works by 3 December 2014. It did not complete the work until 2 June 2017, which was a delay of 130 weeks in which Ms Zeng and her husband could not use the property. During this period, Ms Zeng incurred a number of expenses attributable to her ownership of the property, including owners corporation fees, council rates and utility charges.
VCAT (Victorian Civil and Administrative Tribunal) at first instance awarded only nominal damages of $100 to Ms Zeng for the breach of contract, on the basis that she suffered no substantial loss, as she had not intended to live at the property or make it available for lease. On appeal to the Victorian Supreme Court, a judge awarded Ms Zeng substantial damages of $357,500 (plus interest) as damages for her loss of use of the property during the delay period. The figure of $357,500 was calculated as the property's rental value of $2750 per week for the period of the delay of 130 weeks. The judge rejected Ms Zeng's claim for wasted expenditure of $283,802.17 comprising council rates, owners corporation fees and utility charges incurred during the delay period, on the basis that these expenditures would have been incurred regardless of the breach of contract.
Justice McLeish, with whom Justice Tate and Justice Kaye agreed, held that Ms Zeng could be compensated for her loss of use of the property during the delay period, but that the appropriate measure of damages was the wasted expenditure of $283,802.17, rather than the rental value of $357,500. Justice Kaye and Justice McLeish both reviewed a number of previous cases, and held that a landowner can be compensated for their inability to use their land as a result of a breach of contract, despite the loss being intangible with no obvious measure of the loss.
Justice Kaye considered that the appropriate measure of valuing the loss of use of land is the 'holding cost' of the land during the period in which a person cannot use the property. Justice Tate and Justice McLeish declined to embrace a universal principle, and held that the loss must be valued on a case-by-case basis according to the particular facts of each case. Justice McLeish observed that residential land stands in a special position, as it used not just for profit or pleasure alone but to meet a necessity. Justice McLeish explained that, given the multiple purposes for which land may be owned, it is inappropriate to measure the loss of use and enjoyment according to one particular standard for all cases.
In this case, the court unanimously held that Ms Zeng's loss of use of her apartment during the 130-week delay period could not be the rental value of the property because she did not intend to lease the property. Instead, the court held that the appropriate measure of Ms Zeng's loss was the expenses she was willing to incur to enable her expected use of the apartment as a private art gallery for her enjoyment and occasional residence. On this basis, the court valued Ms Zeng's loss of her ability to use her apartment due to the breach of contract as her wasted expenditures of owners corporation fees, council rates and utility charges during the delay period.
Tincknell & Anor v Duthy Homes Pty Ltd & Anor; Duthy Home Pty Ltd & Anor v Tincknell & Anor  SASCFC
The Bellgrove principle and the prevention principle – seeking damages from defective and delayed building work
In this case, the Full Court of the Supreme Court of South Australia considered whether damages sought for defects in a residential construction were reasonable, in line with the 'Bellgrove principle'. The court also considered how the prevention principle applied in a claim for damages for delay in relation to the same residential construction.
The court held that the damages sought for the building defects were unreasonable. It also held that the prevention principle will not operate where a building contract confers on a builder a right to a time extension for delays caused by the owner’s breach.
This case provides a detailed examination of the 'Bellgrove principle' and the potential development of this principle in South Australia. It also reinforces the limited circumstances where the prevention principle will aid parties to a building contract.
Beth and Michael Tincknell entered into a contract with Duthy to construct a three-level residential property in Mannum, South Australia. The contract price was $2.3 million and the property was to be completed by September 2011.
In December 2012, Duthy informed the Tincknells that the building works had reached practical completion and issued the final progress claim. The Tincknells responded by claiming that the property had not reached practical completion and issued Duthy with a list of defects. Following the receipt of this list, Duthy undertook certain remedial works and then issued a revised notice of practical completion. In response, the Tincknells served Duthy with a notice outlining that, due to its failure to remedy the defects, they would engage others to perform that remedial work.
Duthy initiated proceedings against the Tincknells for the recovery of the final progress claim of $271,434.65 and the return of the bank guarantee of $115,000. The Tincknells denied liability and pursued a cross-claim. They argued that Duthy had breached the building contract for allegedly defective work. The Tincknells also sought damages for the delay in completing the work. They argued that Duthy's delay in completing the property was in breach of clause 12.2 of the contract and had prevented them from selling their current residence, moving into the new property and reinvesting the profits from this sale.
