Re Amann Aviation Pty Limited v Commonwealth of Australia [1990] FCA 55; 22 FCR 527

Re Amann Aviation Pty Limited v Commonwealth of Australia [1990] FCA 55; 22 FCR 527 - FCA 1990 case summary — Zoe

[111]

18. Here we have a contract to be performed over a period of three years which perforce required the contractor to expend very substantial sums of money on the acquisition of aircraft and other equipment and in establishing bases before it could commence its operations and earn one cent under the contract. The overriding rules for the assessment of damages in breaches of contract cases stem from what was said in Robinson v. Harman [1848] EngR 135; (1848) 1 Exch 850 and Hadley v. Baxendale [1854] EngR 296; (1854) 9 Exch 341. The damages must have been such that they may fairly and reasonably be considered either as arising naturally, that is, according to the usual course of things, from the breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Furthermore, they must be no more and no less than would reasonably compensate the plaintiff for the breach which has been committed. In those circumstances justice will not be done in this case unless the expenditure incurred by the contractor in consequence of the entry by it into the contract and reliance by it upon the performance of the contract by the Commonwealth is recouped by it. It follows that I agree that each of the items of expenditure referred to in the other judgments should form a component of the award of damages. These items are pre-operational expenditure, the cost of the acquisition of the aircraft less their value at termination of the contract, the amount of termination payments made to employees and the amount of the security deposit. In relation to the cost of the acquisition of the aircraft, I agree with the other judges in their conclusion that the contractor was bound to indemnify CVC Investments Pty. Limited for the amount it incurred and that it was likely that the title to the aircraft would have passed to the contractor itself once finance was provided by the Commonwealth Bank.

[139]

"2.22 LIQUIDATED DAMAGES

If the Contractor proceeds with a flight with

any of the following items of equipment

missing or unserviceable:

(a) specified radio equipment (7.5)

(b) specified tactical navigation system (2.5)

(c) specified radar equipment (2.5)

(d) fully operational air conditioning system (5)

(e) specified intercom equipment (5)

(f) specified cameral equipment (2)

(g) specified binoculars (2)

(h) radar altimeter (5)

(i) any windows which, through opacity, do

not allow clear external vision (5)

the Contractor shall be required to pay to

the Commonwealth, as liquidated damages and

not as a penalty, an amount equal to the

percentages of the daily standing charge for

that aircraft, as shown above, for each item

of missing or unserviceable equipment.

2.23 DEFAULT

If the Contractor fails to make a flight in

the manner required under the Contract and

the Secretary is not satisfied that the

failure was due to accident or other

reasonable cause beyond the control of the

Contractor the Contractor shall without

prejudice to any other remedy pay the

Commonwealth, or the Commonwealth may, at its

option, deduct from any amount due or to

become due to the Contractor any sum payable

by the Contractor as liquidated damages or

the amount that would have been paid had the

Contractor not been in default and any extra

expense over the contract rate incurred by

the Department in having the Contractor's

default made good.

2.24 TERMINATION

Whenever and so often as the Contractor fails

to carry out the Contract or comply with a

condition of the Contract to the satisfaction

of the Secretary then in either of these

events the Secretary may, by notice in

writing, require the Contractor to show cause

in writing to the satisfaction of the

Secretary, why the Contract or any specified

portion thereof should not be cancelled. If

the Contractor fails to show cause in

writing, as so required, the Secretary shall

be entitled to treat the Contract or any

specified portion thereof as having been

cancelled and may declare the whole or any

part of the security lodged by the Contractor

forfeited to the Commonwealth, and thereupon

the amount so declared to be forfeited shall

become the property of the Commonwealth absolutely.

The Commonwealth shall, in addition, be

entitled to recover from the Contractor any

damages, losses costs and expenses which the

Commonwealth may sustain, or incur in

consequence of such cancellation of the

Contract or portion thereof as the case may

be. A certificate by the Secretary stating

the amount of any damages, losses, costs and

expenses sustained or incurred by the

Commonwealth in consequence of the

cancellation of the Contract or portion

thereof shall be conclusive evidence of the

matter stated.

