High Court to Rule on Reliance Damages in Case Against Council for Aircraft Hanger Built at Cessnock Airport

An upcoming High Court appeal could significantly change the way Courts assess claims for reliance damages in commercial litigation.

Introduction

The High Court of Australia has recently granted special leave to appeal from a decision of the NSW Court of Appeal on the issue of reliance damages[1].

The decision on appeal is 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21 (Cutty Sark).

It is expected that a full bench of 7 members of the High Court will hear the appeal in 2024.

The grant of special leave is significant. The appeal is expected to resolve differences of opinion between courts regarding the application of earlier High Court authority on contractual reliance damages claims, including McRae v Commonwealth Disposals Commission (1951) 84 CLR 577 and Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 (Amann Aviation).

In particular, the appeal will focus on what is referred to as the “presumption of recoupment” in reliance damages cases.

The NSW Court of Appeal summarised the presumption of recoupment from the plurality judgments in Amann Aviation as follows:

“a plaintiff who does not prove expectation damages may recover expenditure incurred in reliance on a contractual promise made by the defendant and “wasted” because of non-performance by the defendant (“the presumption”), except to the extent that the defendant shows that the plaintiff would not have recouped its expenditure had the contract been performed (“the rebuttal”).“

The dominant rationale for the presumption (despite some differences of opinion in Amann Aviation) is that it may be presumed that a party would not enter into a contract unless it would at least have recovered its reliance expenditure had the contract been performed.

The Facts

Cessnock City Council (the Council) had plans to subdivide and develop land at Cessnock Airport in order to promote the area as a gateway to the Hunter Valley region.

The Council was proposing a 25 lot subdivision in order to allow for development of the land for aviation and non-aviation uses.

On 26 July 2007, Cutty Sark (now 123 259 932 Pty Ltd) entered into an agreement for  lease in respect of one of the proposed lots (Lot 104) for the purpose of operating a business of joy flights and advanced flight aerobatic training.

The agreement for lease provided that:

• Cutty Sark would be granted a 30 year lease of Lot 104 upon registration of a proposed plan of subdivision (the Plan);
• the Council would take all reasonable action to cause the proposed Plan to be registered by 30 September 2011 (Sunset Date);
• Cutty Sark was entitled to a licence to use Lot 104 on the same terms as the proposed lease up until the time that the proposed Plan was registered;
• the permitted use of Lot 104 under the licence was “as an aircraft hangar for joy flights and advance [sic] flight-aerobatic training”.

Cutty Sark subsequently built an aircraft hangar on Lot 104 at a cost of over $3 million and began operating an aviation business at the property.

On 29 June 2011, the Council informed Cutty Sark that it would not be proceeding with the proposed subdivision because it did have the capacity to pay the $1.3 million required to connect the proposed lots to sewerage as a precondition to registration of the Plan.

By mid-2012, Cutty Sark had ceased the operation of its aircraft hangar business from Lot 104 and the payment of licence fees to the Council.

There were negotiations between Cutty Sark and the Council about compensation for construction of the aircraft hangar, however no agreement was reached.

In September 2015, Cutty Sark was deregistered by ASIC for non-payment of fees.  Under the terms of the licence, this was an act of default which entitled the Council to terminate the agreement for lease  and acquire the aircraft hangar for nominal consideration of $1.

Cutty Sark was reinstated and in 2017 commenced the proceedings against the Council claiming damages for the cost of the aircraft hangar, amongst other relief.

Supreme Court of NSW

At first instance, the Supreme Court of NSW found that the presumption of recoupment did not arise and, even if it was wrong on that conclusion, the Council had successfully rebutted the presumption.

The Supreme Court found that the Council could not prove that it would have recovered the $3 million costs of the aircraft hangar even if the Council had performed its obligations.  The Court agreed with the Council that Cutty Sark’s commercial judgment in constructing the aircraft hangar had been flawed from the outset.

The Court placed significance on the fact that Cutty Sark had abandoned its businesses on Lot 104 prior to the Sunset Date, and abandoned the site altogether not long afterwards, which went strongly against the assumption that Cutty Sark would have, but for the breach, remained on Lot 104 post-registration of the Plan and remained there for a sufficient period of the lease to recoup the cost of the hangar.

