The Relevant Principles
34 In Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64 Mason CJ and Dawson J said at pp 80-81:
The general rule at common law, as stated by Parke B. in Robinson v. Harman [(1848) 1 Ex 850, at p 855 [154 ER 363, at p 365]], is "that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed". This statement of principle has been accepted and applied in Australia [See Wenham v. Ella (1972) 127 CLR 454, at p 471, per Gibbs J].
The award of damages for breach of contract protects a plaintiff's expectation of receiving the defendant's performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as "expectation damages". The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff's expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation.
In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profits. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit.
The expression "damages for loss of profits" should not be understood as carrying with it the implication that no damages are recoverable either in the case of a contract in which no net profit would have been generated or in the case of a contract in which the amount of profit cannot be demonstrated. It would be an invitation to the repudiation of contractual obligations if the law were to deny to an innocent plaintiff the right to recoupment by an award of damages of expenditure justifiably incurred for the purpose of discharging contractual obligations simply on the ground that the contract breached would not have been or could not be shown to have been profitable. If the performance of a contract would have resulted in a plaintiff, while not making a profit, nevertheless recovering costs incurred in the course of performing contractual obligations, then that plaintiff is entitled to recover damages in an amount equal to those costs in accordance with Robinson v. Harman, as those costs would have been recovered had the contract been fully performed. Similarly, where it is not possible for a plaintiff to demonstrate whether or to what extent the performance of a contract would have resulted in a profit for the plaintiff, it will be open to a plaintiff to seek to recoup expenses incurred, damages in such a case being described as reliance damages or damages for wasted expenditure.
35 Mason CJ and Dawson J continued at pp 85-86:
An award of damages for expenditure reasonably incurred under a contract in which no net profit would have been realized, while placing the plaintiff in the position he or she would have been in had the contract been fully performed, also restores the plaintiff to the position he or she would have been in had the contract not been entered into. In this particular situation it will be noted that there is a coincidence, but no more than a coincidence, between the measure of damages recoverable both in contract and in tort.
It should be observed that, in a case where it is not possible to predict what position a plaintiff would have been in had the contract been fully performed, as was the case in both McRae and Anglia Television, it is not possible as a matter of strict logic to assess damages in accordance with the principle in Robinson v. Harman. But the law considers the just result in such a case is to allow a plaintiff to recover such expenditure as is reasonably incurred in reliance on the defendant's promise. In this case, the law assumes that a plaintiff would at least have recovered his or her expenditure had the contract been fully performed. It will still be open to a defendant, however, to argue that, notwithstanding the fact that it is impossible to assess what profits, if any, the plaintiff would have made had the contract been fully performed, the expenditure claimed by a plaintiff would nevertheless not have been recovered even if, to use the examples of McRae and Anglia Television, the tanker had existed or the defendant actor, Oliver Reed, had participated in the production of the film. In essence, such an argument is to the effect that, far from being impossible to predict what the result of the contract would have been, if fully performed, it is possible to demonstrate that performance of the contract would not even have resulted in the recovery by the plaintiff of reasonable expenses incurred.
36 Their Honours said at p 89:
[A] plaintiff has a prima facie case for recovery of wasted expenditure once it is established that the expense was incurred in reliance on the promise of the party in breach, there being a failure of performance by that party.
37 Brennan J said at pp 104-108:
Where a contract has been rescinded for breach, the amount which a plaintiff has reasonably expended in reliance on the defendant's promise and which is wasted by reason of the defendant's breach of his promise is a proper subject of damages for breach of contract [McRae v Commonwealth Disposals Commission (1951) 84 CLR at pp 412, 414]. Damages assessed for wasted expenditure incurred in reliance on the defendant's promise may be described as reliance damages to distinguish them from damages assessed for loss of the benefits which the plaintiff expected from performance of the contract (expectation damages). A plaintiff who seeks to recover reliance damages must ordinarily prove that the net value of the benefits to which he would have been entitled if the contract had been performed ($B - $y) would have exceeded the wasted expenditure incurred in reliance on the defendant's promise ($x) and, to the extent that he fails to do so, his claim will fail. To discharge the onus of proof, however, the plaintiff may be able to raise and rely on an inference that a party would not incur expenditure in reliance on the other party's promise without a reasonable expectation that, on performance of the contract, the expenditure would be recouped. That is an inference of varying strength according to the circumstances. Sometimes, the inference would be of sufficient strength to enable the plaintiff to discharge the onus; sometimes, the inference would be too weak.
However, when a contract is rescinded for breach and that breach, by preventing the performance of the contract, has made it impossible for the plaintiff to prove that the net value of his contractual benefits ($B - $y) exceeds the wasted expenditure incurred in reliance on the defendant's promise prior to rescission ($x), it is just to shift to the defendant the ultimate onus of proving that, had the contract been performed, the net value of the plaintiff's benefits would not have covered the expenditure he had incurred before rescission.
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The sufficient and necessary justification for shifting the onus to the party in breach in the assessment of damages for wasted expenditure incurred in reliance on the defendant's promise before rescission for breach is that the breach of the contract itself makes it impossible to undertake an assessment on the ordinary basis.
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A plaintiff's inability to quantify his lost benefits is no justification by itself for casting on the defendant an onus to prove that the plaintiff would not have recouped reliance damages had the contract been performed. What justifies the reversal of the onus is the defendant's repudiation or breach which denies, prevents or precludes the existence of circumstances which would have determined the value of the plaintiff's contractual benefits.
