Supreme Court New South Wales Medium Neutral Citation: Airloom Holdings Pty Ltd v Thales Australia Ltd [2011] NSWSC 1513 Hearing dates: 9 June 2011 Decision date: 14 December 2011 Jurisdiction: Common Law Before: Harrison AsJ Decision: (1) The judgment of her Honour Madgwick LCM dated 26 April 2010 is varied to the extent that the defendant is to pay the plaintiff an additional $1,100, such that total damages payable are $12,100. (2) The second further amended summons dated 9 June 2011 is otherwise dismissed. (3) The cross appeal is dismissed. (4) Costs are reserved. Catchwords: APPEAL FROM LOCAL COURT - contract not validly terminated - award of damages - whether Magistrate erred in law in assessing plaintiff's damages - whether GST payable on damages considered in the Local Court CONTRACT - relief - damages - whether plaintiff entitled to expectation damages -principles of expectation and reliance damages Legislation Cited: A New Tax System (Goods and Services Tax) Act 1999 (Cth) Local Court Act 2007 Cases Cited: Calderbank v Calderbank [1975] 3 All ER 333 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 House v R (1936) 55 CLR 499 Howe v Teefy (1927) SR NSW 301 Leichhardt Municipal Council v Green [2004] NSWCA 341 JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 Jones v Bradley (No 2) [2003] NSWCA 258 Robinson v Harman (1848) 1 Exch 850 at 855 Texts Cited: Corbin on Contracts, vol 5 (1964) Australian Tax Office, Tax Ruling GSTR2001/4 (12 November 2008) Category: Principal judgment Parties: Airloom Holdings Pty Ltd (Plaintiff) Thales Australia Limited (Defendant) Representation: A Connolly (Plaintiff) A J Bulley (Defendant) JSM Lawyers (Plaintiff) General legal counsel for Thales Australia Limited (Defendant) File Number(s): 2010/98363 Decision under appeal Before: Madgwick LCM File Number(s): 2008/6018 Judgment 1HER HONOUR : By second further amended summons filed (in Court) on 9 June 2011 , the plaintiff seeks, first, an order that the judgment of the Local Court given on 26 March 2010 be varied and the defendant be ordered to pay the plaintiff $32,300 (including $1,100 in respect of goods and services tax) instead of $11,000 ( awarded in the Local Court ); secondly, an order that the order of the Local Court made on 26 March 2010 that the plaintiff pay the defendant's costs on an indemnity basis from 29 January 2009 until 20 November 2009 be set aside; and thirdly, an order that the order of the Local Court made on 26 March 2010 that the defendant pay the plaintiff's costs on the ordinary basis up until 29 January 2009 be varied by deleting the words "up until 29 January 2009". 2The defendant filed a cross appeal to which I have referred below. 3The plaintiff in these proceedings and in the Local Court proceedings is Airloom Holdings Pty Ltd ABN 63 097 469 497 ("Airloom"). The defendant in these proceedings and in the Local Court proceedings is Thales Australia Limited ABN 66 008 642 751 ("Thales"). For convenience I shall refer to the parties by name. The appeal 4Section 39 of the Local Court Act 2007 provides that a party who is dissatisfied with a judgment or order of the Local Court may appeal to the Supreme Court, but only on a question of law. 5Section 40(1) of the Local Court Act provides that a party who is dissatisfied with a judgment or order of the Local Court may appeal to the Supreme Court on a ground that involves a question of mixed law and fact, but only by leave of the Supreme Court. 6Section 40(2) provides that a party who is dissatisfied with an order as to costs of the Local Court may appeal to the Supreme Court, but only by leave of the Supreme Court. 7Section 41 of the Local Court Act provides that this Court may determine an appeal either (a) by varying the terms of the judgment or order, or (b) by setting aside the judgment or order, or (c) by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court's directions, or (d) by dismissing the appeal. Grounds of appeal 8The grounds of appeal are lengthy. They fall into three broad categories: first, whether the Magistrate applied the correct legal principle in assessing damages for the termination of the services contract; secondly, whether the Magistrate erred in making findings on evidence and thirdly, whether the Magistrate erred in awarding costs on an indemnity basis. Cross appeal 9On 14 April 2011, Thales filed a cross appeal (the original summons commencing the appeal having been filed by the plaintiff on 22 April 2010). Thales sought, first, an extension of time to file the cross appeal; secondly, an order that the Magistrate's judgment be varied so as to award only nominal damages to Airloom. Leave is granted to extend the time for filing the cross claim. 10The grounds of the cross appeal are, first, that the Magistrate erred in law in respect of the assessment of the plaintiff's damages in awarding the plaintiff the sum of $11,000; and secondly, the Magistrate erred in Iaw in failing to order that the plaintiff was entitled to nominal damages only from the defendant. The Local Court proceedings 11In the Local Court proceedings, Airloom sought damages in the sum of $60,000 for breach of contract. Airloom claimed $31,200 as the contract price for the supply of services and $25,882 as the profit margin in respect of the supply of goods . It is only Airloom's claim for $31,200 as the contract price for the supply of services that is in issue before me, because the Magistrate only found that the contract for services existed. 12On 26 March 2010, the Magistrate assessed Airloom's damages at $11,000 and entered judgment accordingly. Her Honour ordered that Thales pay Airloom's costs on a party/party basis up until 29 January 2009. Thereafter Airloom was ordered to pay Thales' costs on an indemnity basis up to 20 November 2009. Interest was awarded from the date the statement of claim was filed, namely 4 July 2008. 13These proceedings were heard in the Local Court over a number of days, namely on 20 February 2009, 29 and 30 June 2009 , 19 October 2009, 20 November 2009 and 26 March 2010. 14Her Honour Madgwick LCM made a finding that on 21 March 2007 there was an agreement executed by the parties that was for services. Her Honour also made a finding that Thales wrongly terminated the contract on 28 May 2007. Neither party has appealed against any of those findings. 15On 19 October 2009, her Honour accepted that had Airloom performed the work, it would have incurred the usual and expected business costs, both fixed and variable, but the only revenue expected was the fixed price contract in the sum of $31,200. 16On 19 October 2009, The Magistrate delivered some extempore reasons for judgment. On 26 March 2010, her Honour delivered further reasons, to which I shall refer in more detail later in this judgment. 