Economic Loss

Analysis of the assessment of damages in Amann Aviation Pty Ltd

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In Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54 ("Amann Aviation"), the distinction between expectation damages and reliance damages was altered as the two types of loss were held to be "simply manifestations of the central principle enunciated in Robinson v. Harman rather than discrete and truly alternative measures of damages which a party not in breach may elect to claim" ([27] Mason C.J. and Dawson J).  

 

From an accounting perspective, the way that the damages were calculated in the High Court decision was consistent with the conventional approach to financial decision making.  That is, to determine whether it is worthwhile to proceed with a particular project, you project the cash flows that are likely to arise from the project and compare them to the cash flows you would otherwise derive.  In accounting, a shorthand method of the same approach is to exclude fixed costs from the comparison (assuming that fixed costs would not differ).  The shorthand method focusses on lost gross profit, less any savings.  A disadvantage to the shorthand approach is that it is not clear to readers that all cash flows have been taken into account.

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Below I have summarised the damages calculation in Amann Aviation as set out in the High Court Judgement.  Below that, I have set out the shorthand approach using the same amounts.

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