EXPECTATION AND RELIANCE DAMAGES IN CONTRACT

CO-AUTHORED BY MICHELLE PAINTER SC AND GILES STAPLETON, 9 SELBORNE CHAMBERS

This paper was presented on 12th March 2020 at LegalWise Seminars' Contract Law Conference 2020 by Giles Stapleton.

INTRODUCTION

1.    We’re nearing the end of this session, so let’s talk about the end goal in contractual disputes – damages. Advising a client on the assessment of damages, or other remedies, is an important part of our job as legal practitioners. It is these awards of damages and remedies which have a practical impact on them, and so hit closer to home than common law and statutory principles that are applicable to their case, which might just come across a whole lot of ‘legalese’.

2.    It can be tricky business, because there are numerous kinds of damages which a client may be able to seek. For tort, for breach of contract, for equitable wrongs, just to name a few. However, seeing as we are at a Contract Law Conference, let’s narrow it down (for now) to just that. So first, I will lay out the difference between expectation and reliance damages. Each can tackle a different kind of situation effectively, so it’s important to make the distinction clear.

3.    Second, I will talk through the statutory principles which govern claims for damages under the Civil Liability Act 2002 (NSW) (‘CLA’). This statute modifies, and adds, a number of applicable standards when assessing the quantum of damages. After noting these principles, I’ll be paying particular attention to calculating future economic loss where the CLA applies. Where do you draw the line on assessing damages when the circumstances giving rise to the claim aren’t actually known yet? It’s a difficult question with which the courts have had to grapple time and time again, and quite unsurprisingly, it often isn’t an easy task.

4.    Third, I will lay down the kinds of damages which you can’t always claim. Common examples in Australian contract law are exemplary and gain-based damages, and so I’ll be focusing on these two today.

5.    Throughout this presentation, I’ll be putting this all in context by referring to a couple of recent cases which consider some of these issues. As well-trained as we might be in ‘legalese’, I think it is safe to say that most things are better understood when applied to (sometimes quirky) real-life situations.

EXPECTATION VS RELIANCE DAMAGES

6.    Now, having set all of that out, first onto expectation and reliance damages. Expectation and reliance damages can each be used to right a contractual wrong and offer a monetary remedy for the plaintiff. The purpose of damages in contract, more broadly, is to place ‘the plaintiff in the position in which [s]he would have been had the contract been performed’.[1] The ultimate goal is to protect the interest(s) which the parties have in enforcing and fulfilling their contractual promises.[2]

7.    The High Court has differentiated between expectation and reliance damages as such: a wronged party to a contract is ‘entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred in reliance upon the contract (reliance loss)’.[3] This distinction between the loss of an undelivered promise, and damage which has already been suffered, is key and so we’ll look at each in turn.

8.    The award of expectation damages seeks to realise the plaintiff’s expectations upon entering the contract. In many cases, expectation damages will represent the value between what the defendant has done, and what the defendant should have done. This form of damages is likely familiar to you all, as it is quite often the one which presents itself in practice. Your client bargains for X, and upon the other party’s failure to hand over X, expectation damages come into play so that your client is put in the nearest monetary position to which they would have been if they had been given X. Put another way, your client is entitled to the monetary value of X so as to put them as near as possible to the position they would have been in, if the contract had been performed correctly.

9.    Reliance damages, on the other hand, seem to subvert the idea that damages are intended to put the plaintiff in the position they would have been if the contract had been performed. Your client bargains for X, but the other party fails to hand over X. However, in the process of trying to acquire X, your client has spent money or used other resources upon faith of the contract and the expectation that they will, in the end, get X. Courts may, under the head of reliance damages, award your client compensation for that money which it has spent in reliance of the contract, which it would not have otherwise spent if the contract and expectation to acquire X did not exist. So … we’re compensating the plaintiff by assuming what they would have if the contract hadn’t been made, rather than if it was performed correctly?

10. In trying to figure out reliance damages, we have to think about to extent to which a reliance interest is independently protected and can result in an award of damages where there is no expectation loss. The classic High Court authority on this issue is found in McRae v Commonwealth Disposals Commission.[4] With a pretty distinct set of facts, you may even remember this case from your law school days as the ‘case of the missing tanker’.

11. The Commonwealth Disposals Commission sold the plaintiffs ‘one oil tanker including contents wrecked on the Jormaund Reef approximately 100 miles north of Samarai … [which was] said to contain oil’.[5] The plaintiffs paid the purchase price, and in addition, incurred significant expense in fitting out a salvage operation and undertaking a search for the tanker.[6] After a thorough search of the area, the plaintiff was unable to locate the tanker. In fact, it did not exist.[7] The existence of the tanker was literally the kind of ‘fake news’ we hear about so often today.