17Both parties made submissions in relation to the application of the principles enunciated in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64. I shall now refer to this case in more detail. Consideration of Commonwealth of Australia v Amann Aviation 18Counsel for Airloom submitted that all of their Honours in Amann approved the fundamental principle enunciated in Robinson v Harman (1848) 1 Ex 850 at 855; 154 ER 363 at 365, namely, that the innocent party should be put in the same position it would have been in, if the contract had been performed. The High Court acknowledged that the principle in Robinson v Harman would be applied in various ways depending on the circumstances of the case . 19Since Amann is a seminal case the facts are well known, however, it is worth considering its circumstances and principles and how they relate to this appeal. The facts are as follows. Amann contracted with the Commonwealth to conduct aerial surveillance of Australia's northern coastline. In order to perform the services, Amann entered into a number of substantial and onerous financial commitments that included purchasing specially equipped aircraft. Despite this, it turned out that Amann did not have enough resources to perform the contract and the company was otherwise in breach. The Commonwealth served a notice terminating the contract, however it later conceded that the notice was invalid. Nonetheless, Amann accepted the Commonwealth's actions as a repudiation, which entitled it to elect to terminate the contract and sue for damages. Amann would suffer a substantial loss if it had to dispose of the specially equipped aircraft. 20At trial in the Federal Court, Amann contended that it was entitled to damages on a reliance basis due to its expenditure in equipping itself to carry out its contractual obligati on. The trial judge, Beaumont J, assessed damages on the basis of lost profits and arrived at an amount which was substantially less than that claimed by Amann. Beaumont J did not accept that Amann was entitled to be compensated on the basis that it was probable that it would have secured a renewal of the contract when it expired , nor was Amann entitled to wasted expenses incurred in reliance of the Commonwealth's contractual promise. Beaumont J also decided that damages should be reduced by 50 per cent to allow for the chance that the Commonwealth would have terminated the contract in any event. The Full Federal Court reversed that decision and allowed over $6.6 million in damages. The Commonwealth appealed to the High Court. 21Mason CJ and Dawson J (at 81) stated that damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit. 22Their Honours expressed the view that the reason damages for breach of contract are often described as expectation damages is because the award of damages for breach of a contract protects a plaintiff's expectation of receiving the defendant's performance of the contract. The onus of proving the damage lies with the plaintiff and the amount of damages to be awarded will be in line with the plaintiff's expectation. The measure of the plaintiff's expectation is an objective test. That is, the plaintiff must prove that it was more likely than not, that he or she would achieve the expected outcome that would have resulted from the performance of the contract. 23Their Honours stated (at 81) that expectation damages, otherwise known as damages for loss of profits, should not imply that it is not possible to recover damages if no net profit would have been generated or where the amount of profit cannot be demonstrated. In such a situation where, if the contract had been fully performed, the plaintiff would not have made a profit but would have recovered its expenditure, the plaintiff is entitled to recover damages in accordance with Robinson v Harman because those costs would have been recovered if the contract had been performed. Similarly, where the plaintiff cannot demonstrate to what extent performance of the contract would have resulted in a profit for the plaintiff, the plaintiff can seek to recoup its expenses - that is it can receive reliance damages. 24Mason CJ and Dawson J in Amann continued at 82 to 83: " Hayes v. Dodd is a useful illustration of the statement that the expressions "expectation damages", "damages for loss of profits", "reliance damages" and "damages for wasted expenditure" are simply manifestations of the central principle enunciated in Robinson v Harman rather than discrete and truly alternative measures of damages which a party not in breach may elect to claim. The corollary of the principle is Robinson v Harman is that a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed. ... ...the plaintiff may choose to sue for damages based on his reliance interest "if he cannot prove his profit with reasonable certainty..." ... To the same effect is Corbin on Contracts . Corbin says: 'The fact that profits are too uncertain for recovery does not prevent a judgment in favour of the plaintiff for the amount of his expenditures.' " 25At 84 their Honours stated that a plaintiff is only entitled to damages for an amount equivalent to that which would have been earned had the contract been fully performed. In this way, the award of damages assessed by reference to a plaintiff's expenditure is in complete conformity with the principle that an award of damages for breach of contract should place a plaintiff in the same position as if the contract had been performed. 26At 86 their Honours further stated: "It should be observed that, in a case where it is not possible to predict what position a plaintiff would have been in had the contract been fully performed, as was the case in both McRae and Anglia Television, it is not possible as a matter of strict logic to assess damages in accordance with the principle in Robinson v Harman. But the law considers the just result in such a case is to allow a plaintiff to recover such expenditure as is reasonably incurred in reliance on the defendant's promise. In this case, the law assumes that a plaintiff would at least have recovered his or her expenditure had the contract been fully performed. It will still be open to a defendant, however, to argue that, notwithstanding the fact that it is impossible to assess what profits, if any, the plaintiff would have made had the contract been fully performed, the expenditure claimed by a plaintiff would nevertheless not have been recovered even if, to use the examples of McRae and Anglia Television, the tanker had existed or the defendant actor, Oliver Reed, had participated in the production of the film. In essence, such an argument is to the effect that, far from being impossible to predict what the result of the contract would have been, if fully performed, it is possible to demonstrate that performance of the contract would not even have resulted in the recovery by the plaintiff of reasonable expenses incurred." 