Castle Constructions Pty Ltd v Fekala Pty Ltd and Ors

Supreme Court of NSW|2005-07-05|Before: Palmer J, Berecry AM

CITATION : Castle Constructions Pty Ltd v Fekala Pty Ltd and Ors [2005] NSWSC 642

DECISION : Purchaser not entitled to damages for loss of profits; appeal dismissed.

CATCHWORDS : VENDOR AND PURCHASER - BREACH OF CONTRACT - DAMAGES - MITIGATION - CAUSATION - Purchaser did not wish to proceed with contract for sale of land because of commercial risks - purchaser rescinded for vendor's failure to complete in accordance with Notice to Complete - whether purchaser can recover as damages profits of the venture which it had decided it did not wish to undertake - relationship of causation of loss and mitigation of damages discussed.

Supreme Court Rules 1970 (NSW) - Pt 60 r.10. LEGISLATION CITED : Trade Practices Act 1974 (Cth) - s.52

Burdis v Livsey [2002] 3 WLR 762 - Koch Marine Inc v D'Amica Societa di Navigazione ARL (the "Elena d'Amico") [1980] 1 Lloyd's Rep 75 CASES CITED : - Nimmo v Habton Farms [2003] 1 All ER 1136 - McGregor on Damages (17th Ed) para.7-002

Castle Constructions Pty Ltd - Appellant PARTIES : - Fekala Pty Ltd, Jennifer Gai Davies & Ian Leslie Coulburt, Ronald Reginald Fitzgerald & Dalice Monica Fitzgerald, Dorothy Winifred Michalk, Raymond Thompson & Moorean Thompson, Franziska Antonia Mandl, Jennifer Gai Davies, ERMA Pty Ltd, William Murphy, Cecilia Wolifson, Winston Park Pty Ltd, C. & L. Cameron Pty Ltd, Duncan Ferguson Grierson & Patricia Dawn Grierson, Earle Richard Wolstenholme & Janice Ann Wolstenholme, Elsa May Monsour, Dianne Dickson, Meridian Holdings Pty Ltd, Valda Joan Goldie, Francesco Carmelo Vumbaca & Coral Agnes Vumbaca, Russell Bruce Wood, Roy Anthony Neale & Gloria Neale, Max Fischer, Peggy Marriott & Ronald David Marriott, Alexander Michard & Irene Michard, Monsour Enterprises Pty Ltd, Francesco Carmelo Vumbaca & Coral Agnes Vumbaca, Jennifer Nora Jeffery:- Respondents

D.P.F. Officer QC, D.L. Warren - Appellant COUNSEL : I. Wales SC, M. Young - Respondents

Aitken McLachlan Thorpe - Appellant SOLICITORS : Nugent Wallman & Carter - Respondents

1 This case raises a curious problem in the law of mitigation relating to damages for breach of contract. It may shortly be stated thus. 2 A vendor is willing to complete a contract for sale of land but, when the time for completion under a Notice to Complete arrives, it is temporarily unable to procure the necessary signatures to the Memorandum of Transfer. The purchaser, on the other hand, has repented of entering into the contract and now wishes to get out of it, if it can, because the commercial venture for which the land was required is now seen as too risky. As soon as the Notice to Complete expires, the purchaser seizes on the vendor's temporary inability to obtain the necessary signatures and validly rescinds the contract. 3 The purchaser then sues the vendor for damages for breach of contract, claiming the whole of the profits which it says it would have made from the venture had it gone ahead with the purchase of the land, without making any allowance for the losses which the unacceptable risks of the venture may have produced. 4 The vendor says that the purchaser should have mitigated its damages for breach of contract by going ahead with the purchase, as the vendor offered to do. The vendor says that because the purchaser failed to mitigate its loss in this way, it is not entitled to any damages. 5 The purchaser responds that the law only requires it to act reasonably in deciding whether to take action to mitigate its loss. The purchaser says that it acted reasonably in refusing to go ahead with the purchase of the land after termination of the contract because the venture for which the land was required was too risky, with the consequence that it did not, in law, fail to mitigate its losses. Can the purchaser now recover as damages the profits of the venture, risk free? 6 The question arises in an appeal from a decision of Acting Master Berecry assessing damages for breach of a contract for the sale of land between the Appellant ("Castle") and twenty-seven Respondents (collectively referred to as "Fekala" for convenience) as vendors. The appeal is to the Court constituted by a single Judge, in accordance with Supreme Court Rules 1970 (NSW) Pt 60 r.10. The facts

