Baron Alderson’s formulation of the damages an injured party ought to receive for breach of contract in Hadley v Baxendale (1854) 9 Exch. 345; 156 ER 145 is possibly the most cited authority in the common law world.

In the decision of El Ali v Tritton [2019] NSWCA 111 (17 May 2019), the Court of Appeal of the Supreme Court of New South Wales (Payne JA; Macfarlan JA and Leeming JA agreeing), applied Hadley v Baxendale to determine the loss and damage a purchaser could recover flowing from the failure by a vendor to complete a Contract for sale of land.

The Facts

On 24 July 2015, El Ali (as vendor) entered into a Contract for sale of vacant land at Edward Street, Sylvania to Tritton (as purchasers) for a price of $740,000.

The purchasers intended to build a house on the land and paid a deposit under a preliminary building contract with Metricon Homes.

The purchasers proposed to use 3 sources of finance for the purchase – personal savings, a family loan and a loan from La Trobe for $444,000 secured by mortgage over the property.

The vendor failed to complete on 14 August 2015, the date nominated in the Contract. The purchasers served a Notice to Complete which made time of the essence on 4 September 2015. The vendor failed to attend at the time and place appointed for settlement.

Instead of accepting the vendor’s repudiation and terminating the Contract, the purchasers sought an order for specific performance, which was logical because the property had increased in value. This led to negotiations to purchase the property at a higher price, which failed.

On 29 February 2016, the purchasers purchased another block of vacant land, at Grays Point. The cost to build a house on that property was $128,000 higher than the cost to build a house at Edward Street.

On 11 April 2016, the vendor’s mortgagee sold the land at Edward Street to a third party for $800,000.

The losses claimed by the purchasers

The loss and damage claimed by the purchasers was under four heads:

1.Expectation damages of $60,000 representing the difference between the contract price of $740,000 and market value of $800,000. The Court’s assessment was made on this basis:

Where a party sustains a loss by reason of a breach of contract, he or she is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed: Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 [at 365]

      In this case, the Court considered that the usual “date of breach” rule should not apply: instead of damages being assessed at the date of the initial breach of contract (14 August 2015), they should be assessed at the date the property was re-sold (11 April 2016) and that the re-sale price be accepted as the value of the land. The Court said [at p 54]:

Damages in these circumstances should be assessed as at the date the remedy of specific performance was no longer available and the contract was lost. The respondents had acted reasonably in pursuing the remedy of specific performance. 

2. Increased building costs representing the fact that the house at Grays Point would cost $128,000 more to build than the house at Edward Street. The Court adopted what the High Court stated in European Bank Ltd v Evans (2010) 240 CLR 432; [2010] HCA 6 [at 13]:

“The formulation of the rule in Hadley v Baxendale states the entitlement of the plaintiff to recover such damages as arise naturally, that is, according to the usual course of things, from the breach of contract, or such damages as may reasonably be supposed to have been in the contemplation of both parties concerned at the time they made the contract as the probable result of the breach.” 

The Court of Appeal stated [at p 60]:

In this case it was not within the reasonable contemplation of the parties that the respondents [the purchasers] would buy a different kind of property which necessitated a different kind of home from that which they had been intending to build on the subject land at Edward Street. On application of the principles of remoteness the test was not satisfied in this case.

The Court of Appeal stated further that even if there was evidence that the vendor knew of the purchasers’ intentions to build a house, the loss would be calculated on the value of each property with a house built. The Court stated:

[the concentration] on the costs of construction of the proposed improvements on each block of land, without identifying the consequent effects on the improved value of the land [was misplaced]

3.Rental costs of $21,945 representing rent paid for 28.5 weeks from 14 August 2015 to 29 February 2016 (when the property at Grays Point was purchased) was considered by the Court to be too remote because during that period the purchasers “would in any event have been paying rent while a house at Edward Street was being constructed”.

In addition, the Court said [at p 69] that:

in order … to compare the position … the [purchasers] would have been in had the contract been performed, account must be given to any savings by reason of the non-payment of interest on those loans [to fund the building of a residence].

4.Interest on the family loan of $3,915 representing interest on funds borrowed on a reverse mortgage to contribute to the price. The Court stated [at p 73]:

[the purchasers] did not prove that they paid interest or were entitled to claim damages for the payment of interest under either limb of Hadley v Baxendale. The parties would not reasonably have contemplated that the purchaser would have drawn down financing prior to completion and be incurring ongoing interest liabilities notwithstanding the absence of any completion. 

Conclusion

The Court of Appeal in El Ali v Tritton took a narrow approach to the losses to be recovered for breach of a Contract for sale of land.

The difference in value at the relevant date and the contract price was allowed; but the increased building cost, rental costs and interest on the family loan were considered too remote, neither arising naturally from the breach nor being in the contemplation of the parties, so as to come within Hadley v Baxendale

As a result, the Court of Appeal entered judgment for the purchasers for $66,934.16 (including interest of $6,934.16). The Court disallowed the claim for $153,860 for increased building costs, rental and interest, which the primary judge had allowed.

The Court allowed the primary judge’s costs order against the vendor to stand, and awarded the costs of the appeal to the vendor because the vendor was largely successful in the appeal.