Contractor's loss of profit claims upon termination - proving the counterfactual and the facilitation principle

Damages claimed by an innocent party following termination of a contract require the decision maker to consider the hypothetical counterfactual i.e. what would have happened but for the breach. In the context of a contractor's claim for lost profit, how is the counterfactual established and does the law ever give the contractor a 'leg up'?

It is trite to state that termination at (common) law for repudiatory breach entitles the innocent party to damages for loss of bargain.  Where a contractor terminates a contract for the employer's repudiatory beach the primary loss of bargain will be the lost profit on the unperformed works.  But how does the contractor prove the lost profit?

The term 'repudiatory breach' is used here as an umbrella term to capture any of the three legal bases for termination at law; namely, termination for (i) breach of a contractual term classified as a condition (an 'essential' term of the contract), (ii) a sufficiently serious breach of an innominate/intermediate term (sometimes referred to as a breach that goes to the root of the contract), or (iii) an absence of readiness and willingness to perform the contract that satisfies the requirement of seriousness.  It is only category (iii) that is a repudiation properly so-called.

As long ago as 1967, the great contract scholar G H Treitel referred to the legal taxonomy in this area of the law as 'formidable and confusing'.  The taxonomy was largely straightened out, at least in Australia, in confirming the above tripartite classification by the High Court in Koompahtoo v Sanpine [2007] HCA 61.

But variances in terminology remain.  For example, it is common (particularly in the UK) to see the term repudiation used as an umbrella term for categories (i) and (ii) and 'renunciation' for category (iii).  However, strictly speaking, the doctrine of repudiation is irrelevant where a breach of condition exists - as the right to terminate necessarily follows from the promisor's failure to perform.  Further, a repudiation of obligation may not amount to a breach of obligation (let alone a condition).  The usual example is a repudiation that precedes the time for performance i.e. an anticipatory breach.

For an anticipatory breach to occur the innocent party must in fact terminate the performance of the contract i.e. it is the exercise of the right to terminate that gives rise to the anticipatory breach.  If there is no discharge of contract and the promisor continues to repudiate a breach will occur when the time for performance arrives.  However, that is then a failure to perform and not an anticipatory breach.  The outcome is of more than passing academic interest especially in the current geopolitical context and the emphasis on the twin concepts of force majeure and frustration. For example, in the context of frustration, if the frustrating event occurs after the anticipatory breach but prior to acceptance there is no claim for damages for breach.

The same 'loss of bargain' outcome applies to termination pursuant to a contractual provision always providing the contract provides for that outcome (or the contractual breach is 'equivalent' to a common law breach). Often, the contract will expressly provide for the loss of bargain outcome.  However, the contract may not provide for this outcome and this can be a snare for the terminating party.  There may also be room for debate as to the meaning of the contract.  That was the issue recently in Great Asia Maritime Limited v Orion Shipping and Trading LLC [2026] UKSC 23.  There, the UK Supreme Court held that a clause in the Norwegian Saleform standard form contract allowing a buyer terminating for cause a right to be paid 'due compensation ... for their loss and expenses' included a right to loss of bargain damages. The UK Supreme Court, at [24], construed 'due compensation' to mean 'appropriate compensation using the common law principles of causation, remoteness, and mitigation' and that the term 'loss' was 'general and unqualified' and included loss of bargain damages.

The New South Wales Court of Appeal has recently issued a sharp reminder concerning what a contractor needs to do (and not do) in order to succeed on a claim for loss of profits following termination.  Frequently, a contractor will seek to prove such a claim by relying on evidence of a typical 'going rate' industry profit margin or an average of the contractor's recent profit margins often derived from the last several years' accounts.  This perhaps reflects a reluctance for some contractors to 'open up the books' and reveal their actual costings for the project in question.

In Atlanta Building Pty Ltd v Abela [2026] NSWCA 126 the New South Wales confirmed that this approach will not do.  There, the contractor (Atlanta) led lay evidence that, at [91], 'Atlanta enjoys a profit of approximately 15% from turnover under each contract it completes.'  Atlanta sought to buttress this with expert evidence provided by Atlanta's expert, Mr Madden, that profit in the industry typically ranged from 10% to 20% with a midpoint of, somewhat conveniently, 15%.

