Amann Aviation Pty Ltd v Commonwealth of Australia

Re: AMANN AVIATION PTY LIMITED
And: COMMONWEALTH OF AUSTRALIA
No. N G10 of 1989
FED No. 43
Contract - Damages
22 FCR 527

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies(1), Sheppard(2) and Burchett(3) JJ.

CATCHWORDS

Contract - construction of contractual provision for termination; whether it exhaustively regulates the Commonwealth's right to terminate the agreement; whether it provides for termination on grounds not available at common law; whether power conferred on "the Secretary" must be exercised in good faith - breach of contract, anticipatory breach of contract and repudiation - whether time was of the essence in respect of the commencement of performance to be continued over a three year period - whether time was made of the essence - whether notice of termination was premature.

Damages - whether damages should be nominal or reduced under the principle of The Mihalis Angelos on the basis that the contract would if not repudiated and rescinded have shortly afterwards been validly cancelled - whether the party suing could show that a profit would have been earned - whether damages should be awarded for the loss of the chance of earning a profit - whether damages should be discounted for the chance that a profit would not have been earned or for other contingencies - whether "reliance" damages should be awarded in respect of very substantial expenditure wasted by reason of the breach - onus of proof where "reliance" damages are claimed - observations on whether damages can be awarded both for loss of profit and to recoup wasted expenditure - award of "reliance" damages on the basis that the Commonwealth's breach so cut short contractual expectations that an assessment on the normal basis was impossible - McRae v. Commonwealth Disposals Commission considered - discussion of depreciation as it affected a claim for loss of profits under a contract requiring the acquisition of specialized equipment - prospects of renewals of contract being obtained - qualification upon principle that a defendant must be presumed to act so as to reduce rather than enhance damages.

Words and Phrases - meaning of "as soon as possible"

HEARING

SYDNEY

#DATE 5:3:1990

Counsel for the Appellant: Mr R.J. Bainton QC with Mr Gracie

Solicitors for the Appellant: Messrs Owen Hodge and Son

Counsel for the Respondent: Mr D.E. Grieve QC with

Miss C.E. Adamson

Solicitors for the Respondent: Australian Government Solicitor

ORDER

The appellant bring in on a date to be fixed Short Minutes of Orders to reflect the reasons of the Court.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

As the facts have been fully described in the reasons for judgment of the learned trial Judge and in the reasons prepared by my brother, Burchett J., it would be profligate to repeat them. And, as many of the issues are not in themselves crucial, I shall deal only briefly with them.

Skywest Airlines Pty Limited ("Skywest") had a contract from the Commonwealth of Australia for the aerial surveillance of the northern coastline which was due to expire on 31 March 1987. At the end of 1986, the Commonwealth called for tenders for the contract thereafter. The lowest tender, that by the appellant, Amann Aviation Pty Limited ("Amann"), was accepted and Amann was so advised by letter on 12 March 1987. Thereafter, Amann undertook the task of acquiring overseas a sufficient number of planes and of having them equipped to meet the tender specifications.
The task turned out to be a difficult one for finance had to be obtained and suitable planes located, purchased and modified. Amann had dissembles the state of its preparation. The first aircraft was not acquired until June 1987. Once located and purchased, the aircraft had to be modified for the task, flown to Australia, checked and certified as meeting Australian requirements. Many delays inevitably occurred.
In the result, Amann was slower than it had hoped in obtaining its fleet of planes. In the meantime, Skywest had continuously pressed the Commonwealth to terminate the agreement with Amann and to reinstate it as the contractor. It was successful in this endeavour and when, on 12 September 1987, Amann commenced operations, officers of the Commonwealth inspected the aircraft which Amann then had at the surveillance bases and listed the many ways in which Amann failed on that day to meet its contract. During the course of the afternoon, the Commonwealth served on Amann a notice purporting to terminate the contract by reason of Amann's failure to comply with the contract.
The trial Judge held that this notice was not effective to terminate the contract and that the contract came to an end three days later on 15 September 1987 when Amann accepted the Commonwealth's notice as a repudiation of the contract.
The tender had not specified 12 September 1987 as the date for the commencement of operations, but provided:-

"The Contractor will take over the sectors he is contracted for from the existing contractor on a sector by sector basis as soon as possible after receipt of the Notice of Acceptance and expiry of the existing contract. The existing contract is that between the Commonwealth and Skywest Airlines Pty Ltd currently expiring on 31 March 1987."

Amann was not advised until 12 March 1987 of the acceptance of its tender and had specified in its tender for a preparation period of 6 months. The contract necessarily implied that the starting date would be arranged. Having regard to the subsequent correspondence between the parties, the discussions between them and the actions taken, I am satisfied, as was the trial Judge, that 12 September 1987 was subsequently agreed as the date upon which Amann would and was contractually bound to commence operations in accordance with the contract.

The contract did not specify the precise number of aircraft required. Clause 3.11 provided:-

"3.11.1 The Contractor shall provide sufficient aircraft to undertake the task making necessary allowance for scheduled maintenance.

3.11.2 The Contractor shall provide a minimum number of backup aircraft relative to the number of contracted operating aircraft as follows:

(a) one, two or three operating aircraft - one backup aircraft

(b) four, five or six operating aircraft - two backup aircraft

(c) seven or eight operating aircraft - three backup aircraft

The trial Judge found that 8 operating aircraft and 3 backup aircraft would have satisfied the flight requirements. Indeed, 8 operating aircraft would not have been required every day. The tender stated that it was "based upon utilising 11 operating aircraft and 3 100% task ready back-up aircraft and 2 other aircraft that can be quickly converted to task ready requirements." The tender specified 14 pilots.

The tender specified that the 14 aircraft would be Commander 680F and 680FL aircraft and that the other 2 aircraft available would be a Beechcraft Queen Air and a Beechcraft Duke. Subsequently, Amann sought and was granted permission to substitute Commander 681 turbo-prop aircraft. The trial Judge held that Amann's aircraft were prima facie suitable for the task, subject to their modification to meet the tender specifications.
By August 1987, it was plain to the Commonwealth that, on 12 September 1987, Amann would not have in Australia all the aircraft it was contracted to provide and that the aircraft which it had would not, in all respects, comply with the tender specifications. The Commonwealth then had it in mind that when, on 12 September 1987, Amann failed to meet the terms of the contract, the Commonwealth would give notice on that date terminating the contract. Skywest was advised of the Commonwealth's intentions and held itself in readiness to continue coastal surveillance. Skywest had indeed threatened the Commonwealth that, unless the Commonwealth took this action, Skywest would disband its fleet leaving the Commonwealth without adequate coastal surveillance.
The notice of 12 September 1987, which was signed by "Roger Beale, for the Secretary", read inter alia:-

"I give you notice that I hereby terminate the abovementioned contract, effective from the expiration of Saturday 12 September 1987, because your company has failed to comply with the requirement of the contract to commence performance of coastal surveillance services from all bases in accordance with the contract, on 12 September 1987. ...

As at today's date I have ascertained from my officers that your company has no aircraft available for coastal surveillance services, fully equipped as required by the contract and having Australian registration. The availability of the aircraft at the surveillance bases today, was as set out in the attachment of this Notice of Termination. Your company is seriously deficient in not having available the requisite number of aircraft equipped in conformance with the contract, and this deficiency is, in my view, so serious a breach of your company's obligations that I am not prepared to allow the contract to continue."

I now turn to Clause 2.24 of the contract which provided:-

"2.24 TERMINATION

Whenever and so often as the Contractor fails to carry out the Contract or comply with a condition of the Contract to the satisfaction of the Secretary then in either of these events the Secretary may, by notice in writing, require the Contractor to show cause in writing to the satisfaction of the Secretary, why the Contract or any specified portion thereof should not be cancelled. If the Contractor fails to show cause in writing, as so required, the Secretary shall be entitled to treat the Contract or any specified portion thereof as having been cancelled and may declare the whole or any part of the security lodged by the Contractor forfeited by the Commonwealth, and thereupon the amount so declared to be forfeited shall become the property of the Commonwealth absolutely. The Commonwealth shall, in addition, be entitled to recover from the Contractor any damages, losses costs and expenses which the Commonwealth may sustain, or incur in consequence of such cancellation of the Contract or portion thereof as the case may be. A certificate by the Secretary stating the amount of any damages, losses, costs and expenses sustained or incurred by the Commonwealth in consequence of the cancellation of the Contract or portion thereof shall be conclusive evidence of the matter stated.

The Secretary will likewise be entitled to treat the Contract as having been cancelled if the Contractor commits an act of bankruptcy or enters into a composition with creditors or assigns his estate for the benefit of creditors or, if the Contractor, being a company, goes into liquidation otherwise than for the purpose of reconstruction."

"Secretary" was defined in these terms:-

"'Secretary' shall mean, except where otherwise stated, the person for the time being holding the office acting in or performing the duties of Secretary of the Department of Transport or his authorised representative;"

In my opinion, the words "a condition of the Contract" in C1. 2.24 referred to all the terms of the contract with which Amann, as contractor, was bound to comply. The tender documents did not distinguish between terms which were essential and terms which were of less significance. In the tender documents, the word "condition" was used to refer generally to the terms of the tender.

Clause 2.24 therefore eschewed the distinction between a condition, being a term going to the essence of the contract, breach of which would justify rescission, and a warranty, breach of which would give rise only to a claim for damages. To this extent, C1. 2.24 reflected the view expressed in HongKong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha Ltd (1962) 2 QB 26 and Ankar Pty Ltd v. National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 that the right to rescind can depend upon the extent and gravity of the breach relied on rather than on the classification of the broken term as essential or non-essential. In HongKong Fir at p 57, Sellers L.J. said:-

"The charterer may rightly terminate the engagement if the delay in remedying any breach is so long in fact, or likely to be so long in reasonable anticipation, that the commercial purpose of the contract would be frustrated."

At pp 66, Diplock L.J. said:-

"The test whether an event has this effect (permitting rescission) or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings.?"

See also the remarks of Mason A.C.J., Wilson, Brennan and Dawson JJ. in Ankar at pp 561-2.