12. It was found that the Commonwealth Disposals Commission was in breach of contract because it made a promise about the subject of the bargain, being the existence and location of the oil tanker, but did not follow through with it.[8] The Court could not assess damages for this breach of contract under the more traditional head of expectation damages given the circumstances. Unlike most other contracts for the sale of goods where expectation damages can be assessed by reference to the value of the goods promised, the value of a non-existent tanker could not, for obvious reasons, be known or assessed.[9] As a result, the Court found that the appropriate compensation was an award of damages based on the money reasonably expended during the course of the unsuccessful search for the tanker.[10]

13. It was a pretty significant decision by the High Court. In ensuing years, other cases and legal scholars interpreted the decision as restricting the recovery of reliance damages to narrow factual circumstances, such as the one just discussed, in which damages are unable to be assessed in the ‘normal’ way.[11] In England, contrarily, it came to be that the plaintiff can elect to seek expectation or reliance damages of their own accord.[12]

14. At this point, there seem to remain two burning questions. First, doesn’t the award of reliance damages still subvert the idea that damages should be used to place the plaintiff in the position they would have had if the contract had been performed, if it works by awarding damages for costs which wouldn’t have been incurred but for the contract? Second, what are the parameters guiding the award of reliance damages – when are they available, and when aren’t they?

15. We can thank the High Court for settling these two matters in Amann Aviation Pty Ltd v Commonwealth of Australia.[13] Having renewed its approach since McRae, the High Court held that reliance damages could be recovered even when and where it is possible to determine any extent of loss or profit the plaintiff may have had in the correct performance of the contract.[14] Your client has bargained for X, but the other party fails to hand over X. In the process of trying to acquire X, your client has spent money or used other resources upon reliance of the contract, and in expectation of the handover of X. However, the value of X can be calculated (and thus, so too can the value of your client’s expectation under the contract). It is now such that reliance damages are available for this kind of situation. In this respect, the Australian position has become more similar to the English position.

16. Additionally, in considering the relationship between expectation and reliance damages, Mason CJ and Dawson J (writing for the majority) said that ‘damages for loss of profits and damages for expenditure reasonably incurred are simply two manifestations of the general principle enunciated in Robinson v Harman’,[15] which is that damages seek to place the plaintiff ‘so far as money can do’ in the same situation as if the contract had been performed.[16] The preferable view, in the view of the High Court, is to see reliance damages as a form of expectation damages. This is on the basis of taking reliance damages as placing the plaintiff in the position they would have been in if the contract had been performed correctly, by compensating them for costs which they would have expected to have recouped.

17. Nevertheless, there is some academic support for an alternative position, which I have already teased a little bit. The American scholars LL Fuller and WR Perdue said in 1936 that protecting a reliance interest is synonymous with putting the plaintiff in the position they would have been in if they hadn’t entered into the contract.[17] I must say at this point, however, that I would not advocate for putting this position in front of the High Court anytime soon, lest you would like to be quizzed about your understanding of the precedential authority of an American scholarly article in the Court.

18. So, how do we put all this into practice? In a lot of cases, reliance and expectation damages will be intertwined upon the same facts. We must be aware, then, of the potential to miscalculate damages based on the ‘double-dipping’ rationale. It is necessary to calculate losses in such a way that the same loss or incident giving rise to loss is not accounted for twice. For example, in a claim for breach of contract for the sale of X between your client and my client, where my client is the wrongdoing party, your client must elect between a claim for either the net profit of X (the anticipated proceeds of sale less the costs involved) together with reliance damages (to cover the costs involved), or elect to be compensated for the gross profit (the entirety of the anticipated proceeds of sale).

19. It is also worth bearing in mind that to recover expectation damages, a plaintiff must prove on the balance of probabilities that they would have made a profit in some respect had the contract been performed.[18] This is not required when a plaintiff seeks to recover reliance damages. In McRae, the High Court held that once a plaintiff has, prima facie, established their case, it is the defendant who must bear the burden of showing that the plaintiff would not have recouped their costs, even if the contract was performed.[19] In this respect, it may be easier to claim reliance damages, a benefit which makes a thorough understanding of its operation even more significant.

