Contract-related climate disputes: Reliance damages

While contractual disputes have not formed a large part of Australia’s climate litigation landscape to date, it is foreseeable that more of these could arise in the future. 

It is therefore worth considering issues that might arise in these cases. This includes, for example, reliance damages.  

Contracts and climate change

Climate change and contract law are entwined in at least two ways. 

First, the underlying subject matter of certain contracts may relate to mitigating the effects of, and adapting to, climate change. Contracts could relate to, for example, fossil fuel or renewable energy projects, green use of proceeds bonds or carbon offset agreements. 

Second, and perhaps more generally, climate change could affect the performance of certain contracts. For example, extreme weather events could disrupt supply chains and give rise to breach or repudiation of the contract. There could also be changes in certain markets with the transition to a net zero economy.

Climate-related contractual disputes could be brought by those motivated by broader climate-related concerns. However, it seems more likely that these sorts of disputes might be brought by private parties in the ‘ordinary’ course of their business dealings. 

Reliance damages

One issue that might arise in future claims for repudiation or breach of a climate-related contract could be the assessment of damages. 

Typically, plaintiffs are compensated for benefits they would have received if the contract been performed (“loss of bargain” or “expectation” damages). This is, however, problematic where plaintiffs cannot demonstrate whether or not, or to what extent, the contract would have resulted in profit. 

In these circumstances, plaintiffs might instead seek “reliance” damages i.e. recouping their wasted expenditure, rather than lost profits. 

These sorts of damages could be very relevant in climate-related contractual disputes. For example, where there is a contract for a fossil fuel project no longer profitable due to the changing market with the transition to net zero. Or where a green use of proceeds bond is used for non-climate friendly activities. 

Recent case law

A New South Wales Court of Appeal (NSWCA) decision headed for the High Court of Australia could have implications for the determination of reliance damages. 

In 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21, a company was able to recover its expenditure constructing an airport hangar in reliance of a council’s contractual promise to take all reasonable steps to apply for and register a subdivision plan (which the council failed to do).

A reverse presumption applies in these cases. As the NSWCA held, “expenditure incurred by a plaintiff in reliance on a contractual promise made by the defendant and “wasted” because of non-performance by the defendant is recoverable, except to the extent that the defendant shows that the plaintiff would not have recouped its expenditure had the contract been performed”. This is “not confined to expenditure under or required by the contract, but extends… to any detrimental change of position by the promisee in reliance upon the defendant’s promise”. 

High Court appeal

It remains to be seen whether special leave will be granted in this case. But in any event, it is possible to imagine that these sorts of disputes will arise in the climate context. And it is helpful to think about the ways our law will need to adapt to reflect these changing circumstances.