(3) The respondent pay the appellant's costs of the appeal.
24 CAMPBELL JA: I have had the advantage of reading the reasons of Basten JA and Gyles AJA, in which the relevant facts and grounds of appeal are set out. I have reached the same conclusion as their Honours, for the following reasons.
25 It is convenient to deal first with the principles on which compensation is awarded under an undertaking as to damages.
26 Any decision about the quantum of damages payable under an undertaking as to damages requires close consideration of the precise terms of the undertaking that has been given. Part 28 rule 4 Supreme Court Rules (the rule applicable when the undertaking was given) says:
"The "usual undertaking as to damages", if given to the Court in connection with any interlocutory order or undertaking, is an undertaking to the Court to submit to such order (if any) as the court may consider to be just for the payment of compensation, to be assessed by the court or as it may direct, to any person, whether or not a party, affected by the operation of the interlocutory order or undertaking or of any interlocutory continuation, with or without variation, of the interlocutory order or undertaking."
When Undertakings as to Damages are given, and Why
27 The origin and purpose of an undertaking as to damages can help to decide how to assess the amount of compensation that is payable under it. Such undertakings first arose in connection with the granting of interlocutory injunctions pending a first-instance trial, but have come to be more widely applied. As to the history, see Chisholm v Rieff (1953) 2 FLR 211 at 214-215 (Kriewaldt J); Kerridge v Foley (1968) 70 SR (NSW) 251 at 255-256; [1968] 1 NSWR 628 at 630-631 per Sugerman, Asprey & Holmes JJA; Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979) 146 CLR 249 at 260-261 per Aickin J; Smith Kline & French Laboratories (Australia) Ltd v Secretary, Department of Community Services and Health (1989) 89 ALR 366 at 369-371 per Gummow J; National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386 at 599-600 per Brooking J; ICF Spry, "Plaintiffs' Undertakings and Equity's Power to Award Damages" (1991) 65 ALJ 658; PM McDermott, "Undertakings and Lord Cairns' Act - A Comment" (1992) 66 ALJ 219. It was recognised very early in the history of courts accepting undertakings as to damages that even though the undertaking is given in connection with an interlocutory order, the undertaking continues to be enforceable even after the principal litigation in which it was granted has been decided: Newby v Harrison (1861) 3 De GF & J 287; 45 ER 889 at 289; 889 per Knight Bruce LJ, at 290; 890 per Turner LJ.
28 An interlocutory injunction can be sought by a plaintiff who claims that (a) it has a right (which I will call the "underlying right") that it is in the course of seeking to establish and enforce by litigation, and (b) that underlying right is at risk of being damaged or destroyed in the time before the court can decide the litigation. The litigation in question might be a trial, or it might be an appeal. The plaintiff asks the court to make an order that operates only until the litigation has been decided, and that will prevent one or more of the defendants from acting in some specific way that (if the plaintiff were correct in saying it had the right it claims) would damage or destroy that underlying right. Thus an interlocutory injunction obtained on the application of a plaintiff always seeks to protect an underlying right that is claimed, but at the time of granting the interlocutory injunction not established: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63; (2001) 208 CLR 199 at [9]-[11] per Gleeson CJ, [62] per Gaudron J, [91], [105] per Gummow and Hayne JJ. (The practice of courts sometimes granting interlocutory cross-injunctions is consistent with this view. If the cross-injunction is granted in support of a cross-claim by the defendant, the defendant is in that cross-claim in the position of a plaintiff. Even if there is no cross-claim, interlocutory cross-injunctions are sometimes granted when a plaintiff claims an underlying right, and the court comes to the view that the appropriate basis on which that claim should be protected pending the final determination is that the plaintiff also be restrained from acting in some way that is relevant to its claim of right pending the hearing. In that situation, requiring the plaintiff to be bound by an interlocutory order is a means of lessening the damage that might result if at the final hearing it proved that the plaintiff did not have its claimed underlying right.)
29 There have been some changes in the language that the courts have used to describe the tests for when it is appropriate to grant an interlocutory injunction: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, cf American Cyanamid Co v Ethicon Ltd [1975] AC 396; Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 at [19] per Gleeson CJ and Crennan J, cf [65]-[72] per Gummow and Hayne JJ as to whether damages being an inadequate remedy is part of what must be shown (a difference that is capable of explanation, as whether damages are an adequate remedy can affect both whether there is a sufficiently seriously demonstrated question to be tried, and the balance of convenience: Inetstore Corporation Pty Ltd (in liq) v Southern Matrix International Pty Ltd [2005] NSWSC 883 at [30]-[31]; (2005) 221 ALR 179 at 184; Varley v Varley [2006] NSWSC 1025 at [23]-[26]).