27Toohey J at pages 134 and 135 explained the distinction between expectation damages and reliance damages in this way: "Where it is clear that a profit would have been made by the plaintiff and the extent of that profit is ascertainable, the simplest means of measuring the loss suffered as a result of the breach is to determine the amount of lost profits attributable to the breach. But where the contract would not have resulted in a profit for the plaintiff or where profits are indeterminate or the outcome of the contract uncertain, the plaintiff is not thereby denied recovery. The principle of Robinson v Harman still operates though some other mechanism must be employed to enable it to do so. That no profit would have been made does not mean that no loss has been incurred by the plaintiff as a result of the breach. And mere difficulty in assessing damages does not relieve a court of the responsibility of estimating them as accurately as possible: Fink v Fink (1946) 74 CLR 127 at 143 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 411-12; Chaplin v Hicks [1911] 2 KB 786 at 792. Damages are recoverable but, rather than prospective profits, expenditure incurred in the partial performance of or preparation for the contract may be a more appropriate yardstick for quantifying the loss suffered. Where the loss is quantified in this way, the plaintiff is awarded "reliance damages". Equally, however, if the rule in Robinson v Harman is to be applied properly, where a contract would have resulted in a loss to the plaintiff he is only entitled to damages equal to expenditure discounted according to that loss. If that loss would have been greater than the expenditure, only nominal damages can be awarded. In Bowlay Logging Ltd v Domtar Ltd (1978) 87 DLR (3d) 325, Berger J, at 335, adopted this statement in Corbin on Contracts , vol 5, (1964), pp 205-6: If, on the other hand, it is proved that full performance would have resulted in a net loss to the plaintiff, the recoverable damages should not include the amount of this loss. If the amount of his expenditure at the date of breach is less than the expected net loss, he should be given judgment for nominal damages only . If the expenditures exceed this loss, he should be given judgment for the excess (emphasis in Bowlay Logging Ltd v Domtar Ltd ). If reliance damages are considered in this way, the quantification of damages by reference to expenditure is, as Mason CJ and Dawson J say, fully consistent with the primary rule that a successful plaintiff should be placed in the same position as if the contract had been performed." 28Counsel for Airloom referred McHugh J's dissenting decision In Amann , where his Honour at stated 161-162: "Where the breach of contract occurs after the plaintiff has incurred expense in preparing or performing the contract, the plaintiff's loss is ordinarily the difference between the value of the benefits which it would have received under the contract, as and from the date of breach, and the expense which the plaintiff would have incurred, as and from that date, in performing its own contractual obligations. In the ordinary case of repudiation, any expense which the plaintiff has incurred in preparing to perform or in performing the contract prior to breach is irrelevant to the assessment of the damages to be awarded: see Banks v Williams (1910) 10 SR (NSW) 220, per Cullen CJ at 229-30. Except in very special circumstances, damages for breach of contract are assessed by reference to the circumstances which existed at the date of breach: Wenham , at 473; Miliangos v George Frank (Textiles) Ltd [1976] AC 443 at 468; Johnson v Agnew [1980] AC 367 at 400-1. If a plaintiff has expended or incurred liabilities of $100,000 prior to breach and would have received $200,000 in the future if the defendant had performed its contractual obligations, the amount of the plaintiff's damages is the difference between the $200,000 and the expenditure which the plaintiff would have incurred in performing its future obligations. The $100,000 already expended or incurred is irrelevant. Of course, if the breach itself causes the plaintiff some additional expense, it is entitled to recover that expense as part of its 'loss'." [footnotes omitted] 29The High Court held that Amann was entitled to reliance damages equivalent to its wasted expenditure, which resulted in a greater award than Amann would have received for loss of profits. The Court determined the appropriate application of the principle of a claim for reliance loss. It considered the distinction between expectation and reliance damages. The Court made general observations on the recovery of compensatory damages for loss of a chance. 30Amann was entitled to recover damages for the amount of pre-operational expenditure wasted; the cost of acquisition and fitting out of aircraft less the value at termination of contract; the amount of the termination payments made to employees; the amount of security deposit paid to the Commonwealth under the contract; any net profit the Commonwealth would have made had the contract been performed; and the value of the chance of having the contract renewed after three years. 31Lastly, while on the topic of Amann, Mr Mikhos (incorrectly spelt as Mikos in some parts of the transcript of the Local Court proceedings), a solicitor who appeared for Airloom referred to Amann in his oral submissions and then stated at T7 (20/11/2009): "The problem is that this situation is totally different. There is no money expended. It's strictly an expectation loss claim. Because, your Honour, let me reverse the argument and say this to you. By not performing the contract, what exactly did Airloom save in terms of expenses? Nothing. And therefore how could it possibly be expected to get less than $31,200?" The Magistrate's reasons 32On 19 October 2009, her Honour made a finding that in May 2007 the services agreement was not validly terminated (T9). Her Honour then referred to Howe v Teefy (1927) SR NSW 301 where she reminded herself that: "Difficulty in determining damages because evidence is lacking or because more than one method of assessment is available will not therefore, deter the court from making an award." 33Her Honour continued: "The basic principle is that damages for breach of contract are awarded for loss of expectation - that the injured party in so far as money can do it - is to be placed in the same position as if the contract had been performed. In Commonwealth of Australia v Amann Aviation Proprietary Limited, the court found that Amann, whose contract had been terminated on the first day of operation, was entitled amongst other things to any net profit it would have made had the contract been performed." 34Her Honour then drew to the attention of the parties the fact that she was having difficulty in ascertaining, first, the amount of the work that was done and the work that was not finished; and secondly, the net profits Airloom would have earned on the services agreement . The claim for quantum meruit had been discontinued. Her Honour requested that the parties either agree on those amounts or failing that, that they furnish written submissions in relation to those issues (T9 -10 , 19/10/09). 