Clause 2.24 thus empowered the Secretary to treat the contract or any specified portion thereof as cancelled in the event of a breach of any term of the contract; but it required him before doing so to give notice to the contractor to show cause in writing to the satisfaction of the Secretary. As the Secretary was not a party to the contract, he was bound to act without actual bias and not capriciously and only after giving due attention to the interests of both parties. That was the purpose of the provision for notice. The provision would be frustrated if the Secretary could act only in the interests of the Commonwealth without taking account of matters that, after notice, the contractor put forward as a reason why cancellation should not be effected. Cf. Dixon v. South Australian Railways Commission (1923) 34 CLR 71 at pp 104, 112. Perini Corporation v. Commonwealth of Australia (1969) 2 NSWR 530. In considering cancellation, the Secretary would have regard to the ordinary principles of law as to rescission of contracts, for they reflect fair and accepted rules for regulating commercial disputes. But such principles would not be determinative, merely a relevant guide.
This being the agreed procedure for cancellation on breach, the Commonwealth was not entitled, of its own motion, outside the agreed procedure, to specify that a term was of the essence and to rescind forthwith for breach of that which, counsel has submitted, was an essential term going to the root of the contract.
Clause 2.24 did not, however, deal with the case of repudiation by the contractor, using that term in its strict sense as referring to an anticipatory breach. Thus, Clause 2.24 was inappropriate to cover an instance where, before the time for performance arose, the contractor informed the Commonwealth that it did not intend to perform the contract. It would be straining Clause 2.24 to read it as requiring the Commonwealth in such a case to wait until the time for performance had arrived and for the Secretary then to give a notice to the contractor asking for a reason as to why the contract should not be cancelled. I agree with the trial Judge in this respect.
Amann did not expressly repudiate the contract. The issue is whether, by its conduct, it did so. Such a case will occur when the actions of a party deprive the other party of "substantially the whole benefit" of the contract or frustrated the commercial purpose thereof. See HongKong Fir Shipping case, cited above, Federal Commerce and Navigation Co Ltd v. Molena Alpha Inc (1979) AC 757 at pp 778-9; Shevill v. The Builders Licensing Board (1982) 149 CLR 620 at pp 625-6, 633; Progressive Mailing House Pty Ltd v. Tabali Pty Ltd (1985) 157 CLR 17 at pp 31, 40, 55 and Laurinda Pty Ltd v. Capalaba Park Shopping Centre Pty Ltd (1989) 63 ALJR 372 at pp 376, 380, 387. In both Shevill's case at p 633 and in Laurinda's case at p 387, reference was made to the remarks of Lord Wright in Ross T. Smyth and Co Ltd v. T.D. Bailey, Son and Co. (1940) 3 ALL ER 60 at p 71, that "repudiation of a contract is a serious matter, not to be lightly found or inferred". In Capalaba Park Shopping Centre at p 376, Mason C.J. pointed out, relevantly to the present case, that:-

"There is a difference between evincing an intention to carry out a contract only if and when it suits the party to do so and evincing an intention to carry out a contract as and when it suits the party to do so. In the first case the party intends not to carry out the contract at all in the event that it does not suit him. In the second case the party intends to carry out the contract, but only to carry it out as and when it suits him. It is much easier to say of the first than of the second case that the party has evinced an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with his obligations and not in any other way. But the outcome in the second case will depend upon its particular circumstances, including the terms of the contract. In some situations the intention to carry out the contract as and when it suits the party may be taken to such lengths that it amounts to an intention to fulfil the contract only in a manner substantially inconsistent with the party's obligations and not in any other way."

The trial Judge dealt with this aspect of the matter only briefly when he said:-

"The applicant never contended that it was not bound by the contract. On the contrary, it offered performance on the due date, 12 September. ... the applicant always... claimed that it was willing to perform."

But it is, nevertheless, clear from his Honour's comments that he considered that such breaches as occurred did not go to the root of the contract and did not deprive the Commonwealth of substantially the whole benefit thereof.

By 12 September 1987, almost $6m had been expended in equipping Amann for the contract. Amann had adequate equipment at each base. It had the pilots, observers and supporting ground staff. Three 690 turbo-prop aircraft, 8 681 turbo-prop aircraft and two 680FL piston engine aircraft had been purchased. Much expense had been incurred in their modification to meet the contract. On 11 September 1987, Amann wrote to the Commonwealth, inter alia, that:-

"4. NUMBER OF AIRCRAFT AVAILABLE a) 13 of the 14 aircraft have been purchased and paid for. b) The fourteenth aircraft has been purchased, is undergoing fitting for the contract and funds are available to complete the purchase. c) All aircraft are in Australia with the exception of aircraft number 11, expected 12th September, 1987 aircraft number 12, expected 19th September, 1987 aircraft number 13, expected 26th September, 1987 aircraft number 14, as to which we do not have a firm arrival date. Aircrafts numbers 1 to 7 are on the Australian register and ready to fly. As you know, the initial tender called for the provision of 11 aircraft only. You will also appreciate that all but two of the aircraft have recently been flown from the United States without any major mechanical problems."

As the letter showed, Amann was well on the way to providing the number of aircraft it had specified and was not attempting to retract from its tender. It should also be noted that Amann did not seek in the letter to delay commencement of operations.

On 12 September 1987, Amann's actual performance was faulty. The trial Judge found:-

"On 12 September, the applicant provided only seven aircraft as airworthy and, of these, one had a fuel leak and appeared to be temporarily unserviceable. Six, or perhaps seven, aircraft were significantly less than the 11 aircraft contemplated by the contract as 'sufficient'."

Even so, Amann had 10 aircraft in Australia and other aircraft were en route. Not all modifications required by the specifications had been carried out but Amann was in the course of bringing all its aircraft up to contract specification.

Three of the deficiencies in all the aircraft were minor, even trivial. The aircraft lacked bubble windows and a drop hatch and the seating for observers was not fully adjustable. These deficiencies, which Amann had planned to rectify, did not provide any reason for termination.
The most serious deficiency was that the turbo-prop aircraft did not have the specified endurance. This came about because it was found that the turbo-prop aircraft did not, without additional fuel tanks, have the specified flying time.
Amann intended to overcome this problem in two ways. Firstly, Amann had purchased at a late date the two piston engined 680FL aircraft. These had the endurance but there had not been time to install in them the special avionics. Secondly, it had arranged for the manufacture and installation of additional tanks in the turbo-prop aircraft. His Honour thought that it was reasonable to expect that it would take approximately 2 months to install the tanks and to obtain either an exemption under Regulation 227(11) or a recertification of the aircraft in respect of the maximum takeoff weight. Having read the evidence on this point, I am content to accept the view of counsel for the Commonwealth that, while the tanks could have been installed in all the aircraft within 2 months, it may have taken longer to resolve the question of recertification or exemption. Even without the greater endurance, Amann's aircraft were capable of carrying out all surveillance flights save during certain eventualities, particularly on two or three of the scheduled flights in certain weather.
Amann did not fly all the scheduled flights on 12 September 1987. But the failure to fly some flights on that day was not crucial. It is difficult to conclude that Amann would, for any significant time, have been unable to provide a satisfactory coast watch service or that Amann was not very close to providing all the aircraft which it had specified in its tender in the condition required by the contract.
I agree with his Honour's view that the breaches by Amann of its contractual obligations did not amount to a repudiation of the contract, that is to say, they did not go to the root of the contract or deprive the Commonwealth of substantially the whole benefit thereof. I also agree with the trial Judge that adverse inferences as to the Amann future performance could not be drawn from the already encountered problems. His Honour said:-

"The difficulties encountered by the applicant in starting up its activities were one thing. It cannot be assumed, or inferred from this, that the applicant would have experienced similar problems once its operation was in place."

I therefore agree with the trial Judge that the Commonwealth was not entitled to rescind on 12 September 1987, on the ground of repudiation by Amann and that, as the procedure followed by Clause 2.24 was not complied with, the notice given by the Commonwealth on 12 September 1987 was invalid. Amann was entitled to accept this notice as a repudiation of the contract, which it did on 15 September 1987. Amann is therefore entitled to any damages suffered by it as the result of the Commonwealth's repudiation of the contract.
It is convenient now to discuss the factual issue whether, if the Commonwealth had not given the notice which it gave on 12 September 1987, the Secretary would, on or shortly after 12 September 1987, have acted under Clause 2.24 and terminated the contract because of breaches which had occurred. The trial Judge thought that there was a 50% chance that this was so. However, his Honour thought that the Secretary was entitled to act in the best interests of the Commonwealth and that there was no duty of fairness to the contractor. For the reasons I have given, I think that this view was incorrect. Moreover, I am satisfied that the Commonwealth had concluded that it would be difficult to terminate the contract once Amann had effectively taken over the running of the operation, because, by that time, the operation of Skywatch may have been dismantled, at least in part, and Amann would have been fulfilling the coastal surveillance duties and improving its position day by day. And the provision in Cl.2.28 for arbitration, which I do not set out, may have made cancellation under Cl. 2.24 difficult, as the trial Judge pointed out. I am therefore satisfied that the 50% allowed by his Honour was excessive, and based in part upon an error of law. Taking into account his Honour's view that the Commonwealth was extremely anxious to terminate the Amann contract, I would accept a 20% chance that, had the Commonwealth not given the notice on 12 September 1987, the Secretary would successfully have terminated the contract thereafter pursuant to Clause 2.24.
I turn now to the question of damages.
My brother Burchett J. has considered in detail the many issues which arise as to damages. It is only necessary for me to deal with the major points.
The trial Judge assessed damages on the basis of loss of profits. But these were hypothetical. Amann had tendered a low price, no doubt to become the successful contractor. Taking the cost and the value of the aircraft, absent the contract, into account, Amann could not, in my view, have made a significant profit from a contract limited to three years. The trial Judge calculated a small profit of $819,099. Any substantial profit lay in future extensions, for the position of a contractor was strong, as Skywest demonstrated. Future extensions of the contract were not only in the contemplation of both parties but probable. Amann's expenditure had therefore been directed in part to the chance of making a profit in the future.
Amann was entitled, in the event, to have its damages assessed on the basis of the expenditure rendered futile by the Commonwealth's repudiation, that is to say, to be compensated for the expenses it had incurred in reliance on the contract and in equipping itself for the contract. See McRae v. Commonwealth Disposals Commission (1951) 84 CLR 377; TC Industrial Plant Pty Ltd v. Robert's Qld Pty Ltd (1963) 37 ALJR 289; Cullinane v. British "Rema" Manufacturing Co. Ltd (1954) 1 QB 292; Anglia Television Ltd v. Reed (1972) 1 QB 60; C.C.C. Films (London) Ltd v. Impact Quadrant Ltd (1985) 1 QB 16; Treitel "The Law of Contract", 7th Ed pp 723-4; Greig and Davis, "The Law of Contract" pp 1355-60; "McGregor on Damages", 15th Ed paras 46-51.
Such a loss could not be claimed where, even if the breach of contract had not occurred, the returns from the contract would not have been sufficient to recoup the expenditure. See C.C.C. Films Ltd v. Impact Quadrant Films Ltd, cited above, at pp 32-41; Treitel pp 725-6; Greig and Davies pp 1356-8; McGregor para 51. However, the onus on this issue was on the defaulting party. In C.C.C. Films Ltd, Hutchison J. concluded at p 40:-

"It follows that, the onus being on the defendants to prove that the expenditure incurred by the plaintiffs is irrecoverable because they would not have recouped their expenditure (and that onus admittedly not having been discharged), the plaintiffs are entitled to recover such expenditure as was wasted as a result of such breach or breaches of contract as they have proved."