30 However, there has always been a need to consider two types of matters - whether there is a sufficient prospect of the underlying right that the interlocutory injunction seeks to protect being established, and whether the balance of convenience favours granting or refusing the injunction. In saying this I speak of the granting of an interlocutory injunction under the general powers of the court, not pursuant to a specific statutory power like section 1324 Corporations Act 2001(Cth).
31 When an interlocutory injunction is sought, there is a practical necessity for the judge to decide whether to grant it at a time when the judge knows that he or she is likely to have only an incomplete understanding of the facts, and sometimes also of the law, that will ultimately decide the case. As well, the judge often knows that granting an interlocutory injunction is likely to alter the way that events will unfold, in ways that themselves cannot be predicted with any accuracy. That alteration in the way events unfold might affect not only parties to the litigation, but also other third parties. The interests of such other people are taken into consideration in assessing where the balance of convenience lies: Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; (1998) 195 CLR 1 at [65]-[66].
32 Some prediction of how the granting of an injunction is likely to affect the way events will unfold is necessarily involved in deciding the balance of convenience. This is because deciding the balance of convenience involves deciding whether, on the limited material then available to the court, it seems it would be more likely to produce harmful consequences if the injunction is granted and it eventuates that the plaintiff was not entitled to the underlying right, than would be produced if the injunction is refused and after the litigation it is known that the plaintiff had the underlying right. But it remains the case that when an interlocutory injunction is granted, the court knows that it cannot predict all the consequences of the injunction being granted. In consequence, there is a risk that, if the plaintiff does not succeed in establishing the underlying right, the granting of the interlocutory injunction will turn out to be productive of harm that in retrospect will be seen to have been unnecessary.
33 Undertakings as to damages have come to be given to courts in circumstances other than the making of an interlocutory injunction. If a defendant (including in that expression a respondent to an appeal) is threatened with proceedings seeking an interlocutory injunction, the defendant sometimes avoids the trouble and expense of having an interlocutory hearing by offering an undertaking to act in some particular way pending the determination of the litigation, on terms that the plaintiff (or appellant) gives to the court the usual undertaking as to damages. Concerning some interlocutory orders that are not injunctions, like Anton Piller orders or Mareva orders, the usual practice of the court is to require the party seeking the order to give an undertaking as to damages: eg Schedule A undertaking 1 to the draft freezing order in Supreme Court Practice Note SC Gen 14, Schedule B undertaking 1 to the draft Anton Piller order in Supreme Court Practice Note SC Gen 13. As in the present case, a stay of proceedings pending an appeal or application for leave to appeal may be granted on terms of an undertaking as to damages. In all cases where an undertaking as to damages is given, however, there is a situation where: (a) a plaintiff claims some underlying right in litigation; (b) the court makes an interlocutory order or accepts an interlocutory undertaking that seeks to protect that underlying right during the period before the court decides whether the plaintiff actually has the underlying right; (c) making the interlocutory order or accepting the interlocutory undertaking has the potential to damage the rights of people affected by it, in circumstances where the court frequently does not know with any precision who will be affected by the order or undertaking given, or in what ways they will be affected.
34 In a contested hearing about the grant of an interlocutory order or on an application for an ex parte interlocutory order, a frequent occurrence is that the court in substance indicates to the applicant that it is prepared to make an order if the applicant gives the undertaking as to damages to the court. It is a matter for the applicant whether it then gives the undertaking as to damages, or risks the court declining to make the interlocutory order. Thus, the undertaking is sometimes referred to as being the "price" of the interlocutory order: Kerridge v Foley at 255; 630; Smith Kline & French at 372; Cheltenham & Gloucester Building Society v Ricketts [1993] 1 WLR 1545; [1993] 4 All ER 276 at 1551; 281. Sometimes an applicant for an interlocutory order offers the undertaking to the court without the court needing to enquire whether it will be offered. Sometimes parties settling an interlocutory dispute agree that one of them will give an undertaking as to damages to the court. But always the giving of an undertaking as to damages is the voluntary act of the person who gives it. The New South Wales practice is that it is not implied from the mere seeking and obtaining of an interlocutory injunction: Kerridge v Foley. Even in England, where the previous practice was that an undertaking as to damages was implied unless a contrary intention appears, "[t]he practice is subject to the qualification that, since an undertaking must be voluntary, it will not be forced on the plaintiff; if he declines to give it …": Kerridge v Foley at 256; 630; JM Paterson, Kerr on Injunctions, 6th ed (1927) at 646.
