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In brief - Contractors claiming damages for a terminated contract must properly articulate and document their claim

The Supreme Court decision in Airloom Holdings Pty Ltd v Thales Australia Ltd [2011] NSWSC 1513 demonstrates that contractors claiming damages for wrongful termination of a contract must be clear on the sort of damages they are seeking, must have all contemporaneous documents available to support the claim and must know if GST is applicable.

Onus to establish damages is on the party claiming them

As part of establishing that damages are payable, contractors need to specify what the damages are for. This could be:

  • loss of profit
  • expenses to be recouped
  • wasted expenditure
  • compensatory damages
  • loss of a chance

Termination of services contract in Airloom v Thales

Airloom Holdings Pty Ltd v Thales Australia Ltd is a case concerning the termination of Airloom's services contract with Thales.

The matter was initially before the Local Court. In those proceedings, Airloom sought damages against Thales in the sum of $60,000 for breach of contract comprised of claims for:

  • $31,200 as the contract price for the supply of services
  • $25,882 as the profit margin for the supply of goods

Airloom submitted that it should be put in the same position it would have been in, if the contract had been performed to completion.

Local Court finds no basis for damages for lost profit

The Local Court found that the proper measure of damages that Airloom would be entitled to was the amount of $31,200 plus GST, less the overheads incurred in earning that revenue, such as the usual and expected business costs, both fixed and variable.

Taking this approach, ultimately, Airloom’s damages were assessed as $11,000 and there was no basis for damages for lost profit.

The Local Court said that it was difficult to ascertain the amount of the work that was done, the work that was not finished and the net profits Airloom would have earned on the services agreement, as Airloom did not provide any evidence or proper assessment for this claim.

Airloom appeals to the Supreme Court

On appeal to the Supreme Court of NSW, Airloom submitted that the Local Court failed to apply the appropriate rule in regard to the assessment of the damages for the defendant’s breach of its contract with Thales. That rule was to be found in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64, namely that the innocent party should be put in the same position it would have been in, if the contract had been performed.

Notably, McHugh J's powerful dissenting judgment in Amman was considered by the Supreme Court. McHugh J found that where a contract has been part performed, a party 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.

Airloom applied McHugh's dissenting judgment in its submission to the Court, as it believed that it was entitled to the full contract price for the services. Airloom submitted that it had already expended or allocated most or all of its resources prior to the breach of the contract by Thales and it could not quantify its expenses saved as they were all "overheads". In other words, these expenses were reasonably related business costs. As such, the contract price was "pure profit", which Airloom believed it was entitled to recover.

Airloom fails to establish type of damages or quantify expected profits and costs

The Supreme Court disagreed with Airloom on how its damages should have been calculated and found that Airloom had not:

  • established what sort of damages it was seeking
  • identified what its net profit would have been had the contract with Thales been performed
  • articulated what its usual and expected business costs would have been, if Airloom had performed the contract
  • quantified in a precise way what its expenses and profit would have been, had the contract been completed, to clarify the actual opportunity it lost

Supreme Court finds that GST is payable on damages

The Supreme Court found that difficulty in quantifying a contractor's loss does not stop the contractor from recovering damages, provided the contractor can establish its loss, and that damages can include an amount for GST payable on the damages awarded.

Airloom also submitted that the Local Court failed to consider whether GST was payable on damages. On this subject, the Supreme Court found that GST should have been awarded, as it was already conceded by Thales in the Local Court.

Overall, the Local Court judgment was varied to the extent that Thales was ordered to pay Airloom an additional $1,100 for GST on the damages awarded, such that total damages payable are $12,100.

Amount of damages claimed needs to be substantiated

It was found that Airloom needed not only to prove that it had suffered loss, but also the actual amount of that loss or damage so that it could recover damages. Therefore the amount of damages claimed needs to be clear and quantified.

An important principle to emerge from this case is that imprecision is not a bar to recovery of damages.

However, the onus is on the party claiming damages to understand from the outset the type and amount of damages it is seeking and what contemporaneous materials exist to support that claim.

Further, while Airloom was compensated for GST payable on damages, it was only because Thales conceded that GST was payable.

Ordinarily, the awarding of GST is difficult to ascertain and the Court will always look to the tax position of the plaintiff when assessing this as part of an award of damages.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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