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Where justification for reversing the onus exists, reliance damages may be recovered; absent that justification, the plaintiff must recover expectation damages, if any, by proof of the value of benefits and the cost of performance; that is, by proof that $B - $y is greater than $x. These are alternative methods of assessing damages, but the plaintiff does not have an election as to the method. The plaintiff who seeks recovery of reliance damages must show that justification for reversing the onus of proof exists. Otherwise, he must endeavour to prove his damages on the ordinary basis.
38 Gaudron J said at pp 155-156:
It is also clear … that damages which are assessed by reference to wasted expenditure are awarded to compensate for loss of contractual rights or loss of profits and, despite any coincidence in effect, not to put the contracting party in the position in which he or she would have been if the contract had not been made. It follows that any loss which would have been involved in performing the contract must be brought to account. Were it otherwise, the plaintiff would be put in a better position than if the contract had been performed. It also follows that it is not correct to characterize damages assessed by reference to wasted expenditure as damages to be claimed by election or in the alternative to damages for loss of profits. However, as damages are assessed on that basis because the contract would not have produced a profit or it is impossible to prove what the profit would have been, it may be expected that a claim for wasted expenditure will ordinarily be framed as an independent claim or in the alternative to a claim for damages for loss of profits.
Once it is appreciated that damages assessed by reference to wasted expenditure are awarded to compensate for the loss of contractual rights or for loss of profits, it is apparent that what is involved is an assumption that the loss is no less than that which has been outlaid and wasted by reason of repudiation or breach. An assumption to that effect is no more than the recognition of the ordinary expectations of the world of commerce that the value of a contract will be no less than the cost of its performance. That assumption necessarily contemplates that damages will include preliminary expenses, as was held in Anglia Television.
The assumption which underlies the award of damages by reference to wasted expenditure, like all assumptions, is one which, once made, will ordinarily be maintained unless displaced by evidence pointing to the contrary. In a practical sense that may mean that the assumption will often be made and maintained unless the defendant proves otherwise. However, save in that limited and practical sense, I do not think it right to say, as was held in C.C.C. Films Ltd. [[1985] QB, at p 40] that the onus is on a defendant "to prove that the expenditure ... is irrecoverable because [the plaintiff] would not have recouped [his] expenditure".
39 Deane J said at p 118:
The frequent inability of curial procedures to determine with certainty what has happened in the past, let alone what would have been or what will be, necessarily gives rise to a need for a number of subsidiary rules governing the determination of the loss or injury which a plaintiff has actually sustained by reason of a wrongful act. One such subsidiary rule is that, even in an action for repudiation or breach of contract where damage is not an element of the cause of action, a plaintiff bears the onus of establishing the extent of his loss or injury on the balance of probabilities. To satisfy the requirements of that rule, a plaintiff must, if he is to recover more than a nominal amount in such an action, affirmatively establish assessable damage, that is to say, loss or injury which is capable of being measured in monetary terms. In many cases, proof of the full extent of the loss or injury sustained will involve establishing an evidentiary foundation for positive and detailed ultimate findings by the court upon the balance of probabilities. There are, however, cases where considerations of justice or the limitations of curial method render ultimate findings, about what would have been or will be, impracticable or inappropriate. In such cases, damages must be assessed on some basis other than findings about what would have ultimately happened if the repudiation or breach had not occurred or about the precise ultimate implications of the situation which exists after the repudiation or breach. In particular, it may be appropriate that damages be assessed by reference to the probabilities or the possibilities of what would have happened or will happen rather than on the basis of speculation that probabilities would have or will come to pass and that possibilities would not have or will not.
(citations omitted)
40 The High Court's decision in Amann was considered in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332. The plurality said at p 349:
[W]here there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat an award of damages. The damages will then be ascertained by reference to the degree of probabilities, or possibilities, inherent in the plaintiffs succeeding had the plaintiff been given the chance which the contract promised.
This approach is not confined to contracts relating to games of chance, sporting contests or other competitions. Fink v. Fink concerned a contract to provide an opportunity for a reconciliation, breach of which was held to entitle the wife to damages. And there can be no doubt that a contract to provide a commercial advantage or opportunity, if breached, enables the innocent party to bring an action for damages for the loss of that advantage or opportunity. So, in The Commonwealth v Amann Aviation Pty Ltd, Mason CJ. and Dawson J. [at p 92], Brennan J. [at pp 102-104] and Deane J. [pp 118-119) concluded that a lost commercial advantage or opportunity was a compensable loss, even though there was a less than 50 per cent likelihood that the commercial advantage would be realized. Damages for breach of contract were assessed by reference to the probabilities or possibilities of what would have happened.
41 Their Honours also referred to the High Court's earlier decision in Malec v JC Hutton Pty Ltd (1990) 169 CLR 638. Their Honours said at pp 350:
In Malec v J C Hutton Pty Ltd ([(1990) 169 CLR 638], this Court drew a distinction between, on the one hand, proof of historical facts what has happened - and, on the other hand, proof of future possibilities and past hypothetical situations. The civil standard of proof applies to the first category but not to the second, particularly when it is necessary to determine future possibilities and past hypothetical situations for the purpose of assessing damages [pp 639-640, per Brennan and Dawson JJ; pp 642-643, per Deane, Gaudron and McHugh JJ].
In Malec, Deane, Gaudron and McHugh JJ. explained the way in which the matter is to be approached in these terms [at p 643]:
"If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring .... But unless the chance is so low as to be regarded as speculative - say less than 1 per cent - or so high as to be practically certain - say over 99 per cent - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability."
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Neither in logic nor in the nature of things is there any reason for confining the approach taken in Malec concerning the proof of future possibilities and past hypothetical situations to the assessment of damages for personal injuries. The reasons which commended the adoption of that approach in assessments of that kind apply with equal force to the assessment of damages for loss of a commercial opportunity, as the judgments in Amann acknowledge.