35 The undertaking as to damages is an attempt to lessen the extent to which the making of an interlocutory order or accepting of an interlocutory undertaking might be productive of harm, if it eventuates that the plaintiff does not have the underlying right that the plaintiff claims in the litigation. When that is its purpose, the relevant way in which a person might be affected by the granting of the interlocutory order or undertaking is if the person is affected by the granting of the interlocutory order or undertaking and it eventuates that the plaintiff does not have the underlying right in support of which the interlocutory order or undertaking was claimed. It could happen that a plaintiff is found not to have the underlying right in support of which the interlocutory order or undertaking was claimed, even if the plaintiff obtains one or more final orders in the litigation. That situation could arise if the injunction granted was wider than was appropriate to protect such rights as the plaintiff is found in the litigation actually to have.
Construction of the Undertaking
36 The terms of the undertaking as to damages under Part 28 rule 4 Supreme Court Rules recognise that not only any parties to the litigation who are restrained, but also parties to the litigation who are not themselves restrained, and even people who are not the parties to the litigation, might be harmed by the granting of an interlocutory order that sought to protect a right that a plaintiff claimed, but that the plaintiff failed to make good at a trial (or, where the interlocutory order operates pending an appeal, at that appeal). Hence the undertaking is to make a payment to "any person, whether or not a party, affected by the operation of the interlocutory order or undertaking". The class of potential payees under such an undertaking is thus very wide - it is anyone in the world, provided only that they have been affected by the operation of the interlocutory order or undertaking.
37 But the terms of the undertaking leave it to the court to decide whether any payment at all should be made under the undertaking, and if so precisely to which of the potential payees any payment should be made, and what the amount is of any such payment. The only limits that arise expressly from the language of the undertaking on the court's decision in those respects are that the order that the court makes is one that the court considers "just", and that the payment is to be a payment of "compensation". It is a reasonable inference from the language that the compensation in question is to be for the payee having been affected by the granting of the interlocutory order or undertaking in question. However there is nothing in the notion of "compensation" that requires it to be the provision of a full indemnity - one need only recall that workers' compensation usually does not indemnify a worker fully for the effects of having been injured at work. While the language of the undertaking allows the compensation to be "assessed by the court or as it may direct", that seems to be directed just to the procedure for quantifying the compensation, not to the principles by reference to which the quantum of the compensation is decided. However, the court is subject to some bounds of principle in making a decision whether and if so how to enforce the undertaking as to damages. The fact that the power to decide whether, to whom, and in what amount any payment should be made is conferred on a court, and the express requirement that the order made be one that the court "considers to be just" requires the power to be exercised in a judicial manner, and in accordance with the purpose for which the power is conferred, and in accordance with the guidance provided by previous decisions about what is just compensation in particular cases.
Relationship of Undertakings as to Damages to Contractual Obligations
38 Decisions identified in the other judgments in this case show that the courts have on occasions quantified the amount of compensation payable under an undertaking as to damages by drawing upon the principles for assessment of damages for breach of contract. That could not be because the undertaking as to damages is a type of contract. In fact, the undertaking as to damages is fundamentally different to a contract in several respects.
39 First, a contract is made between two or more people, and creates legal rights among those people. By contrast, there are no parties to an undertaking to the court. The undertaking is the unilateral act of the person who gives it - something particularly clear when an undertaking as to damages is given upon obtaining an ex parte order. While the undertaking is given to the court, it is not as though the court is a party to the undertaking, as the court is given no legal rights by it. The court is empowered by the undertaking to require the payment of compensation, if it eventuates that someone is affected by the making of the interlocutory order, but that is not the same as the court itself having any rights under the undertaking. Even when an undertaking as to damages is given under a contractual obligation (as happens when an interlocutory dispute is settled on terms that require one party to the dispute to give an undertaking to the court), the giving of the undertaking is performance of that contractual obligation, and once the undertaking has been given any right to compensation for being affected by the interlocutory order arises under the undertaking, not under the contract.
