Limits on the damages recoverable for breach of contract

In El Ali v Tritton [2019] NSWCA 111, the Court of Appeal of the Supreme Court of New South Wales (Court) took a narrow approach in assessing the losses recoverable by a buyer where the seller breached a contract for the sale of land.

The Court applied Baron Alderson’s formulation for breach of contract in Hadley v Baxendale.

Background

Mr El Ali was the owner of vacant land which he held subject to a mortgage.  On 24 July 2015, Mr El Ali entered into a contract for the sale of the land located on Edward Street, Sylvania (Property) with Mr and Mrs Tritton (the Trittons) for the sum of $740,000 (Contract).

On 22 July 2015, the Trittons paid a deposit of $74,000 to Metricon Homes under a preliminary building contract.

The Trittons proposed to finance the purchase of the Property using personal savings, a family loan and a loan from La Trobe in the sum of $444,000.

On 14 August 2015, the date nominated for completion, completion of the sale did not occur. On 19 August 2015, the Tritton’s solicitors served  Mr El Ali with a Notice to Complete which required that the sale be completed by no later than 3.00pm on  4 September 2015.

Mr El Ali’s solicitors failed to attend the settlement on 4 September 2015. On 22 September 2015, the Tritton’s solicitors wrote to Mr El Ali requesting that arrangements be made to effect settlement by 25 September 2015.

On 8 October 2015, Mr El Ali issued a Notice of Termination citing his inability to complete the sale.

In October 2015, Westpac (as mortgagee) took possession of the Property and transferred its interest in the Property to JGYM Pty Ltd (JGYM).

On 28 October 2015, the Trittons commenced proceedings in the Supreme Court of New South Wales seeking an order for specific performance of the Contract.1

In December 2015, JGYM received a report valuing the Property at $900,000.

The Trittons made multiple offers between December 2015 and February 2016 to purchase the Property from JGYM.

In February 2016, the Trittons purchased a block of vacant land in Grays Point for $775,000 and entered into a contract with a builder to construct a house on the land for $600,000. The building costs were $128,000 more than the building costs payable under the building contract with Metricon Homes.

In April 2016, JGYM sold the Property to a third party for $800,000.

Proceedings

In June 2016, the proceedings were remitted to the District Court.  In the statement of claim, the Trittons abandoned their claim for specific performance and sought damages for breach of the Contract.

The primary judge found in favour of the Trittons, and awarded damages in the sum of $230,922.34 (including interest).2

The damages were categorised as follows:

  1. Expectation loss in the amount of $60,000, being the difference between the value of the Property as at the date  it was sold by JGYM for $800,000 in April 2016, and the purchase price in the Contract which was $740,000.
  2. Reliance costs in respect of increased building costs in the amount of $128,000, being the difference between the Tritton’s original building contract with Metricon Homes for $472,000 in respect of the Property and the Tritton’s building contract for $600,000 in respect of the vacant block of land at Grays Point.
  3. Reliance costs in relation to rental payments in the amount of $21,945 which the Trittons were required to pay as a result of Mr El Ali’s breach, calculated from the date of the breach on 14 August 2015 to 29 February 2016, being the date the Trittons contracted to purchase the vacant block of land at Grays Point.
  4. Reliance costs in relation to a portion of the interest payable on the family loan in the amount of $3,915.

Mr El Ali appealed the primary judge’s decision, arguing that the primary judged had erred in his assessment of damages.

Decision

The Court took a narrow approach to losses recoverable for breach of the Contract.

Expectation Loss

The Court said that:

‘where a party sustains a loss by reason of a breach of contract, he or she 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.’3

The primary judge relied on the reasoning of Lord Wilberforce in Johnson v Agnew who stated that:

In cases where a breach of a contract for sale has occurred, and the innocent party reasonably continues to try to have the contract completed, it would to me appear more logical and just rather than tie him to the date of the original breach, to assess damages as at the date when (otherwise than by his default) the contract is lost.4

Damages for breach of contract are generally assessed as at the date of the breach. Mason CJ in Johnson v Perez,5 stated that this rule is not universal and it ‘must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered’.6

The Court held that damages should be assessed as at the date the remedy of specific performance was no longer available and the Contract was lost. The selection of a date later than the initial breach on 14 August 2015 was necessary to properly compensate the Trittons. The Court saw no reason to interfere with the awarded damages.7

Increased Building Costs

The Court adopted the approach of the High Court in European Bank Ltd v Evans in relation to the increased building costs.8  As in Hadley v Baxendale, the respondents were entitled to recover damages arising naturally and things that 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 breach.9

The Court held that it was not within the reasonable contemplation of the parties that the Trittons would purchase a different property which resulted in a different home to be constructed from which they had been intending to build on the Property.10 On application of the principles of remoteness, the test was not satisfied in this case on the basis that there was no evidence that there was relevant knowledge about the Tritton’s intention.  This award was set aside.

Rental Payments

The primary judge awarded damages in relation to rental payments on the grounds that the Trittons would have occupied the Property following completion of the building work. The Court held that this aspect of the damages award was too remote as even if the Contract was completed, the Tritton’s would have paid rent whilst construction took place at the Property.
 
Interest on the Loan

The financier who provided the funds was not identified and there was not sufficient evidence that the Trittons had an obligation to repay the family loan. The affidavit of Mr Tritton declared that the interest was paid by him to an unidentified financier by direct debit each month. Mr Tritton also asserted that his ‘father in law’ obtained a ‘reverse mortgage’ on his property. However, the bank statement annexed to Mr Tritton’s affidavit did not disclose the identify of the financial institution or the holder of the account.

The Court deemed the evidence to be unpersuasive. The Trittons did not establish that they paid interest or were entitled to claim damages for the payment of interest. This award was set aside.

Ultimately, the Court set aside the award of damages of $230,922.34 and awarded the Trittons damages of $66,934.16. The costs of the appeal were awarded to Mr El Ali.

Conclusion

In contract, damages seek to put the injured party in the position they would have been in had the contract been performed. Purchasers cannot recover damages considered too remote if a contract for the sale of land is breached. 

In this case, the rental payments and building costs were found to be too remote and did not come within the rule established in Hadley v Baxendale.

The claim in respect of the interest on the loan failed because it could not be established that the loan actually existed.

03 October 2019
Property Updates
AUTHOR
Peter Beekink
Partner
SERVICES
Property and Leasing


FOOTNOTES

[1] El Ali v Tritton [2019] NSWCA 111 [23]

[2] El Ali v Tritton [2019] NSWCA 111 [33]

[3] Robinson v Harman (1848) 154 ER 363 [365]

[4] Johnson v Agnew [1980] AC 367 [401].

[5] Johnson v Perez [1988] HCA 64 [355] – [356]

[6] El Ali v Tritton [2019] NSWCA 111 [43]

[7] El Ali v Tritton [2019] NSWCA 111 [54].

[8] European Bank Ltd v Evans [2010] HCA 6 [13].

[9] El Ali v Tritton [2019] NSWCA 111 [58].

[10] El Ali v Tritton [2019] NSWCA 111 [60] – [62].