CIVIL LIABILITY ACT FACTORS

20. Damages in tort are positioned and function differently to damages in contract law. Damages in contract look to the prospective position of the parties. Your client, an innocent party to a contract which has been breached, seeks to have the court look forward and see what position they would have occupied in the event the contract would have been performed correctly. This is true even of reliance damages, which although technically look back at your client’s already spent moneys and resources, still conform with this general principle of damages in contract, as was settled by the High Court in Amann Aviation.

21. Damages in tort law are, contrarily, retrospective. Your client has been wronged by the tort of another, and seeks to have the court look back at the position they occupied before the wrongful activity occurred. A classic expression of this principle is that the purpose of damages is to ‘as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as [s]he would have been in if [s]he had not sustained the wrong’.[20] The similarity between damages in contract and in tort is in that both seek to repair a wrong done to the plaintiff.

22. In addition to the common law, the Civil Liability Acts across Australia supplement our understanding and practice in this area. I should note here that under s 11A of the Act, its provisions will apply to personal injuries claims brought in contract and under statute, as well as in tort. If you were wondering why I began talking about the seemingly irrelevant topic of torts, it is because of this nexus between damages for contract and tort law set out in this section.

23. Talking specifically now about the Civil Liability Act 2002 (NSW) (‘CLA’), I’d like to briefly outline some of the general principles guiding claims for damages in New South Wales.

The Reduction of ‘Excessive’ Damages

24. A primary reason for the introduction of the CLA and its counterparts in other states and territories was to address a growing concern over what was perceived to be continually growing and excessive awards of damages in personal injury cases.[21] The “insurance crisis” and subsequent Report of the Commonwealth Review Panel, headed by Justice David Ipp, made a heap of recommendations in relation to codifying laws for civil liability.[22] The then government implemented a number of countermeasures in the legislation to prevent this trend from becoming greater in coming years. It has imposed additional thresholds which must be met before damages can even be claimed, and introduced caps on claims for damages.

Economic and Non-Economic Loss

25. The CLA divides loss into the heads of economic and non-economic loss. First, let’s look at the caps which exist in respect of economic loss. Section 12 of the Act dictates that the maximum award of damages for economic loss cannot exceed three times the value of an average weekly earning at the date of the award. This is not an individual ‘average’ weekly earning, but rather is determined by looking at the average weekly earnings of all employees in New South Wales in the quarter immediately preceding the date of the award of damages. While much can be said about this restriction, I want to take a quick moment to stress the inequal impact this can have on different classes of plaintiffs. In the case of a high-income earner, for example, this section adversely affects their economic interests to a great extent, by glossing over the idiosyncrasies of each person’s working life and rather opting for uniformity.

26. The CLA considers a range of other circumstances giving rise to the award of damages for economic loss as well. For example, where another person provides services in the care of a plaintiff injured by another person’s tort, damages for gratuitous attendant care services can be recouped. However, running with the trend of the legislation, there are hurdles to get over first before one will become eligible to recoup such damages. First, there must be a reasonable need for the services; second, the need must have arisen solely because of the injury for which damages are being sought; third, the court must also be satisfied that the services would not be provided to the plaintiff but for the injury.[23] Beyond that, damages are still unavailable unless the carer must provide such services for at least six hours per week, spanning over a period of at least six consecutive months.[24] Finally, depending on whether such care occupied over or under 40 hours per week, the damages will be assessed by reference to an average weekly earning in NSW, or on an hourly rate, respectively.[25]

27. Similarly, section 15B(2) of the CLA states that damages for loss of capacity to provide domestic services cannot be awarded unless there is a reasonable expectation that plaintiff would have provided the services to their dependents for at least six hours a week for at least six consecutive months, but for the injury.

28. Now, in respect of non-economic loss, there is an absolute cap on the award of damages for non-economic loss. Section 16 of the CLA provides general guidance on determining damages for non-economic loss, but it is important to note that the absolute cap mentioned in subsection (2) is adjusted each year in October, and so no longer stands at $350,000. As of 1 October 2019, the absolute cap is $658,000.[26]

29. In addition to the absolute cap, damages for non-economic loss will be, in any case, unavailable where the severity of the loss is less than 15 percent of the ‘most extreme case’, as per subsection (1). Where non-economic loss equals 15 per cent of the most severe case, a plaintiff will be entitled to 1 percent of the absolute maximum value of damages available. This year, that would be $6,580. Thereafter, with each percentage increase in the severity of loss until 33 percent, the Act dictates a specific percentage of the absolute cap which can be recovered. Beyond 33 percent of the most severe case, plaintiffs are entitled to be compensated proportionately to their loss. If your client has suffered in a way which (in a crude, mathematical sense) is 66 percent of the most severe case, they will be entitled to recover up to 66 percent of $658,000.