7 Since 1978 Castle has carried on business as a developer and builder of commercial and residential properties. Its sole director, Mr Victor Lahoud, is responsible for carrying on that business. He identifies and selects sites which are suitable for redevelopment. Once a property is purchased, Mr Lahoud sets about obtaining development consent from the local authority. Castle then either sells the site with the benefit of the development consent or else it constructs a building on the site for sale. 8 Most of Castle's development projects since 1992 have taken the form of a resale of a site with the benefit of a development consent rather than carrying through the development to construction and sale. Mr Lahoud's evidence was that Castle would purchase a development site if it had good investment value and development potential even if Castle was undertaking another development at that time. 9 On 28 June 2001, Mr Lahoud attended an auction of a property at 5-7 Rowe Street, Eastwood ("the Eastwood Property"). Fekala and its twenty-six co-Respondents in this appeal were selling the property as mortgagees in possession. Mr Lahoud was the successful bidder on behalf of Castle and contracts for sale were exchanged on that day, the purchase price being $3M. 10 Castle intended that it would obtain development consent for the Eastwood Property and then on-sell the site with the benefit of that consent. It set about obtaining development consent from the Ryde Council. 11 On or about 24 July 2001, Mr Lahoud had a conversation with a Mr Roberts, who represented the mortgagor of the Eastwood Property. Mr Roberts said that there was a dispute between Fekala as mortgagee and the mortgagor and that the mortgagor would be taking steps to bring that dispute into Court. Mr Roberts implied that any court case would be lengthy and would necessarily involve Castle as well as Fekala. Subsequently, there was a further conversation between Mr Lahoud and an associate of Mr Roberts in which it was suggested to Mr Lahoud that an agreement could be reached between the mortgagor and Castle if Castle were to give the mortgagor a lease of the Eastwood Property and were to undertake fitting out of the premises to the value of approximately $1M. Those discussions did not progress any further. 12 As the Acting Master found, these conversations with Mr Roberts caused Mr Lahoud to have doubts about the success of the development for the Eastwood Property. He did not wish Castle to become involved in litigation which could render the project uneconomical. In late July Castle gave instructions to its solicitor to approach Fekala with a proposal that the parties agree to rescind the contract for the purchase of the Eastwood Property. Fekala did not agree to the proposal. 13 During this time, Mr Lahoud continued to look at other sites which could have development potential for Castle. On 27 July 2001, Castle gave instructions to a real estate agent to make an offer for purchase of a property at Cammeray ("the Cammeray Property"). The asking price for the property was $3.6M but Mr Lahoud's instructions were to make an offer of $2.8M. 14 On 3 August 2001, Castle applied urgently to the Supreme Court Equity Division for an interlocutory injunction restraining Fekala from auctioning certain plant and equipment on the Eastwood Property which Castle claimed to be included in the sale. The injunction was refused by Santow J (as he then was) on the ground that Castle had not demonstrated a serious question to be tried that the contract for sale included the plant and equipment. Castle was left to a remedy in damages if it could prove representations in breach of s.52 of the Trade Practices Act 1974 (Cth). 15 The contract for the sale of the Eastwood Property was due for completion on 9 August 2001, but time had not been made of the essence. Castle failed to complete the purchase of the property by the due date and, on 14 August, Fekala served a Notice to Complete on Castle fixing the time for completion at 3:00pm on 29 August 2001 and making time of the essence. 16 On 27 August 2001, Fekala's solicitor forwarded to Castle's solicitor a form of transfer for execution and a draft settlement statement. On the same day, Fekala's solicitor sent a 'without prejudice' letter to Castle's solicitors offering to settle "all claims between the parties" on terms that the date for completion of the contract for sale be extended to 21 September 2001 with time of the essence, that Castle execute a Deed of Release whereby it released Fekala from the claim for damages for breach of the Trade Practices Act and from any other claim under the contract, and whereby it agreed to pay interest to Fekala on the contract price up to the date of completion. Castle did not accept the offer. 17 On 28 August, Fekala's solicitor wrote to Castle's solicitor purportedly extending the time for completion under its Notice to Complete until 3pm on 12 September 2001. This attempt at unilateral extension of a valid Notice to Complete was, of course, ineffective in law. 18 On 29 August 2001, Castle's solicitor attended at the office of Fekala's solicitor at 11:55am with the necessary cheques for settlement. There was discussion between the parties' solicitors about the validity of Fekala's purported extension of time under the Notice to Complete. Castle's solicitor left the offices of Fekala's solicitor but returned at 2:55pm, ready for settlement. He was informed by Fekala's solicitor that Fekala was not ready to complete at that time. The reason was that the solicitor had not been able to obtain the execution of the Memorandum of Transfer by all twenty-seven mortgagees. Shortly afterwards, on the same day, time for settlement as specified in the Notice to Complete having passed, Castle sent a Notice of Termination of the contract to Fekala. 19 After terminating the contract for the purchase of the Eastwood Property, Castle instructed its agent to make a bid of $3.1M for the Cammeray Property. Shortly thereafter, Castle was informed that the Cammeray Property was very close to being purchased by another party and that Castle would have to move quickly if it were to secure that property. Castle decided not to act on this information. 20 By 11 September 2001 all co-mortgagees had signed the Memorandum of Transfer and Fekala was ready to settle the contract. On 12 September, Fekala's solicitor wrote to Castle's solicitor advising that Fekala did not accept Castle's Notice of Termination and required completion of the contract. 21 On 25 September 2001, Castle filed an Amended Summons in the same proceedings seeking a declaration that the contract for sale had validly been terminated. On 28 September 2001, Fekala filed a Cross Claim in the proceedings in which Castle had sought an injunction, seeking specific performance of the contract. 22 On 26 February 2002, Windeyer J held that Castle had validly terminated the contract and referred the question of damages to the Master for enquiry. Fekala's Cross Claim was dismissed. Fekala's appeal was dismissed by the Court of Appeal on 6 September 2002. The Acting Master's decision

