Clark v Macourt [2013] HCA 56: Assessment of damages for breach of contractual warranty

It is well established that in cases of breach of contract, the position in which the plaintiff is to be put, by an award of damages, is the position in which the plaintiff would have been had the contract been performed.¹

In the recent case of Clark v Macourt the High Court dealt with the application of this principle in circumstances where the vendor had breached a contractual warranty, but the purchaser had been able to recoup the cost of replacement goods.

Background

The appellant and respondent were registered medical practitioners specialising in providing assisted reproductive technology services. The appellant entered into a deed to purchase assets, including donor sperm samples, from St George Fertility Centre Pty Ltd (company). The respondent guaranteed the company’s obligations under the deed.

The company warranted that the identification of sperm donors complied with specified guidelines. However, of the 3513 samples delivered, some 1996 had not been warranted and were therefore unusable. The appellant later purchased replacement samples from a supplier in the United States known as ‘Xytex’ and subsequently recouped this cost through patient fees.

The total purchase price for the assets of the company (including sperm samples) had been under $400,000. As there was no way to apportion a particular amount to the samples, the appellant accepted that she could not charge patients a fee any greater than the amount she had outlaid to acquire it.

The key question in the litigation was: what was the value of what the appellant did not receive?

The proceeding

In the NSW Supreme Court, Justice Gzell assessed the damages for breach of warranty at over $1.2 million, being the amount the appellant would have had to pay Xytex (at the time the contract was breached) to buy 1996 samples.

On appeal, the NSW Court of Appeal held that the appellant should not be awarded damages for the company’s breach of warranty. The Court reasoned that the appellant had mitigated her loss by using the replacement samples purchased from Xytex and recouping the extra costs associated with those replacements by including them in patient fees.

The appellant appealed to the High Court, seeking orders reinstating the award of damages made by the primary judge.

High Court decision

A majority of the High Court allowed the appeal, holding that damages should be assessed at the amount it would have cost (at the time the contract was breached) to acquire 1996 sperm samples from Xytex.

Damages for breach of contract

The High Court re-affirmed the ‘ruling principle’ that in cases of breach of contract, damages should put the plaintiff in the same situation, so far as money can do, as it would have been in had the broken promise been performed.

Ultimately, the appellant’s loss fell to be measured, not by reference to what she outlaid as compared with what she obtained from the company, but by reference to the value of what the company had promised to deliver but did not.

In applying the ruling principle, the High Court made the following findings:

• The ruling principle governs the assessment of damages, not only in the case of a failure to supply goods in accordance with the requirements of a contract for the sale of goods, but also in a case, such as this, where the goods are supplied as an aspect of performance under a contract for the sale of assets of a business.
• The assessment of damages must be made as at the date of breach of the contract (rather than the date of the trial) according to the market price of the goods (less the contract price if it had not been paid to the seller).
• The fact that it was impossible to calculate the price paid by the appellant to the company specifically for the samples was irrelevant. Because the ruling principle is concerned to provide the purchaser with compensation for the loss of the benefit of the bargain, it does not require an apportionment of the components of the bargain.
  Mitigation

The High Court disagreed with the Court of Appeal’s conclusion that the appellant had mitigated her loss by purchasing replacement sperm and including this cost in patient billing.

In the opinion of the majority, this approach failed to take into account that the appellant’s subsequent dealings with patients did not avoid, or increase or diminish, the loss of her bargain for delivery of the company’s sperm samples which was compliant with the warranty.

If the appellant had obtained some advantage, the value of the advantage would have mitigated the loss she otherwise suffered. Similarly, if she had been left even worse off, that additional loss may have aggravated her primary loss. However, in the opinion of the High Court, the appellant was not shown to have obtained any advantage from the later transactions and she did not claim that they left her any worse off. Rather, the value of the appellant’s loss was revealed by what she paid to buy the replacement samples.

Key message

The High Court decision re-affirms that damages for breach of contract must be measured by reference to the loss of the value of what the plaintiff would have received if the promise had been performed.

Furthermore, the decision emphasises that subsequent transactions (such as those involving the use of replacement products) will only be relevant to the calculation of damages where those transactions either mitigate or aggravate the loss suffered from the vendor not supplying what it had agreed to supply.

¹This principle was enunciated in Robinson v Harman (1848) 154 ER 363 and was confirmed in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272.