40 Second, the obligations that the parties to a contract undertake to each other are to perform their respective parts of the contract. The right to unliquidated damages is an incident that the law attaches to the contract, if the contract is breached, and is not itself part of the contract. Even if there is a term in the contract that quantifies the liquidated damages that are payable upon breach of some term, any such damages that the court might order a party to the contract to pay are payable for breach of both the term the breach of which triggered the liquidated damages clause, and the liquidated damages term of the contract. By contrast, the obligation that arises under an undertaking as to damages is itself an obligation to pay compensation, in certain circumstances.
41 Third, the event that triggers a right to payment of damages for breach of contract is the failure of the party obliged to pay the damages to perform a legal obligation he or she has undertaken. By contrast, there is no precondition of anyone having breached any legal obligation before an amount can be payable under an undertaking as to damages. Rather, it is the arising of a state of facts that is the precondition - that state of facts being that the person who gave the undertaking does not succeed in establishing the claimed underlying right for the protection of which the interlocutory order was made, and that someone has been affected by the interlocutory order having been made. This difference is deliberately reflected in the language of Part 28 rule 4 Supreme Court Rules, where what it requires is the payment of "compensation". The notion of "damages" has a flavour of compensation that is payable for breach of a legal right, while "compensation" can be paid for loss suffered in circumstances that involve no breach of a legal right. The concept of an ex gratia payment of compensation is familiar. Part 28 rule 4 Supreme Court Rules retains the traditional expression "undertaking as to damages", but then defines it in a way that does not include any notion of the compensation being for breach of a legal right.
42 Fourth, once a contract has been breached, the common law gives a right to the innocent party to receive damages. There is no corresponding right for someone affected by the making of an interlocutory order to receive compensation pursuant to the undertaking as to damages. The court can decide that there are reasons why it is not just that such compensation be paid.
"Special Circumstances"
43 One reason recognised in the cases for not requiring any payment to be made under an undertaking as to damages is delay: Newby v Harrison at 289; 889 per Knight Bruce LJ; Smith v Day (1882) 21 Ch D 421 at 425-426 per Jessel MR, at 427 per Brett LJ; Ex parte Hall; In re Wood (1883) 23 Ch D 644 (where four years after litigation concluded was held to be too long); Air Express v Ansett at 261 per Aickin J.
44 Enforcement of an undertaking as to damages can also be totally refused, or the amount awarded under it limited, by reason of other special circumstances: Graham v Campbell (1878) 7 Ch D 490 at 494 (quoted with apparent approval by Aickin J in Air Express v Ansett at 260).
45 The breadth of what can, in the circumstances of a particular case, amount to special circumstances is illustrated by the case law. That the damages involved are small can be a reason for not ordering an inquiry as to damage: Smith v Day at 425.
46 The conduct of the injunctee at the time the injunction was obtained or later, can be a reason for not enforcing the undertaking as to damages: F Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 at 361 per Lord Diplock; Yukong Line Ltd v Rendsburg Investments Corp [2001] 2 Lloyd's Rep 113 (CA) at 119-120 per Potter LJ, with whom Hale and Thorpe LJJ agreed. That the court regards the conduct of the person claiming to enforce the undertaking as to damages as relevant to whether and if so how the undertaking should be enforced was originally a specific instance of application of the maxim that he who seeks equity must do equity. It is not possible to specify exhaustively the type of conduct of the injunctee that might lead the court not to enforce, or to limit the enforcement, of an undertaking as to damages. Even when the relevant conduct of the injunctee is not minimising his loss, the conduct is not necessarily judged by the same standards as apply in the law concerning mitigation of damages at common law. For example, in Hunt v Hunt (1884) 54 LJ Ch 289 at 291 Pearson J intimated, when ordering an enquiry as to damages, "I certainly shall not allow the defendant any damages if I find that he has not availed himself of every opportunity which may be given him" to minimise his loss.
