Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Limited

This decision will be of interest to commercial practitioners.  The case concerned a contractual claim for damages for the loss of a commercial opportunity to acquire and develop land. The trial judge considered that the project would have been more likely to make a loss if completed, and that therefore no more than nominal damages could be awarded. The Court of Appeal overturned that conclusion of law, noting that whether an opportunity is valuable depends on the relative magnitude of potential profits to potential loss, as well as the overall probability of profit. Accordingly, even a project more likely to suffer a loss can have a compensable value.

Philippides and McMurdo JJA and Boddice J

31 October 2017

Background

This case concerned a contractual claim for damages for the loss of an opportunity to develop land at a profit. [2]. In November 2009, the respondent granted to the appellant an option to purchase some of its land at Red Hill, for the construction of units and other facilities. [5]–[6]. To proceed, the appellant required the approval of the Brisbane City Council. However, the development application was never made because the respondent, in breach of contract, withheld its consent. [37]. At trial, Jackson J concluded that the appellant could not recover damages for loss of an opportunity to make a profit, because it was more likely that had the contract been performed, the appellant would have made a loss. [20]. This led his Honour to doubt the applicability of the methodology used to derive a value for a lost opportunity, as set out in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332. [16].

Damages for lost opportunity

The Court of Appeal unanimously overturned Jackson J’s decision. McMurdo JA, with whom Philippides JA and Boddice J agreed, stated that: “There may be a compensable loss of a commercial opportunity, even though there is a less than 50 per cent likelihood that, if pursued, the opportunity would have resulted in a financial return.” [12]. 

His Honour noted that many investments are pursued with an appreciation that “more likely than not, they will not be profitable”. However, they might still be valuable commercial opportunities because the magnitude of the potential profit, when assessed against the relatively small amount of potential loss, may make it a risk “worth taking”. His Honour referred to an example mentioned by Jackson J – that of investments in the mining exploration industry, where the chances of success may be low, but the potential profits very large. [24]. It is only if the commercial opportunity has no chance of being profitable, or is an opportunity that no rational investor would pursue, that such an opportunity would be “worthless” and “could not be compensable”. [23].

Having come to a different view than Jackson J on the legal question, the Court of Appeal then turned to the findings of fact, and the challenges to some of them, to establish the value of the lost opportunity. [28]. (Applying the methodology in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.)

The value of the lost opportunity

There were a number of factors which could have affected the appellant’s commercial opportunity. They included: whether the necessary permissions would be obtained from the council; whether the appellant would have been able to pay the purchase price for the land; whether the appellant would have obtained sufficient finance for the project; whether sufficient pre-sales would be achieved to satisfy any such likely condition of development finance; and at what price the units could be sold. [31]–[35]. Most of Jackson J’s findings at trial on these factors were upheld on appeal. [39]–[99].

The Court of Appeal departed from Jackson J in one crucial respect. Jackson J had concluded that, because of the likelihood that the units would not sell for the price anticipated by the appellant, “the loss, more probably than not, of completing this development would have been of the order of $2,750,000”. (McMurdo JA summarising Jackson J’s findings.) [101]. However, the Court of Appeal considered that such a loss was not likely to eventuate, because the market for the units would have been tested in the pre-sale period. If the requisite number of pre-sales had not been achieved, the proposal would have been abandoned: “In that event, there would not have been a loss from the development, because there would not have been a development”. [108]. Accordingly, had the development actually been undertaken, “more probably than not, it would have yielded a profit”. The Court of Appeal considered that a profit in the order of $4,000,000, had the project gone ahead, had a “high possibility.” [109].

The Court of Appeal discounted the potential profit to reflect the various contingencies that could have prevented that profit being achieved. [112]. After discussing the probabilities of such contingencies (applying many of the findings made by Jackson J), it was concluded that the appellant should be awarded the sum of $250,000 as damages, with interest on that amount calculated from the date of termination of the contract. [113]–[114]. The Court made orders to that effect. [115].

W Isdale