The Secretary will likewise be entitled to

treat the Contract as having been cancelled

if the Contractor commits an act of

bankruptcy or enters into a composition with

creditors or assigns his estate for the

benefit of creditors or, if the Contractor,

being a company, goes into liquidation

otherwise than for the purpose of reconstruction.

2.25 BREAK CLAUSES

The Commonwealth may, upon giving three

months' notice in writing to the Contractor

of its intention so to do, cancel the

Contract or any part thereof and on such

notice being given, the Contractor shall

cease work in accordance with and to the

extent specified in the notice and shall

immediately do everything possible to

mitigate any loss consequent upon such cancellation.

In the event of cancellation of the Contract

or part thereof other than through a

negligent act or default on the part of the

Contractor, the Contractor may submit a claim

for compensation to the Commonwealth and the

Commonwealth shall pay to the Contractor such

sums as are fair and reasonable in respect of

the loss or damage sustained by the

Contractor by reason of such cancellation."

[146]

11. The learned trial Judge, however, took the view that the clause not only makes comprehensive provision for termination in those cases where termination would be available in accordance with the ordinary law of contracts; he read the clause as allowing the Secretary, after the giving of appropriate notice, to cancel the contract for a breach which would not give rise to a right to terminate under the general law. This amplification of the Commonwealth's powers was the quid pro quo, in his Honour's view, for the fetter placed by the clause on the power to rescind for repudiation or breach of condition. It should be pointed out that a disturbing consequence of this construction would be to confer on the Commonwealth in express terms a right to damages sustained "in consequence of such cancellation of the Contract" in a case where the damages, while flowing from the cancellation, did not flow from the breach, since the breach did not deprive the Commonwealth of substantially the whole benefit of the contract, but only of the right to due performance of some relatively unimportant warranty. This would follow from the terms of the second section of the clause. (Cf. Shevill v. The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620; The Progressive Mailing House Proprietary Limited v. Tabali Proprietary Limited [1985] HCA 14; (1985) 157 CLR 17 at 30-31, 55; AMEV-UDC Finance Limited v. Austin [1986] HCA 63; (1986) 162 CLR 170 at 186.) It is unnecessary to seek a quid pro quo for the concession to the contractor involved in clause 2.24, which finds its justification in the size and complexity of the contract and the irrecoverability, in the event of cancellation, of the contractor's huge outlay. In any case, there is a quid pro quo in the right to cancel a part only of the contract, which, of course, would not be available under the general law. The existence of that right provides a further reason for confining the clause to serious breaches; it would be a harsh bargain which would give the Commonwealth the right, on account of a minor breach, to cancel perhaps the most lucrative sectors of the contract, while holding the contractor strictly to a rump of it.

[170]

22. As was emphasized in the argument for the Commonwealth, the continuity of the coast watch operations on Australia's northern shores is a matter of great importance. The admitted fact is the effort appears to have been directed, in the main, at infringements of quarantine rules. But other reasons for maintaining such operations, vigilantly and without interruption, are not obscure. Nevertheless, the Commonwealth chose to let the contract to the appellant at a time when its predecessor's contract was about to expire, and when the appellant had no aeroplanes in Australia. The departmental papers record a very great number of failures by the appellant's predecessor to comply, in the performance of the coast watch operations, with what the Department considered requisite. Perhaps this accounted for what was done. Be that as it may, the argument from the importance of the continuity of the operations must be weighed against the fact that there could hardly have been any absolute certainty the change of operators could be effected without any dislocation at all. The agreement does not reflect a perception that a precise date or period should be fixed as essential. If the phrase "as soon as possible", when applied to two shipments of goods under the contract of sale in Bowes v. Chaleyer, could not be construed in an inflexible sense, the same phrase cannot properly, in the context of the present contract for the setting up of a widespread and complex organization and the acquisition of millions of dollars' worth of highly specialized equipment (to be operated over a period of three years), be construed as excluding eventualities affecting what might prove to be achievable. And the plain fact is the draftsman of the Commonwealth's tender documents, on the terms of which the tenderer had to rely, provided for commencement of the operations "as soon as possible after ... expiry of the existing contract", a provision that must have contemplated the possibility of some interval, however short. That extensions of the existing contract were in the event feasible, does not deny this point.