47 A specific example of circumstances in which the conduct of the injunctee makes it unjust to enforce the undertaking as to damages appears in Modern Transport Company Ltd v Duneric Steamship Company [1917] 1 KB 370. There, a shipowner had entered a time charter of its vessel. During the term of the charter, the vessel was requisitioned, and the Crown paid a monthly amount considerably less than the contractual amount of hire under the charter. The owner claimed the full amount of hire from the charterer, and when the charterer was unwilling to pay it the owner invoked an arbitration clause in the charterparty. The charterer argued that the requisition had brought the charterparty to an end, and hence its liability to pay the hire had ceased. Before the arbitration was concluded, and still during the term of the charterparty, the Admiralty released the vessel from requisition. By that time the market had altered so that it would be more favourable to the owner to have possession of the vessel. The owner sent a notice requiring payment of the outstanding hire, and threatening to withdraw the vessel if the hire was not paid virtually immediately. The charterer began an action for an injunction to restrain withdrawal of the vessel, and obtained an interlocutory injunction to prevent it being withdrawn. Ultimately, it was held that the charterer remained liable for the contractual amount of hire, but that, by reason of the subsistence of the arbitration, the notice of withdrawal was invalid. In those circumstances there was no occasion to enforce the undertaking as to damages that the charterer had given, but Swinfen Eady LJ (with whom A T Lawrence J agreed) said at 379 that:
"The circumstances of this case were of a character to lead the plaintiffs to believe that any right to require payment or to withdraw the ship for non-payment would be suspended until there had been determined in the arbitration what the respective rights of the parties were, whether the time charter was still subsisting or not, and whether or not the plaintiffs remained liable to pay the hire."
48 He continued, at 380:
"Having regard to the circumstances under which the notice to withdraw of November 19 was given, I am of the opinion that the plaintiffs were fully justified in applying to the Court immediately for an injunction, and that the plaintiffs ought not to be required to make any payment to the defendants in respect thereof, even if it should have happened that at the trial the plaintiffs could not have sustained their claim to a continuance of the injunction. The special circumstances are such that no inquiry as to damages ought to be granted, even if the claim for an injunction could not be sustained at the trial."
49 In Air Express Mason J noted without disapproval at 323 that in Vieweger Construction Company Ltd v Rush & Tompkins Construction Ltd (1964) 48 DLR (2d) 509 at 519 the Supreme Court of Canada held that the court would be entitled to refuse a reference as to damages when the plaintiff is a public body that has acted in the public interest to hold the situation until the rights are determined and when the defendant, having succeeded on technical grounds, has been guilty of misconduct.
50 In Cheltenham & Gloucester Building Society v Ricketts at 1557; 287 Peter Gibson LJ collected other examples of special circumstances in which a court might decline to enforce an undertaking as to damages:
"In Upper Canada College v City of Toronto (1917) 40 OLR 483, the court in refusing to order an inquiry as to damages … had regard to a number of circumstances including the good faith of the plaintiffs and the fact that no costs were awarded against them when the action was dismissed. In Attorney-General for Ontario v Harry (1982) 25 CPC 67 a factor taken into account by the court in refusing to enforce an undertaking as to damages … was the inequitable conduct of the defendants. These cases support the general words of Turner LJ in Newby v Harrison (1861) 2 De GJ & J 287, 290: 'there may be cases in which the court will not consider it just to enforce an undertaking, though the jurisdiction to do so exists.'"
51 Whether this reference to Upper Canada College states a principle that would apply in Australian law would depend very much on the particular reasons why no costs were awarded against the losing party, as good faith on the part of a plaintiff is seldom enough to excuse the plaintiff from making a payment under an undertaking as to damages.
52 The decision in Cheltenham & Gloucester Building Society was that, when an undertaking as to damages had been given in connection with the grant of an interlocutory order that was dissolved before the trial, the inquiry as to damages should be delayed until after the trial, because only then would the judge know all the relevant circumstances that could affect whether it is appropriate to enforce the undertaking as to damages. That is a decision concerning the facts of the particular case. The time at which a court should consider whether to order an inquiry as to damages, as with all matters concerning enforcement of an undertaking as to damages, is a question of discretion to be exercised in accordance with all the circumstances of the case, and a principle has been expressed that an application to enforce an undertaking as to damages should be made within a reasonable time of the dissolution of the interlocutory injunction: Smith v Day at 427 per Brett LJ.
53 In Churnin v Pilot Developments Pty Ltd [2008] NSWSC 831 Young CJ in Eq (as his Honour then was) at [16] held that the court should offset gains made by the defendant because of the injunction against the loss suffered by the plaintiff because of the injunction.
