In this case, the New South Wales Court of Appeal considered the manner in which expectation damages should be calculated in contract law and what account should be taken of overhead costs for these purposes.
This judgment shows that there is no general principle as to how overhead costs should be factored into a calculation of expectation damages. The aim of expectation damages is to put the aggrieved party into the same position as if the contract had been properly performed. This includes taking into account revenue that the party would have received if the contract had been performed, as well as costs that the party has been able to avoid due to the breach. On this basis, overhead costs that the party has been able to avoid or mitigate may be deducted from the award of damages. However, a deduction should not necessarily be allowed for overhead costs that cannot be avoided or mitigated.
Synergy Protection (“Synergy”) provided security services at two clubs operated by North Sydney Leagues Club (“NSLC”) under two separate contracts. In earlier proceedings, NSLC was found to have wrongfully terminated these two contracts and Synergy was awarded damages. On appeal, NSLC challenged the way that the amount of damages had been calculated, saying that the trial judge had failed to deduct NSLC’s overhead expenses from the estimated future revenue that Synergy would have received if the contracts had not been terminated.
The NSW Court of Appeal found that there is no absolute principle that overhead expenses must be taken into account when calculating expectation damages. The simple rule, as set out in many previous authorities, is that the damages must be calculated so as to put the aggrieved party into the same position as if the contract had been properly performed. This requires an assessment of payments that the party would have received if the contract had been performed, offset by any additional costs that the party has been able to avoid as a consequence of the breach.
In the present case, NSLC argued that Synergy’s overhead costs (both fixed, such as rent, and variable, such as telephone and power costs) should have been deducted on a proportionate basis from the revenue that Synergy had lost due to the wrongful termination. However, both the trial judge and the Court of Appeal rejected this as an overly simplistic principle. The Court of Appeal quoted with approval from the trial judgment that “it would be inaccurate to postulate that simply because a contract represents 30% of one’s business, there will be a 30% saving if that contract ends.”
The correct approach to take is to examine each category of cost to determine whether or not they can be avoided or mitigated by the aggrieved party. Costs that can be avoided or mitigated should be deducted from the amount of damages awarded, but costs that cannot be avoided or reduced (such as a fixed amount of rent for premises that cannot be used for another purpose) should not necessarily be deducted as they will be incurred irrespective of the fact that the contract has come to an end.
This judgment shows that it is difficult to make sweeping statements as to how damages should be calculated. In each case, a factual assessment needs to be made as to the amount required to place the aggrieved party into the same position as it would have been in had the breach not occurred.
To see the full judgment in this case, please click here.