23 The enquiry as to damages was heard by Acting Master Berecry on 19 and 20 July 2004. On 30 July 2004 the learned Acting Master delivered judgment in which he held that:

at the time the contract for sale of the Eastwood Property was exchanged Fekala knew that Castle was acquiring that property for development. This finding is not disputed;

the measure of damages which flowed from Fekala's breach of contract was the profit which would have been derived by Castle from the on-sale of the Eastwood Property with development consent and plans approved, less the cost of acquisition and the costs of obtaining such consents and approvals;

the nett profit which would have been derived by Castle from the on-sale of the Eastwood Property was $3,698,000;

when Castle terminated the contract with Fekala it could have used the money which would have been committed to the acquisition and development of that property for the acquisition and development of the Cammeray Property;

if Castle had acquired the Cammeray Property for development the profits from the project would have offset the loss flowing from termination of the contract for the purchase of the Eastwood Property;

in failing to acquire the Cammeray Property, Castle had failed to take all reasonable steps to mitigate the loss flowing from Fekala's breach of contract;

accordingly, Castle was not entitled to any damages. 24 Castle appeals from this decision. Fekala has filed a Notice of Contention in which it contends that the Acting Master's decision should be affirmed on the grounds that:

i) even apart from the issue of mitigation, the loss of profit claimed by Castle was not caused by Fekala's breach of the contract in failing to complete in accordance with the Notice to Complete;

ii) the only damages which Castle could properly have claimed were either reliance damages in the form of wasted legal and architects' costs or loss of bargain damages equal to the difference between the contract price of the Eastwood Property and its market price as at the date of breach. However, as Castle had disclaimed both of these heads of damage and had led no evidence as to the market value of the Eastwood Property at the time of breach of the contract, Castle was not entitled to any damages;

iii) Castle had failed to mitigate its damages by failing to enter into another contract to repurchase the Eastwood Property from Fekala or by failing to agree to performance of the terminated contract and by resisting Fekala's cross claim to have that contract specifically performed. Castle's submissions