[183]

29. At the hearing of the appeal, counsel for the appellant attacked this finding, but it was well within his Honour's province to form views based on the evidence of Mr Heddles. There is no substance in the suggestion that, as an aeronautical engineer, Mr Heddles was not qualified to express an opinion about the time required to achieve certification. The ultimate conclusion, depending as it did not only on the letter of the transcript, but also on the Court's estimate of the actors and of how sustained and effective their efforts were likely to have been, is the kind of conclusion an appellate court should not lightly disturb. In this case, we should accept it. If a different view were taken, it would nevertheless, on the evidence, be wrong to hold that delay at the very beginning of the contract period, in solving the problem of the endurance of the turboprop aircraft, amounted to a serious breach or repudiation of the contract, bearing in mind that the Commonwealth agreed to the late change of aircraft type (which its officers are revealed by their reports as welcoming), and must have been aware of the difficulty from the time of the tests carried out in the United States in June. Of course, if the appellant had sat back and done nothing about it, the position would have been quite different, but in fact the appellant was straining every nerve to lift the endurance of its turboprop aircraft to comply with the terms of the specification. As at 12 September, it had purchased, as additions to its fleet, two piston engined aircraft, having the appropriate endurance characteristics, in order to help tide it over until the fuel tank problem was solved. Once the level of compliance was reached, the turboprop planes would be superior in terms of performance capabilities to those originally contemplated, both because their higher cruising speed would give more flexibility and a greater range for the specified "transit of one hour at normal cruise" and because of their superior avionics and other equipment.

[189]

34. It does not follow from this evidence of much less than full performance on the first day that the appellant would not have very soon been performing its entire task, subject to the delay already discussed of about two months before complete compliance with all of the specifications of the contract. It is plain that the late acquisition of aircraft, which then had to be modified and equipped with highly specialised surveillance equipment and ferried from the United States to Australia, and perhaps other factors, had left the appellant with far too many last minute arrangements to make. But some difficulties at the commencement of an operation of this kind were only to be expected. The trial Judge reached the conclusion that the coast watch service would be "fully provided" by about the middle of November. His Honour referred to about the middle of November because he thought it would take that long to solve the endurance problem, not on the basis that the failure to perform substantially the whole of the required surveillance task, which had occurred on 12 September, would have continued thereafter, or for more than a short time. Some reliance was placed for the Commonwealth on evidence that attempts were made to carry out the previously programmed flights on 13, 14 and 15 September, and that these attempts were quite inadequate. But the Commonwealth had repudiated the contract on 12 September, and it would be wrong to reach conclusions about the appellant's previous capacity and determination to perform the contract on the basis of its partial and spasmodic efforts during the few days between the Commonwealth's repudiation and the appellant's acceptance of the inevitable by its termination of the contract for that repudiation. The evidence suggests that, unembarrassed by the collapse of the contract, the appellant would have pursued with vigour its efforts to resolve the remaining problems. Having regard to what was then in train and the further aircraft which were then due to become available in the near future, the appellant for its part had not by its conduct repudiated the contract, nor, though it was in breach so as to confer on the Commonwealth a right to damages, had it committed any breach of contract so as to entitle the Commonwealth to terminate the contract for breach. So far as the failures on 13, 14 and 15 September are concerned, the purported termination of the contract by the Commonwealth was "a continuing intimation" that the programme of flights on those days need not be observed: Peter Turnbull and Company Proprietary Limited v. Mundus Trading Company (Australasia) Proprietary Limited [1954] HCA 25; (1954) 90 CLR 235 at 251, per Kitto J.