30. It is also important to note that interest cannot be awarded on each of the last three kinds of damages I have just spoken about – being non-economic loss, gratuitous attendant care services and loss of capacity to provide domestic services.[27]

Future Economic Loss

31. Having said much about the ways in which the Civil Liability Act seeks to reduce the award of damages, I’ll now talk a bit about how the Act deals with future economic loss. As I prefaced earlier, it can be a very interesting conundrum for courts, as they try to determine what a wronged plaintiff would have gone on to acquire but for the injury. Courts must refuse claims for future economic loss ‘unless the claimant first satisfies the court that the assumptions about future earning capacity or other events on which the award is to be based accord with the claimant’s most likely future circumstances but for the injury’.[28]

32. Awards for future economic loss are most commonly considered in the case of lost earning capacity. Interestingly though, this isn’t all about the future. Rather, the Australian view is that a plaintiff is entitled to damages for the present impairment of their capacity to earn in the future.[29] These kinds of damages were first recognised in Australia in the High Court case of Graham v Baker,[30] which held that a plaintiff can be compensated for an impairment to their earning capacity by virtue of a tortious injury.

33. Actual economic consequences must flow from an injury before courts can assess the kind of lump sum which would restore the plaintiff to their pre-injury position.[31] Evidence of the plaintiff’s past salaries and other income, along with information about present award rates are very useful in adducing what the plaintiff might expect to earn in the future. But the question is not only what the plaintiff would have gone on to earn; is also for how long the plaintiff would have gone on to earn. Your client, aged 49, would probably fairly be awarded less than my client, a healthy and able person aged 18, with a near half century of potential earning capacity ahead of them at the time of injury. Thus, the plaintiff must also adduce evidence to establish the length of their expected working life, in order to more accurately predict the years of lost service for which they must be compensated.[32]

34. Now, say, this hypothetical healthy and able client aged 18 is hurt in such a way that their expected working life has been reduced from an expected near 50 years to some lesser time, and this would not have occurred but for the tort. Is their compensation going to be assessed according to what they would now earn, given that these are the new circumstances which actually exist? The way its calculated is by compensating the plaintiff for their future loss by looking at their pre-injury circumstances and work life expectancy.[33]

35. Courts will be looking toward the plaintiff’s most likely future circumstances but for the injury as the benchmark against which to assess any claims for future economic loss. But, given the inherent certainty in taking on a task like this, courts do not adopt an ‘all or nothing’ approach to the evidence which they put weight on.[34]

36. A recent case heard in the New South Wales Court of Appeal, Kabic v AAI Ltd t/as GIO,[35] shows just how this works in practice. Kabic, a heavy labourer, fell from a wet plywood platform which was raised quite above ground level, in the course of his work. Kabic was injured and was awarded damages for past and future economic loss. Kabic appealed the decision, taking issue with the assessment of damages by the primary judge. Particularly, Kabic took issue with evidence which supported a finding by the primary judge of some residual earning capacity.

37. The primary judge found that the evidence suggested the plaintiff could still earn at least $600 a week performing light duties, in a workplace which would not require significant English skills and where Kabic’s need for part-time hours could be met.[36] The primary judge said that ‘many such positions [are] available to the plaintiff, especially bearing in mind that he lives in a metropolis of 5 million people, not some remote or rural location’.[37] For both past economic loss (for loss of earnings between the date of injury and date of award) and future economic loss (for loss of earning capacity), the primary judge deducted $600 from Kabic’s otherwise anticipated net weekly earnings which he was to recoup in damages.

38. The Court of Appeal noted that the evidence before the primary judge was sufficient to support the finding that Kabic did have a residual earning capacity.[38] However, the Court noted that ‘[t]he deduction of $600 net per week for residual earning capacity assumes that not only is Mr Kabic capable of earning $600 per week, but that he can obtain such employment’.[39] For the same reasons, which I will speak about now, the Court found this assumption could not be made good in respect of past and future economic loss.