25 Castle submits, first, that the Acting Master erred in finding that it could have acquired the Cammeray Property after termination of the contract for the purchase of the Eastwood Property. Castle says that another purchaser was then on the point of acquiring the Cammeray Property and in any event a third party had placed caveats on the title to the Cammeray Property. 26 Second, Castle says that the purchase of the Cammeray Property by Castle was another commercial venture entirely separate from the Eastwood Property venture. As a general rule, Castle submits, in an ongoing business which enters into a number of different commercial ventures a party whose anticipated profit from one particular venture is disappointed by breach of contract is not expected to mitigate that loss of profit from that venture by employing its capital in an entirely different venture. 27 Third, Castle says that its obligation in law is only to take such steps as are reasonable to mitigate its loss from breach of the Eastwood Property contract. It says that it could not prudently and reasonably have endeavoured to acquire the Cammeray Property by way of mitigation because it still remained exposed to Fekala's Cross Claim for specific performance of the Eastwood Property contract. If Fekala succeeded in that Cross Claim, Castle could not have engaged in both the Cammeray project and the Eastwood project at the same time nor could it have engaged in the Cammeray project and paid damages for its breach of the Eastwood Property contract. 28 Fourth, Castle says that it acted reasonably in not entering into another contract with Fekala to purchase the Eastwood Property because there was a threat of litigation hanging over the Eastwood Property which made the venture too risky from a commercial viewpoint. Consequently, it says, it has not failed to mitigate its damages. Fekala's submissions