See also McRae's case at p 414; Albert and Son v. Armstrong Rubber Co (1949) 178 F 2d 182 at p 189 per Learned Hand C.J. As future extensions to the contract must be taken into account, being within the contemplation of the parties, the Commonwealth could not establish that, had the contract continued on foot, Amann would not have recouped its losses.

I turn now to the issue whether the loss so calculated should be reduced or extinguished by reference to the possibility that, if the Commonwealth had not renounced the contract, the Secretary may have taken steps to cancel the contract under Cl. 2.24.
Damages, as with other issues in a civil case, are assessed by reference to the civil standard of proof, namely, on the balance of probabilities. As Salmon L.J. said in Sykes and Ors v. Midland Bank Executor and Trustee Co Ltd and Ors (1971) 1 QB 113 at p 130:-

"If advice given negligently or in breach of contract has on a balance of probability caused the plaintiff to act to his detriment, I have never heard it suggested that the degree of that probability has anything to do with the assessment of damage. To hold that it has would, in my view, be contrary to principle and authority."

See also TCN Channel 9 Pty Ltd v. Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130, in which a submission was rejected that, in the assessment of damages for breach of contract, there should be imported a discount for vicissitudes such as is commonly allowed in the assessment of economic loss in personal injury cases.

Nevertheless, as the circumstances of commercial life are complex and varied, issues of chance and contingency may play a part. Some damages are speculative. The value of a chance or a possibility, when relevant, must be taken into account, if it can be calculated. See Chaplin v. Hicks (1911) 2 KB 786; Manubens v. Leon (1919) 1 KB 208; Howe v. Teefy (1927) 27 SR (NSW) 301; Otter v. Church, Adams Tatham and Co (1953) Ch 280; Fink v. Fink (1946) 74 CLR 127; McRae v. Commonwealth Disposals Commission, cited above. The value must be estimated though certainty is lacking. The greater the contingency, the less will be the value. In McRae's case, Dixon and Fullagar JJ. at p 411-2 cited with approval the remarks of Street C.J. in Howe v. Teefy at p 306 that:-

"The question in every case is has there been any actual loss resulting from the breach of contract complained of. There may be cases where it would be impossible to say that any assessable loss had resulted from a breach of contract, but, short of that, if a plaintiff has been deprived of something which has a monetary value, a jury is not relieved from the duty of assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty."

See also "McGregor on Damages", 15th Ed., paras 360-5.

An important distinction in this respect was drawn by Mahoney J.A. in Levi Strauss (Australia) Pty Ltd v. Mayne Nickless Ltd, (NSW Court of Appeal, unreported, 17 December 1976) when he said:-

"This distinction, between the loss of an identifiable thing and the loss of a chance, is of importance, both in determining whether the plaintiff has proved, on the probabilities, that he has suffered the loss for which he claims, and in quantifying that which has been lost in money terms."

His Honour also commented that:-

"If the plaintiff in Chaplin v. Hicks ((1911) 2 KB 786) could have satisfied the court, as a matter of probability, that she would have won the prize, no doubt she would have recovered the prize and not merely the money value of the chance of competing for it. And, if the court is satisfied as a matter of probability that the plaintiff will recover in this way, it would be wrong to discount the loss suffered because of the possibility that the loss might not actually have been suffered."

The trial Judge, who assessed as 50% the prospect that the contract would have been cancelled under Cl.2.24, considered that the loss of profits he would otherwise have allowed should be reduced by that proportion, because of the contingency. His Honour relied upon The Mihalis Angelos (1971) 1 QB 164. But that case is not apposite when the damages are based on proven reliance losses and when the contingency has a mathematical probability of only 20%. In The Mihalis Angelos case, a contingency that, if the charterers of a ship had not repudiated a charterparty, they would subsequently have cancelled the charterparty for non-performance, was taken into account to extinguish the damages otherwise allowable. The owners of the ship had accepted the repudiation of the charterers. At the time, the owners were in default and the charterers would "beyond doubt" have cancelled the charter when the ship reached the port of Haiphong. As Lord Denning M.R. said at p 196:-

"Seeing that the renunciation is the breach, the damages must be measured by compensating the injured party for the loss he has suffered by reason of the renunciation. You must take into account all contingencies which might have reduced or extinguished the loss."

His Lordship said at p 197:-

"Seeing that the charterers would, beyond doubt, have cancelled, I am clearly of opinion that the shipowners suffered no loss: and would be entitled at most to nominal damages."

Edmund Davies L.J. said at p 203:-

"The rights lost to the owners by reason of the assumed anticipatory breach were thus certain to be rendered valueless."

At p 210, Megaw L.J. said:-

"If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the right which he has lost, having regard to those predestined events."

That decision underlines the preference of the common law for reasonable certainty rather than speculation in the assessment of damages; it provides no support for discounting a proved loss by reference to an event which was unlikely to occur.

It is a relevant principle that damages for breach of contract should be assessed on the basis that, if the party in default had a way of performing the contract which would have mitigated the damages, the party should be assumed to have taken that course. Thus, in The Mihalis Angelos, Lord Denning said at pp 196-197:-

"It follows that if the defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed he will exercise it."

At p 203, Edmund Davies L.J. said:-

"The assumption has to be made that, had there been no anticipatory breach, the defendant would have performed his legal obligation and no more. 'A defendant is not liable in damages for not doing that which he is not bound to do': per Scrutton L.J. in Abrahams v Reiach Ltd (1922) 1 KB 477, 482, cited with approval by Diplock L.J. in Lavarack v Woods of Colchester Ltd (1967) 1 QB 278, 293."

It follows that, if a respondent has two means of complying with a contract, one of which will extinguish or mitigate the damages claimed, it may be assumed that he would have taken the path most favourable to him.

However, to take such an approach in the present case would be to extinguish the damages by reference to an event which was unlikely to happen. Such an approach was rejected in the TCN case, where Hope J.A. declined to calculate damages by reference to the alternative most favourable to the defendant for, as he said at p 156:-

"... consistently with the many authorities which establish that regard can be had to evidence of facts between the time when a cause of action arises and the time of trial in order to produce certainty where there would otherwise be uncertainty, the general preference of the law for fact rather than hypothesis is applicable to the principle under consideration. That principle does not require the assessment of damages to be based on a fiction in disregard of the actual facts."

In summary, therefore, I am of the opinion that it is improbable that the contract would have been terminated pursuant to Cl. 2.24. I am of the view that damages should be assessed on the footing that, had the Commonwealth not repudiated the contract, in breach of its obligations, Amann would have completed the contract and been in a favourable position for future contracts. No discount should be allowed for the possibility that, had the Commonwealth not repudiated the contract, events may have turned out otherwise. It was the Commonwealth's repudiation which brought the contract to an end and rendered futile Amann's expenditure and liabilities incurred.
The next issue is whether Amann incurred expenditure on the aircraft. The aircraft were purchased, modified and made ready for the contract at a cost of $5,281,521. Their agreed value after termination of the contract was only $917,329, for they had been equipped for a specialised contract and had little value absent that contract. The title to the aircraft was in CVC Investments Pty Limited, which had acted as a conduit for the financing of the acquisition and modification of the aircraft.
The arrangement between Amann and CVC Investments was never spelt out with clarity. However, the following minute of a meeting of directors of CVC Investments on 12 April 1987 appears to set out the substance of it:-

"CVC INVESTMENTS It was agreed that CVC Investments TRUST and AMANN Pty Limited would act as AVIATION PTY Trustee of moneys provided by LIMITED Wenola Pty Limited and, if necessary, from Southsea Investments Pty Limited which companies were providing the loan funds to enable the purchase of the aircraft in the name of CVC Investments Pty Limited. These aircraft would be hired to Amann Aviation so that an interest rate of 20% was derived by the Trust as bridging finance until the Commonwealth Bank took over the debt on the safe arrival of the aircraft in Australia and the finance contract with the Commonwealth being available."

This minute accords with Mr Amann's evidence that it was intended that CVC Investments would hold the title only until such time as Amann had made arrangements for Commonwealth Bank or other lease finance. It was contemplated that this would occur when the contract was in operation. Amann understood that it was liable to CVC Investments for losses on the aircraft.

His Honour held:-

"From the minute of the meeting held on 12 April quoted above, it appears that there was an understanding between the applicant and CVC that the applicant would take over the aircraft from CVC once the Commonwealth Bank finance had been arranged. From the note at the foot of the applicant's balance sheet as at 19 September (see above), it seems that the applicant had also agreed to indemnify CVC against any loss in connection with the coastwatch contract."

I agree with his Honour's finding. A court should not be slow to infer or imply an obligation to indemnify when one party places himself in a position of jeopardy at the request of and for the benefit of another. See Waring v. Ward 7 Ves 332; Eastern Shipping Co Ltd v. Quah Beng Kee (1924) AC 177; Newman v. McNicol (1938) 38 SR (NSW) 609; Yeung Kai Yung and Anor v. Hong Kong and Shanghai Banking Corporation (1981) AC 787 at p 796-8.