At first instance, the primary judge found that there were certain minor defects and ordered Duthy to rectify certain defective work. Because of these defects, Her Honour found that Duthy was entitled to a reduced final payment of $173,049.41. The primary judge dismissed the Tincknells' claim for damages for delay, pain and suffering. This claim was dismissed, as it was unclear what the respective contributions of the Tincknells and Duthy were to the delays, and because the primary judge considered that the Tincknells had decided not to move into their new property for reasons unrelated to the delay. The Tincknells appealed to the South Australian Supreme Court.
The Tincknells raised a number of issues on appeal, but the main questions were:
- whether the primary judge had correctly applied the 'Bellgrove principle' in her assessment of damages for the defects; and
- whether the prevention principle applied to bar the Tincknells' claims for damages for delay, pain and suffering.
The two most significant defects that the Tincknells raised on appeal concerned waterproofing and termite protection. In dealing with each, the court outlined the 'Bellgrove principle': where building work is defective and remedial work is required to ensure conformity with the contract, the measure of damages will be the cost of the remedial work. However, the remedial works must be a reasonable response to fix the defect. The court also outlined the case of Stone v Chappel, where the Full Court of the South Australian Supreme Court suggested that if a defendant’s conduct in relation to a building contract was 'intentional, sharp, cynical, profit-driven or opportunistic', then it would be more difficult to demonstrate that the remedial work would be unreasonable.
The court found that the principle from Stone v Chappel had not been expressly adopted in other Australian authorities. Nonetheless, the court applied it to the waterproofing defect, finding that the evidence did not establish that Duthy's actions were 'intentional, sharp, cynical, profit-driven or opportunistic'. More importantly, the court also found that the primary judge did not err in her finding that for both the waterproofing and termite protection defects, the costs of the proposed remedial works would not be reasonable.
Regarding the waterproofing, the court found that that the evidence did not go beyond establishing that there was a slight risk of water damage during the economic life of the building. Therefore, it held that the Tincknells' claim for damages of $198,913 would not be reasonable to rectify this defect and the court dismissed this ground of appeal.
Similarly, the court found that while termite protection had not been applied to the full extent required by the contract, there was a low risk of a termite problem for the building. This was because there was no evidence of termite presence, the building was made of concrete and steel and a 10-year manufacturer warranty for the termite protection had been provided. Considering these factors, the court held that the Tincknells' claim for damages of $245,993 was not reasonable to remedy the termite protection defect and it also dismissed this ground of appeal.
Regarding the claim for damages for delay, the Tincknells argued that the primary judge had 'tacitly' applied the prevention principle in dismissing their claim. This principle specifies that where a party to a contract has prevented the other party from fulfilling its contractual obligations, the preventing party cannot then insist on the strict performance of the contract by the other party. Relying on Built Environs Pty Ltd v Tali Engineering Pty Ltd, the Tincknells argued that the prevention principle cannot apply where a building contract contains a provision that gives the builder a right to an extension of time for delays caused by the owner’s breach of contract. As clause 12.3 of the contract gave Duthy such a right, the Tincknells argued that the prevention principle could not apply.
The court did not find any tacit application of the prevention principle by the primary judge, but it did accept the correctness of Built Environs and held that, due to clause 12.3 of the contract, the prevention principle had no application here. As such, it found Duthy to be prima facie liable for losses arising from the delay in practical completion of the works. However, like the primary judge, the court also dismissed this ground. It found that for reasons unrelated to the delay, the Tincknells would not, in any case, have moved into the house at that time and sold their current residence. The court held that the chain of causation leading to the Tincknells' loss was broken by their own choice not to move into the property when it was complete.
1 Bellgrove v Eldridge (1954) 90 CLR 613. 2 Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 69 LGR 1. 3 (2017) 128 SASR 165. 4 Ibid . 5 Tincknell & Anor v Duthy Homes Pty Ltd & Anor; Duthy Home Pty Ltd & Anor v Tincknell & Anor  SASCFC, . 6 Ibid . 7  SASC 84.
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