In relation to the lay evidence the Court, at [92], held that evidence of asserted historic turnover 'was not admissible evidence of the profit that Atlanta would have earned on the balance of the contract in question’ and, in relation to the expert evidence, the Court concluded the 'only evidence in support of a profit margin of 15% was given by Mr Madden. However, Mr Madden did not derive that figure by estimating the cost of completing the work and comparing it with the contract price. Rather, as the primary judge observed, the figure of 15% was taken as the midpoint of the “usual contractor margin in the industry, which was between 10 and 20%”, and which Mr Madden thought was supported by the fact that the Contract provided for a margin of 15% in calculating the costs of variations under the Contract: see PJ1[22]. But again, the margin achieved or applied across the industry was not evidence of the profit that Atlanta was likely to earn on a specific fixed-price contract. And the fact that the parties agreed to a margin of 15% for variations that would be priced on a cost-plus basis was not a sound reason for concluding that that was the profit that Atlanta would be likely to earn on the fixed-price component of the Contract.'

Crucially, the Court further held that it 'was open for Mr Madden to give evidence of the actual likely costs of completing the work.' That could be calculated from reliable sources including the contractor's costing records (actual and forecast) and tender estimates.  From that amount the likely profit could be calculated simply by deducting the likely cost from the gross revenue.

The treatment of counterfactuals in the discharge of proof in this context frequently calls into play an interesting and developing area of law involving a presumption against wrongdoers.  In Australia this has become known as the 'facilitation principle' (following Cessnock City Council (2024) 281 CLR 39) and, in the UK, the 'fair wind principle' (following Omak Maritime Ltd v Mamola Challenger Shipping Co [2011] 1 Lloyd’s Rep 47).  The rationale for this presumption acknowledges that it is the wrongdoer’s breach that has brought about a situation where, in order to succeed, the claimant must prove the relevant counterfactual in circumstances where, but for the breach, the counterfactual would be the actual.  As a consequence, to the extent that the claimant encounters evidentiary hurdles or difficulties the law 'facilitates' the claimant's burden and provides a 'fair wind' in the claimant's sails. Where the principle applies, it has resulted in an arguably more relaxed test for proving counterfactuals compared with proving historical facts.  Historical facts are proven on an ‘all or nothing’ basis in accordance with the balance of probabilities.  However, akin to proving future hypotheticals, in certain circumstances the law recognises demonstrating counterfactuals on the basis of a 'substantial chance'.  

For example, in Treana Holdings Pty Ltd v Kakkad [2026] SASCA 77 purchasers under a contract of sale for real property failed to comply with certain conditions precedent to settlement and the developer rescinded the contracts.  In turn, the purchasers argued that the reason they failed to achieve the conditions precedent was the developer’s failure to use reasonable endeavours to complete the development by the promised date.  In finding in favour of the purchasers, the trial judge held that (a) the developer breached its obligation to use reasonable endeavours to complete on time, (b) that breach was causally connected to the purchasers' failure to achieve the conditions precedent, and (c) with the result that the developer was not entitled to rescind the sale contracts. The South Australian Court of Appeal agreed. At [123]: 'The test for causation relevant to this case is the ‘substantial chance’ test articulated in the authorities set out earlier. That is, had the appellants used their reasonable endeavours to achieve practical completion, there was a substantial chance that the building works would have been completed by the extended Proposed Practical Completion Date.'

However, there are clear limits on the operation of the facilitation principle - there is a clear difference between a presumption in favour of a claimant in establishing the counterfactual and the claimant’s failure to prove its claim.

Returning to the contractor's loss of profit claim in Atlanta, the Court noted, at [93], that it was open to Atlanta 'to lead evidence of the actual likely costs of completing the work' and concluded that 'this was a case where a party has fallen short in adducing evidence of a kind that permits certainty and particularity where such evidence was possible.'

In arriving at that conclusion, the Court relied on the recent discussion of the facilitation principle in Financialstrategy.com.au Pty Ltd v Bailey Roberts [2026] NSWCA 74 where, at [119], the Court held: 'notwithstanding the facilitation principle, there remains an important distinction between a rational assessment and quantification of loss, informed by the evidence capable of being adduced, and speculative guesswork in circumstances where the party seeking compensation has failed to produce evidence that it was within its power to produce and which would allow the proper degree of certainty and particularity in the assessment process. As a general proposition, mere difficulty in estimating damages does not relieve the court from the responsibility of estimating as best it can. But there is less justification for that approach in circumstances where a party seeking compensation has fallen short in adducing evidence of a kind that permits certainty and particularity ... Where the evidence does not provide a rational foundation for a proper estimate of damages or compensation, guesswork ought not be substituted for evidence and it is appropriate not to make an award. Justice does not dictate that a figure should be plucked from the air ...'.

In conclusion, a contractor claiming loss of profits following termination is reminded that it must prove the expected lost profit under the terminated contract in question, and nothing less will do.  Whilst in certain evidentiary circumstances the Court might cut the contractor some slack in addressing the counterfactual, the facilitation principle will not convert a 'fair wind' into a 'free ride'.