Thursday, November 3, 2011

Expectation damages - Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

I was involved in a matter yesterday where the parties were debating whether loss of profit is capable of being recouped in a contractual damages claim where there is no defined contract price for the term of the contract. This reminded me of the discussions in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64, and I thought I would give a brief case note on this.

Amann was a company that entered into a contract with the Commonwealth to provide aerial coastal surveillance for 3 years. The contract provided that if Amann failed to carry out the contract or comply with a condition to his or her satisfaction, the Commonwealth had power to give notice to Amann to show cause why the contract should not be cancelled.

Amann spent a lot of money purchasing aircraft for the contract, however when Amann commenced work under the contract, it didn't have enough aircraft to perform the work. The Commonwealth served a show cause notice, which was invalid. Amann alleged that the show cause notice was a repudiation of the contract and Amann terminated the contract. Amann sought damages for breach.

The primary Judge held that if the contract ran its full term Amann would have made a profit of $820,000 but because there was a 50% chance of the Commonwealth terminating the contract, the damages had to be reduced by half. The primary Judge awarded Amann damages for loss of profit but declined to award wasted expenditure, which represented the bulk of the damages claim. On appeal the Full Court awarded Amann damages inclusive of wasted expenditure. On appeal to the High Court, Amann was allowed wasted expenditure.

Referring to Robinson v Harman (1848) 1 Ex. 850, Mason CJ and Dawson J (at p80) set out the principle for the recovery of expectation damages (which usually takes the form of loss of profit):
The general rule at common law, as stated by Parke B. in Robinson v Harman, 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. 
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.

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