Posted on June 6, 2024 by Lindsay Taylor and Dimitrious Havadjia
High Court requires local council to honour contract despite budgetary constraints
‘No good can come from a circumstance in which a local government body takes action to foster the development of its area without also being willing and able to fund the action it has contractually promised to undertake’ is the opening sentence of Justice Jagot’s reasons in the recent High Court decision of Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 (HC Appeal).
As foreshadowed by her Honour, this High Court decision to dismiss the appeal by Cessnock City Council (Council) serves as a timely reminder to local authorities of the importance of good contract management.
We discussed the NSW Court of Appeal’s decision in 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21 (NSWCA Decision) previously, which included a more detailed discussion of the facts relevant to this matter: see article.
Background
123 259 932 Pty Ltd (Respondent) and the Council entered into an agreement for lease between the Council as lessor and the Respondent as lessee (Agreement) for part of the land at Cessnock Airport in 2007. The Agreement included a clause that required Council to “take all reasonable action to apply for and obtain” registration of a plan of subdivision by 30 September 2011. Although not a term of the Agreement, both parties understood that the registration of the plan of subdivision, including the associated construction of water and sewer services, would facilitate further development of the airport.
In anticipation of the subdivision occurring, the Respondent built an aircraft hangar at the airport, at a cost of $3,697,234.41. Council did not register the plan of subdivision, in breach of the Agreement, stating that the costs of around $1.3 million associated with the subdivision were too high.
Without the additional development around the airport, the Respondent’s businesses at the hanger were unsustainable, and the Respondent ceased trading and was de-registered. Pursuant to the Agreement, the Council acquired the hanger for $1 and began renting it out to others.
In 2017, the Respondent commenced these proceedings seeking the costs it incurred in constructing the hangar. It argued that those costs were ‘wasted expenditure’, because it constructed the hanger on the basis that Council would comply with the Agreement and register the plan of subdivision (and therefore the further development of the airport would proceed).
In the HC Appeal, the Council no longer disputed that it breached the Agreement by not undertaking the works necessary to obtain registration of the plan of subdivision. Instead, it argued that the NSWCA Decision was incorrect to award the Respondent damages in the amount of $6,154,459.40 (representing the wasted expenditure of constructing the hangar of $3,697,234.41 and interest).
Decision
The High Court unanimously affirmed the NSWCA Decision and refused the appeal and awarded costs to the Respondent.
The High Court rejected the Council’s argument that the Respondent needed to prove it would have recouped the cost of the hangar. Consequently, it affirmed that a party to a contract may claim for ‘wasted expenditure’, being costs related to the contract, subject to some technical legal principles beyond the scope of this article.
Impact
The case underscores that councils cannot avoid obligations under commercial contracts by relying on budgetary or policy matters, and that they are just as bound to perform such a contract as any other contracting party.
In this case, despite the Council’s initial efforts to finance the subdivision works, it elected not to proceed as circumstances evolved. Further, evidence before the Court suggested Council could have paid for the works by reallocating other funds or imposing developer contributions, but it chose not to do so. Regardless, the Court was clear that Council could not rely on budgetary constraints to escape liability for breaching the Agreement.
In retrospect, it would have been more cost-effective for the Council to either carry out the subdivision works (and enjoy the benefits of further development of the airport) or reach a settlement with the Respondent for cost of the hangar. Instead, the Council has spent significant funds in a failed attempt to evade liability for an Agreement they willingly signed, a burden ultimately borne by the ratepayers.
The HC Appeal can be accessed via this link: Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17.
If you wish to discuss any aspect of this article, please contact Lindsay Taylor on 02 8235 9701 or Dimitrious Havadjia on 02 8235 9724.
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