39. The Court was at odds with the primary judge because it found that the primary judge put too much weight on a supposed ‘charade’ that Mr Kabic had engaged in by attempting to find work for which he was so ‘patently unsuitable’, which had the supposed effect of overdramatising his inability to work a job with a lighter load and less physical stress.[40] The Court held that the primary judge

ought to have concluded that notwithstanding his capacity to undertake light duties, Mr Kabic was unable to secure employment of the kind identified [in medical reports] and that the likely consequence of his loss of capacity to do heavy physical work is that it is unlikely that he would ever obtain any form of suitable employment on the open labour market.[41]

40. We can see how the primary judge took a more ‘all-in’ approach to assessing damages for future economic loss. The primary judge, upon finding that Mr Kabic could, in medical terms, have a residual earning capacity, assumed that Mr Kabic would have the relevant opportunities to do so. The Court of Appeal instead said that ‘[t]he medical evidence does not establish the availability of jobs which Mr Kabic would be capable of performing or the likelihood of his securing employment in such jobs’.[42] The Court of Appeal instead referred to evidence in the form of a job-seeking activity log, which Mr Kabic was provided by Rehabilitation Services, to document his job-seeking attempts. The report of a psychologist and rehabilitation counsellor, Mr Girdler, ultimately came to show that ‘[r]egardless of his ability to sustain work, Mr Kabic’s injuries will continue to prevent him from securing employment’.[43] Having had assistance in applying for work through the Rehabilitation Service, Mr Girdler found it ‘apparent that Mr Kabic has fully tested the labour market and that it has rejected him’.[44]

41. In these circumstances, you could say that the primary judge’s finding that Mr Kabic engaged in a charade in his job-seeking endeavours was the precise ‘all or nothing’ kind of approach which courts cannot adapt to the tricky business of calculating future economic loss. It was an assumption that could not be made good.

42. In Radakovic v R G Cram & Sons Pty Ltd,[45] Samuels JA emphasised that the task of calculating damages for future economic loss involves an assessment of the value of a chance, in which case it is ‘appropriate to take into account a range of possible outcomes even though the likelihood of any particular outcome being achieved may be no more than a real possibility’.[46] Spinning this a little for our purposes, it means that the primary judge should have remained aware of the real possibility that Mr Kabic had fully employed his efforts in seeking a job after his injury and was unable to, and this would continue to affect his earning capacity into the future. If not this, at least, the primary judge ought to have considered the possibility that whilst Mr Kabic had the capacity to keep a job with lighter duties, and had previously engaged in a job-seeking charade, it remained possible that he would not be able to acquire such as job even with the most earnest of efforts.

43. After considering all the factors in a specific case which will determine the quantum of damages for future economic loss which is appropriate in the circumstances, the courts are bound to apply uniform principles from the CLA as well. A ‘vicissitudes discount’ exists to reduce lump sum awards for future economic loss based on the assumption that uncertainties in life, irrespective of the incident causing the relevant injury, would nevertheless have reduced the plaintiff’s ability to earn over the course of their life. Section 13(2) of the CLA says that courts should assess this ‘by reference to the percentage possibility that the events might have occurred but for the injury’. A general standard, which was adopted in Wynn v NSW Ministerial Corporation,[47] is that a 15 percent discount is typically appropriate to account for the ordinary vicissitudes of life. While this was decided earlier to the introduction of the CLA, it continues to hold great sway in the courts as being an appropriate discount in the ordinary case. Of course, this figure may be increased on account of factors particular to the plaintiff, including pre-injury health conditions or career factors that independently affect earning capacity.

44. Another recent case before the New South Wales Court of Appeal has changed – or rather, clarified – the scope of section 13(2). In Avopiling Pty Ltd v Bosevski; Avopiling Pty Ltd v The Workers Compensation Nominal Insurer,[48] the appellant agreed with the NSW Department of Education and Training to undertake works at a school site in Cringlia, NSW. While the works were going on, Mr Bosevski, a labourer employed by Professional Contracting Pty Ltd, was injured at the school site. This injury occurred when two employees of Avopiling were on a higher platform and a cable on the rig holding them up snapped. Because of this, some metal objects fell and hit Mr Bosevski, causing injuries to his head, neck and chest.

45. The Workers Compensation Nominal Insurer sought to be indemnified by Avopiling in respect of its responsibility to pay workers’ compensation for employees of Professional Contracting. In the Supreme Court of NSW, the primary judge found that Avopiling had been negligent and awarded Mr Bosevski a quite large sum of damages. In this sum of damages, there were allowances for various kinds of future economic loss. The quite obvious one was for loss of earning capacity, but damages were also awarded for future attendant care; lawn mowing, gardening and handyman services; and future medical expenses.[49] Avopiling, among other things, appealed the primary judge’s assessment of damages.

