Question

Jack Spinner is a fitness junkie and a world-renowned professional cyclist. Last year Jack competed on the Australian cycling team at a number of international events and was the winner of three highly coveted golden jerseys.

On returning from a recent international competition, Jack decided to leave behind the world of professional cycling and embark on a new challenge by opening a state of the art indoor cycling studio where Jack will run “spin classes” for members. He will run this himself and handle all the classes. He will limit the membership to 200 members as this is the maximum he fells he can handle and he wants to have some air of exclusivity about the studio.

In September 2017, Jack explains his business plan and proposed asset acquisitions to Gunther Cutthroat. Gunther owns a property in Subiaco that he is looking to rent.

In November 2017, Jack enters into a lease agreement with Gunther Cutthroat for the property. The lease provides that:
1. The lease will commence on 1 January 2018.
2. Gunther will pay $20,000 as a sign-on payment to Jack to assist in the fit out of the new studio payable on 1 January 2018 (the property has been vacant for quite some time and Gunther is keen to get a tenant).
3. Jack will pay lease payments of $120,000 per annum to Gunther in equal monthly instalments.
4. The term of the lease is for 3 years with an option for Jack to renew the lease for a further 3-year term if he wishes to do so.

As Jack has secured a space for the gym, he enters into a contract with Warrior Bikes Pty Ltd for the supply of 50 indoor spin bikes at a cost of $3,000 each. The delivery of the bikes and payment will take place on 5 January 2018.

Jack also sets about doing the fit out of the studio and marketing it. Jack manages to sell all 200 one year memberships at $1,000 each that are paid by the members upfront.
At the end of December 2017, the demand for rental properties in Subiaco skyrockets due to the construction of new apartments and a supermarket in the area. Gunther Cutthroat realises that he is now able to secure a tenant who is willing to pay $170,000 per annum for the property with no sign-on payment and for a period of 6 years. On 25 December 2017, Gunther signs a lease with Interloper Ltd who promptly moves into the premises the next day. Gunther writes to Jack on 26 December and informs him that the lease is off as he has secured a tenant who is willing to pay more.

Jack is devastated when he receives the letter from Gunther and immediately calls him. Jack says: “This is not acceptable, we had a signed contract and now you are not willing to honour it five days before I am due to move in? I have taken money from customers, purchased equipment and I have spent $20,000 fitting out the premises. I also have an advertising contract with Giant who will pay me $25,000 per year to advertise their products” Gunther laughs and says: “So what if I have breached the contract. Welcome to the world of business, I’ll pay you $500,000 and that will be that!”

Jack scrambles to find another rental property at an affordable price. Unfortunately, he is unable to do so because of the skyrocketing rents in Subiaco. The prospects of any decent rentals in the next few years are bleak.

Given Jack’s high profile in the Australian cycling community, the collapse of his studio venture makes headline news and his reputation is in tatters. The advertising contract does not eventuate. The members that Jack signed up are chasing him to get their money back and Warrior Bikes are demanding payment for the spin bikes. They claim that if Jack cannot purchase the bikes, they can only now sell them for $2,000 each as the economy is bad and they will seek the difference from Jack.

Jack develops depression because of the situation. Fortunately, Jack seeks treatment from Dr Janet Parker. Dr Parker tells Jack that his symptoms are a direct result from the collapse of the business. Dr Parker prescribes Jack medication costing $5,000 and tells him to take some time to relax and go on an overseas holiday. Jack books a cruise with Rest Relax Cruises costing $10,000.

You are Jack’s lawyer. Advise Jack on what losses he will be able to recover from Gunther. (remedies concerns area)

Answer 1

Damages for breach of contract are viewed as a 'alternative' for performance. These are designed to compensate for the loss that the plaintiff undergoes because of breach of contract. Punitive damages are not available. The loss claimed by the plaintiff must not be too remote (not directly related) from the breach and the non-breaching party i.e., the plaintiff must do what is reasonable to reduce (mitigate) the damage that he suffers.

Further Liquidated damages can only be claimed from the party breaching the contract if they were agreed and were included by way of clause in the agreement, that a certain money will be payable on breach .

Jack Would be able to recover the following losses from Mr.Gunther i.e., which was directly related to the contract and are not remote to the breach of the contract:

1.The loss which Warrior Bikes Pty Ltd would have to bear because of non-purchase of 50 indoor spin bikes( they can be sold at only $2000/bike) -- 50bikes x $1000/each bike =$50,000

2.Memberships - 200 x $1000 = $2,00,000.

3. Fitting out expenses of $20,000- directly related.

4. Advertisement contract is also considered because it is the opportunity cost which is lost by Jack due to breach of contract of $25,000 x 3 years = $75,000.

5. Loss of mental health- getting into depression and the medical expenses connected with it- $5000+$10,000=$15,000.

6. The difference in the lease rentals which have skyrocketed in Subiaco. Jack had entered into a contract and agreed to to pay $ 120,000 every year as lease rentals in the form of equal monthly instalments but not the prices have hiked and Gunther has entered into new lease agreement with $170,000 lease rental payable every year. Thus if Jack enters into a lease rentalhe would have to pay something similar ( assumed as market price) the differencing amount which Jack would end up paying - $170,000-$120,000= $50,000 x 3years = $150,000.

Such other opportunity cost if any that Jack would have received if the contract was not breached by Gunther. Therefore these are the expenses that Jack would be successful in recovering from Gunther.