[190]

35. The day 12 September 1987 must be seen as the last day of a period of six months of preparation, and the first day of active operations intended to extend over three years, so that it was one day in a three and a half years contractual period. It has already been concluded that the contract did not make the day itself essential in the sense that it was a condition everything had to be done by then so as to enable every applicable term of the contract to be fulfilled on that day completely. Although the appellant was not then ready to commence all scheduled operations, and had not assembled all the aircraft required and completed their equipment, the delay was partly to be accounted for by an agreed change of aircraft type made more than a third of the way through the preparatory period, and that delay certainly did not show any intention to repudiate the agreement. The whole of the necessary infrastructure had been established, and very large sums had been spent equipping the aircraft to comply with the contract; the time for completion of the comparatively little that remained to be done would be a small fraction of the operational period involved and, as it happens, approximately the same period as that which had been lost by the decision to change the type of aircraft to be used. The partial performance of the operations which occurred on 12 September could then have been expected to be made total within a very short period. It should be added that, at least unless the appellant's failure to perform all its allotted tasks on 12 September could be regarded as in itself a fundamental breach, it is very doubtful whether the Commonwealth could properly rely on this failure to support its notice of termination; for the notice, so far as this matter is concerned, was premature, being given before the period of daylight available for the carrying out of operations on that day had expired: Afovos Shipping Co. S.A. v. Pagnan (1983) 1 WLR 195; cf The Mihalis Angelos (infra).

[193]

38. For the Commonwealth, there was, first, a claim that had it not repudiated the agreement on 12 September, it could immediately afterwards have cancelled it, in perfect accord with the contract, under clause 2.24. More accurately, it might have been argued the Commonwealth could have secured cancellation through the action of the Secretary, but, however that may be, the conclusion of the argument was an appeal to the principle expressed in the case usually referred to as The Mihalis Angelos (Maredelanto Compania Naviera S.A. v. Bergbau-Handel G.m.b.H. The Mihalis Angelos) [1970] EWCA Civ 4; (1971) 1 QB 164 at 196, 201-203, 210, which is discussed by Hope J.A. in TCN Channel 9 Pty Ltd v. Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 151-156, and is mentioned by Dawson J. in Foran v. Wight [1989] HCA 51; (1989) 88 ALR 413 at 462-463. Since the argument was put upon the basis, which has already been rejected, that clause 2.24 applied to the breaches of contract proved against the appellant, it is unnecessary to pursue it further. No contention was raised (nor could it have been successfully) that, though clause 2.24 was not attracted by the breaches, the continuance of them or of those of them which might be expected to continue, for the relatively short period correctly found by his Honour to be involved, would bring into existence a new and sufficient ground for the application of the clause. A possibility, as distinct from a probability, that the contract would have been prematurely cut short, even if it had not been repudiated, would not affect the ordinary measure of damages. Generally, and apart from the special case where a plaintiff sues for the loss of a chance (see Chaplin v. Hicks (1911) 2 KB 786; Fink v. Fink [1946] HCA 54; (1946) 74 CLR 127), damages are assessed upon the probabilities. The court makes no discount for a mere possibility of this kind: Sykes v. Midland Bank Executor and Trustee Co. Ltd. (1971) 1 QB 113 at 129-130; Levi Strauss (Australia) Pty Ltd v. Mayne Nickless Ltd (unreported, N.S.W. Court of Appeal, Moffitt P., Hutley and Mahoney JJ.A., 17 December 1976), per Mahoney J.A. at pages 5 and 6 of his judgment; TCN Channel 9 (supra) at 159.