29 Fekala's primary submission does not really attempt to meet and contradict Castle's submissions. Rather, it approaches the whole question of damages from a different perspective. In that regard, the parties' cases have, in a sense, 'passed like ships in the night' without engaging each other. 30 Fekala's primary submission, as encapsulated in the first ground of its Notice of Contention, is that Castle did not suffer any loss of projected profit from the Eastwood Property venture by reason of Fekala's failure to tender an executed Memorandum of Transfer on 29 August 2001. This was because Castle, through its director Mr Lahoud, had decided before 29 August that the Eastwood Property venture was too risky, for reasons not attributable to Fekala's breach of contract, and that Castle should escape from that contract if it could. Fekala says that when the opportunity to terminate the Eastwood Property contract presented itself on 29 August 2001 because all co-mortgagees had not signed the Memorandum of Transfer, Castle seized that opportunity and immediately delivered a Notice of Termination, subsequently rejecting Fekala's attempts to procure settlement of the purchase. 31 This submission is founded on evidence which Mr Lahoud gave in his affidavit of 28 March 2003. Mr Lahoud there recounts how he went with his solicitor, Mr Germanos, to attend the offices of Fekala's solicitor on 29 August 2001 at 2.55pm for the purpose of completing the purchase. The time limited for completion in the Notice to Complete expired at 3pm on that day. Mr Lahoud waited in the car outside while Mr Germanos went into the solicitor's offices. Shortly afterwards, Mr Germanos returned and said that the vendors were not ready to settle and their solicitor could not tell him when they would be ready. 32 Mr Lahoud continues in paragraph 62 of his affidavit: "On the way back to Mr Germanos' office I instructed him to terminate the contract. I believe the termination notice was served on Mr Carter shortly afterwards. The decision of whether to terminate or not was somewhat difficult for me. On the one hand, I had expended both my time and money in preparing the application for a development approval, as I have outlined in this my affidavit. I had also committed myself to the project since effectively the beginning of June. By doing so I gave up the pursuit of the other sites I had been working on. I believed the project could be profitable for Castle. On the other hand, I had a number of concerns about the property. Firstly, it was undesirable from my point of view that there were pending legal proceedings between Castle and the vendors. Secondly, I was concerned by the fact that the vendors were not able to settle, and were not able to say why they were not settling. I was uneasy about what steps the owner of the property was taking, and I was uneasy about the threats that had been made to me that I would be dragged into litigation between the owners and the mortgagee vendors, although I was an innocent party. The site was beginning to have the potential for a number of problems which were difficult to gauge at that time. The market was bullish and I was confident that if I terminated, Castle would find another development opportunity relatively quickly. Finally, I had been given legal advice to the effect that the right to terminate upon the failure of one party to comply with the Notice to Complete must be exercised very quickly, or it is lost. After weighing these matters, I decided to abandon the site, terminate and seek other opportunities. I did not wish to complicate Castle's development activities with legal disputation. At this time, I believed that the decision to terminate would free up Castle's funds virtually immediately, enabling the pursuit of alternative opportunities, and I thought that the case for damages which Castle would pursue on termination would be relatively straightforward, involving the expenditure of consultants and my own time and legal fees to date. I did not believe that Castle would make a claim for the loss of benefit of the bargain because I assumed that the vendors would accept the termination and as the market was so robust, I believed that the vendors would be able to resell the property for in excess of the price paid by Castle. At the same time, I was sure that Castle would find another development opportunity quite quickly." 33 Mr Lahoud gave evidence to the same effect in cross examination at T25.1-.35. 34 The Master made the following findings: "The plaintiff was concerned about the attitude of the mortgagor. The plaintiff's evidence is that the mortgagor had informed the plaintiff that if the sale were to proceed there would be legal proceedings between the mortgagor and the mortgagee which would tie up the property and involve the plaintiff. This was a significant consideration for the plaintiff as the nature of the business conducted by it involved a smooth turnover of properties and thus maintaining cash flow and profitability. The concern to the plaintiff was that if it became embroiled in litigation it may have funds which would be subject to the payment of interest but not receiving any income in the meantime. … Would it have been prudent to purchase the property knowing of the threat of litigation by a disgruntled mortgagor? In late July when Mr Lahoud became aware of the threat of the mortgagor he offered to rescind the contract. The basis if the offer was the cost and uncertainty any potential litigation would have on the commercial objectives of the plaintiff. In my opinion but for the threatened litigation there would have been no reasonable basis for the plaintiff not to have completed the purchase. The threatened litigation was a significant factor in weighing up all matters. That the defendant did not abandon its claim for damages supports the plaintiff's decision not to accept the offer. I do not think that it was unreasonable for the plaintiff." 35 The evidence of Mr Lahoud and the finding of the Acting Master make it clear that Castle's position was not that it would have proceeded with the purchase of the Eastwood Property but for the refusal or inability of Fekala to convey it by 3pm on 29 August 2001; rather, Castle's position was that it would have preferred not to proceed at all. When it was presented with an opportunity to escape the contract it made a commercial decision to rescind immediately. 36 I do not think that Fekala's Cross Claim for damages in addition to specific performance of the contract could have had much impact on the mind of a reasonable person in considering whether to proceed with the purchase of the Eastwood Property or forego entirely the profits which might be derived from that venture. Clearly, when Fekala filed its Cross Claim on 28 September 2001, Mr Lahoud himself did not give consideration to the matter but a reasonable person, properly advised, would have realised that as at 28 September 2001 Fekala's claim for damages, if good, would have been relatively insignificant in the scale of the transaction. Fekala could not claim damages as from 9 August or 29 August for Castle's delay in failing to complete the contract because Fekala itself was not able to complete until 12 September. If Castle had completed the contract on 28 September, when Fekala filed its Cross Claim, and paid any damages, if it were found liable, those damages could only have been to compensate Fekala for the delay in settlement between 12 and 28 September, that is, sixteen days. If the profits to be foregone by Castle in not proceeding with the purchase were truly in the order of $3.5M, damages for sixteen days' delay would have been an extremely small price to pay in exchange for such a profit. It would have been unreasonable to pass up the opportunity to earn that profit at such a small added cost. 37 While the Acting Master found that Fekala's maintenance of its claim for damages supported Castle's decision not to proceed with the purchase when Fekala sought specific performance of the contract, I do not think that it could be said that Castle could reasonably have regarded the maintenance of the claim for damages as, in itself, justifying its refusal to proceed with the contract and thereby avoid the substantial loss which it now claims to have suffered. Mitigation and causation

