In this case, the High Court ruled that the same damages principles apply to breach of contracts for the sale of business assets and for the sale of goods. In each case, damages are intended to be compensatory and aim to place the promisee in the position they would have been in had the promise not been broken.
Whether a contract is classified as a sale of a business asset or the sale of goods, the same principle relating to the nature of damages for breach of contract is to apply. That is, damages are intended to be compensatory and aim to place the promisee in the position they would have been in had the promise not been broken. In other words, damages protect the promisee’s so-called “expectation interest”. The relevant time for assessing damages is the time of breach.
The quantum of damages to be awarded is to be determined by reference to the loss of value between what was promised and what was received. The value of the unperformed obligation can be informed by the cost to the promisee of rectifying the unperformed obligation (ie the cost of realising the expectation).
The fact that the promisee is able to pass on the costs of rectifying the breach to a third party is irrelevant in assessing the quantum of damages to be awarded for delivery of defective goods. Damages are to be assessed on the basis of what the promisor should have supplied, but did not supply. Subsequent transactions will only be considered where they either mitigate or aggravate the loss caused by the failed promise.
This principle can operate harshly in a sale of business transaction if the seller fails to negotiate limitations on liability. Here the seller was liable for damages equal to more than twice the purchase price.
Dr David Macourt was a specialist fertility practitioner and the sole director of St George Fertility Centre Pty Limited. In early 2002, St George entered into a 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). Dr Macourt guaranteed the performance of St George’s obligations under the Deed.
The purchase price for the Assets was calculated using a complex formula based on Dr Clark’s past earnings. Importantly, the purchase price was not divided between specific categories of Assets - a single amount was payable for all of the Assets.
The breach of warranty and its consequences
St George breached various warranties in the Deed by failing 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 source replacement straws from a US company, Xytex Corporation. In accordance with Dr Clark’s ordinary business practice (which was dictated by the applicable regulatory framework), the price of the Xytex straws was incorporated into the professional fees that Dr Clark charged her patients (ie there was no additional charge to her patients for the sperm straws). In the first instance, the Supreme Court of NSW calculated damages as $1,020,252.70 by reference to the cost of acquiring suitable replacements for the defective sperm supplied by St George.
Appeal to the NSW Court of Appeal (NSWCA)
The NSWCA overturned the decision at first instance stating that due to the compensatory nature of contractual damages, no damages were to be awarded as the purchaser was able to fully mitigate the loss she suffered since she could pass on to patients the reasonable costs of procuring the replacement sperm.
Further details on the decision at first instance and the Court of Appeal can be found in our earlier publication here.
Appeal to the High Court
In a 4-1 majority decision, the Court allowed the appeal with costs. It was held that damages should be calculated by the amount it would have cost (at the time the contract was breached) to acquire a replacement for the defective goods.
There was no dispute in the High Court, or any of the courts below, as to the principle that a plaintiff who successfully sues for breach of contract is to be awarded as damages “that sum of money which will put the party who has been injured….in the same position as he [or she] would have been in if he [or she] had not sustained the wrong for which he [or she] is now getting his [or her] compensation or reparation.”.
In applying this principle, the Court identified the relevant loss as the loss of the value of what Dr Clark would have received if the promise, to supply 3513 straws that complied with the relevant industry code of practice, had been performed. The loss was therefore to be measured by reference to the value of what St George had promised to deliver, but had not.
The Court agreed with Dr Clark’s submission that the value of what she did not receive was the amount it would have cost, at the date of breach of warranty, to acquire 1996 straws of sperm from Xytex (being the amount of St George sperm she could have reasonably have been expected to be able to use, 2500 of the 3513 straws, less the amount she actually could use). The Court held this to be the content of the unperformed promise.
The Court held that the NSWCA erred in finding that Dr Clark was not entitled to damages because she had fully mitigated her loss by acquiring new straws of sperm from Xytex and subsequently recouping the costs of the new sperm from her patients.
St George had failed to perform under the contract. Dr Clark’s purchase from Xytex merely put her in the position she should have been if St George had properly performed the contract. The Court held that Dr Clark was neither better off nor worse off due to the purchase from Xytex, thus the transactions merely revealed the value of her loss from St George’s failure to perform.
Further, the Court found that if St George had not failed to perform in accordance with the terms of the contract, Dr Clark would have had a stock of sperm having the warranted qualities which she could use as she chose. The fact that Dr Clark had charged, or could charge her patients the amount she had paid to acquire the replacement sperm from Xytex was irrelevant to determining the value of what St George should have supplied. It had no consequence on the value of what she had received under the contract compared to what she should have received.
To see the full judgment in this case, please click here.