Damages: Loss of Profit on Resale of Land By Paul Anderson | September 2006
The recent Court of Appeal decision of Castle Constructions Pty Limited v Fekala Pty Limited highlights the difficulties faced by a purchaser of land for development in claiming damages in the form of lost profit following breach by the vendor.
Facts At public auction the purchaser contracted to purchase a property for $3 million from mortgagees exercising power of sale. The premises constructed on the land were equipped as a private hospital but its use for this purpose had been suspended. Following the failure of the purchaser to complete the purchase on the due date for settlement, the vendors issued a Notice to Complete. However, on the date specified for settlement under the Notice, it was the vendors who could not complete. The transfer had not been signed by all of the vendors (there were 37 involved). The purchaser gave Notice of Termination of the contract for breach. There was evidence suggesting that the purchaser had changed its mind about the commercial viability of the project and in fact welcomed the vendor’s failure to complete. The vendors unsuccessfully sued for an order that the contract be performed in its terms and an enquiry was ordered into the damages suffered by the purchaser as a result of the vendors’ breach. The purchaser claimed damages (some might say in an opportunistic fashion)of $3,598,000. This sum represented the estimated profit lost if the purchaser had been able to resell the land with a development approval for the construction of 52 home units on the land.
Judgment The leading judgment was delivered by President Mason, with whom Justice Beazley agreed. His Honour considered three issues: • Causation; • Remoteness; and • Mitigation. Justice Bryson only considered the first question of Causation.
CAUSATION - WAS THE CLAIMED LOSS CAUSED BY THE BREACH? A plaintiff seeking damages for a particular loss must prove that the loss was caused by the defendant’s breach.
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Subject to consideration of the other issues, President Mason found that the purchaser had established, on the balance of probabilities, the profit it would have expected to make had the contract been completed and the property resold with development approval. This was despite that “the purchaser rejoiced secretly when the vendors were hoist on the petard of their own Notice to Complete”. Justice Bryson disagreed. He agreed with the trial judge Justice Palmer who found that the cause of any loss suffered by the purchaser was not the vendors’ breach but the purchaser’s “independent decision…not to proceed with the venture at all”. In the view of Justice Bryson, this was sufficient to dispose of the appeal in favour of the vendors and there was no need for him to consider the other two issues raised by President Mason.
REMOTENESS - WAS THE LOSS TOO REMOTE? The second limb of Hadley v Baxendale establishes that a party seeking to recover unusual loss must show that the “loss was such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the Contract, as a probable result of the breach of it.” A buyer may acquire land for a number of purposes including letting, business purposes, personal occupation or resale. There is no general rule that a buyer of land will recover the loss of profit on its resale. Nothing in the evidence disclosed grounds for concluding that the vendors when contracting ought reasonably to have contemplated any special loss as the likely consequence of failing to complete. In the words of President Mason: “The common contemplation of the parties would have been that, in that event, the purchaser would lose a property worth the price that the market then placed on the land with all the possibilities for redevelopment that it obviously had. The purchaser either chose not to prove what that value was or was unable to show that it was anything different to the contract price.” In his Honour’s view, claims for loss of profit on resale should be treated with caution for two reasons. Firstly, the law was conscious of the injustice of visiting the party in breach with the consequences of a loss that was not within that party’s reasonable contemplation when contracting. That party may have lost the opportunity to make an informed decision whether or not by entering into the contract to accept such risk, and whether to negotiate some exclusion from such liability. Secondly, there is a fear of double compensation. The market for land that is generally known to be capable of redevelopment builds into the present value the possibility of future gains stemming from such development.
FAILURE TO MITIGATE A plaintiff is under a general duty to take reasonable action to avoid or reduce any damage or loss sustained. President Mason held that the purchaser in this case had failed to discharge this duty because it “chose not to accept the vendors’ offer to complete the original contract according to its terms and under the supervision of the Court, such offer being propounded in the cross claim for specific performance filed” by the vendors.
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Result The result was that Justice Bryson found for the vendors on the first issue and President Mason,and Justice Beazley on both the second and third issues.
Conclusion The case highlights the difficulties for a purchaser claiming damages for loss of profit on resale of land following breach by a vendor. However, the broader application is somewhat tainted by the opportunistic approach adopted by the purchaser in claiming damages when it had decided not to proceed with the development for commercial reasons. What remains is a clear principle that the vendor must be aware of the purchaser’s intention to redevelop and/ or resell the land. This result could be achieved by the inclusion of a special condition in the contract or by exchange of correspondence before exchange of contracts. A purchaser should also be aware that if a vendor subsequently offers to complete the Contract in its terms, then rejection of such an offer could mean that the purchaser has failed to mitigate its loss and has therefore forfeited any right to claim damages for loss of profit on resale of the land.
For Further Information Please Contact Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
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