46. The primary judge, when calculating the discount to be applied for damages awarded for future economic loss, did not apply a discount for all the kinds of future economic loss which they identified. While a 15 percent discount was applied to damages awarded for loss of future earning capacity,[50] which the Court of Appeal did not disturb, no discount was made for the other damages for future attendant care, etc. Counsel for Mr Bosevski submitted that the discount called for in section 13 of the Civil Liability Act was only in relation to loss of earning capacity, and that where a discount was applied to future medical expenses in earlier cases, such as Malec v JC Hutton[51] in the High Court, it was not the statute, but rather the facts of the case which dictated the discount being applied.[52]

47. Payne JA, with whom McColl and White JJA agreed, disagreed with this approach to calculating discounts under section 13(2). Quite plainly, their Honours said, the text of section 13 refers to damages for future economic loss as being about ‘future earning capacity or other events on which the award is to be based’.[53] The Court reiterated that it had, even prior to the introduction of the CLA, taken the approach adopted by the High Court in Malec v JC Hutton.[54] The High Court, in that case, held that a discount is applicable in respect of future attendant services,[55] and thus the Court of Appeal emphasised that under the CLA, damages must continue to be assessed this way. To this effect, the Court of Appeal discounted each of the other kinds of future economic loss – 25 percent for future commercial attendant care services; 25 percent for future lawn mowing, gardening and handyman services; and 10 percent for future medical expenses.[56]

48. Lastly, section 14 of the CLA imposes another uniform discount. A present value discount of 5 percent is applied to account for the fact that the plaintiff will receive their income in a lump sum rather than over their working life. In doing this, the courts assume that, with interest, this sum will better represent the plaintiff’s expected income over the course of their expected work life prior to being injured.

NON-RECOVERABLE DAMAGES

49. In what we’ve looked at so far, the purpose of damages has been to compensate. This is said explicitly in the case of damages in contract law, and is demonstrably clear in the case of damages in tort and under the Civil Liability Act also. So, keeping this in mind, there are certain types of damages that a plaintiff may be unable to claim when bringing an action for breach of tort or contract. The two key kinds which I will talk about now are exemplary and gain-based damages.

Exemplary Damages

50. Exemplary damages exist to punish the defendant for their wrongdoing. The oft-quoted High Court description of exemplary damages is that ‘[t]hey can apply only where the conduct of the defendant merits punishment, which is only considered to be so where his conduct is wanton, as where it discloses fraud, malice, violence, cruelty, insolence or the like, or, as it is sometimes put, where he acts in contumelious disregard for the plaintiff’s rights’.[57]

51. The award of exemplary damages can be quite contentious. The New South Wales Law Reform Commission, for example, in 2009 recommended against allowing exemplary damages in civil proceedings, particularly given the difficulty in reconciling their purpose with the general purposes of civil law[58] – such as the compensatory function of damages in contract and tort law. Others have said that exemplary damages encourage litigiousness.[59] A 2018 statistical analysis by two UK scholars has shown that ‘since approximately 2001, the award of punitive damages has been rendered effectively extinct in Australia’.[60] An important clarification must be made here, though. Exemplary damages can be recovered under certain categories of tort (such as intentional torts, trespass and deceit),[61] but are wholly unavailable for breach of contract.[62] In fact, a study of cases decided between 2000–16 in all Australian jurisdictions, in which exemplary damages were sought, found that the overall success rate of being awarded such damages was just less than 50 percent, with a mean award of just over $105,000.[63] It is important to distinguish between the kinds of claims which continue to preclude the availability of exemplary damages, such as breach of contract, and those which do not.

52. The position that exemplary damages cannot be awarded for breach of contract has stood in Australia since at least 1917.[64] The aims of exemplary damages: punishment, deterrence and vindication are thought to be simply antithetical to the Robinson v Harman principle of compensation.[65]

53. Statutory prohibitions exist too. Most importantly for our purposes today, Section 21 of the CLA prohibits exemplary and aggravated damages for personal injury claims caused by negligence. This too arises from the desire to limit damages in civil proceedings, following on from the Ipp Report’s findings.

Gain-Based Damages

54. In a similar vein, gain-based damages seek to strip profits which another party may make in doing a (typically) contractual wrong. For example, my client bargains for X with your client, and they enter into a contract. At some point though, your client realises that keeping X is actually very profitable for themselves. Your client takes X and turns it into a successful commercial endeavour. From a compensatory perspective, my client is entitled to the monetary value of X so as to compensate her for what she was entitled to under the contract, should it have been performed correctly by your client. From a gain-based perspective, your client should be stripped of the profits she made by engaging in that commercial endeavour by using X, as X was no longer rightfully hers to benefit from.