35On 19 November 2009, Thales filed written submissions in accordance with her Honour's directions. In those submissions, Thales submitted that Airloom's damages were the loss of profits which Airloom could have expected to have earned under the services contract, had that contract been fully performed. Thales said that the maximum revenue which Airloom could have recovered pursuant to the fixed price services contract was $31,200 plus GST. According to Thales, the proper measure of damages to which Airloom would be entitled was $31,200 less the overheads incurred in earning that revenue. Thales further submitted that Airloom was lacking evidence as to the amount of profits that it would have earned. Airloom did not furnish written submissions despite the direction of the Magistrate. Instead Airloom sought to and was permitted to file a further affidavit of Mr Georgopoulos dated 15 November 2009. 36Prior to the submissions being made on 20 November 2009, her Honour had already concluded that the proper measure of damages that Airloom would be entitled to the amount of $31,200 plus GST, less the overheads incurred in earning that revenue (T12, 19/10/09). That determination was in accordance with the approach that Thales later sought in its submissions. 37On 26 March 2010, her Honour gave further ex tempore reasons. Her Honour reproduced paragraph 3 of the services agreement and then continued (T2): "During the terms of this agreement, Airloom shall provide the following services in a professional manner by appropriately experience qualified or certified individuals as is required by the specific tasks: 1. Credent Solution Design. 2. Credent Solution Design document. 3. Site Specific Credent build document. 4 Three days on-site Credent installation and configuration. 5. Two days on-site Credent administrator training. 6. Provision of a project manager ensuring efficient and timely communication between the project teams and co-ordinating any documentation requirements.' There was a fixed price given for those services, being 31,200. In the quotation dated January 9 2007, the 31,000 is set out in the following amounts. Airloom Consulting Services project manager: 3,000. Airloom Consulting Services: 3500. Airloom Consulting Services Credent Solution Design document: 4500. Airloom Credent Deployment Services day rate on-site: 6,600. Airloom Credent Systems administrator training day rate on-site: 5,600. Airloom Credent enterprise edition site specific bill document: 8,000. A total of 31,000. The items which the defendant said were not supplied were: site specific bill document - which were three days on-site, two days on installation and configuration, two days on-site Credent administrator training. These items amount to 20,000 and it is this amount that has to be valued as to the [lost] profit the plaintiff would have obtained if it had performed the above services. The defendant submits, and I accept, that if the plaintiff had performed the work he would have incurred the usual and expected business costs, both fixed and variable, and only the revenue expected from the fixed price contract. Now, I did allow the affidavit of Mr Georgiopolis to go in on the last occasion, but all I can say is Mr Michos, if anything, that has confused the issue. Because in his recent affidavit, which I didn't allow the defendant to cross-examine him on, he says it would have been all pure profit. Now, that goes against the evidence of the other director, Mr Hajios, who talked about overheads and internal costs of $65,000 or so. I have gone through all the material and I have not been assisted. The defendant submits, and I accept, that if the plaintiff had performed the work he would have incurred the usual and expected business costs, both fixed and variable, and only the revenue expected from the fixed price contract. During the proceedings, there was no evidence quantifying lost profit as a result of the work identified above not being performed. Whilst there is evidence in various affidavits and man-hours spent et cetera, there is none re lost profit. As I said, Mr Georgiopolis' and Mr Hajios' evidence; it is at odds. I have been unable to make a judgment on it so, as far as I can say, there will just be judgment for the plaintiff in the sum of 11,000." 38Hence, Her Honour adopted the approach of assessing Airloom's damages by accepting that Airloom would have earned revenue of $31,200. Her Honour accepted that in performing that work, Airloom would have incurred usual and expected business costs both fixed and variable. 39To calculate the appropriate damages , her Honour deducted the items identified in paragraph 3 of the agreement that were not supplied to Thales from the revenue sum of $31,200 . The costs of these services would not have been incurred by Airloom. The items not supplied amounted to $20,000 so her Honour awarded damages for the balance of $11,000 (T3, 26/3/2010). The Magistrate did not assess damages on the basis of lost profit as she made a finding that there was no evidence as to what that would be. Consideration of grounds of appeal 40It is convenient that I consider grounds 1 to 3 of this appeal together. They are first, whether the Magistrate erred in law in the assessment of damages; secondly, the application of the appropriate rule in relation to damages; and finally, failure to consider that there was no saved expenses resulting from the repudiation of the contract. 41The errors that Airloom submitted in relation to ground 1 were made are as follows: (a)Her Honour erred in failing to apply the appropriate rule in regard to the assessment of the damages for the defendant's breach of its contract with the plaintiff. Particulars : (i) The contract between the parties was a contract under which the plaintiff agreed to provide services to the defendant for the sum of $31,200, and her Honour so found; (ii) The defendant repudiated the said contract, and refused to accept the said services, and her Honour so found; (iii) In circumstances such as those in (i) and (ii) above, the rule for assessment of damages is that the plaintiff is prima face entitled to the contract price for the said services (less any expenses saved as a result of non-provision of the services that were not provided by reasons of the defendant's repudiation); (iv) The damages to which the plaintiff was entitled would be reduced by such amount as was earned by any alternative contracts for services which the plaintiff was able to enter into because of the defendant's repudiation, or which the plaintiff might reasonably have entered into in consequence of the defendant's repudiation (the mitigation principle); (v) The onus was on the defendant to establish that the contract price should have been reduced in consequence of the application of the mitigation principle; (vi) Further and or alternatively, the whole of the evidence before her Honour demonstrated that there was in fact no alternative contract for service entered into by the plaintiff in consequence of the defendant's repudiation. 42Airloom's submissions on ground 2, which was linked to ground 1 set out above, concluded that had her Honour applied the correct legal principles, damages would have been assessed at $31,200. 