High Court clarifies application of principles relating to assessment of contractual damages

By 16/03/2014Contract
contract damages

In Clark v Macourt [2013] HCA 56 the High Court has clarified the application of the principle that contract damages are to be awarded, so far as money can do it, to put a plaintiff in the same situation the plaintiff would have been in had the contract had been performed.

Background

The appellant and respondent were registered medical practitioners who each specialised in providing assisted reproductive technology services. The case concerned the appellant’s purchase of the business assets of St George Fertility Centre Pty Ltd, a company controlled by the respondent. The assets included a stock of frozen donated sperm. The respondent guaranteed the vendor’s (St George’s) obligations under the contract, which included a warranty that the identification of donors of the sperm complied with particular guidelines. Of the sperm that was delivered, 1,996 straws of sperm were not as warranted and were unusable.

The appellant could not purchase replacement sperm in Australia, but could do so from Xytex, an American supplier. At the time the contract was breached, the cost of the replacement sperm was around $1 million. The purchase price for the business assets (including the stock of frozen donated sperm) was $387,000.

The appellant did not make a profit from the use of the sperm acquired from Xytex as the appellant was ethically bound not to do so by the applicable regulatory regime.

The question

How to assess the appellant’s damages for breach of warranty?

As the trial judge did, by assessing damages as the amount the appellant would have had to pay Xytex (at the time the contract was breached) to acquire 1,996 straws of sperm? That is, around $1 million.

Or as the NSW Court of Appeal did, by assessing that no damages were payable because the appellant had entirely mitigated any loss by acquiring straws of sperm from Xytex and charging each patient a fee which covered the cost of such acquisition (with no element of profit).

The answer

By a 4-1 majority (Gageler J dissenting) the High Court allowed the appeal and held that contract damages should be assessed in the amount paid to Xytex (around $1 million). That is, the value of the loss was the value of what the appellant would have received if the warranty had been complied with.

The purchase price paid for the replacement sperm revealed the value of what was lost when the vendor did not perform the contract (at [19]).

It was irrelevant that the appellant paid some (undetermined) amount less than $387,000 (the price of sale of the business) for the benefit of the promise under the contract, to obtain 1,996 straws of sperm. The fundamental value protected by the law of contract is that pacta sunt servanda, bargains are to be kept (at [135]).

Showing that the appellant had charged, or could charge third parties (her patients) the amount she had paid to acquire replacement sperm from Xytex was irrelevant to deciding the value of what the vendor should have, but had not, supplied (at [22]).

As the appellant made no profit from the sale of the 1,996 straws, it was not necessary to take mitigation of damages into account, because there was no loss that the appellant avoided (see [17]).

The value to be compensated is assessed at the date of breach of the contract. As Keane J observed:

[this] serves the important end of bringing finality and certainty to commercial dealings.  It ensures that whatever might befall the purchaser after the date of breach, for good or ill, and whether by reason of the purchaser’s acumen, or lack of it, in dealing with other persons who were not party to the contract, and whatever movements may occur in the market, these developments have no bearing on the entitlement of the purchaser and the liability of the seller.” (at [110]).

The value of the sperm lay not in what they may bring in a market for sperm as a commodity, but as the contract contemplated, as stock in a business. In that latter regard the sperm delivered were distinctly inferior (at [134]).

In dissent Gageler J held that the approach of the Court of Appeal was correct, namely that no damages were payable. His Honour observed that this case did not fit within the standard category, because the value to the appellant of delivery of contractually compliant sperm could not be “equated with the value to a buyer of having dominion over contractually compliant goods of a nature which would be available to be re-sold by the buyer in a market at the time of delivery” (at [70]).

In this case, his Honour held, the value to the appellant of contractually compliant sperm lay rather in the appellant having control over a stock of frozen sperm which could then be used in the normal course of her practice. Accordingly the appropriate measure of the appellant’s loss was so much of the cost of acquisition of 1,996 straws of sperm that the appellant could not recoup from her patients. Namely, nothing.

Comment

This case presents unusual facts, but serves as a reminder to focus on the true “loss” being compensated. On the approach of the majority, the fact that the frozen sperm did not constitute a marketable commodity did not displace the application of the “ruling principle” stated by Parke B in Robinson v Harman (fn1), namely that:

“The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.'” (at [106]).

Footnote

  1. (1848) 1 Ex 850 at 855 (154 ER 363 at 365).