Breach of contract: quantifying damages for a lost opportunity to ... lose money?
Where there has been a breach of contract, the innocent party can sue for damages including, where relevant, damages for the lost opportunity under the contract. In Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Limited, the Queensland Court of Appeal has considered a scenario where the opportunity to earn a profit under the contract was affected by various contingencies and where there might ultimately have been a loss instead. The Court has addressed the question of law, namely, whether an innocent party to a breach of contract can suffer a compensable loss even where, had the contract proceeded, that party might have lost money.
The case involved a contractual claim for damages for the lost opportunity to acquire and develop land. On the facts, the property development was unlikely to have made a profit because of difficulties in obtaining development approval and finance for the purchase price, as well as potential development costs. There were also likely to have been cost overruns.
In the Supreme Court, the trial judge noted that, generally, damages can be awarded even where there was a less than 50 percent chance of a profit but distinguished that scenario from one in which a loss was more likely than a profit. The trial judge held that, on the balance of probabilities, the property development in question would be more likely to make a loss than a profit. Because the trial judge concluded that a loss (as distinct from breaking even) was more likely than a profit, the plaintiff had not suffered a compensable loss. Accordingly, the trial judge awarded only nominal damages for breach.
The key issue on appeal was whether the appellant (the party suing for breach) could recover damages for loss of a commercial opportunity which was more likely to make a loss than a profit, albeit in circumstances where the size of the potential profit sufficiently exceeded the size of the potential loss.
In allowing the appeal, McMurdo JA, with whom Philippides JA and Boddice J agreed, delivered the Court’s judgment. McMurdo JA stated at the outset his Honour’s difference in opinion to that of the trial judge, holding that:
‘The opportunity to develop this land at a profit, which was denied to the appellant by the respondent’s repudiation of the contract, had a value, in my view.’
Bearing in mind the principles relating to damages for an opportunity lost due to breach of contract, his Honour considered that the present case was distinct from the typical ‘win or not win’ scenario as illustrated in the case of Chaplin v Hicks. In that case, the plaintiff suffered loss where she was deprived of the chance to win a prize in a competition. The possibilities in that case were either a win or no win, with no possibility of a loss as such. In the case before the Queensland Court of Appeal, the possible outcomes comprised either a ‘win’ (a profit), ‘no win’ (breaking even) or a loss, with varying probabilities for each.
The Court of Appeal considered that there was a more than negligible chance that the appellant would have profited from the development. The Court was mindful of the commercial reality of the matter; McMurdo JA stated that:
‘The relative probabilities of a profit and a loss, in a particular case, could be relevant in assessing whether the opportunity had a value. It is possible to imagine cases where both the likelihood of a profit and the magnitude of that profit are so small that no rational investor would pursue the opportunity with the risk of thereby suffering a comparatively large loss.’
Adopting this formulation of the ‘rational investor’, his Honour went on to hold that a commercial opportunity which would attract no rational investor would be a ‘valueless opportunity’ for the purposes of assessing damages. Notwithstanding its risks, his Honour did not consider that the property development in question was valueless. Instead — and departing from the trial judge’s decision that no more than nominal damages ought be awarded for a lost opportunity where that opportunity carried the possibility of a loss rather than a profit — McMurdo JA held that:
‘A likelihood that this would have been a loss making development did not, as a matter of law, preclude the award of more than nominal damages. The question is whether the opportunity to profit from this development had a value and that was possible although a developer’s loss was more likely than a profit. If it did have a value, there was a compensable loss and the extent of that loss would have to be assessed.’
It was relevant in the present case that:
- the greatest potential profit from the development was $4,000,000;
- the greatest potential loss was $2,750,000;
- there was ‘a range of other possibilities’ between the greatest profit and the greatest loss;
- ‘[t]here was more than a negligible prospect that the appellant could have undertaken [the] development’; and
- there was a distinct possibility that the target number of pre-sales for the development would not have been reached, in which case the development project would have been abandoned and there would not have been any loss (let alone a profit).
His Honour considered that:
‘Undoubtedly this opportunity was affected by many contingencies, and the prospect that the development would proceed was small. But there was some prospect that it could have proceeded, and if so, there would then have been a high probability that it would have been profitable. It was an opportunity which a rational business person might have pursued, although many would not have done so. It was an opportunity which had a value.’
In quantifying the damages, his Honour held that the Court must assess the extent to which the greatest profit ($4,000,000) should be discounted to reflect the various possibilities of that profit not being reached. His Honour ultimately arrived at a figure of $250,000 so as to reflect, amongst other things:
- the trial judge’s finding that there would be a less than 10 percent chance that the maximum profit of $4,000,000 would be achieved;
- the trial judge’s finding that due to financing risks there was a 30 percent chance the development would not proceed; and
- ‘some allowance [that is, a deduction] … for the prospect, although relatively small’, that the development would have resulted in an overall loss.
The Court of Appeal in Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Limited appears to have formulated an approach to the exercise of quantifying damages for a lost contractual opportunity whereby, at least in a context of a commercial venture, the question can be asked whether a ‘rational business person’ or ‘investor’ might have pursued the opportunity given the risks. Where that question can be answered in the affirmative, the lost opportunity can be said to have some value — even where a commercial loss is a possibility — and should be met with an award of damages greater than nominal damages.
:  QCA 254.
: Ibid .
:  2 KB 786.
: Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Limited  QCA 254 .
: Ibid .
: Ibid  (emphasis added).
: Ibid .
: Ibid .
: Ibid  (emphasis added).
: Ibid .