55. In Australia, such damages are not allowed. But first, I’ll quickly talk about the case which steered the course for the availability of gain-based damages in England. Attorney-General v Blake[66] saw a set of circumstances that you don’t quite come across every day. Mr Blake, an ex-British M16 agent, signed a declaration under his employment contract that he would respect a non-disclosure clause which prohibited him from ever discussing his work in M16. However, in the early 1950s, Mr Blake became an agent for the USSR and used his insider knowledge of British intelligence for the benefit of the USSR. Mr Blake was imprisoned for his actions, but managed to escape and fled to the USSR. When in the USSR, Mr Blake wrote a memoir and the British Crown sought to have the profits he would have had by way of royalties disgorged. The House of Lords found the circumstances to be ‘exceptional’, and accepted that in that case, the profits could be stripped from Mr Blake. While the House of Lords did not ‘lay down the law’ on when such damages would be available for contractual disputes, Lord Nicholls said that a ‘useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit’.[67]

56. Attorney-General v Blake[68] was considered in Australia soon after its judgment was handed down. In 2001, the Federal Court heard the case of Hospitality Group Pty Ltd v Australian Rugby Union Ltd.[69] The dispute arose from Hospitality Group purchasing Rugby Union tickets from third parties and re-selling them as part of hospitality packages to corporate clients. The tickets had a clause banning resale at a premium. The Australian Rugby Union sued the Hospitality Group for the tort of inducing a breach of contract, as well as for breach of contract itself and sough to strip their profits. The trial judge denied compensatory damages and took the rather radical step of awarding exemplary damages on the basis that the Hospitality Group had deliberately breached the ticket conditions.[70]

57. The Full Federal Court reversed the award of exemplary damages, and so counsel for the Australian Rugby Union sought recourse to other non-compensatory remedies. In particular, they relied on Attorney-General v Blake. The majority of the Court refused to depart from the long-standing principle that damages in contract are compensatory.

58. Interestingly though, even though I have said much about how forcefully Australian courts have stated that gain-based damages are unavailable in claims for damages under contract in Australia, there is maybe one overlooked exception. Perhaps unsurprisingly to most of you, it is none other than Justice James Edelman who makes this point. It is not uncommon for gain-based damages, called an ‘account of profits’, to be used in equity to remedy the wrongs of an equitable wrongdoer. His Honour has commented that it is in this intersection of equity and contracts that gain-based damages for breach of contract are actually ‘far more common than is usually realised’.[71] His explanation goes like this. First, an account of profits is a common remedy for breach of fiduciary duty. Second, the content of a fiduciary undertaking can be determined by the express or implied contractual undertakings of parties to a contract, such as undertakings of loyalty or to prohibit profit from one’s position. Finally, his Honour says ‘in such cases, attaching the epithet ‘fiduciary’ to the breach of an express or implied contractual undertaking adds little, perhaps nothing, to the analysis of whether an account and disgorgement of profits should be available’.[72] With this understanding, then, even cases like Attorney-General v Blake become ‘entirely unexceptional’.[73]

59. As a sidenote, Justice Edelman also appeared as a barrister in Hospitality Group Pty Ltd v Australian Rugby Union Ltd. He wrote near immediately after the case that when the time does come for the High Court to consider the matter – maybe soon, since he now sits on the bench – they should be guided by English jurisprudence and recognise that where the plaintiff has a legitimate interest in contractual performance and compensatory damages are inadequate to deter the breach, the plaintiff should be entitled to recover disgorgement damages.[74] I suppose that all that is left to do is to wait eagerly and see whether Justice Edelman manages to sway the bench in favour of his view!

[1] Gates v City Mutual Life Assurance Society Ltd (1986) 160 CR 1, 11–2.

[2] See Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, 503.

[3] Ibid.

[4] (1951) 84 CLR 377.

[5] Ibid 380.

[6] Ibid 384.

[7] Ibid 399.

[8] Ibid 410.

[9] Ibid 414.

[10] Ibid 415.

[11] DW Greig and JLR David, The Law of Contract (1987) 1355–9.

[12] See Anglia Television Ltd v Reed [1972] 1 QB 60; CCC Films London Ltd v Impact Quadrant Films Ltd [1985] QB 16.

[13] (1991) 174 CLR 64.

[14] Ibid 81.

[15] Ibid 85.

[16] (1848) 1 Exch 850, 855.