38 Castle's argument in this case has proceeded on a classification of the critical issue as one of mitigation. However, in my opinion, the issue is in truth one of causation of loss, as Fekala contends in the first ground of its Notice of Contention and as it submitted to the Acting Master: T58.6-59.8. 39 As pointed out in McGregor on Damages (17th Ed) para.7-002, the principal meaning of the term "mitigation" in relation to damages flowing from tort or breach of contract is "the avoidance of the consequences of a wrong". Even before one considers the question of mitigation one must first identify precisely what were the consequences of the particular wrong done to the plaintiff. Only then can one say what could reasonably have been done to avoid the loss flowing from those consequences. In short, questions of mitigation are inextricably intertwined with questions of causation, as has been observed by Robert Goff J (as his Lordship then was) in Koch Marine Inc v D'Amica Societa di Navigazione ARL (the "Elena d'Amico") [1980] 1 Lloyd's Rep 75. The facts of that case are instructive for present purposes. 40 The owners of the Elena d'Amico had let the vessel under a time charter for a period of three years. The charterers required the vessel for carrying crude oil and its products world wide but because the vessel was flying the Italian flag it was also able to engage in the restricted Italian coastal trade. The market rate for Italian vessels was higher than that for comparable vessels which did not have access to the Italian coastal trade. 41 Halfway through the charter period the vessel was found to be in need of substantial repairs. The owners refused to undertake the repairs in accordance with their obligations under the charter party. The charterers terminated the contract. They did not charter another vessel thereafter and rejected an approach by the owners which might have resulted in another Italian flagged vessel being offered to them. 42 The charterers sued for damages for breach of the charter party. There had been a material rise in the market rate for Italian vessels after termination of the charter party. The charterers claimed that they had been deprived of the profits they would have made in the Italian coastal trade during the remainder of the charter period. The owners argued, however, that the charterers were entitled only to the difference between the contract charter rate and the market charter rate for chartering a substitute vessel at the time of breach. 43 Robert Goff J found that at the date of the breach of the charter party there was an available market to charter a substitute vessel. The decision not to charter a substitute vessel was a judgment which the charterers had made in their own commercial interest and was not dependent on the wrongdoing of the owners in breaking their contract. His Lordship held that in these circumstances the charterers could not recover the profits of the Italian coastal trade which they claimed to have lost as the result of the owners' breach. 44 It will be seen that in Koch, as in this case, the issue was presented to the Court as an issue of mitigation of damages but the Court found that, in reality, the issue was one of causation of loss. 45 At p.88, Robert Goff J said that the rules of mitigation of loss: "… are all really aspects of a wider principle which is that, subject to the rules of remoteness the plaintiff can recover, but can only recover, in respect of damage suffered by him which has been caused by the defendant's legal wrong. In other words, they are aspects of the principle of causation.

It follows that what is alleged to constitute mitigation in law can only have that effect if there is a causative link between the wrong in respect of which damages are claimed and the action or inaction of the plaintiff. That was made clear by Viscount Haldane, LC, in his classic statement of the principle of mitigation in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673. There are two passages in his judgment which I have in mind. The first is at p.689, where he sets out the principle and states, in much quoted words:

… there are certain broad principles which are quite well settled. The first is that, as far as possible, he who has proved a breach of bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. … The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second which imposes upon a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. … this second principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss, he has suffered may be taken into account even though there was no duty on him to act.