43Counsel for Airloom says that McHugh J's observations in Amann make it clear that, where a contract has been performed in part, a plaintiff may sue for the whole of the contract price, less expenses saved in respect of the unperformed part of the contract, plus additional expenses incurred as a result of the breach. Counsel further submitted that when applied to the present case, Airloom is entitled to the contract price of $31,200 plus GST, less expenses saved and plus any additional expenses. It is submitted that Airloom saved no expenses as a result of the non-performance of the unperformed part of the contract, all of the relevant expenses were fixed and could not be avoided: they were paid, they were not saved. Therefore, Airloom submitted that it is entitled to $31,200 plus GST. Counsel for Airloom submitted that the appropriate measure of damages was the fixed contract price of $31,200. Thales submitted that the overheads in earning the sum of $31,200 should be deducted. 44The crux of Airloom's argument is that the magistrate erred in finding that there was no evidence as to lost profit, when the evidence before her Honour was actually that there were no lost expenses. Airloom submitted that it had already expended or allocated most or all of its resources prior to the breach of the contract and it could not quantify its expenses saved as they were all 'overheads' or in other words these expenses were reasonably related business costs. The argument continues that Airloom's employees were timetabled to work on the Thales job. After they had performed this service all that remained was for Airloom to be paid. Airloom submitted that since those resources had already been allocated, it could not mitigate its loss by re-booking its engineers to work on other jobs. This is the explanation for Airloom's argument that the contract price was "pure profit". 45Thales submitted that in relation to the Magistrate's findings as to damages, her Honour did not commit any relevant error of law. Thales submitted that it was clear from the transcript that her Honour sought, based upon the evidence before her, to apply the applicable principles laid down by the High Court in Amann , including the passage from the judgment of McHugh J set out above. 46The onus was upon Airloom to establish its damages. Airloom could have claimed damages on the basis of expectation damages (also known as loss of profits) or alternatively it could have claimed reliance damages. The difficulty that the Magistrate encountered was that it was not clear what sort of damages Airloom was seeking. This difficulty was further compounded when Airloom's evidence as to damages changed from the approach that , to earn revenue of $31,200, it incurred expenses or overheads in the sum of $65,000, to the approach that the sum of $31,200 represented "all profit" as no expenses were incurred. 47The Magistrate made a finding that there was no evidence of what Airloom's net profit would have been. If that was the situation then Airloom could only recover reliance damages. What was Airloom's evidence as to damages? 48Airloom relied on affidavits of two of its directors, the affidavit of Mr Chris Hagios dated 4 December 2008 and three affidavits of Mr John Georgopoulos dated 4 December 2008, 19 February 2009 and 15 November 2009. 49While Mr Hagios' affidavit dated 4 December 2008 does not address the issue of damages, when he was cross examined the following exchange occurred (20/2/09, T41, 7-23): "Q. But Airloom would incur overheads in providing those services wouldn't it? A. Providing the total services? Q. Yes. A. Certainly. Q. In providing those services they would incur overheads such as salary and wages? A. Certainly. Q. What other overheads would they incur in providing those services? A. There's a range of different costs that influence a business. Q. What sort of costs - what sort of costs that are applicable to your business for those services? A. Technology costs, maintaining them, labbing costs, housing staff costs, superannuation costs, I can keep listing them all day if you want." 50So according to Mr Hagios, overheads were incurred by Airloom in providing the services to Thales. 51Mr Georgopolous' first affidavit of 24 December 2008 does not address the issue of damages. 52In his affidavit dated 19 February 2009 Mr Georgopolous deposed that two engineers from Airloom were booked in to work for seven days at the Thales site. He continued: "26. This equates to 14 man days. Given the lead time necessary for a customer to have an engineer on site, we were unable to fully rebook the resources. 27. I have performed a review of our internal timesheet records on salesforce.com and can advise that from 1 Jan 07 - 30 Jun 07, the average time spent by both engineers on internal Airloom work vs external customer facing (billable) work was 26% internal and 74% external. Our professional services day rate was $2,200 ex gst. This equates to 14 days x 74% billable x $2,200/day = $22,792 in lost revenue by having the engineers not available for other work. 28. We have also invested significant time in pre-sales, contract negotiation and project management time that is not recorded on any time sheet system. A conservative estimate of the time spent would be 7 man days for Chris Hagios and 3 man days for myself. 29. All this time is in addition to the work actually done by Wayne Phillips and David Creedy as evidenced by the Timesheet report and previously submitted. 30. In brief a breakdown of the true time spent/lost with Thales is a(s) follows: Resource Days Timesheets - Engineers 9.5 Opportunity loss due to engineers on hold 10.4 Chris Hagios 7 John Georgopoulos 3 Total in man days 29.9 BILLABLE Day rate $2,200 Internal Cost $65,780 31. As you can see, the internal 'costs' to the business are actually closer to $65,000, and this does not include time or costs incurred as a result of these legal proceedings" 53However, the contents of Mr Georgopoulos' third affidavit sworn 15 November 2009 is at odds with what was contained in his second affidavit. Mr Georgopoulos deposed that the purpose of this third affidavit was to provide evidence as to loss that Airloom had suffered and to substantiate the profit margin of the portion of the services contract which remained unperformed. In particular he deposed that he was providing evidence as to the difference between the costs of providing the balance of the work unperformed compared to the income derived. 54At paragraphs 3, 4, 7, 8 and 11 of his third affidavit Mr Georgopoulos deposes that: "3. I have been advised by my solicitor to indicate and substantiate the profit margin of the at portion of the Services Contract which remained unperformed, and in particular the difference between the costs of providing the balance of the work unperformed compared to the income derived there from. 4. The balance of the work that was not performed was part of the Deployments services, the onsite Administrator training, part of the Site Specific Build Document. I estimate that work time to have been around 4 to 5 days. ... 