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casetreasury

McRae v Commonwealth Disposals Commission (1950) 84 CLR 377

Facts: CDC invited tenders for the purchase of an oil tanker lying on a reef based on a particular set of coordinates. McRae entered into a contract with CDC to purchase the tanker for £285. McRae paid CDC the purchase price and then incurred significant costs in an expedition to locate and salvage the vessel, but it turned out that there was no tanker and no reef at the location. McRae claimed damages.


Issue 1: Should the plaintiff be compensated by reliance or expectation damages?


Held: The appropriate way to compensate the plaintiff was to award damages based on wasted expenditure (reliance damages) in searching for the tanker. It was impossible for the Court to place any value on the non-existent tanker that the CDC sold. The Commonwealth was unable to prove that, even if the tanker had existed, the contract would have been loss-making.


Principle: Reliance damages should only be awarded if it is impossible to quantify expectation damages. The burden then shifts to the defendant, to prove that the contract would have been loss-making.


Issue 2: CDC tried to argue that the contract was void because they were both under a common mistake. In the alternative, the CDC tried to argue that it could be resolved through the process of construction - the parties were released from their contractual obligations due to implied condition (if condition fails, the contract fails).


Held: The non-existence of the tanker did not amount to a common mistake because CDC contributed to their mistake (CDC asserted the existence of the tanker recklessly and without any reasonable ground).


Held (Dixon and Fullagar JJ at 407-10): ‘If ... this case ought to be treated as [one] raising a question of “mistake”, then [CDC] cannot in this case rely on any mistake as avoiding the contract, because any mistake was induced by the serious fault of their own servants, who asserted the existence of a tanker recklessly and without any reasonable ground.’


Held: The problem is one of construction. It could be resolved through the process of construction (constructionist approach). The contract was not subject to an implied condition precedent that the tanker existed (such that upon failure of the condition, the contract failed) as the plaintiff did not know. Instead the contract contained a promise by CDC that the tanker existed.


Held (Dixon and Fullagar JJ at 407-10): ‘[T]he common law has generally been true to its theory of simple contract, and it has always regarded the fundamental question as being “what did the promisor really promise?” ... [T]he problem is fundamentally one of construction...’ ‘It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition precedent to the creation of contractual obligations. The [CDC] made an assumption, but the plaintiffs did not make an assumption in the same sense. They knew nothing except what the [CDC] had told them.’ ‘[CDC] contracted that a tanker existed in the position specified. Since there was no such tanker, there has been a breach of contract, and the plaintiffs are entitled to damages for that breach.’

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