NSW Court of Appeal

Cutty Sark appealed the Supreme Court’s decision to the NSW Court of Appeal.

The Court of Appeal overturned the first instance decision on the issue of reliance damages and held relevantly that:

The presumption of recoupment arose

The presumption of recoupment arose because Cutty Sark proved that it had incurred expenditure in reliance on the Council’s performance of its obligation to take all reasonable action to procure registration of the proposed Plan.  It was not necessary as a precondition to the principle arising that Cutty Sark had to show that the nature of the breach rendered the assessment of loss of profits impossible.

The presumption was not rebutted

The Council did not (and could not) show that Cutty Sark would not over a 30-year lease have recouped its expenditure in circumstances where it was speculative as to what would have transpired had the Council performed its obligations.

Losses in the early stages of the businesses and their discontinuation prior to the Sunset Date does not significantly inform the prospects of Cutty Sark resuming operations and recouping expenditure over the ensuing period of 30 years in the different circumstances that would or might have prevailed had the proposed Plan been registered and the lease granted, particularly given that with a subdivision there was a prospect of surrounding commercial development and a more conducive commercial environment if not immediately then sometime over the ensuing thirty years of the lease.  Furthermore, there was a high degree of likelihood (given that Council was also the consent authority) that the proposed Plan would be registered if Council took all reasonable action.

The fact that there was no promise to develop the airport (as opposed to procuring the subdivision) does not mean that the potentiality of the development was irrelevant to the question of whether the Council had discharged its onus of rebutting the presumption.

A rejection of an alternative offer of lease by Cutty Sark was not conclusive that it thought the 30 year lease was worthless or that it would not have continued or resumed operations and ultimately recouped its expenditure over the term of the lease.  As the innocent party, Cutty Sark was entitled to insist on its contractual rights, or damages for breach, rather than accept some inferior proposal advanced by the Council.

The Council appealed to the High Court.

High Court Special Leave Application

Appellant’s case

The Council’s first ground on the special leave application was that the presumption of recoupment does not apply to all contracts; it only applies to contracts where the presumption is essential as opposed to incidental to the purpose of entering into the contract.

The Council used ‘aleatory contracts’ as an example of a contract where the presumption of recoupment is incidental to the purpose of entering into the contract.  A common aleatory contract is an insurance policy under which there is a prospect of recovering expenditure if a certain event happens.

The Council argued that this is a case, as with aleatory contracts, where the uncertainty of recovering expenses under the contract was such that the law should not recognise the presumption of recoupment.

The Council’s second ground was that even if the presumption of recoupment applies where it is incidental to the purpose of entering into the contract, the presumption was rebutted in this case because it was impossible from the outset of the agreement for lease to know whether over a 30 year lease Cutty Sark would have recovered its expenditure let alone be still paying rent.

The Council queried the standard of proof required to rebut the presumption but said that if what is required is a substantial prospect that Cutty Sark’s returns under the contract would not have been sufficient to recoup its expenditure, then the Council had discharged its onus and should succeed on the appeal.

Respondent’s case

Cutty Sark opposed the grant of special leave principally on the basis that there is a difference between aleatory contracts and this case.

Cutty Sark argued that this is a case where there was an expectation that expenditure would be recovered but, due to the Council’s repudiation of the contract, the prospects of recovery had been made difficult or impossible to assess.

In such a case, Cutty Sark argued that as a matter of policy, the onus should be on the defaulting party to show that the innocent party would never have made sufficient profit to recover its expenses.

Cutty Sark argued that the Council had failed to satisfy that onus and as such did not rebut the presumption of recoupment.

After hearing these arguments, the Court decided to grant special leave to appeal.

Implications for future litigation

The Cutty Sark appeal will place a microscope over the presumption of recoupment in contractual disputes.

The decision will clarify whether the presumption of recoupment applies to all contracts and, if not, to which types of contracts it does not apply.

The decision has the potential to make it more difficult for plaintiffs to recover reliance damages where the prospects of ‘breaking even’ appeared to be slim from the beginning.  On the other hand, defendants may be subject to a more stringent test in order to rebut the presumption.

We eagerly await the High Court’s decision in this important matter.

[1] Cessnock City Council ABN 60 919 148 928 v 123 259 932 Pty Ltd ACN 123 259 932 [2023] HCATrans 125.