7. In relation to the Services Contract, there was no additional cost incurred for the supply of software as the defendant failed to order the software from the plaintiff. There was also no cost of transport as the plaintiff's office is located no more than 1 to 1.5 kilometres or so from the defendant's place of business. ... 8. As no additional costs were to be incurred by Airloom in performing the Services Contract (because David Creedy and Wayne Phillips salaries were payable whether the contract existed or not) the entire contract price represented pure profit. That included the portion of the Services Contract which was unperformed. ... 11. I confirm that David Creedy and Wayne Phillips were at all material times and continue to be fixed costs of the plaintiff and that there was no additional costs incurred or to be incurred by the plaintiff in order to perform its obligations under the Services Contract. As such the contract price was (would have been) all profit for the plaintiff including all that part of the work that was not performed. " 55Mr Georgopoulos was cross-examined before the Magistrate about whether the services contract would have made a loss (T31-34 29/6/2009): "Q: ...your evidence was that costs were incurred by Airloom before the services agreement was executed; is that your evidence? A. Yes. Q And again, the costs in relation to contract negotiation are purely an internal Airloom cost, aren't they? A. Yes, it is a cost of my time and Chris' time. Q. And in the ordinary course your would never be able to recoup these costs from a client, would you A. Depending on the specifics of every engagement, we sometimes bill them for our project management fee, which is a direct pasture of my class or Chris' class. It depends on the nature of the agreement. Q. Do you say that you would be able to recoup these costs in the fixed price services contract which was agreed between the parties? A. The costs of the services agreement - sorry the price of the services agreement and the margin on the software licence agreement was the revenue that we were going to - were only going to cost them based on that basis in total, that's why I'm struggling to distinguish between the two because it's the one transaction. Q. Now it is correct to say that the figures that appear in that table are inaccurate, aren't they? A. I disagree. What do you make that assumption on? Q. They make a claim for supposed opportunity lost? A. Yes. Q. In respect of the two engineers when they were performing at least some work? A. Yes, but when you look at the total of the hours that are allocated in the timesheet, and if you deduct that from the 14 man days, you are still owed a number higher than 10.4 man days. So my number is still a conservative estimate. Q. Again it's an estimate only? A. Yes. ... Q. But, of course, you're claiming lost costs of $65,780? A. No, I'm not claiming that is; what I'm saying is this is an estimate - this is a reflection of the true costs that we incurred, the quantum of our claim is as read in the claim that we've put before the court. This 65,780 is not our claim. Q. It's not. What is your claim? A. Our claim is for the time - is for the 31 odd for the services and for the lost margin on our software licence. ... Q. What was the purpose of the calculation you set out at paragraph 30? A. The purpose is to demonstrate that the reason why we viewed it as one transaction was that we were going to incur costs over and above the $31,000 odd for the services only. ... Q. You also say that your claim is in relation to the lost margin on software licence; is that right? A. That's correct. ... Q. What do you say is the lost margin that Airloom suffered in relation to the software, what was the margin of loss that you say? A. The exact numbers on the statement of claim, but broadly speaking as a credit reseller, we make 30 per cent on the value of the software licences and we make 50 per cent on the value of the maintenance agreement. Q. But those figures aren't set out anywhere in this affidavit, are they? A. No, so the actual loss to the company is significantly more than the 65,780; yes, that is correct." 56In re-examination Mr Georgopolous stated (T36): "Q. You were asked several questions in relation to the figures that appear on the final two pages of your affidavit, on paragraphs 24 down to 32? A. Yes ... Q. And I think you gave an answer to the effect the reason that was priced in your affidavit was to show that the $31,600 services agreement in no way was covering all your services in relation to this transaction? A. That is correct. If this was to be - if the agreement was to be solely based on services and no supply of software, it would be significantly higher than the $31,200. Q. And you're saying this is simply to demonstrate that? A. This is to demonstrate the fact that, yes, there is - yes, time involved because when - and this is the difficulty I had in ascertaining the profit margin of one versus the other because to procure the software from Credent would total half and hour ... It is a paper trail, and that was to the value of I think 30,000 odd...So there is no direct correlation between the time and effort in terms of acquiring a licence key versus... versus the time spent in getting to that point, which is why we took a discount in the services to reflect that..." 57From this evidence it appears that Mr Georgopoulos is saying that Airloom would have incurred estimated costs of $65,780. In other words, had the contract been performed, it would have resulted in a substantial loss to Airloom. 58Her Honour stated that Mr Georgopoulos' evidence was not of assistance because it was inconsistent with the evidence of Mr Hagios who stated that Airloom's internal costs in relation to the contract were about $65,000 (26/3/2010, T3). Mr Connolly, counsel for Airloom, submitted at the hearing of this appeal that her Honour had mistaken the witnesses and the nature of the evidence that was given: Mr Hagios did not give such evidence; it was actually evidence from Mr Georgopoulos (9/6/2011, T14). This submission is correct in so far as the Magistrate attributed that evidence to Mr Hagios when it was in fact given by Mr Georgopoulos. However, her Honour correctly summarised the substance of the evidence given by Mr Georgopoulos. 59The evidence Mr Hagios gave in cross-examination demonstrated the kind of overheads the plaintiff would ordinarily expect to incur in contracts of this sort but it does not give any indication of the profit the plaintiff would have expected to earn. 60Airloom submitted that her Honour fell into error of law in finding that Mr Georgopoulos' evidence in his affidavit of 15 November 2009 was inconsistent with Mr Hagios' evidence and there was no basis for this finding because the evidence about the $65,780 was wrongly attributed by Her Honour to Mr Hagios and there was no basis for the finding that the evidence of the two witnesses was inconsistent (T15-17). The reference to Mr Hagios' name was a mistake. It should have been a reference to evidence given by Mr Georgopolous, the other director of Airloom who gave evidence that was inconsistent , in the Magistrates' view, with other parts of his own evidence. This misstatement of one of the directors' names is of no consequence. It is the substance of the evidence that is important and her Honour correctly summarised that evidence. There is no error of law and if it is an error of fact, it is not a matter where leave would be granted. 