This case concerns the calculation of contractual damages in respect of defective goods. It deals with a situation where there was no clear purchase price for the defective goods and the purchaser had, in any case, been able to fully recoup the cost of acquiring replacement goods. Special leave has been granted to appeal this decision to the High Court.

Key Lessons

Damages for breach of contract are intended to be compensatory and aim to place the plaintiff in the position they would have been in had the contract been performed. This case demonstrates that one consequence of this is that damages are not always available for breach of contract.

Where a contract has been breached by the supply of defective goods, damages are usually assessed by calculating the difference between the value of complying goods and the value of the defective goods actually supplied. However, as this case demonstrates, this method is only a rule of thumb and, due to the compensatory nature of contractual damages, it is possible that no damages will be awarded where the purchaser has been able to fully mitigate the loss they have suffered.

Background

Dr David Marcourt was a specialist fertility practitioner and the sole director of St George Fertility Centre Pty Limited (St George). In early 2002, St George enter into a deed (Deed) with Dr Anne Clark under which St George agreed to sell Dr Clark "the Assets" a term defined to include the goodwill in the St George Fertility Centre as well as donor sperm (in the form of 3513 "straws" of sperm), embryos and donor records (including consent forms, screening tests and identification information).

The purchase price for the Assets was calculated using a complex formula based on Dr Clark's past earnings (Purchase Price). Importantly, the Purchase Price was not divided between specific categories of Assets, so that a single amount was payable for all of the Assets.

The Deed also contained clauses that: imposed a limited restraint of trade on Dr Marcourt, required St George to transfer existing telephone services to Dr Clark and gave St George's consent to Dr Clark to advertise that her business "includes the business formerly conducted as St George Fertility Centre".

The breach of warranty and its consequences

In a summary judgment delivered on 9 June 2010, Dr Clark succeeded in establishing St George's liability for various breaches of warranty caused by St George's failure to provide donor records and to identify sperm donors in compliance with the relevant industry code of practice. As a consequence of these breaches, Dr Clark was only able to use 504 straws of St George sperm before having to discard the remaining 3009 straws and to then source replacement straws from a US company called Xytex. In accordance with Dr Clark's ordinary business practice, the price of the Xytex straws was incorporated into the professional fees that Dr Clark charged her patients.

The issue of damages was considered by Gzell J, who, after offsetting amounts owed by Dr Clark to St George under the Deed, awarded Dr Clark $1,246,025.01. This amount was based on the value of the Xytex sperm, which his Honour regarded as the best evidence of the value of hypothetical warranty-compliant sperm (ie the goods contracted for). In other words, the amount of damages awarded to Dr Clark was calculated by reference to the cost of acquiring suitable replacements for the defective sperm supplied by St George. The method for calculating these damages was the subject of an appeal by St George.

Findings of the Court of Appeal

The Court of Appeal considered the starting point for assessing damages to be the principle that the amount of damages should place the plaintiff in the position they would have been in had the contract been properly performed.

In considering this hypothetical position, the Court noted that from 2007 the Human Cloning for Reproduction and Other Prohibited Practices Act 2003 (NSW) prevented Dr Clark from charging valuable consideration for donor sperm other than as necessary to cover reasonable expenses. Furthermore, Dr Clark's evidence indicated that, even before 2007, she would have considered herself ethically precluded from charging patients for donor sperm unless she could clearly identify the cost of that sperm. As there was no identifiable amount payable for the St George sperm under the Deed (as described above the Purchase Price covered all of the relevant business assets, and there was no specific amount attributable to the sperm alone), the Court of Appeal concluded that, even if the St George sperm had been warranty compliant, it was unlikely that Dr Clark would have recouped any costs of the St George sperm from patients. This was consistent with the lack of any evidence to suggest that Dr Clark charged patients for supplying the 504 straws of St George sperm which she did use.

Given that Dr Clark could not have charged patients for the supply of hypothetical non-defective St George sperm, the expected value of this hypothetical sperm was best assessed as the cost of acquiring replacement sperm from an alternative source (for which the Xytex sperm provided the best evidence). Therefore, because the actual value of the 3009 defective straws of St George sperm was zero, Dr Clark was prima facie entitled to an amount of damages equivalent to this replacement cost. This prima facie assessment of damages was, however, subject to the principle of mitigation.

The Court referred to a number of authorities on mitigation of loss which supported the proposition that, in determining whether a loss has been mitigated, courts should only take into account subsequent transactions that arose both as a direct consequence of the breach and in the ordinary course of business. Applying these principles to the present case, the Court found that Dr Clark had taken effective mitigating action by acquiring new straws of sperm from Xytex and subsequently recouping the cost of the new sperm from her patients.

Notably, Dr Clark did not seek damages in respect of costs associated with storing the St George straws or thawing them before use (which were arguably costs that had not been mitigated through the acquisition of Xytex sperm). Instead, her claim (and the primary judge's assessment of damages) was based solely on the amount charged by Xytex to Dr Clark for the supply and transportation of the Xytex sperm. Because these supply and transportation costs had been recouped from patients, the Court of Appeal found that Dr Clark's loss had been fully mitigated. The Court, therefore, overturned Gzell J's award of damages, leaving Dr Clark significantly worse off and with considerable legal expenses.

The case has been granted special leave to be heard before the High Court.

To see the full judgment in this case, please click here. The transcript of the special leave application is available here.