In the circumstances, the liability of Amann to indemnify CVC Investments for the difference between the sum paid on the aircraft $5,281,521 and their agreed value, $917,329, a net $4,364,192, must be taken into account. To this should be added the pre-operational expenditure of $854,943, the termination payments to employees of $143,049 and the security deposit of $113,000. The resultant sum is $5,475,184. I would allow interest under s.51A of the Federal Court of Australia Act 1976 (Cth).

I agree with the remarks as to costs made by Burchett J. and with the orders proposed by his Honour.

JUDGE2

In this matter I have had the opportunity of reading the judgments to be delivered by the other members of the Court. The facts of the matter and the relevant provisions of the contract have been referred to in the judgment of Burchett J. and it is unnecessary for me to set them out in detail in my own reasons. I am in substantial agreement with much of what Burchett J. has said but, regrettably, I differ from him in relation to some matters which, although small in number, are significant for the outcome of the appeal - not the cross-appeal, which I agree should be dismissed.

My first point of difference relates to the construction of clause 2.24 of the general conditions of contract. In this respect I am in agreement with the reasons and conclusions of Davies J.
The principal part of the contract is the document which is described as the Specification for Charter of Aircraft for Coastal Surveillance Services. This document is divided into four sections, Conditions of Tender, Conditions of Contract, Specification for Charter Aircraft Task and the Schedules. Section 1, which deals with Conditions of Tender, is not relevant to the present problem and need not further be referred to. Section 2, which includes clause 2.24, contains the conditions of contract and has been closely analysed by Burchett J. The critical provision of clause 2.24, which is headed, "Termination", consists of the words, "Whenever and so often as the Contractor fails to carry out the contract or comply with a condition of the Contract to the satisfaction of the Secretary ...". The first point to be made is that these words make a clear distinction between the contractor failing to carry out the contract and the contractor failing to comply with a condition of the contract. If "condition" means only a condition which goes to the root of the contract or which is fundamental to it, there is a real question whether the first limb of the clause was appropriately included because failure to comply with a fundamental condition would itself usually involve a failure to carry out the contract.
A more important consideration is that it seems to me unlikely that any of the provisions of section 2 of the contract would, in many cases, lead to the exercise of the power provided for in clause 2.24, whatever its ambit may be. The provisions of section 2 provide a comprehensive code to guide the parties in their ongoing relationship. I do not state the various matters with which section 2 deals exhaustively, but included amongst them are provisions dealing with assignment, the period of the contract, the security deposit, the format of accounts for payment, rise and fall, variations, instructions to the contractor's staff, notices, publicity, the contractor's dealings with South Africa, indemnification, liquidated damages, waiver, and settlement of disputes. Provisions of a different kind are those which deal with the obligation of the contractor to pay award rates, the observance by it of statutory obligations and failure to make flights in the manner required under the contract. It would seem to me that it would only be in relation to these last three matters that any question of the application of clause 2.24 could arise. That is provided one confines oneself to section 2 of the contract.
Once one leaves section 2 and goes to section 3, one encounters provisions which are much more likely to give rise, in the event of breach, to the need for the Secretary to invoke clause 2.24. Section 3 deals with the specification for the charter of the aircraft. This is where one finds the provisions which have been the subject of so much discussion in the argument and in the judgment of the learned primary Judge. It is here that one finds the performance requirements which are imposed by the contract. I do not refer extensively to the provisions of section 3 but I provide some examples. Clause 3.1.5 provides for the maximum hours' capacity of each base. Clause 3.1.6 provides for the aircraft, aircrew and related administration and resources which are to be provided at each operating base. It also provides for the number of hours to be flown, the limitations on the number of hours per day for which any particular observer may be flown, the operation of the aircraft at times to be nominated by the Department and the flexibility to operate which is required. Clause 3.2 provides for surveillance requirements. It indicates what matters are to be reported. Clause 3.3 provides for aircraft requirements. It is here one finds provisions as to the endurance of the aircraft, their capacity and the radio equipment with which they are to be fitted. Clause 3.3.1(k) provides for the bubble windows and clause 3.3.1(o) for the drop hatches which are the subject of contention between the parties.
Clause 3.4 deals with pilots' requirements, that is to say, what is or may be required of pilots, and clause 3.5 with aircrew requirements. There are a multiplicity of other provisions to which it is not helpful to refer in detail. It is enough to say that each of them specifies particular matters or standards with which the contractor is required to comply.
It is thus plain on the face of the contract that the most likely event which would lead the Secretary to exercise the power he has under clause 2.24 is a perceived breach by the contractor of one or more of the provisions of section 3. That being the case, it is important to observe at the outset that the word "condition" in the sense in which it is here under consideration, that is, in the sense of a term of the contract fundamental or otherwise, is not used in section 3. It thus becomes unhelpful to look at other provisions of section 2 of the contract, where the word "condition" is used in a number of places, for the purpose of seeing whether its use in those places is of assistance in determining the meaning it has in clause 2.24. Rather, the task, in my opinion, is to give the word meaning by considering the great variety of circumstances, most of which, if not all of which, if the clause is to be triggered, will arise by reason of breaches of the provisions of section 3.
The question is whether the parties intended that the operation of clause 2.24 should be limited to cases in which the common law would treat the breach relied upon as fundamental or to cases where it would treat the breach as being of an innominate term; see Hongkong Fir Shipping Co. Limited v. Kawasaki Kisen Kaisha Limited (1962) 2 QB 26 and Ankar Pty Limited v. National Westminster Finance (Australia) Limited (1987) 162 CLR 549. The strength of the view that the clause was intended to be restricted in this way arises from the serious consequences which may flow if the power is exercised and the fact that the contractor, for quite a minor breach, might lose the benefit of the whole contract. Coupled with this consideration is the circumstance that the contract provides in a number of places for liquidated damages which are to be paid in the event of particular breaches which are of a comparatively inconsequential nature.
To be measured against these considerations is, in my respectful opinion, the improbability that the parties intended that, in the course of the administration of a complex contract which was to be carried on over a number of years, either party was to be put in a position where a judgment had to be made, often of some nicety, whether a breach of section 3 of the contract was, or was not, of a particular quality.
A further factor is that the clause does not provide for termination whenever such a breach occurs, but provides that the Secretary may require the contractor to show cause to the satisfaction of the Secretary why the contract should not be cancelled. Although the Secretary is the contractor's servant, there is no warrant, in my opinion, for attributing to him the pre-disposition to act capriciously, arbitrarily or in bad faith. Furthermore, I agree with Davies J. that the better view of the authorities is that it would be unlawful for the Secretary to act in this way. In this regard I have found some assistance in the decision of the High Court in Dixon v. The South Australian Railways Commissioner (1923) 34 CLR 71 and in that of Macfarlan J. in Perini Corporation v. Commonwealth of Australia (1969) 2 NSWR 530. The contracts in those cases were construction contracts and the officials in question, in the former, the Chief Engineer, and in the latter, the Director of Works, were, although employees of the respective proprietors, certifiers in the sense in which that expression is understood in building and construction contracts. I do not think that the Secretary here is properly characterised as a certifier so that what is said in the two cases about the duties and obligations of certifiers is not directly applicable. Moreover, there are some matters provided for in the contract here in respect of which the Secretary is plainly intended to act only as agent for, and in the interests of, the Commonwealth.
It is apparent that, whatever be the ambit of clause 2.24, it confers on the Secretary a power which, if exercised adversely to the contractor, may have quite disastrous consequences for it, not only because the contract will be cancelled, but also because the Secretary is obliged to certify the amount of any damages, losses, costs and expenses sustained or incurred by the Commonwealth in consequence of the cancellation. The Commonwealth is entitled to recover the amount of these from the contractor. The certificate is conclusive evidence of the matters which it states. It follows, in my opinion, that when exercising power under clause 2.24, the Secretary is obliged to have due regard to the entirety of the circumstances, the interests of both parties to the contract and all the matters put to him by the contractor in response to the notice to show cause. In Dixon v. The Commonwealth Starke J. said (p 112):-

"Now this contract is one of the type discussed in Jackson v. Barry Railway Co.

(1893) 1 Ch 238 and in Cross v. Leeds Corporation (1902) 2 Huds B C (4th ed.) 339. The Chief Engineer fills an equivocal position under the contract. He is an officer of the Railways Commissioner, bound, as a matter of duty, to supervise the execution of the contract in the interests of the Commissioner. He is also, for many purposes of the contract, a certifier, or 'preventer of disputes,' as a person in such a position has been termed (Hudson on Building Contracts, 4th ed., vol. I, p 365), and in this capacity he must judge impartially between the parties and act in a quasi-judicial manner. He is also an arbitrator under the contract, and in such capacity may be required to review and reconsider his own decisions, and must, of course, here too, act in a quasi-judicial manner, and impartially between the parties. As was said by Bowen L.J. in Jackson's Case

(1893) 1 Ch, at pp 246-247, the essential feature of the contract is that disputes which arise between the parties under the contract are to be decided - with some immaterial exceptions, already noticed - 'not by a stranger or a wholly unbiased person but by the ... engineer himself.' 'Virtually, the engineer, on such an occasion, must be the judge, so to speak, in his own quarrel.' Both the parties contract on this basis, and rely on the engineer's 'professional honour, his position, his intelligence.' And, in the case now before the Court, they rely also upon the fact that he is a distinguished officer in the Public Service of the State of South Australia, and therefore by no means so dependent upon the Railways Commissioner for his position and pay as is the engineer usually employed by the ordinary building contractor."