61Mr Georgopolous' final sentence in the excerpt (above ) from the 15 November 2009 affidavit is most important. He states, "As such the contract price was (would have been) all profit for the plaintiff including all that part of the work that was not performed." Prior to this sentence the plaintiff submitted correctly that Mr Georgopolous is referring to the post-repudiation period, however, with this final sentence he then sums up his belief as to the position Airloom would have been in if the contract had been performed. This sentence contradicts his affidavit evidence of 19 February 2009. 62According to the 19 February 2009 affidavit, the opportunity lost was 10.4 days which equals $22,880 at the billable daily rate deposed to of $2,200. But this is not accurate. The breakdown shows that Airloom had already spent 9.5 days on the Thales contract. It is not clear how much of the 10 days Mr Hagios and Mr Georgopolous could be billed as some of this time was spent was in pre-contract negotiations and preparations. By being on site at Thales, the percentage of billable time would have been greater. Also, the fact that the service was to be completed by salaried employees cannot truly represent the 'billable day rate' as 'pure profit'. Airloom must make some internal deductions from the price of its business contracts generally in order to pay its reasonable business costs, such as wages. Otherwise it would go broke very quickly. 63In the 15 November 2009 affidavit, Mr Georgopolous states Airloom lost about four to five days on which Airloom could have charged its employees out. This evidence is inconsistent with the breakdown provided in the affidavit of 19 February 2009 where Mr Georgopolous at paragraph 30 estimates the "Opportunity loss due to engineers on hold" at 10.4 days. 64On the evidence contained in the affidavit of 19 February 2009 Airloom would have made a loss if the contract had been performed. Given Mr Georgopoulous' evidence, Airloom had already made significant losses in relation to time in pre-sales, contract negotiation and project management time that is (importantly) not recorded on any time sheet system. It seems from annexure 'D' to Mr Georopoulous' February affidavit that Airloom has lost 75.8 hours in time its engineers spent working on the Thales project and the directors estimate their time at 7 days, although there seems to be no dollar figure to equate to this time. It is impossible from the evidence to accurately calculate Airloom's loss or internal costs. 65The Magistrate's judgment shows that Airloom was unable to articulate exactly what its usual and expected business costs would have been if it had performed the contract. If Airloom had been able to show that its costs had been reasonably incurred, the presumption would have been that it would have recouped its costs through performance of the contract and the onus would have been on Thales to prove otherwise. However, this does not mean that her Honour erred in requiring Airloom to quantify its loss, whether this is by way of lost expenses or diminished profit. To say that $31,200 was all profit and that it should be awarded to Airloom was incorrect and to award that figure would be to put Airloom in a better position than it would have been in had the contract been performed. Airloom, on its own evidence, would have expended about double that figure if the contract had been performed. 66Airloom needed to quantify its expenses and profit had the contract been completed, to clarify the actual opportunity it lost . It has shown none of those things in a precise way. It is not clear what licences Airloom would have profited from post-performance of the contract. Normally, as discussed, expectation damages are awarded based on the expected profit, taking into account expenses incurred after the breach. However, as Mason CJ and Dawson J stated in Amann at pages 80 to 81, where it is not possible to predict the net profit that would have been earned by a plaintiff, the principle in Robinson v Harman dictates that reliance damages, based on the expenditure a plaintiff had reasonably incurred in reliance on the defendant's promise. According to their Honours, "expectations damages" and "reliance damages" are simply manifestations of the central principle enunciated in that case (at 82). 67It is apparent that the Magistrate considered and applied the principles set out in Amann and in Robinson v Harman. It is my view that her Honour awarded damages based on the principle set out in those cases that the plaintiff should be placed in the position it would have been had the contract been performed. It is difficult to characterise the damages awarded in this case as either "reliance damages" or "expectation damages" and her Honour did not clearly do so. However in my view she did not have to do so, given that she was nevertheless applying the correct principles. 68Her Honour identified that while the onus was on Airloom to not only prove that they had suffered loss, but also the actual amount of that loss or damage, such quantification problems should not bar recovery. However, this principle does not apply where such quantification problems are the fault of the plaintiff. Her Honour appears to have done her best with the evidence before her. As stated by Brooking J in JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 at 241: "A plaintiff cannot recover substantial... damages unless he proves both the fact and the amount of damages... If he proves the fact of the loss but does not call the necessary evidence as to its amount he cannot be awarded substantial damages: he must put the tribunal in the position of being able to quantify in money the damage he has suffered". 69Airloom was unable to prove what their net profit would have been if the fixed price contract had been performed; to award $32,300 to Airloom for services would not have been the correct approach. Her Honour did not make any error of law. Ground 4 - Possible mixed question of fact and law 70This ground is a fall back position, in that if the earlier grounds of appeal involved mixed fact and law, leave should be granted. I have already addressed each issue, one being a factual matter. It is my view there is no further issue of mixed fact and law for which leave is required. Hence, no leave is granted. Ground 5 - GST 71Airloom submitted that the $11,000 awarded by the Magistrate was calculated by reference to figures exclusive of GST. If this approach leading to the calculation of the $11,000 was correct, it would have resulted in undercompensating Airloom, as it would have become liable to pay GST on the damages. 