I emphasise the words 'arising out of the transaction'. The second passage from Lord Haldane's speech is at p.691, where he said:

I think the principle which applies here is that which makes it right for the jury or arbitrator to look at what actually happened, and to balance loss and gain. The transaction was not res inter alios acta, but one in which the person whose contract was broken took a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach …

I emphasise the words 'quite naturally arising out of the circumstances in which he was placed by the breach'. In my judgment, those two passages, particularly the words I have emphasised, indicate plainly that there must be a causative link between the breach of contract and the action or inaction in question to bring into play the principle of mitigation of damage." 46 His Lordship then gave by way of example the case of a seller of goods who fails to deliver on the due date. If there is then an available market for the goods and the buyer decides not to take advantage of that market to buy in the goods, that is "… an independent decision, independent of the breach, made by the buyer on his assessment of the market. It is perfectly true that his decision is made in the context of a pre-existing breach of contract by the seller, in the sense that the breach of contract provided the occasion upon which the buyer makes his market judgment; but even if there had been no breach at all it would have still been possible for the buyer to have made the same decision. … So in that situation, generally speaking, the decision not to take advantage of the available market is the independent decision of the innocent party, independent of the wrongdoing which has taken place. It takes place in the context of a pre-existing wrong but it does not, to use Viscount Haldane's expression, 'arise out of the transaction'." 47 These passages from the judgment of Robert Goff J in Koch have been approved and applied in two recent cases in the English Court of Appeal: Burdis v Livsey [2002] 3 WLR 762, at 792 (paras 88-90) per the Court; Nimmo v Habton Farms [2003] 1 All ER 1136, at 1153 (paras 63-65) per Clarke LJ, with whom Auld LJ agreed (Jonathan Parker LJ dissented but not on this point). Conclusion

48 In my opinion, Castle's loss of the profits of the Eastwood Property venture was not at all caused by the fact that Fekala was, for a matter of days, unable to procure all necessary signatures on the Memorandum of Transfer. Castle had by that time decided that the venture was too risky; it had tried, unsuccessfully, to persuade Fekala to release it from the contract. When the opportunity arose for Castle to escape the contract because of Fekala's temporary difficulty in obtaining all of the co-mortgagees' signatures, Castle seized that opportunity with alacrity and terminated the contract. Thereafter, it resisted attempts by Fekala to procure it to continue with the acquisition. 49 In those circumstances it is clear, in my opinion, that whatever loss of profits Castle may have suffered from not proceeding with the Eastwood Property venture was caused, not by Fekala's breach of contract in failing to deliver an executed transfer on time, but rather by Castle's independent decision that it did not wish to proceed with the venture at all. To use the words of Robert Goff J in Koch, the decision of Castle not to proceed with the contract was an independent decision, independent of the wrongdoing but taking place in the context of a pre-existing breach of contract by Fekala. The loss of the profits of the venture did not, therefore, arise out of, nor was it in any real sense caused by, Fekala's breach of contract. 50 In my opinion, an innocent party to a contract cannot claim from the contract-breaker damages for the loss of profits from a transaction which the innocent party chose not to undertake for its own business reasons and which the breach of contract gave it an opportunity to avoid. Put another way, when Fekala breached the contract, Castle chose not to proceed with the venture because of all of the commercial risks involved. Now, Castle seeks by way of damages for breach of contract the profits of that venture, freed of all of the commercial risks. In popular parlance, that is called trying to eat your cake and have it too. Such an endeavour has the same result in the law as it does in real life. 51 The only damages flowing from Fekala's breach of contract in failing to complete on 29 August 2001 which Castle was properly entitled to recover were, as Fekala submitted, legal and architects' costs and expenses thrown away by the termination of the contract or loss of bargain damages equal to the difference between the contract price of the Eastwood Property and its market price as at the date of breach. However, Castle chose not to claim these heads of damages and led no evidence as to the market value of the Eastwood Property as at the date of breach of the contract. The Acting Master was not able, therefore, to assess damages under these heads. Orders

52 For the reasons which I have given, I respectfully differ from the grounds upon which the Acting Master held that Castle was not entitled to damages for loss of profits. I do not think that this is a case in which the purchaser has failed to mitigate its damages for loss of profit flowing from a breach of contract. Rather, I think that it is a case in which the breach of contract did not produce the loss of profit for which the purchaser contends. I uphold the first of Fekala's grounds of appeal in its Notice of Contention. 53 Castle's appeal is dismissed. I will hear the parties as to costs. ~ oOo ~

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Trade Practices Act 1974(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (32 paragraphs)

Parties

Legislation Cited (2)

Cited By (3)