Plainly not all that his Honour there said is of relevance to the circumstances of this case, but what his Honour said about the parties' relying on the engineer's professional honour, position and intelligence and upon his being a distinguished officer in the public service applies equally to the position of the Secretary in this case. If, therefore, the Secretary purported to invoke his power to terminate the contract under clause 2.24 in a case where the contractor's response to a notice given to it to show cause, the question whether the power had been properly exercised would be examinable by the arbitrator provided for in clause 2.28 and, in some circumstances, by the Court on a reference from his decision on the question.
I should say, in relation to the arbitration clause, that it is a clause of wide import and would enable, as I have said, the contractor to refer to arbitration the question whether the Secretary had properly exercised his power to terminate the contract under clause 2.24. The arbitration clause is the contractor's ultimate protection. Indeed, it would protect the contractor against unlawful exercises of the power (for example, exercises which are capricious or infected by bad faith) as well as enabling it to have such exercises reviewed in cases which are less opprobrious. At this point I should say that the evidence in this case gives rise to an inference that either the Commonwealth itself or the Secretary had decided, well in advance of 12 September 1987, to terminate this contract on the first day of operations irrespective of the many indications which were available to support the view that the contractor's state of readiness did not warrant this extreme course.
All this demonstrates, in my opinion, that clause 2.24, when properly construed, does not enable the Secretary to act under it otherwise than responsibly in the overall interests of the parties. That conclusion means that there is not, in my respectful opinion, any reason associated with the critical power which clause 2.24 confers, which should lead a court to the narrow construction of the clause for which the contractor contends. It is of wide application and it is capable of applying to the breach of any term of the contract, but standing between the contract and termination is the Secretary, who must act in the way that I have decided, and, over him, the shadow of the arbitrator.
For the purposes of determining the question of liability in this case the matter I have dealt with is not of consequence. The consequences of my conclusion are important for the question of damages rather than that of liability. I agree with the conclusions reached by Burchett J. in relation to the liability of the Commonwealth to the contractor for breach of contract. I am satisfied that clause 2.24 provided a comprehensive procedure for the termination of the contract, at least in the circumstances which applied here, and that, except in cases of true anticipatory breach, the provisions of the common law were intended by the parties not to apply. Accordingly, the purported termination of the contract by the Commonwealth was unlawful. I should also say, although I do not think it necessary to decide the question, that, if contrary to my opinion, the common law had applied concurrently with the provisions of clause 2.24, the breaches of the contract which were relied upon by the Commonwealth did not justify it in its view that the contractor had so conducted itself as to evince an intention no longer to be bound by the contract. I agree with the reasons and conclusions of Burchett J. on this matter but I mention particularly the nature of the contract, which required the supply of services over a period of three years, the lateness of the acceptance of the tender by the Commonwealth, its prior knowledge of all the difficulties the contractor was encountering in procuring and making ready suitable aircraft, and the contractor's ability, if not on 12 September 1987, then very shortly afterwards, substantially to perform the contract, as principal factors why I have this view.
I next come to the question of damages. In my opinion, this is not a case for any award of damages based on loss of profits. I am of that opinion because a proper projection of the likely outcome of the contract required the taking into account of depreciation of the aircraft. If they are depreciated at 10 per cent per annum, which was the rate mentioned in the evidence, that is enough to absorb any profit that might otherwise have been made. The consequence, in my respectful opinion, is that the discretion of the learned primary Judge has miscarried so that one must approach the question of the amount of damages to be awarded afresh.
I am satisfied that this is a case where the damages which the contractor is entitled to recover should be based on its expenditure, particularly the amounts it expended in the acquisition of aircraft and in relation to other matters before the time to commence operations had arrived. In this regard I agree with what Burchett J. has written about "reliance damages" and I have nothing to add to what he has said. There may be a question whether, in an appropriate case, a plaintiff will be put to his election as to whether he claims loss of profits or reliance damages. That is a question for another day because in the view I take of the instant case, no claim for loss of profits could succeed.
Here we have a contract to be performed over a period of three years which perforce required the contractor to expend very substantial sums of money on the acquisition of aircraft and other equipment and in establishing bases before it could commence its operations and earn one cent under the contract. The overriding rules for the assessment of damages in breaches of contract cases stem from what was said in Robinson v. Harman (1848) 1 Exch 850 and Hadley v. Baxendale (1854) 9 Exch 341. The damages must have been such that they may fairly and reasonably be considered either as arising naturally, that is, according to the usual course of things, from the breach of contract itself, 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 of it. Furthermore, they must be no more and no less than would reasonably compensate the plaintiff for the breach which has been committed. In those circumstances justice will not be done in this case unless the expenditure incurred by the contractor in consequence of the entry by it into the contract and reliance by it upon the performance of the contract by the Commonwealth is recouped by it. It follows that I agree that each of the items of expenditure referred to in the other judgments should form a component of the award of damages. These items are pre-operational expenditure, the cost of the acquisition of the aircraft less their value at termination of the contract, the amount of termination payments made to employees and the amount of the security deposit. In relation to the cost of the acquisition of the aircraft, I agree with the other judges in their conclusion that the contractor was bound to indemnify CVC Investments Pty. Limited for the amount it incurred and that it was likely that the title to the aircraft would have passed to the contractor itself once finance was provided by the Commonwealth Bank.
The learned primary Judge did not approach the matter in this way because he awarded damages on the basis of loss of profits. But he reduced the amount of the award he would otherwise have made by the factor of 50 per cent to allow for the contingency that, notwithstanding the wrongful termination of the contract by the Commonwealth, it might lawfully have terminated the contract soon after 12 September 1987.
Both at the trial and before us counsel for the Commonwealth submitted that it was likely in the extreme that the contract would have been terminated by the Commonwealth shortly after 12 September 1987 and that therefore the damages to be recovered should be nominal; cf. Maredelanto Compania Naviera S.A. v. Bergbau-Handel GmbH - The Mihalis Angelos (1971) 1 QB 164.