72Airloom submitted that as only some of the services under the contract were supplied, only the part of the damages referable to the supplied services is consideration for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (Cth). Airloom further submitted that if the amounts in the quotation dated 9 January 2007 were used, the apportionment of damages to the consideration component would be $11,000, giving rise to a GST liability of $1,100. Thales did not submit that GST is otherwise not payable on the amount awarded by her Honour or such other amount as may be awarded by this court. 73In calculating the damages payable, her Honour decided that the amount of the supply of services up to the date of the breach and held that they totalled $11,000 (26/3/2010, T2). In these circumstances, I agree that GST should have been awarded on the damages. 74Her Honour should have compensated Airloom for the GST that is payable on the damages she awarded, namely $1,100. This is an error that can be corrected on appeal. In accordance with House v R (1936) 55 CLR 499 at 505 (Dixon, Evatt and McTiernan JJ) I can exercise my own discretion on this point and award an additional sum of $1,100 for GST and I have done so. Cross-appeal 75The grounds of the cross-appeal are that her Honour Madgwick LCM erred in law in respect to the assessment of the plaintiff's damages in awarding the plaintiff the sum of $11,000 and her Honour erred in law in failing to order that the plaintiff was entitled to only nominal damages. 76In the cross appeal, it was submitted that her Honour did not apply the relevant principles in Amann and Robinson v Harman , because her choice of the sum of $11,000 did not make appropriate allowance for the expenses Airloom would have incurred in providing its services on the basis that under the fixed contract price the services offered were always going to be a loss-making exercise for the plaintiff. Therefore, the defendants say there was an error of law in awarding the $11,000 and her Honour should have only awarded nominal damages at best. 77However, Thales did not make the submission before the Magistrate that Airloom was entitled to only nominal damages. As this proposition was not raised before the Magistrate for her to consider, it cannot be raised here. 78In any event it is my view that her Honour did not fall into error in awarding the damages to Airloom and applied the proper principles, save as to her failure to consider GST. The cross appeal is dismissed. Ground 6 - the costs orders 79Airloom has sought leave to appeal the Magistrate's decision on costs. They require leave to appeal pursuant to s 40(2) of the Local Court Act . 80At the conclusion of the proceedings in the Local Court, there was debate about the contents of various letters by Thales to Airloom on the topic of settlement. In the end Thales relied on its letter dated 29 January 2009 as a basis for an indemnity costs order being made. Thales submitted that it was clear from the terms of the letter dated 29 January 2009, that it had made an offer of $43,000 to settle the proceedings (26/3/10, T4). 81There were submissions made by both parties as to whether or not an order should be made for indemnity costs. Thales was seeking an order for indemnity costs on the basis it had made an offer governed by the principles in Calderbank v Calderbank [1975] 3 All ER 333 for the sum of $43,000, albeit inclusive of costs. On any view, that offer far exceeded the amount awarded of $11,000 ( and indeed my increased award of 12,100). Airloom did not accept that offer. 82This decision to award indemnity costs was made consistently with the authorities of Jones v Bradley (No 2) [2003] NSWCA 258 and Leichhardt Municipal Council v Green [2004] NSWCA 341. The principle underpinning these decisions is that "[i]ndemnity costs do not flow as a matter of course from unaccepted defendant offers". For the Court to award indemnity costs there must be particular grounds on which the Court can exercise its discretion and the defendant needs to demonstrate that the plaintiff's rejection of the offer was "unreasonable" ( Leichhardt Municipal Council v Green at [46] per Santow JA). This discretion is only to be exercised after considering all the circumstances of the case. 83From the Magistrate's comments, although I accept that at times she did not express what she meant with clarity, it is clear she had formed the view that Airloom acted unreasonably when it rejected the 29 January 2009 offer. The following exchange occurred at T9 (26/3/2010): "MIKOS: ... it's also a discretionary issue for your Honour not something which goes automatically, as in an offer of compromise. In this particular situation, my submission would be that given the action of .. (Not transcribable) .. and that our client was completely innocent of any wrongdoing in terms of the breach of contract. It's unfair and would not be in the interest of justice to award the costs order as proposed by my friend. It doesn't take into account the commercial activity and the way they have behaved during the course of the commercial relationship. It seems as thought it would be rewarding them for something that they have done, which your Honour specifically criticised them about when she gave her initial judgment. MIKOS: Could I say one further thing your Honour, and I'll try and keep it very brief. In circumstances of this kind when your Honour is considering whether or not to exercise your Honour's discretion in a certain way-- HER HONOUR: I can't see how I can exercise it. That's my problem. BULLEY: Yes. HER HONOUR: Throughout the whole series, I wanted the parties to settle it because I could see the problems. BULLEY: Well, this is what we were seeking to do. It's clear that's what we were seeking to do. HER HONOUR: And whilst there may have been no offer after the proceedings commence, there was an offer before. 84What the Magistrate was indicating was because Thales' offer of 29 January 2009 of $43,000 far exceeded the $11,000 damages awarded, there was no reason why she should not exercise her discretion in favour of Thales. It was not necessary for her Honour to provide any further reasons. In my view leave should not be granted but if it was her Honour correctly applied the principles and the costs order should stand. 85The decision of her Honour Madgwick LCM dated 26 April 2010 should be varied, to the extent that an additional $1,100, referable to GST payable, should be paid by the defendant to the plaintiff. The appeal is otherwise dismissed. The cross appeal is dismissed. 86Costs are reserved. The Court orders that: (1) The judgment of her Honour Madgwick LCM dated 26 April 2010 is varied to the extent that the defendant is to pay the plaintiff an additional $1,100, such that total damages payable are $12,100. (2) The second further amended summons dated 9 June 2011 is otherwise dismissed. (3) The cross appeal is dismissed. (4) Costs are reserved ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 December 2011