CASE NOTE

DAMAGES FOR LOST When a contract is breached The assessment of

PROFITS—A QUESTION the question often arises as to contractual damages in
the extent of damages that may
OF REMOTENESS Australia relies on the well
be recovered by the aggrieved
established doctrine set
STUART PTY LTD V party. Damages that naturally
arise are generally recoverable out in Hadley v Baxendale
CONDOR COMMERCIAL (1854) 9 Ex 341, an old but
but compensation for the more
INSULATION PTY LTD remote and less foreseeable still very relevant English
[2006] NSWCA 334 damages will depend very much case.
Scott Alden, Partner on the facts of each individual
case. A recent decision of the
Alyson Eather, Solicitor Court of Appeal regarding a claim
TressCox Lawyers, Sydney for loss of profits went through
the relevant factors to consider in
relation to the recovery of remote
damages.
The assessment of contractual
damages in Australia relies on the
well established doctrine set out
in Hadley v Baxendale1 an old but
still very relevant English case.
This case set out the two limbs of
contractual damages being those:
1. arising naturally, i.e. according
to the usual course of things; or
2. 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.
It is the second limb which
was relevant in this case which
considered the situation where
a contractor sought damages
from its subcontractor for
loss of profits in a potentially
lucrative contract where that
contract was terminated due
to the subcontractor’s faulty
workmanship.
Stuart (the contractor) entered
into a contract with the
Commonwealth of Australia
to replace wool insulation in
residential properties as part
of the Sydney Aircraft Noise
Insulation Program. Relevant
to this case, the work to be
carried out on each property was
its own discrete contract, and
whilst it was expected that the
government would enter into a
number of such contracts with

56 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER 2007

Stuart, due to past experience and
other factors, this was not certain.
Stuart subcontracted the work
to Condor (the subcontractor)
which failed to properly box some
downlights prior to installing the
insulation leading to a fire at five
of the properties. Following a
quality audit the Commonwealth
terminated the contract with
Stuart for faulty workmanship and
Stuart brought an action against
Condor for loss of profits resulting
from the loss of this contract and
also the potential profits in the
expected large number of future,
but now lost, contracts. At first
instance the trial judge found
that the faulty workmanship
by the subcontractor was the
reason for the termination of the
contract between Stuart and the
government but that the claim for
lost profits for future contracts
was too remote. Stuart appealed
this decision to the Court of
Appeal.
The Court of Appeal, in this case,
confirmed that when considering
contractual damages the two
limbs of Hadley v Baxendale set
out the relevant tests and then
proceeded to consider a number
of subsequent decisions which
have applied and clarified these
tests on their particular facts.
These subsequent cases have
established the following:
(a) Not every type of damage
reasonably foreseeable by the
parties when the contract is made
can be considered as arising
naturally or in the contemplation
of the parties.2
(b) It is not enough that, in fact,
the plaintiff’s loss was directly
caused by the defendant’s
breach.3
(c) The crucial question is
whether the loss of the particular
kind was within the defendant’s
contemplation.4
(d) Damages are not necessarily
too remote merely because
their likelihood is less than an may lead to agreement not being
even chance, the relevant test reached on the contract or to
is whether they are ‘not unlikely difficult risk discussions at the
to occur’. It is clear that ‘a great commencement of a project when
many extremely unlikely results the parties are more interested in
are reasonably foreseeable’.5 focussing on the positive aspects
of the project.
(e) It is clear that a general loss of
profits is recoverable but loss of Notwithstanding this difficulty
profits from a specially lucrative it is advisable for parties to
contract of which a defendant is engage in a risk identification
unaware is not. The parties must and allocation process in relation
contemplate both the general to performance and non–
nature of the loss or damage performance of their contracts.
and the general manner of its This ensures that the parties are
occurrence.6 fully aware of their position at
the outset and are then able to
(f) The law is conscious of the
make informed decisions about
injustice of visiting the party in
proceeding to contract and pricing
breach with the consequence of a
for potential risks and damage.
loss that is not within that party’s
reasonable contemplation when
contracting.7 REFERENCES
In this case the court found that 1. (1854) 9 Ex 341
the subcontractor was not liable
2. C Czarnikow Ltd v Koufos
for these damages as they were
[1969] 1 AC 350
outside of the second limb in
Hadley v Baxendale. In finding 3. ibid
this the court focussed on the
4. ibid
disparity between the price
5. R&H Hall Ltd v WH Pim (Junior)
payable to the subcontractor
& Co Ltd (1928JJ) 33 Com Ca 324;
for the work and the very large
[1928] All ER 763 at 388
and disproportionate claim for
damages for lost profits. As a 6. Alexander v Cambridge Credit
result of this disparity it was Corporation Limited (1987) 9
seen that the presumption of NSWLR 310
acceptance by the defendant of
7. Castle Construction Pty Limited
the risk, due to actual knowledge
v Fekala Pty Limited [2006]
of the potential damage at
NSWCA 133
the time of contract, had been
rebutted.
It is highlighted in the judgement
that one solution to this potential
problem of uncertainty in relation
to the recoverability of damages
following a breach is the inclusion
of an express clause in the
contract which clearly allocates
the risk in the event of the breach
occurring as well as identifying
the damage which may flow and
responsibility for that damage. Of
course parties are often unwilling
to clearly identify and allocate all
potential risks and damage at
the start of a project, particularly
the higher value risks, as this
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #117 NOVEMBER/DECEMBER 2007 57