There are many considerations which, when accumulated together, make it more probable than not that the Commonwealth would not have terminated the contract at all. The probabilities are that, if 12 September 1987 had passed uneventfully, the contractor's position would have continued to strengthen almost on a daily basis. More aircraft would soon have been on strength. Pilot training and licensing would have been completed. Programs for the fitting of drop hatches and bubble windows on a progressive basis would have been in place and the task completed, as the learned primary Judge found, within two months. Endurance and extra fuel tanks may have presented a greater problem but, as Burchett J. has demonstrated, that problem, including the necessary recertification of the aircraft, too would in all probability have been largely overcome by the time of the onset of the wet season. As all this became clear to Skywest, it would soon, as it had threatened to do, have departed the scene, leaving the field to the contractor alone. By then its position would, from a practical point of view, have been virtually impregnable.
Notwithstanding all these factors, I do not think that one could say categorically that the contract would not have been terminated. There is a distinct possibility that it may have been and I agree with the learned primary Judge that an award of damages which ignores this possibility or contingency would not reflect a matter that ought to be taken into account. There are cases in which the contingency may be discounted altogether. An example is provided by the decision of the Court of Appeal in New South Wales in TCN Channel 9 Pty. Limited v. Hayden Enterprises Pty. Limited (1989) 16 NSWLR 130 where later termination of the contract there in question was described by Hope J.A. as "quite improbable" (p 155). Each case must depend upon its own facts. In my opinion, this case is governed neither by The Mihalis Angelos nor by the Channel 9 case. In the former case only nominal damages were awarded; in the latter case the contingency was set at nought. In this case, I am of opinion that fairness demands that there be some reduction in the amount to be awarded. If there were no more, I would agree with Davies J. that an appropriate allowance to be made for the possibility of early termination would have been 20 per cent, rather than the 50 per cent selected by the primary Judge.
There are, however, other contingencies which, in my opinion, need to be taken into account. The first is the circumstance that, if there had been no prior termination of the contract and it had run for the full period of three years, the contractor would not within that period have recouped the entire cost of the aircraft from moneys which would have been paid to it by the Commonwealth. The question that arises is whether the contractor would have been granted a renewal of the contract for a further period. This involves a matter of substantial speculation but, again for the reasons given by Burchett J., I think it likely that the contract would have been renewed. But it must be said that there is again the distinct possibility that this would not have occurred in which case the contractor would have had to sell the aircraft at a greatly reduced price at the end of the three year period. Had the contract not been renewed, the contractor would have been substantially out of pocket and yet had no redress against the Commonwealth.
There is another, and really independent, contingency which one needs to consider when contemplating the question of renewal. Each of the aircraft, although suitable for the task in question, was comparatively old. Each was fitted with a complex array of avionics. It is common knowledge that technology in this electronic age continues to advance with such rapidity that very often what is "state of the art" today is out of date a year or so later. Much speculation is involved but, if one is to give proper attention to all the implications of renewal, it is difficult to do so unless one has regard to possibilities that the specifications of further contracts might have required the replacement, or at least the substantial refitting, of the aircraft and a degree of modification or replacement of the equipment installed in them. A balancing factor may have been that no tender for the new contract would have been made at rates or prices which did not accommodate these matters. But is is difficult to think that, in a competitive world, they would have reflected the need for the existing contractor to recover what would in effect have been losses suffered under the contract which would, ex hypothesi, be about to expire. Speculative though all this is, I do not think that one can ignore the implications which arise from these various considerations.
I think that an award of damages which does not reflect these various contingencies will provide over generous compensation. To ignore them would involve, in my opinion, the making of an award of damages which would turn the Commonwealth into a guarantor of an outcome which, although not the most satisfactory the contractor might have hoped for because it would recover no profit, would be an outcome which would secure to the contractor the return to it of the amount of the liability which it had incurred in acquiring the aircraft. This would be a result which the contractor, if it had been allowed to perform its contract, had no reason necessarily to expect.
Another factor is this. The contractor will be receiving now a sum of money intended to compensate it for the loss of the amount of its liability or expenditure incurred in acquiring the aircraft. It will receive that sum now, not over the next nine or ten years as would have been the case if the matter had proceeded as the contractor was entitled to expect. If I had taken the view that the figure to be awarded in respect of the acquisition of the aircraft should not be discounted for any contingency, it would have been possible to reduce the figure fairly precisely by calculating, on the assumption of an appropriate interest rate, the present value of $4,364,192 paid in equal annual instalments over say eight or ten years. But the reduction of the sum to allow for the contingency of possible failure to secure a renewed contract makes the exercise much less certain. All I have felt able to do is to allow for this matter by yet a further reduction in the amount incurred for the acquisition of the aircraft.
The amount to be awarded comprises four components, pre-paid expenditure other than the amount incurred in respect of the aircraft, the amount incurred in their acquisition, termination payments made to staff and the amount of the security deposit. The first of the contingencies to which I have referred - early termination - applies in relation to each of the components. The possibility that the contract would not have been renewed and considerations arising from a possible need to replace aircraft and equipment, and also the fact that the amount will be paid now in one lump sum, apply only in relation to the component of the award which represents the cost of acquisition of the aircraft. That circumstance makes the exercise an extremely complex one.
In the result I have reached the conclusion that justice would be done by an award of damages which amounted to one half of the sum of the four components of the award, namely, $2,737,592. To that sum I would add an award of interest to be made pursuant to s.51A of the Federal Court of Australia Act 1976. We have not heard counsel on the question of the rate of interest to be awarded and I would stand the matter over for a short time to enable them to be heard on that matter.
Before concluding, there are some further matters which I should mention. In deciding to approach this matter as I have, I have been concerned about the fact that one usually takes into account contingencies in cases where one is awarding damages for the loss of a future entitlement to moneys. Loss of future earnings or profits is a common example. In the present case liability for the entirety of the moneys which are the subject of the claim were incurred in the past. But I think it right to approach the matter in the way that I have because the contractor's right to recover them, or some of them, may have been lost if the contract had been lawfully terminated by the Commonwealth at a later point of time or if the Commonwealth had failed to renew the contract at the end of its three year term.
Sometimes in cases where damages are difficult to assess it is as well to approach the matter in an alternative way for the purpose of checking the likely correctness of one's initial or preferred approach. It would be possible in the present case to approach the question of the amount to be awarded in respect of the cost of the acquisition of the aircraft from a different direction. The view could be taken that, assuming no cancellation of the contract, the contractor would have been assured of a three year period during which it would have recovered in each of those years 10 per cent of the cost. This would have given it 30 per cent of the total. This is an arbitrary figure. If one has regard to the primary Judge's profit figure, which omits depreciation from account, the available sum is $819,099 spread over three years. This, if applied to depreciation, would yield a result closer to 5 per cent per annum rather than the 10 per cent per annum which I have postulated. On the other hand, his Honour's profit figure is calculated after taking into account, over the three year period of the contract, the amount of $3,390,000 to be expended in interest or hiring fees. If this is brought to account, the amount of the cost of the aircraft may have been much more substantially recouped in the period of the contract than at first sight appears.
Whatever percentage one were to select, it would next have been appropriate to award the contractor a further figure for the loss of the probability (some might prefer strong possibility) that the contract would be renewed upon the expiration of the original one. If one were to approach the matter in this way, I do not think that one would reach a conclusion very different from the one I have arrived at. I refer generally to Chitty On Contracts, 25th ed., Vol. 1, para. 1673 and to the cases there cited.
It remains to say that the difference in the approach which I have adopted from that adopted by my brothers lies in my conclusion that it is appropriate to discount the amount which the contractor might otherwise have been awarded because of a number of contingencies which there are and the receipt by it now of an amount which it could only have expected to recoup in the future. These matters, I consider to be in play because of the need to project the situation into the future and the speculative exercise to which this necessarily gives rise. My brothers, on the other hand, relying upon authority, take the view that, the probabilities being as they are, it is for the Commonwealth to establish that the contractor's loss is not as great as the entirety of the expenditure, the benefit of which has been lost. The authorities in question are L. Albert and Son v. Armstrong Rubber Co. 178 F 2d 182 (1949) per Learned Hand C.J. at p 189, McRae v. Commonwealth Disposals Commission (1951) 84 CLR 377 per Dixon and Fullager JJ. at p 414 and C.C.C. Films Ltd. v. Impact Quadrant Films Ltd. (1985) 1 QB 16 per Hutchison J. at p 40. The strength which these authorities provide to the contractor's case stems from the fact that the relevant dicta appear in three of the few authorities which there are on reliance damages.
On the other hand, one ought never to lose sight of the fact that damages are intended to be compensatory and that an award of damages should neither be extravagant or over generous nor mean. Moderation is the touchstone. One needs to bear in mind that the task of assessing damages will often give rise to an uncertaint and speculative exercise which will not yield a precise result because it may have to be achieved by the selection of amounts or figures which has involved quite an arbitrary process.
In my respectful opinion, it will not always be correct to accept as universally applicable to all cases statements such as were made by the judges in the three authorities earlier mentioned. They must be read in the context of the facts of the cases in which they were made and, particularly, in the light of what justice in those cases required. The McRae case, which is, of course, the most authoritative was, in my view, a case very different from the present. The defendent sold the plaintiff a shipwrecked vessel which, as it transpired, did not in fact exist. The plaintiff incurred substantial expenditure in preparing to salvage the vessel. The entirety of the expenditure was wasted and the plaintiff also lost the value of the price it had paid the defendant for the vessel. It seems hardly surprising that the plaintiff was held entitled to recover the entirety of these losses. In this case the parties remained in a continuing contractual relationship for six months. They expected that the relationship would continue for a further three years. The amounts the contractor could expect to receive under the contract were to be paid to it over that period. The basis upon which they would be calculated was clearly spelt out in the contract. For its part, the contractor was to provide coastwatch services, the nature of which were specified in the contract. In the events which happened, the contractor incurred expenditure which was wasted, but fairness, in my opinion, requires its claim for the losses it has suffered to be assessed in the light of the entirety of the circumstances of the case and not by the simple expedient of casting the burden of proof on the defendant.
Once one transfers the onus of proof to the Commonwealth, the result must be as my brothers purpose. No party in its position here could ever discharge it. And yet, for the reasons I have given, there are the contingencies, really the distinct possibilities, coupled with the early receipt of the moneys, upon which I have relied to reduce the amount which might otherwise have been awarded. That, in the ordinary run of cases calling for the assessment of damages for breach of contract, contingencies should be taken into account, does not require any substantial reference to authority. It is trite law. The matter is mentioned in the judgment of Lord Denning M.R. in The Mihalis Angelos - see p 196 where his Lordship said, "You must take into account all contingencies which might have reduced or extinguished the loss." At least inferentially Hope J.A. in the Channel 9 case expressed a similar view for he referred (p 156), without disapproval, to the judgment of the primary Judge in this case, a judgment in which his Honour had reduced the damages for loss of profits he would otherwise have awarded because of the contingency that the contract might have been terminated by the Commonwealth.
I confess that I have found the exercise of assessing damages in this case one of substantial difficulty. I have no doubt that it is a task that may be approached, quite properly, in a number of different ways. My conclusion, however, is that a result which does not allow for the various matters to which I have referred will not do justice as between the parties.
In summary then, I would propose that the appeal be allowed and that the amount of the judgment under appeal be varied by increasing it from $410,000 to $2,737,592 to which needs to be added an amount for interest. As mentioned, I would propose that the matter stand over to enable counsel to be heard on the rate of interest to be awarded. I would dismiss the cross-appeal and I would make orders for costs as proposed by Burchett J.

JUDGE3

An action commenced in the High Court by the appellant, Amann Aviation Pty Limited, against the Commonwealth of Australia was remitted for hearing by a judge of this court. The hearing occupied over one hundred sitting days, and resulted in a judgment in favour of the appellant for $410,000.00 for breach of contract. There was also an order that the Commonwealth pay one half of the appellant's costs. From this decision, an appeal and cross-appeal have been brought - the appeal on the basis that substantially higher damages were called for, that a discount was wrongly applied, and that the costs order wrongly deprived the appellant of costs it should have received; and the cross-appeal on the basis that the appellant's claim should have been rejected, or that the damages awarded should have been no more than nominal.

The facts of the case are somewhat complex; and they have been stated in detail by the learned trial judge. An understanding of the issues raised upon the appeal requires some account of what happened, but it is unnecessary to restate all that his Honour has so fully set out. Concerning most of it, there is no longer any dispute. The background is the Commonwealth's policy of maintaining, not by its own resources, but pursuant to private contract, regular aerial observation of the northern coastline of Australia from Karratha in the north of Western Australia, near Broome, to Cairns in north Queensland. The object is the detection and reporting of vessels, aircraft, unauthorized landings, etc., primarily (but not solely) for quarantine purposes.
As at 12 March 1987, the contract of a company Skywest Airlines Pty Limited (Skywest) was due to expire on the last day of the month. The Commonwealth had decided, instead of renewing that contract, to call for tenders, and it had chosen, after a lengthy checking process, to accept the tender submitted on behalf of the appellant, Amann Aviation Pty Limited. There was no explanation why either tenders were called so late, or else the consideration of them was so protracted, that the notice of acceptance of the appellant's tender was given only nineteen days before the day fixed for expiry of the existing contract. However, on 12 March 1987, the Commonwealth did accept the appellant's tender; and Skywest agreed to extend its operations, first, to 30 June, and subsequently to 11 September 1987. The appellant set about the acquisition and fitting out, in the United States, of the fourteen specially equipped aircraft it proposed to commit to the performance of its contract.
Although there were complications, and proposals which were not pursued to finality, the parties envisaged, at the time of acceptance of the tender, a preparatory period of six months. Whether time was made contractually essential in relation to that period, and in respect of all the applicable obligations of the appellant, was one of the issues to be determined at the trial. On 12 September 1987, the appellant commenced coast watch flights, having received from the Commonwealth a programme of what was required for that day, and for ensuing days. But the appellant did not then have all its aircraft ready to perform the task, nor did any of its planes then comply in every respect with the specifications of the contract. It had been apparent for some considerable time that this would be so, and there is no doubt the Commonwealth had already decided to give immediate notice of termination of the contract upon its verifying the inevitable event. Skywest had threatened that, unless the Commonwealth acted in this way, it would dispose of its own planes (which, however, also fell short of the standard set by the contractual specifications), leaving the Commonwealth entirely dependent on the appellant.
The Commonwealth gave notice, on grounds which elaborated the appellant's failure to provide aircraft complying with the contract, that it regarded the contract as terminated. That notice was given in the afternoon of 12 September 1987. The first question at the trial, and now upon the cross-appeal, is whether the notice was effective, or whether (as contended by the appellant and held by the learned trial judge) it amounted to a repudiation of the contract, entitling the appellant to elect to terminate it and sue for damages. On 15 September 1987, the appellant so elected. The Commonwealth supports the notice, not only by reference to the breaches relating to the aircraft available on 12 September, but also by reference to the quite inadequate flights carried out by the appellant on that day and thereafter until the giving of its notice of termination. These matters raise issues of construction of the contract, and particularly of the effect of a provision conferring on the Secretary of the relevant department a right of cancellation for breach by the contractor. They also raise the question whether the acknowledged breaches committed by the appellant were such as would, apart from the effect of a special term, have brought into existence a right in the Commonwealth to treat the contract as at an end. If those questions are answered favourably to the appellant, difficult problems remain concerning the assessment of damages.