54 Another example of special circumstances recognised in this court was in Clift v Windrum [1991] NSWCA 54. There an interlocutory injunction had been granted to delay settlement of a sale of land to a company, the plaintiff failed to make good at trial the claimed right to stop the sale, and a claim by the company for compensation under the undertaking as to damages was settled. Later, directors of the company, who had not been parties to the contract of sale nor the litigation relating to it, made their own claim for compensation under the undertaking as to damages. The court denied their claim on the grounds of both delay and of lack of clarity about whether the compensation they were claiming had already been taken account of in the manner in which the agreed amount of compensation paid to the company was arrived at.
55 The foregoing examples of special circumstances do not exhaust the field. As well, if it would be contrary to public policy to order compensation to be paid under an undertaking as to damages, presumably a court would decline to do so. However the examples show how varied such "special circumstances" can be.
Rationale for Contractual Principles of Remoteness
56 Because damages at common law are compensation for a legal wrong, the manner in which they are assessed depends on the precise legal wrong that has been committed. When the wrong consists of a breach of a contract, the wrong is not doing that which the defaulting party had promised to do. It is for that reason that the principle for assessing damages for breach of contract is the one stated by Parke B in Robinson v Harman (1848) 1 Ex 850 at 855;154 ER 363 at 365:
"The rule of the common law 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."
57 That principle continues to apply in Australia: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; 83 ALJR 390 at [13]; Wenham v Ella (1972) 127 CLR 454 at 471. However, in assessing damages for breach of contract the common law does not necessarily require compensation to be given for all the consequences of the breach. Rather, damages are awarded for those losses that fall within the rule in Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145. As explained by Mason CJ and Dawson J in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 91-92:
"According to Alderson B's renowned formulation, the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, 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: at p 354 (ER at p 151). It is now accepted that this is the statement of a single principle and that its application may depend on the degree of relevant knowledge possessed by the defendant in the particular case: C Czarnikow Ltd v Koufos [1969] 1 AC 350, at p 385 per Lord Reid; p 421, per Lord Upjohn; The "Pegase" [1981] 1 Lloyd's Rep 175, at p 182, per Robert Goff J."
58 One can see why it is just that principles like these should apply to the quantification of damages for breach of contract. When A promises B that some future event will occur, both parties would reasonably understand that A is undertaking the risk of that event not occurring. But the scope of the risk that A is undertaking needs to be construed in the same way as any other aspect of a contract is construed, namely objectively in the light of surrounding circumstances known to both parties: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 at [22]; (2004) 218 CLR 451 at 461-462; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 at [40]; (2004) 219 CLR 165 at 179; Taylor v Johnson (1983) 151 CLR 422 at 429; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549-550; Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at [262]-[266]. It is consonant with A having undertaken a risk construed in that way that, if the event does not occur, A will be liable for those consequences of the breach that arise according to the usual course of things from the breach, and also for those consequences of the breach that would reasonably be supposed to be in the contemplation of both parties at the time they made the contract. However, damages that do not meet those criteria are beyond the scope of the risk that A undertook, and hence ought not be recoverable. That losses recoverable for breach of contract are those for which the party in breach has assumed responsibility has recently been reiterated in Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48; [2009] 1 AC 61 at [12], [17], [21], [31]-[32] and [87].
Relationship of Contractual Remoteness Rules to Assessing Compensation Under an Undertaking
59 Notwithstanding the significant differences that I have earlier pointed out between the giving of an undertaking as to damages and the entering of a contract, there are some similarities. A contract and an undertaking as to damages are both promises, both are entered into voluntarily, and both are legally enforceable devices for risk allocation. That the undertaking as to damages involves voluntarily coming to be under an obligation gives it an analogy to contract that it does not have to tort obligations and statutorily imposed obligations. The purpose of the undertaking as to damages is to lessen the risk that granting the interlocutory order will prove to be productive of harm that turns out not to have been justified. The undertaking as to damages lessens that risk by the party who seeks the interlocutory order undertaking the risk that harmful consequences will flow if it turns out that he or she does not have the underlying right in protection of which the interlocutory order is sought. When the undertaking as to damages is given to the court, and is known, or is likely to become known, to at least other parties to the litigation, it is reasonable that, like a contract, it be construed in an objective fashion. The scope of the power that the undertaking gives to the court to make an order "as the court may consider to be just" needs to be exercised bearing in mind the extent of the risk that the giver of the undertaking is reasonably to be understood as agreeing to bear. That risk would ordinarily include the risk of making good the consequences that would flow in the ordinary course of things from it eventuating that the plaintiff does not have the underlying right. If at the time the undertaking was given there was reason, because of particular facts known to the plaintiff, for the court or a relevant person affected by the interlocutory order to understand that the plaintiff was undertaking some wider risk than that, the scope of the undertaking would be construed as extending to that wider risk. But I cannot at present think of any circumstances in which it would be just for the court to enforce the undertaking as to damages to cover consequences of the granting of the interlocutory order and of the plaintiff turning out not to have the underlying right, where those consequences fell outside the scope of the risk that the plaintiff ought reasonably be understood to have been undertaking by proffering the undertaking. In this way, the rationale for the rules concerning remoteness of damage in contract have a similarity to the rationale by reference to which a court fixes just compensation under an undertaking as to damages (absent special circumstances), notwithstanding the significant differences between a contractual obligation and an undertaking as to damages.
