Clark v Macourt [2013] HCA 56: Damages for Breach of Warranty

In Clark v Macourt [2013] HCA 56 (18 December 2013) the High Court by majority has allowed an appeal from a decision of the NSW Supreme Court of Appeal relating to the appropriate measure of damages that the purchaser of the assets of a business was entitled to recover from a vendor who broke its contractual promise to deliver stock complying with a warranty.

Background

Both the appellant and the respondent in the case were registered medical practitioners specialising in the provision of "assisted reproductive technology services". The appellant had agreed to buy the assets of St George Fertility Centre Pty Ltd, a company controlled by the respondent which provided medical and assisted reproductive technology services to patients.

The company agreed to sell certain assets of the practice, including a stock of frozen donated sperm and the respondent guaranteed the vendor company's obligations under the contract. As part of the transaction the vendor company warranted that the identification of sperm donors complied with specified guidelines but as it turned out of the stock of sperm delivered, some 1,996 straws of sperm, which the appellant would have expected to be able to use were not as they had been warranted to be and were unusable.

In the circumstances the appellant could not mitigate its loss by buying suitable replacement sperm in Australia but could buy such in the USA. At trial it was found that the cost of 1,996 straws of replacement sperm from a US supplier (Xytex) would have cost about $1 million at the relevant time when the contract had been breached. Given that the purchase price for the assets (including the sperm straws) was less than $400,000 the appellant was forced to accept that ethically it could not charge, and in fact had not charged, patients a fee any greater than the amount the appellant had out-laid to acquire it.

At Trial

In proceeding in the NSW Supreme Court judgement was entered for the appellant finding the vendor company had breached its warranty and that the respondent as guarantor of the vendor company's obligations was liable. Damages for breach of warranty were assessed as the amount that the appellant would have had to pay Xytex at the time the contract had been breached to buy the 1,996 straws of sperm.

On appeal to the NSW Court of Appeal on the question of assessment of damages, the Court found that the appellant should not be awarded damages for the vendor's breach of warranty because the appellant had bought the straws of sperm from Xytex to use in treating patients and had charged each patient a fee which covered the appellants costs in buying the replacement straws. They found that the appellant had thus avoided any loss it would otherwise have sustained.

In the High Court

The appellant appealed to the High Court by way of special leave and sought orders to reinstate the award of damages made at trial. By way of a majority decision the Court allowed the appeal holding that the appellant should recover the amount it would have cost (at the date the warranty was breached) to acquire the replacement straws from the US supplier Xytex.

Essentially the majority of the court took the view that the appellant’s loss was to be measured by the value of what the vendor company had promised to deliver but failed to realise and not by reference to what the appellant had paid compared with what it received. The court looked at the sum required to rectify the breach as at the date it occurred and not at the diminution in value which had occurred to appellants’s business or the amounts spent in reliance on the promise.

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• Clark v Macourt [2013] HCA 56 (18 December 2013) report of case.
• Clark v Macourt - comment posted to Melbourne Law School Blog 18/12/2013