[212]

49. The way in which the learned trial Judge approached the assessment of damages, in the present case, did not require him to examine these principles in detail. He considered that the appellant would have earned a net profit over the period of the contract of $820,000.00, a figure he then halved, in assessing damages, for the contingency of cancellation which arose upon his view of the true effect of clause 2.24. No adjustment was made to reflect the fact that large sums spent (which would have been recouped from gross receipts if the contract had been performed) remained unrecouped by reason of the termination of the contract. Accordingly, he assessed the appellant's loss at $410,000.00, commenting that he had followed a method of assessment similar to that suggested in T.C. Industrial Plant (supra) at 294. But the calculation there suggested by the High Court, as a means of assessing damages for breach of a warranty of fitness in a contract for the acquisition of a special machine to be used in the performance of work under another contract, required "taking the whole of the actual and probable expenditure which the plaintiff would have incurred" - and thus clearly involved the cost of the machine which was obtained on hire purchase for the purpose of the other contract. Also, the passage in the High Court judgment states in very general terms an alternative to the method of calculation actually adopted, which the Court had already approved subject to the elimination of some double counting. The damages the award of which was so approved included (as also appears at 294) "all items of cost incurred by the plaintiff" less receipts under the contract. Unfortunately, the summary statement of the alternative method of working out the loss may have been capable of misleading, but it is not to be thought that the High Court intended its alternative approach to produce a result inconsistent with that it had already reached in another way. The plaintiff in T.C. Industrial Plant was clearly entitled (as was held) to recover its outstanding expenditure, in addition to the profit it could prove it would have earned.

[214]

51. Another aspect of the calculation of damages is more controversial. At the trial, the appellant submitted that, in addition to its other pre-contract expenditure, it was entitled to claim the sum of $5,650,000.00, the cost of the acquisition of the aircraft with their sophisticated and specialized equipment, less their agreed net value of $917,329.00 - the great difference being accounted for by the fact that there was no work in Australia (and relatively little overseas, for that matter) for which aircraft of this kind, so equipped, were suitable, other than the coastal surveillance covered by the contract. (After the hearing of the appeal had concluded, the court was informed by the Commonwealth, with the concurrence of the appellant, that the figure of $5,650,000.00 should be revised to $5,281,521.00; the figure of $917,329.00 has not been revised.) His Honour rejected this claim on the ground that the expense of acquisition of the aircraft had not been borne by the appellant but by an associated company, C.V.C. Investments Pty Limited. Having refused to allow the cost of the aircraft to be taken into account in the calculation of the appellant's damages, his Honour made no provision for depreciation in calculating the net profit which the appellant would have earned. Instead, he took into account an amount of $3,390,000.00 which he described as "interest or hiring fee", being the amount which he considered the appellant would have had to pay, over the period of the contract, to C.V.C. Investments Pty Limited in order to secure the use of the aircraft. This approach is perfectly consistent. If the cost of acquisition is not treated as an expense, in the case of specialized equipment acquired only for the purposes of the contract, because the equipment is treated as not the appellant's, neither should the appellant be charged with depreciation. On the other hand, if his Honour erred in disallowing the cost of acquisition of the aircraft, because it was a liability which the appellant had already incurred, then a calculation of profit without provision for depreciation (that is, for recoupment over a period of the capital expenditure required to enable the gross profit to be earned) would be impossible to justify. However, counsel for each of the parties sought to have it both ways. For the appellant, his Honour's calculation of the net profit was relied on, while at the same time it was contended that the damages should include the cost of the aircraft less their residual value. For the Commonwealth, it was contended the cost of the aircraft was not allowable as an expense of the appellant, while at the same time it was urged that depreciation should have been taken into account by his Honour and would have eliminated the net profit he found.

[215]