60 This view is consistent with the earlier case law about the manner in which compensation is assessed under an undertaking as to damages. From quite early in the history of the undertaking as to damages some connection has been noted between the principles that are applied to assess the compensation under such an undertaking and the principles on which damages for breach of contract are assessed. Thus, Pearson J has said that if the damages sustained are "of such a nature that if it were a case of suing on a contract they would be too remote, then they are not damages which the Court on such an undertaking ought to allow": Hunt v Hunt (1884) 54 LJ Ch 289 at 291. Similarly in Smith v Day Brett LJ at 428 said:
"If damages are granted at all, I think the Court would never go beyond what would be given if there were an analogous contract with or duty to the opposite party … in such a case the damages to be allowed are the proximate and natural damages arising from such a breach, unless as in Hadley v Baxendale , notice had been given to the opposite party, of there being some particular contract which would be affected by the breach." Similarly at 430 Cotton LJ said: "I think that the damages must be confined to loss which is the natural consequence of the injunction under the circumstances of which the party of obtaining the injunction has notice …"
61 Lindley LJ, with whom Lopes and A L Smith LLJ agreed, said in Schlesinger v Bedford (1893) 9 TLR 370 at 370-371, in a passage quoted with approval by Aickin J in Air Express at 264:
"The real nature of an undertaking of this kind and the extent to which damages ought to be awarded thereunder were carefully explained by the late Master of the Rolls in the well-known case of Smith v Day . That case was instructive for this reason, that it showed that all the remote consequences of obtaining an injunction which was afterwards dissolved, were not to be taken into account in assessing the damages to be paid to the defendant under the plaintiff's undertaking. It would be unduly straining such undertaking to include in it damages which did not naturally flow from the injunction. In Smith v Day (1882) 21 Ch D 421 it was held that the damage was too remote. The defendant there claimed that he had lost a good tenant by reason of the injunction, but it turned out that there had not at the date of the injunction been any agreement for a lease, although negotiations had been entered into with a view to a lease. That case was followed by Ex parte Hall; In re Wood (1883) 23 Ch D 644, where a receiver obtained an injunction restraining a man from the selling of certain goods, and damage resulted from the receiver restraining him from removing the goods. The Court held that the man against whom the injunction was obtained was not entitled to recover any damage except such as resulted naturally from his being restrained from selling and that the damage was too remote. So here the plaintiffs ought not to be exposed to damages which were not fairly consequential upon the injunction, and which they could not have foreseen when the injunction was granted."
62 All these English cases refer to the principles for remoteness of damage in contract as setting an outer limit on the amount of compensation recoverable under an undertaking as to damages, but not necessarily stating the amount of compensation that is actually recoverable.
63 In Air Express at 266 Aickin J accepted that the contractual rules for remoteness of damage were "at least a prima facie guide" to the quantum of damage recoverable under an undertaking of damages. He continued, at 266-267:
"In a proceeding of an equitable nature it is generally proper to adopt a view which is just and equitable, or fair and reasonable, in all the circumstances rather than to apply a rigid rule. However the view that the damages should be those which flow directly from the injunction and which could have been foreseen when the injunction was granted, is one which will be just and equitable in the circumstances of most cases and certainly in the present case. No doubt the view as expressed in the two decisions of the Court of Appeal does not constitute a rigid rule and circumstances may sometimes require a different approach. However it will in my opinion be seldom that it will be just or equitable that the unsuccessful plaintiff should bear the burden of damages which were not foreseeable from circumstances known to him at the time."