In a recent case of contractual damages between North Sydney Leagues' Club Ltd v Synergy Protection Agency Pty Ltd [2010] NSWSC 256, the Court held that fixed overhead costs should be taken into account in determining net profit in calculating expectation damages.

ISSUES

1) What are Expectation Damages? These damages aim to restore the aggrieved party in a position where the damage had not occurred.

2) It is not disputed that when assessing loss of profits, the difference between revenue and costs is to be taken into account.

3) However, are fixed costs a part of the above equation?

4) If fixed costs are included, the overall costs would logically increase and subsequently the profit would also decrease.

COURT’S FINDINGS

Assessing damages is left up to the court’s discretion. It usually tends to follow one of two assessment basis - expectation damages and reliance damages.

Reliance damages allow the wronged party to recover damages on the basis that it would not have incurred but for the breach of the contract. Unfortunately, Syngery only pleaded one basis and did not make room for an alternative. The court held that Synergy should have made room for a second basis.

How then are fixed overhead costs calculated?

Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 provides guidance on this evidentiary question. As per this case, factors taken into account included whether the overheads were increased by the sale of the product; whether they reflected costs which would have decreased; whether they reflected costs which would have inevitably accrued; or whether there was surplus capacity.

In essence, courts pay attention to the nature of the costs and their connection to the contract.

LESSONS

1) It is advisable to consider all bases before seeking damages – a backup option will not hurt.

2) The good news is that overhead fixed costs are recoverable although within bounds.

3) This depends on whether these types of costs are extra costs indeed or losses.

4) Courts will restore parties in the position before the damage occurred or if the damage had not occurred but it will not put the party in a better position had the contract been performed.