The proposition that a plaintiff cannot have both loss of profits and also recoupment of wasted expenditure is thus not universally true. Cullinane and Anglia Television simply provide examples of particular situations where it was true. In other circumstances, it is always necessary to consider whether a breach of contract has deprived the innocent party both of profits and also of the opportunity to recoup, or to benefit from, expenditure. See Treitel, The Law of Contract, 7th ed (1987) 726-727; Chitty on Contracts, 25th ed (1983), vol. 1, para. 1702.
It is unnecessary to examine the universality of the rule, stated by Hutchison J. in C.C.C. Films, that a plaintiff may always frame his claim as one for recovery of wasted expenditure, if he chooses. For there is ample authority to support a claim of that nature in cases where a breach of contract has cut short contractual expectations so as to prevent an assessment, or a reasonably accurate assessment, being made in the normal way: McRae v. Commonwealth Disposals Commission (1951) 84 CLR 377; Anglia Television (supra) at 63; C. and P. Haulage v. Middleton (1983) 1 WLR 1461 at 1465-1466; Sunshine Vacation Villas Ltd v. Governor and Company of Adventurers of England trading into Hudson's Bay (1984) 13 DLR (4th) 93 at 104, 106; Goldburg v. The Shell Oil Company of Australia Ltd (unreported, Jenkinson J., 17 August 1989) at 50. See also the United States authorities cited later in these reasons. For a valuable discussion of cases of this kind, and of other cases where "reliance" damages may be claimed, see "Some Aspects of the Recovery of Reliance Damages in the Law of Contract" by Marc Owen (1984) 4 Oxford Journal of Legal Studies 393.
If, however, a party to an unprofitable contract claims to recover damages in respect of expenditure all of which he would inevitably have lost, even if the contract had been performed, his claim should be rejected. The loss was not a result of the breach. That proposition raises the question whether there is any onus borne by a claimant to establish that wasted expenditure would have been recovered had the contract been performed. In the fundamental United States decision L. Albert and Son v. Armstrong Rubber Co (1949) 178 F 2d 182 at 189 Learned Hand C.J. said:

"In cases where the venture would have proved profitable to the promisee, there is no reason why he should not recover his expenses. On the other hand, on those occasions in which the performance would not have covered the promisee's outlay, such a result imposes the risk of the promisee's contract upon the promisor. We cannot agree that the promisor's default in performance should under this guise make him an insurer of the promisee's venture; yet it does not follow that the breach should not throw upon him the duty of showing that the value of the performance would in fact have been less than the promisee's outlay. It is often very hard to learn what the value of the performance would have been; and it is a common expedient, and a just one, in such situations to put the peril of the answer upon that party who by his wrong has made the issue relevant to the rights of the other. On principle therefore the proper solution would seem to be that the promisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost, if the contract had been performed."

See also Dade County Florida v. Palmer and Baker Engineers Inc. (1964) 339 F 2d 208; Wartzman v. Hightower Productions, Ltd (1983) 40 ALR 4th 523 at 529. The same position has been accepted in Canada: Sunshine Villas (supra) at 103; Bowlay Logging Ltd v. Domtar Ltd (1978) 87 DLR (3d) 325 at 334, and on appeal, (1982) 135 DLR (3d) 179.

In McRae v. Commonwealth Disposals Commission (supra), the joint judgment of Dixon and Fullagar JJ. at 411-415 analyses the problems raised by a breach of a contract that a tanker existed at a specified position upon a reef in the Pacific. The plaintiff had fitted out a salvage expedition at considerable expense, only to find there was not, and never had been, a tanker on the reef. At 414, the joint judgment states:

"If we regard the case as a simple and normal case of breach by non-delivery, the plaintiffs have no starting-point. The burden of proof is on them, and they cannot establish that they have suffered any damage unless they can show that a tanker delivered in performance of the contract would have had some value, and this they cannot show. But when the contract alleged is a contract that there was a tanker in a particular place, and the breach assigned is that there was no tanker there, and the damages claimed are measured by expenditure incurred on the faith of the promise that there was a tanker in that place, the plaintiffs are in a very different position. They have now a starting-point. They can say: (1) this expense was incurred; (2) it was incurred because you promised us that there was a tanker; (3) the fact that there was no tanker made it certain that this expense would be wasted. The plaintiffs have in this way a starting point. They make a prima-facie case. The fact that the expense was wasted flowed prima facie from the fact that there was no tanker; and the first fact is damage, and the second fact is breach of contract. The burden is now thrown on the Commission of establishing that, if there had been a tanker, the expense incurred would equally have been wasted. This, of course, the Commission cannot establish. The fact is that the impossibility of assessing damages on the basis of a comparison between what was promised and what was delivered arises not because what was promised was valueless but because it is impossible to value a non-existent thing. It is the breach of contract itself which makes it impossible even to undertake an assessment on that basis. It is not impossible, however, to undertake an assessment on another basis, and, in so far as the Commission's breach of contract itself reduces the possibility of an accurate assessment, it is not for the Commission to complain."