52. There was evidence, reflected in a note to the balance sheet of the appellant as at 19 September 1987, that the appellant had agreed to indemnify C.V.C. Investments Pty Limited against any loss resulting from the provision of the aircraft and equipment to the appellant. That there was such an agreement seems to have been accepted by his Honour in certain supplementary reasons which are annexed as appendix 5 to his reasons for judgment. The probabilities strongly support the appellant on this issue, since the aircraft were purchased "in the name of C.V.C. Investments Pty Limited" (to quote the directors' minutes of that company of 12 April 1987), as part of an arrangement for bridging finance to enable the appellant to proceed with the obtaining of the aircraft to carry out the contract. It seems most unlikely that it was ever intended C.V.C. Investments Pty Limited should become the owner of the aircraft, except as a means of financing their ultimate acquisition by the appellant. There is no reason for rejecting the evidence that the arrangement included an indemnity given by the appellant to C.V.C. Investments Pty Limited. Indeed, a request to provide bridging finance in this particular way could be expected to involve such an indemnity by implication of law: Eastern Shipping Company Limited v. Quah Beng Kee 1924 AC 177 at 182-183. The evidence should be accepted, applying the principles stated in Warren v. Coombes [1979] HCA 9; (1979) 142 CLR 531. (The Commonwealth itself submitted the agreement for bridging finance was intended to be replaced by a lease-finance arrangement under which title would pass to the Commonwealth Bank, and the aircraft would be leased to - and ultimately acquired at residual values by - the appellant.) It follows that this liability of the appellant would have to be taken into account in some way (such as by a depreciation allowance) in the calculation of the profit which the appellant expected to earn under the contract, and also that the liability to C.V.C. Investments Pty Limited would have to be taken into account in any calculation of damages based upon the proposition that the breach of the contract by the Commonwealth had resulted in expenditure, which the appellant had incurred, becoming futile.

[218]

55. The considerations just discussed do not enable it to be said that the appellant would probably, but for the Commonwealth's breach of contract, have been able to secure a renewed contract on a basis yielding some ascertainable amount of profit. The case is not like T.C. Industrial Plant (supra) or Richardson v. Mellish [1824] EngR 715; (1824) 2 Bing 229; 130 ER 294 where such a finding was possible, and was made. (It is hardly necessary to add that a court will strive, whenever it is able, to put a value on expectations lost by a breach of contract, and will not be deterred by mere difficulty of assessment: Abrahams v. Herbert Reiach, Limited (1922) 1 KB 477; Levi Strauss (Australia) Pty Ltd v. Mayne Nickless Ltd (unreported, N.S.W. Court of Appeal, Moffitt P., Hutley and Mahoney JJ.A., 17 December 1976); Williston on Contracts 3rd ed. vol. II section 1346; Corbin on Contracts vol. 5 section 1022.) But neither can the prospect that the appellant would have procured a renewed contract be dismissed on the basis, discussed by Edmund Davies L.J. in The Mihalis Angelos (supra) at 203, that it must be assumed "the defendant would have performed his legal obligation and no more", any renewal of the contract being beyond the Commonwealth's legal obligation. For as Diplock L.J. pointed out in Lavarack v. Woods of Colchester Ltd [1966] EWCA Civ 4; (1967) 1 QB 278 at 295-296, in applying such a principle, "one must not assume that (the defendant) will cut off his nose to spite his face and so control these events as to reduce his legal obligations to the plaintiff by incurring greater loss in other respects." (See also T.C.N. Channel 9 (supra) at 155; Abrahams (supra), per Atkin L.J., at 483.) The unique features of the situation which would have obtained at the time of a reletting of the coast watch contract would have been as significant for the Commonwealth as for the appellant. However, the precarious position of the appellant under the contract does make this case analogous to the cases cited above, McRae v. Commonwealth Disposals Commission and Anglia Television Ltd v. Reed. The Commonwealth's breach of contract has swept the pieces from the board, and the end-game which might have led to further contracts can never be played out. The appellant cannot show that performance of the contract would ultimately have led to the profits it hoped to gain; but equally the Commonwealth is unable to show that the appellant would not in fact have recouped the whole of the expenditure it incurred on the faith of the contract. Upon the principles which have been discussed in these reasons, the appellant is entitled to damages assessed on the basis that that expenditure should be recouped. It also follows, however, that the appellant should not receive the amount of net profit calculated without allowance for depreciation. There is no way of telling whether ultimately a profit would have been earned as a result of performance of the contract.

At a glance

Court

Decision date

Before

Source

Judgment (228 paragraphs)

Re Amann Aviation Pty Limited v Commonwealth of Australia [1990] FCA 55; 22 FCR 527 (5 March 1990)

Parties

Legislation Cited (4)

Cases Cited (19)