Home Page | Cases | Tabcorp Holdings Ltd v Bowen

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8

236 CLR 272; 83 ALJR 390; 253 ALR 1

Overview

This case considered the appropriate measure of damages for rectifying damage caused by a tenant in breach of contract.

Tabcorp (tenant) destroyed the landlord's (Bowen's) foyer and replaced it with a new foyer in breach of contract.

The trial judge awarded damages representing the difference in value between the original foyer and the new foyer.

The Full Federal Court awarded damages representing the cost of returning the foyer to its original condition, plus lost rent for the period in which the restoration took place.

Tabcorp appealed, seeking restoration of the trial judge's decision; the High Court dismissed Tabcorp's appeal.

Foyer of office building

Catchwords

Contract – Damages - Lease - Tenant's covenant - Covenant not to make any substantial alteration to premises without consent - Appropriate measure of damages for tenant's breach.

Contract – Damages - Lease - Principle in Robinson v Harman (1848) 1 Ex 850 [154 ER 363] - Whether costs of rectification available - Whether rectification must be reasonable - Relevance of commercial character of premises - Whether landlord entitled only to damages for diminution in value of reversion.

Words and phrases – "costs of repair", "rectification costs".

 

Facts

Bowen Investments was the landlord of an office building in Melbourne. Tabcorp was a tenant. Tabcorp jack hammered stone flooring in the foyer of the building.

The lease contained a covenant (cl 2.13) which forbid the tenant from altering premises without prior written approval of the landlord. Tabcorp had not received written consent to destroy the flooring in the foyer. Despite protests, Tabcorp continued to alter the foyer and replace it with a new foyer.

 

Trial judge (Tracey J)

The trial judge described Tabcorp's conduct as 'contumelious disregard' for the landlord's rights. This description was not challenged on appeal. The trial judge upheld a claim for common law damages for two breaches:

  1. destroying the old foyer (up to 14 July 1997)
  2. constructing a new foyer (to end August 1997)

Damages of $34,820 were awarded (difference between value of old fyer and new foyer).

 

Full Federal Court

The Full Court of the Federal Court increased the award of damages to $1.28 million, comprising the cost of restoring the foyer to original condition plus lost rent for the time the restoration was taking place.

 

High Court

French CJ, Gummow, Heydon, Crennan and Kiefel JJ

Dismissed Tabcorp's appeal that the measure of damages applied by trial judge should be restored:

[para 13] Underlying the Tenant's submission that the appropriate measure of damages was the diminution in value of the reversion was an assumption that anyone who enters into a contract is at complete liberty to break it provided damages adequate to compensate the innocent party are paid. ... It has been dignified as "the doctrine of efficient breach". It led, in the Landlord's submission, to an attempt "arrogantly [to] impose a form of 'economic rationalism'" on the unwilling Landlord. The assumption underlying the Tenant's submission takes no account of the existence of equitable remedies, like decrees of specific performance and injunction, which ensure or encourage the performance of contracts rather than the payment of damages for breach. It is an assumption which underrates the extent to which those remedies are available. However, even if the assumption were correct it would not assist the Tenant. The Tenant's submission misunderstands the common law in relation to damages for breach of contract. The "ruling principle", confirmed in this Court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman:

"The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he 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."

Oliver J was correct to say in Radford v De Froberville that the words "the same situation, with respect to damages, as if the contract had been performed" do not mean "as good a financial position as if the contract had been performed" (emphasis added). In some circumstances putting the innocent party into "the same situation … as if the contract had been performed" will coincide with placing the party into the same financial situation. Thus, in the case of the supply of defective goods, the prima facie measure of damages is the difference in value between the contract goods and the goods supplied. But as Staughton LJ explained in Ruxley Electronics Ltd v Forsyth such a measure of damages seeks only to reflect the financial consequences of a notional transaction whereby the buyer sells the defective goods on the market and purchases the contract goods. The buyer is thus placed in the "same situation … as if the contract had been performed", with the loss being the difference in market value. However, in cases where the contract is not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract is not possible. In such cases, diminution in value damages will not restore the innocent party to the "same situation … as if the contract had been performed".

[para 14] In circumstances like the present, where the relevant covenant is in the form of cl 2.13, it is not the case that, in Oliver J's words:

"the disappointment of the plaintiff's hopes and expectations from the contract becomes a relevant consideration only so far as it is measurable either by some deterioration of the plaintiff's financial situation or by some failure to obtain an amelioration of his financial situation."

To reason otherwise is to undermine a fundamental postulate inherent in cl 2.13.

[para 15] Similar thinking underlies a statement made by Dixon CJ, Webb and Taylor JJ in Bellgrove v Eldridge. A builder who had built a house which, in breach of contract, contained defective concrete and mortar, contended that the measure of damages was limited to diminution in value and did not extend to costs of rectification. Their Honours said:

"In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract."

So here, the Landlord was contractually entitled to the preservation of the premises without alterations not consented to; its measure of damages is the loss sustained by the failure of the Tenant to perform that obligation; and that loss is the cost of restoring the premises to the condition in which they would have been if the obligation had not been breached.