In the last sentence of the passage cited, Dixon and Fullagar JJ. put the matter on a basis similar to that stated by Learned Hand C.J. However, earlier in the passage, Dixon and Fullagar JJ. reasoned that the plaintiffs had made out a prima facie case which had not been, and in the circumstances could not be, rebutted. Generally, where parties have entered into a contract, freely negotiated in the ordinary course of commerce, it seems reasonable to treat proof of the incurring of expenditure appropriate to the performance of the contract as raising a prima facie inference that the expenditure would be recouped by the carrying out of the contract. In the only English case in which this question has been considered, Hutchison J. followed the North American authorities: see C.C.C. Films (supra) at 40. The same view was taken by Jenkinson J. in Goldburg (supra) at 52, citing a textbook which refers both to McRae and to C.C.C. Films as well as to United States decisions.
The way in which the learned trial Judge approached the assessment of damages, in the present case, did not require him to examine these principles in detail. He considered that the appellant would have earned a net profit over the period of the contract of $820,000.00, a figure he then halved, in assessing damages, for the contingency of cancellation which arose upon his view of the true effect of clause 2.24. No adjustment was made to reflect the fact that large sums spent (which would have been recouped from gross receipts if the contract had been performed) remained unrecouped by reason of the termination of the contract. Accordingly, he assessed the appellant's loss at $410,000.00, commenting that he had followed a method of assessment similar to that suggested in T.C. Industrial Plant (supra) at 294. But the calculation there suggested by the High Court, as a means of assessing damages for breach of a warranty of fitness in a contract for the acquisition of a special machine to be used in the performance of work under another contract, required "taking the whole of the actual and probable expenditure which the plaintiff would have incurred" - and thus clearly involved the cost of the machine which was obtained on hire purchase for the purpose of the other contract. Also, the passage in the High Court judgment states in very general terms an alternative to the method of calculation actually adopted, which the Court had already approved subject to the elimination of some double counting. The damages the award of which was so approved included (as also appears at 294) "all items of cost incurred by the plaintiff" less receipts under the contract. Unfortunately, the summary statement of the alternative method of working out the loss may have been capable of misleading, but it is not to be thought that the High Court intended its alternative approach to produce a result inconsistent with that it had already reached in another way. The plaintiff in T.C. Industrial Plant was clearly entitled (as was held) to recover its outstanding expenditure, in addition to the profit it could prove it would have earned.
As a result of the matters to which attention has been drawn, the assessment made in the present case involved a deduction from the damages awarded of pre-operational expenditure in the sum of $854,943.00. Since that amount had already been spent by the appellant, and would, according to his Honour's calculation, have been recouped out of the income of $17,107,462.00 to be paid over the course of the contract, it represented part of the losses suffered by the appellant by virtue of the Commonwealth's breach of contract. It was recoverable upon the principles discussed in T.C. Industrial Plant.
Another aspect of the calculation of damages is more controversial. At the trial, the appellant submitted that, in addition to its other pre-contract expenditure, it was entitled to claim the sum of $5,650,000.00, the cost of the acquisition of the aircraft with their sophisticated and specialized equipment, less their agreed net value of $917,329.00 - the great difference being accounted for by the fact that there was no work in Australia (and relatively little overseas, for that matter) for which aircraft of this kind, so equipped, were suitable, other than the coastal surveillance covered by the contract. (After the hearing of the appeal had concluded, the court was informed by the Commonwealth, with the concurrence of the appellant, that the figure of $5,650,000.00 should be revised to $5,281,521.00; the figure of $917,329.00 has not been revised.) His Honour rejected this claim on the ground that the expense of acquisition of the aircraft had not been borne by the appellant but by an associated company, C.V.C. Investments Pty Limited. Having refused to allow the cost of the aircraft to be taken into account in the calculation of the appellant's damages, his Honour made no provision for depreciation in calculating the net profit which the appellant would have earned. Instead, he took into account an amount of $3,390,000.00 which he described as "interest or hiring fee", being the amount which he considered the appellant would have had to pay, over the period of the contract, to C.V.C. Investments Pty Limited in order to secure the use of the aircraft. This approach is perfectly consistent. If the cost of acquisition is not treated as an expense, in the case of specialized equipment acquired only for the purposes of the contract, because the equipment is treated as not the appellant's, neither should the appellant be charged with depreciation. On the other hand, if his Honour erred in disallowing the cost of acquisition of the aircraft, because it was a liability which the appellant had already incurred, then a calculation of profit without provision for depreciation (that is, for recoupment over a period of the capital expenditure required to enable the gross profit to be earned) would be impossible to justify. However, counsel for each of the parties sought to have it both ways. For the appellant, his Honour's calculation of the net profit was relied on, while at the same time it was contended that the damages should include the cost of the aircraft less their residual value. For the Commonwealth, it was contended the cost of the aircraft was not allowable as an expense of the appellant, while at the same time it was urged that depreciation should have been taken into account by his Honour and would have eliminated the net profit he found.
There was evidence, reflected in a note to the balance sheet of the appellant as at 19 September 1987, that the appellant had agreed to indemnify C.V.C. Investments Pty Limited against any loss resulting from the provision of the aircraft and equipment to the appellant. That there was such an agreement seems to have been accepted by his Honour in certain supplementary reasons which are annexed as appendix 5 to his reasons for judgment. The probabilities strongly support the appellant on this issue, since the aircraft were purchased "in the name of C.V.C. Investments Pty Limited" (to quote the directors' minutes of that company of 12 April 1987), as part of an arrangement for bridging finance to enable the appellant to proceed with the obtaining of the aircraft to carry out the contract. It seems most unlikely that it was ever intended C.V.C. Investments Pty Limited should become the owner of the aircraft, except as a means of financing their ultimate acquisition by the appellant. There is no reason for rejecting the evidence that the arrangement included an indemnity given by the appellant to C.V.C. Investments Pty Limited. Indeed, a request to provide bridging finance in this particular way could be expected to involve such an indemnity by implication of law: Eastern Shipping Company Limited v. Quah Beng Kee 1924 AC 177 at 182-183. The evidence should be accepted, applying the principles stated in Warren v. Coombes (1979) 142 CLR 531. (The Commonwealth itself submitted the agreement for bridging finance was intended to be replaced by a lease-finance arrangement under which title would pass to the Commonwealth Bank, and the aircraft would be leased to - and ultimately acquired at residual values by - the appellant.) It follows that this liability of the appellant would have to be taken into account in some way (such as by a depreciation allowance) in the calculation of the profit which the appellant expected to earn under the contract, and also that the liability to C.V.C. Investments Pty Limited would have to be taken into account in any calculation of damages based upon the proposition that the breach of the contract by the Commonwealth had resulted in expenditure, which the appellant had incurred, becoming futile.
There was remarkably little evidence bearing on the appropriate rate to allow for depreciation. Such direct evidence as there was supports an allowance of 10% per annum. Subject to the impact of the considerations to be mentioned in the next paragraph, the valuation evidence suggests that a very low figure would be appropriate, since it proceeded upon the assumption that it was unnecessary to distinguish between the value of the aircraft at the date of the breach and the value of the aircraft at the date of their valuation in June 1988, and also that their selling price would not vary over the ensuing 24 months, which it was estimated would be required to dispose of such a large number of planes of this type. Certainly, it would be wrong simply to accept the residual value in a proposed lease-finance agreement as a measure of depreciation, for that sum is not required to be fixed by reference to the factors which should determine the amount of an allowance for depreciation in the accounts of the appellant.
But the difficulty raised by the question of depreciation, in this case, is much more fundamental than the relatively mundane problem of fixing a rate. The difficulty is inherent in the features of a very individual contract. While the contract was for a quite short term (three years of operations), it required a vast expenditure on highly specialized equipment, as well as on the setting up of bases, a great proportion of which, as the valuation evidence convincingly demonstrated, could never be recovered unless further coast watch contracts were obtained. Failing a further contract, what would be required to show a profit would be amortization of over 80% of the cost of the aircraft in three years. Plainly, the parties did not contemplate that. The arithmetic of the contract is conclusive. What made the contract a commercial venture, though quite apparently one not without risks, was the prospect of renewal at the end of three years. The very uniqueness of the operations, and of the aircraft required for their performance, would confer a great advantage, in any tendering process in three years' time, upon an operator with the appropriate experience, organization, aircraft and other equipment. The events which led to the present case, and the ultimate triumph of the former contractor, only serve to underline what was in any event obvious. Had the appellant succeeded in replacing that contractor, it would have been in an extremely strong position.
The considerations just discussed do not enable it to be said that the appellant would probably, but for the Commonwealth's breach of contract, have been able to secure a renewed contract on a basis yielding some ascertainable amount of profit. The case is not like T.C. Industrial Plant (supra) or Richardson v. Mellish (1824) 2 Bing 229; 130 ER 294 where such a finding was possible, and was made. (It is hardly necessary to add that a court will strive, whenever it is able, to put a value on expectations lost by a breach of contract, and will not be deterred by mere difficulty of assessment: Abrahams v. Herbert Reiach, Limited (1922) 1 KB 477; Levi Strauss (Australia) Pty Ltd v. Mayne Nickless Ltd (unreported, N.S.W. Court of Appeal, Moffitt P., Hutley and Mahoney JJ.A., 17 December 1976); Williston on Contracts 3rd ed. vol. II section 1346; Corbin on Contracts vol. 5 section 1022.) But neither can the prospect that the appellant would have procured a renewed contract be dismissed on the basis, discussed by Edmund Davies L.J. in The Mihalis Angelos (supra) at 203, that it must be assumed "the defendant would have performed his legal obligation and no more", any renewal of the contract being beyond the Commonwealth's legal obligation. For as Diplock L.J. pointed out in Lavarack v. Woods of Colchester Ltd (1967) 1 QB 278 at 295-296, in applying such a principle, "one must not assume that (the defendant) will cut off his nose to spite his face and so control these events as to reduce his legal obligations to the plaintiff by incurring greater loss in other respects." (See also T.C.N. Channel 9 (supra) at 155; Abrahams (supra), per Atkin L.J., at 483.) The unique features of the situation which would have obtained at the time of a reletting of the coast watch contract would have been as significant for the Commonwealth as for the appellant. However, the precarious position of the appellant under the contract does make this case analogous to the cases cited above, McRae v. Commonwealth Disposals Commission and Anglia Television Ltd v. Reed. The Commonwealth's breach of contract has swept the pieces from the board, and the end-game which might have led to further contracts can never be played out. The appellant cannot show that performance of the contract would ultimately have led to the profits it hoped to gain; but equally the Commonwealth is unable to show that the appellant would not in fact have recouped the whole of the expenditure it incurred on the faith of the contract. Upon the principles which have been discussed in these reasons, the appellant is entitled to damages assessed on the basis that that expenditure should be recouped. It also follows, however, that the appellant should not receive the amount of net profit calculated without allowance for depreciation. There is no way of telling whether ultimately a profit would have been earned as a result of performance of the contract.

If a different view had been taken, and the prospect of future contracts had been wholly excluded from consideration, it may then have been proper to exclude also from consideration the ultimate fate of the aircraft in the hands of the appellant, and to assess damages on the basis of a calculation such as that made by his Honour, but adding (rather than subtracting) the pre-operation expenditure which had actually been paid. Cf. the explanation of Cullinane (supra), previously referred to, which was given by the High Court in T.C. Industrial Plant (supra).
The appellant also sought inclusion in the damages to be awarded to it of the sum of $143,049.00, being termination payments it was required to make to employees whose dismissals followed from the repudiation of the contract. The fact that this amount was incurred was not in dispute, and the amount should be allowed. It was a direct and natural result of the breach.
The appellant challenged the interest rate taken by the learned trial Judge in calculating the profit figure adopted by him. This ground of appeal would have involved a re-examination of a number of issues of fact, but it is unnecessary to undertake such an examination since, for reasons already discussed, damages cannot be awarded on the basis of a loss of profit.
The next item in dispute is the sum of $113,000.00 which was paid pursuant to clause 2.5.1 of the contract to the Secretary "as security for the due and proper performance and completion of the contract". By clause 2.5.5 it was provided:

"The amount of the security will be refunded to the Contractor without interest as soon as practicable after the Secretary has certified that the Contract has been satisfactorily completed and that there are no outstanding moneys owing to the Commonwealth as a result of the Contract."

The termination by breach of the contract rendered this payment, which had been made by the appellant, futile, just as it rendered other expenditure incurred by the appellant futile. It is true that the performance of the contract may not have resulted in this payment being recouped. But the onus, as regards that issue, is on the Commonwealth, and it has not shown that the amount would probably not have been recouped. The learned trial judge thought otherwise on the footing that the breaches of contract by the appellant on 12 September, and those which he found would probably have continued for about two months thereafter, would probably have prevented the secretary from certifying the contract as "satisfactorily completed". But the contract was to run for three years, and if it was complied with for two years and ten months, the difficulties at the commencement could hardly lead to forfeiture of the whole deposit paid "as security for the due and proper performance and completion of the contract". The contract contemplated the payment of liquidated damages for certain defaults; assuming these were paid, or deducted from payments to be received from the Commonwealth, would not an additional forfeiture of the deposit have been a penalty? With respect, the termination of the contract at so early a stage makes it impossible to ascertain whether the security deposit would or would not have been wholly refunded. In those circumstances, it is recoverable by the appellant as expenditure rendered futile by the Commonwealth's breach of the contract, and not shown by the Commonwealth to have been irrecoverable even if the contract had been performed.
Finally, as regards damages, there should be an allowance of interest pursuant to section 51A of the Federal Court of Australia Act 1976: see Henjo Investments Pty Ltd v. Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 104. As the assessment has been based on recoupment of expenditure incurred, and performance of the contract, although it would not have meant immediate return of that expenditure, would have involved recoupment also of interest paid in respect of it, the interest allowed under s.51A should be calculated, at an appropriate rate or rates, from the date of termination of the contract.
The appellant challenged, too, the order for costs which allowed it only one half of its costs of the proceedings. It is unnecessary to consider whether the costs order was justified on the findings made at the trial, since it clearly would not be justified having regard to the appellant's additional success upon the appeal. The appellant should have an order for 90% of its costs of the proceedings below, and it should have its costs of the appeal and the cross-appeal.
The appeal should be allowed; the cross-appeal should be dismissed; and the appellant should be directed to bring in on a date to be fixed short minutes of appropriate orders to reflect the reasons of the court. Those orders, subject to the correction of any error (other than that already mentioned) in the figures, will include an order varying the judgment under appeal to substitute the following for the damages allowed by the trial judge:

Amount of pre-operational expenditure wasted $ 854,943.00 Cost of acquisition and fitting out of aircraft, less value at termination of contract 4,364,192.00 Amount of termination payments made to employees 143,049.00 Amount of security deposit 113,000.00 Total (to which interest must be added under s.51A) $5,475,184.00

[1990] FCA 43

05 MARCH 1990