By Dr Katy Barnett
Clark v Macourt [2013] HCA 56 is a case where the damages awarded far outstripped the cost of the original contract. The contract concerned the sale of an IVF business for close to $387,000, but a majority of the High Court affirmed the decision of the trial judge that the purchaser of the business was entitled to damages of over $1.2 million for a breach of warranty, as a substantial amount of the sperm included as an asset of the business did not comply with the warranty. This award was made notwithstanding the fact that the purchaser passed the cost of purchasing substitute sperm onto patients. This post will concentrate on the High Court’s recognition of the plaintiff’s interest in performance of the contract and the way in which damages are measured.
Why were the damages so high?
The damages were so high because the breach of warranty was in respect of one of the assets of the business, 3513 straws of donor sperm, which the purchaser proposed to use in the course of her own IVF business. The contract of sale warranted that the sperm complied with certain guidelines. However, at least 1996 straws of sperm did not comply with the warranty and had to be discarded. The vendor had not completed the necessary consent forms and screening tests, nor had it properly identified donors. In order to perform IVF services for her patients, the purchaser was obliged to purchase compliant donor sperm from an American company, Xytex, at a cost of over $1 million. She passed the costs of acquiring the sperm onto the patients. The purchaser sought damages reflecting the cost of acquiring the sperm. As noted above, the trial judge awarded damages for the cost of acquiring the sperm, but the award was overturned by the New South Wales Court of Appeal. A majority of the High Court of Australia reinstated the award of the trial judge (Hayne J, Crennan and Bell JJ, Keane J, Gageler J dissenting).
What is the point of expectation damages in contract?
Both the majority (comprised of Hayne J, Crennan and Bell JJ and Keane J) and Gageler J in dissent emphasise that the aim of expectation damages in contract is to put the plaintiff in the position in which she would have been if the contract had been performed.
At [9], Hayne J notes that there are three different ways in which one can measure the loss flowing from breach of contract:
First, there might be a loss constituted by the amount by which the promisee is worse off because the promisor did not perform the contract. That amount would include the value of whatever the promisee outlaid in reliance on the promise being fulfilled. Second, the loss might be assessed by looking not at the promisee’s position but at what the defaulting promisor gained by making the promise but not performing it. Third, there is the loss of the value of what the promisee would have received if the promise had been performed.
The majority of the High Court took the approach that the third measure was appropriate in the circumstances. All judges also refer to Fuller and Perdue’s celebrated article about contract damages (L L Fuller and William R Perdue, Jr, ‘The Reliance Interest in Contract Damages’ (Pt 1) (1936) 46 Yale Law Journal 52, accessible here). Hayne J cites the following passage at page 53 of Fuller and Perdue’s article:
This [expectation damages] seems on the face of things a queer kind of ‘compensation’. … In actuality the loss which the plaintiff suffers (deprivation of the expectancy) is not a datum of nature but the reflection of a normative order. It appears as a ‘loss’ only by reference to an unstated ought. Consequently, when the law gauges damages by the value of the promised performance it is not merely measuring a quantum, but is seeking an end, however vaguely conceived this end may be.
This consideration of the aims of expectation damages then led to the question of how to measure the loss in this case.
How to measure the loss: diminution in value or cost of repair of the breach?
Keane J (with whom all of the other majority judges agreed) referred to the High Court’s previous decision in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, in which the court quoted Oliver J in Radford v De Froberville [1978] 1 All ER 33, 44. Oliver J said that putting the plaintiff in a position as if the contract has been performed does not simply mean putting the plaintiff in as good a financial position as if the contract had been performed. In Tabcorp and Radford, the court was faced with the choice between whether the damages should simply be measured by the difference in value between a compliant and a non-compliant building and whether damages should be measured according to the much greater cost of repairing the breach. In both cases the court chose the latter course and awarded rectification costs.
Although this case involved goods, the majority decided that the loss in this case was not the difference in value between the business as supplied and the value of a business which had warranty compliant sperm. Instead, the court looked at what it cost the plaintiff to procure a substitute performance and used the market value of the replacement sperm to measure the value of the sperm the plaintiff would have received if the promise had been performed. In my view, it was relevant in this case that the subject matter of the contract was a rare commodity which was not readily available in the market. Generally diminution in value will be adequate for contracts for sales of goods and, indeed, diminution in value is enshrined in s 54 of the Sale of Goods Act 1923 (NSW) and in other equivalent Sale of Goods Act provisions across the Commonwealth. However, where the contract is not for the sale of marketable commodities, diminution of value will not restore the plaintiff to the same situation as if the contract had been performed.
Gageler J in dissent said at [71] that the value to the plaintiff was not the value of the goods at the time of delivery, and that the true value of the sperm was that the plaintiff could gain ‘control over a stock of frozen sperm which she could then use for the treatment of her patients in the normal course of her practice’. He said that the plaintiff was factually no worse off as a result of the breach because she could (and did) pass on the costs of obtaining alternative frozen sperm to her patients.
What was the role of mitigation and passing on the costs to third parties?
Ultimately, the majority decided that it was irrelevant that the plaintiff had passed on the costs of obtaining the compliant sperm to patients. The court took their general approach from Slater v Hoyle & Smith Ltd [1920] 2 KB 11, namely that it was irrelevant if no actual loss had been suffered because defective goods were sold for full price (cf Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87). This general approach is problematic, and even if there are reasons why it is appropriate generally, it was problematic in this case. My reasoning is explained in a forthcoming note (K Barnett, ‘Contractual expectations and goods’ (2014) 130 Law Quarterly Review (forthcoming). In summary, although I agree with the court’s method of measuring the loss, I disagree with the court’s position on mitigation. The plaintiff was put in a better pecuniary position than if the contract had been performed. By ignoring the fact that the plaintiff passed on her losses to patients, the High Court undermined the compensatory principle in contract.
Conclusion
Clark v Macourt offers a useful clarification of the aims of contractual damages which prioritises the plaintiff’s interest in performance. It also provides an interesting and unusual instance where rectification cost is an appropriate measure of damage rather than diminution in value for goods. Moreover, it provides a useful exposition of the principles of mitigation. But one cannot help thinking that the end result is something that will strike the average person as instinctively problematic: the plaintiff gets damages three times greater than the price of the original contract notwithstanding the fact that she passed the costs onto third parties. There are some signs in the judgment that the way in which the plaintiff pleaded her claim was pivotal to the majority’s conclusion, as she simply sought an assessment of the value of the sperm which had not been delivered in accordance with the vendor’s warranty (see Hayne J at [13], Crennan and Bell JJ at [32], Keane J at [101]–[102] cf Gageler J at [71]).
AGLC3 Citation: Katy Barnett, ‘Protecting the Plaintiff’s Expectations: Clark v Macourt’ on Opinions on High (10 March 2014) <https://blogs.unimelb.edu.au/opinionsonhigh/2014/03/10/barnett-clark/>.
Dr Katy Barnett is a Senior Lecturer at Melbourne Law School.