[para 16] The Tenant relied heavily on findings by the trial judge that the Landlord had erected and leased the building for commercial purposes and that it was an investment property. The Tenant contended that the Landlord had never run a case that it valued the foyer for its aesthetic qualities as distinct from its having "pulling power" as a "leasing tool", and it relied on the trial judge's implicit finding, based on the resolution of conflicting expert evidence, that the old foyer was no more effective as a leasing tool than the new foyer. The answer to these submissions was put thus by Oliver J in Radford v De Froberville:

"Now, it may be that, viewed objectively, it is not to the plaintiff's financial advantage to be supplied with the article or service which he has stipulated. It may be that another person might say that what the plaintiff has stipulated for will not serve his commercial interests so well as some other scheme or course of action. And that may be quite right. But that, surely, must be for the plaintiff to judge. Pacta sunt servanda. If he contracts for the supply of that which he thinks serves his interests - be they commercial, aesthetic or merely eccentric - then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit."

...

[para 17] The Tenant stressed that in Bellgrove v Eldridge this Court pointed out that there was a qualification to the rule it stated in regard to damages recoverable by a building owner for the breach of a building contract. "The qualification … is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt." The example which the Court gave of unreasonableness was the following:

"No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of secondhand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks."

That tends to indicate that the test of "unreasonableness" is only to be satisfied by fairly exceptional circumstances. The example given by the Court aligns closely with what Oliver J said in Radford v De Froberville, that is, that the diminution in value measure of damages will only apply where the innocent party is "merely using a technical breach to secure an uncovenanted profit." It is also important to note that the "reasonableness" exception was not found to exist in Bellgrove v Eldridge. Nothing in the reasoning in that case suggested that where the reasoning is applied to the present circumstances, the course which the Landlord proposed is unnecessary or unreasonable.

[para 18] As part of the same submission, the Tenant relied on Ruxley Electronics and Construction Ltd v Forsyth. The House of Lords there held in a building case that where the expenditure necessary to rectify the defect in the building was out of all proportion to the benefit to be obtained the appropriate measure of damages was not the cost of reinstatement but the diminution in the value of the work occasioned by the breach, even if that would result in a nominal award. The House rejected a claim for £21,560 damages for reconstructing a swimming pool that was 1 foot 6 inches too shallow. The House saw the following matters as indicating that the cost of reconstruction was not recoverable:

"The trial judge made the following findings which are relevant to this appeal: (1) the pool as constructed was perfectly safe to dive into; (2) there was no evidence that the shortfall in depth had decreased the value of the pool; (3) the only practicable method of achieving a pool of the required depth would be to demolish the existing pool and reconstruct a new one at a cost of £21,560; (4) he was not satisfied that the respondent intended to build a new pool at such a cost; (5) in addition such cost would be wholly disproportionate to the disadvantage of having a pool of a depth of only 6 feet as opposed to 7 feet 6 inches and it would therefore be unreasonable to carry out the works; and (6) that the respondent was entitled to damages for loss of amenity in the sum of £2,500."

Their Lordships quoted and referred to various passages in Bellgrove v Eldridge and Radford v De Froberville without dissent. ... they did not disagree with what those cases said as a matter of principle... for present purposes it is sufficient to say that the facts of Ruxley Electronics and Construction Ltd v Forsyth, which their Lordships evidently saw as quite exceptional, are plainly distinguishable from those of the present appeal.

[para 19] ... the Landlord correctly submitted that the Tenant's submission misconstrued what this Court said in Bellgrove v Eldridge. The "qualification" referred to in the passage quoted above that the "work undertaken be necessary to produce conformity" meant, in that case, apt to conform with the plans and specifications which had not been conformed with. Applied to this case, the expression "necessary to produce conformity" means "apt to bring about conformity between the foyer as it would become after the damages had been spent in rebuilding it and the foyer as it was at the start of the lease". And the Landlord also correctly submitted that the requirement of reasonableness did not mean that any excess over the amount recoverable on a diminution in value was unreasonable. The Tenant's submissions rested on a loose principle of "reasonableness" which would radically undercut the bargain which the innocent party had contracted for and make it very difficult to determine in any particular case on what basis damages would be assessed. That principle should not be accepted.

[para 20] If the benefit of the covenant in cl 2.13 were to be secured to the Landlord, it is necessary that reinstatement damages be paid, and it is not unreasonable for the Landlord to insist on their payment. For these reasons the orders of the Full Court are upheld. ...

[footnotes omitted; emphasis added]

 

Commentary

Matthew Bell, 'After TABCORP, for Whom Does the BELLGROVE Tolls? Cementing the Expectation Measures as the 'Ruling Principle' for Calculation of Contract Damages' [2009] UMelbLRS 17

Peter Butt, ‘Breach of Covenant against Alterations: Tabcorp v Bowen in the High Court’ (2009) 83 Australian Law Journal 365

Nick Christopoulos and Jack Fan, ‘When Can Rectification Costs Be Recovered as Damages for Breach of Contract? The Australian High Court Clarifies’ (2009) 4(2) Construction Law International 33

W D Duncan and Sharon Christensen, ‘Tenant Fails Reasonableness Test in Making Alterations without Consent’ (2009) 23(8) Australian Property Law Bulletin 91

Mark Holler, ‘Measure of Damages for Breach of Contract — Reinstatement Cost or Reduction in Value?’ (2009) 36(3) Brief 30

Justice G A A Nettle, ‘Landlord and Tenant: Damages for Breach of Covenant’ (2009) 83 Australian Law Journal 296

Anthony Papamatheos, ‘Reinstatement Damages for a Tenant’s Alteration of Premises’ (2009) 125 Law Quarterly Review 397

Solène Rowan, ‘Protecting Contractual Expectations: An Australian Perspective’ (2009) 68 Cambridge Law Journal 276. 

Ava Sidhu 'The Issue of Betterment in Claims for Reinstatement Costs' [2016] MqLawJl 8; (2016) 16 Macquarie Law Journal 127

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