[17] See LL Fuller and WE Purdue, ‘The Reliance Interest in Contract Damages’ (1936) 46(1) Yale Law Journal 52 (Pt 1); LL Fuller and WE Perdue, ‘The Reliance Interest in Contract Damages’ (1937) 46(3) Yale Law Journal 373 (Pt 2).

[18] Amann Aviation Pty Ltd v Commonwealth of Australia (1991) 174 CLR 64, 80.

[19] McRae v Commonwealth Disposals Commission (1951) 84 CLR 377, 414.

[20] Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39.

[21] Peter Handford, ‘Intention, Negligence and the Civil Liability Acts’ 86(2) Alternative Law Journal 100, 100.

[22] Ibid 100, 102.

[23] Civil Liability Act 2002 (NSW) s 15(2).

[24] Ibid s 15(3).

[25] Ibid s 15(4).

[26] Civil Liability (Non-economic Loss) Amendment Order 2019 (NSW) s 3.

[27] Civil Liability Act 2002 (NSW) s 18.

[28] Ibid s 13 [emphasis added].

[29] O’Brien v McKean (1968) 118 CLR 540; Husher v Husher (1999) 197 CLR 138, 143.

[30] (1961) 106 CLR 340.

[31] Kallouf v Middis [2008] NSWCA 61, [46]-–[48]-.

[32] Ibid [49] (McColl JA).

[33] Skelton v Collins (1966) 115 CR 94; reaffirmed in dicta in Sharman v Evans (1977) 138 CLR 563 at 579 (Gibbs and Stephens JJ).

[34] Malec v J C Hutton Pty Ltd (1990) 169 LCR 638, 643 (Deane, Gaudron and McHugh JJ).

[35] [2019] NSWCA 247.

[36] Ibid [20]–[21].

[37] Ibid [124].

[38] Ibid [144].

[39] Ibid [168] [emphasis added].

[40] Ibid [165].

[41] Ibid [165].

[42] Ibid [145].

[43] Ibid [141].

[44] Ibid [162].

[45] [1975] 2 NSWLR 751.

[46] Ibid 761.

[47] (1995) 184 CLR 484.

[48] [2018] NSWCA 146.

[49] Ibid [25], [28]–[30].

[50] Ibid [25].

[51] (1990) 169 CLR 638.

[52] Avopiling Pty Ltd v Bosevski; Avopiling Pty Ltd v The Workers Compensation Nominal Insurer [2018] NSWCA 146, [124].

[53] Ibid [128]; see text in Civil Liability Act 2002 (NSW) s 13.

[54] (1990) 169 CLR 638.

[55] Avopiling Pty Ltd v Bosevski; Avopiling Pty Ltd v The Workers Compensation Nominal Insurer [2018] NSWCA 146, [129]–[130].

[56] Ibid [170].

[57] Lamb v Cotogno (1987) 164 CLR 1, 8, quoting Mayne & McGregor on Damages (Sweet & Maxwell, 12th ed, 1961) 196.

[58] New South Wales Law Reform Commission, Invasion of Privacy (Report No 120, 2009) 47–8 [7.4].

[59] Felecity Maher, ‘An Empirical Study of Exemplary Damages in Australia’ (2019) 43(2) Melbourne University Law Review (advance).

[60] James Goudkamp and Eleni Katsampouka, ‘An Empirical Study of Punitive Damages’ (2018) 38(1) Oxford Journal of Legal Studies 90, 91.

[61] See Lauree Coci, ‘It’s Time Exemplary Damages Were Part of the Judicial Armory in Contract’ (2015) 40(1) University of Western Australia Law Review 1, 4.

[62] Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118, 154.

[63] Felecity Maher, ‘An Empirical Study of Exemplary Damages in Australia’ (2019) 43(2) Melbourne University Law Review (advance).

[64] See Butler v Fairclough (1917) 23 CLR 78.

[65] See generally Lauree Coci, ‘It’s Time Exemplary Damages Were Part of the Judicial Armory in Contract’ (2015) 40(1) University of Western Australia Law Review 1, 21.

[66] [2001] 1 AC 268.

[67] Ibid 285.

[68] [2001] 1 AC 268.

[69] (2001) 110 FCR 157.

[70] Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157, [50].

[71] Justice James Edelman, ‘Fiduciaries and Profit Disgorgement for Breach of Contract’ (Speech, Journal of Equity and Commercial Law Association Conference, 30 March 2012) 2.

[72] Ibid.

[73] Ibid 13.

[74] James Edelman, ‘Non-Compensatory Damages for Breach of Contract and Torts’ (2002) 76 The Australian Law Journal 328, 339.