Imagine how aghast you would be if you entered into a contract for the sale of a business for less than $400,000 and ended up having to pay the purchaser more than $1,000,000 in damages for breach of warranty and in circumstances where the purchaser had, in actual financial terms, lost nothing!
Those who are reading this and are not from the legal community will be astonished to learn that this was in fact a decision recently made by the High Court of Australia.
The facts in Clark v Macourt  HCA 56 were as follows:
- In 2002, Clark, a registered medical practitioner specialising in providing assisted reproductive technology services, agreed to buy the assets of St George Fertility Centre Pty Limited, a company controlled by Macourt (also a registered medical practitioner);
- Included in the assets for sale was a quantity of frozen donated sperm;
- Macourt guaranteed the obligations of St George Fertility Centre Pty Limited (the Vendor);
- The Vendor warranted that the identification of donors of the sperm complied with specific guidelines;
- In fact, of the stock of sperm delivered by the Vendor, 1,996 straws which Clark had expected to be able to use were not as warranted and were unusable;
- Clark bought 1,996 straws of sperm from an American supplier (‘Xytex’) and charged her clients the cost of straws used in treating them but not so as to make a profit – solely to recoup the cost; and
- Clark did not pay approximately half of the purchase price owing to the Vendor.
The Vendor sued Clark in court for the outstanding amount owing under the agreement for the sale of business but Clark cross-claimed against the Vendor for breach of warranty.
Supreme Court Decision
At first instance Macready AsJ entered judgment against the vendor for breach of warranty and against Macourt as guarantor.
Damages were assessed by Gzell J, who determined that the damages for breach of warranty were the amount Clark would have had to pay Xytex, at the time the contract was breached, to buy the 1,996 straws of sperm.
The Court of Appeal reversed the decision of the Judge at first instance reasoning that since Clark had in fact suffered no loss (because she had charged each patient a fee which covered costs incurred in buying the straws of sperm used in treating the patient) there were no damages payable.
The majority of the Court upheld the appeal and Clark was thus ultimately successful. On what basis? On a strict application of the principles of compensation for breach of warranty. The judgment of Keane J is particularly interesting. He notes that:
(a) Damages for breach of contract are awarded to put the promisee in the same position (as far as money can do it) as the promisee would have been in had the broken promise been performed;
(b) The ruling principle governs the assessment of damages not only in the case of failure to supply goods in accordance with the requirement for the sale of goods but also where, as in this case, the goods are supplied as an aspect of performance under a contract for the sale of assets of a business;
(c) The value is assessed at the date of the breach of contract to give the purchaser the economic value of the performance of the contract at the time that performance was promised;
(d) The fact that she had mitigated loss by buying sperm from Xytex and recovering the cost from patients did not compensate her for the breach of contract. The loss for which she claimed compensation was at the completion of the Deed (of sale) at which time the assets she acquired were not as valuable as they would have been had St George’s performance measured up to its warranties. In other words, if she had wanted to on-sell the business the value would have been substantially less because of the damaged stock in trade (sperm). Thus she had suffered a real loss in terms of the benefit of her bargain at the date on which she acquired the business.
Given that Clark had suffered no financial loss as a result of the breach of warranty it is unlikely that she would have initiated court proceedings against the Vendor or Macourt. But who knows?
One lesson to be learned from this case is perhaps to be careful about instituting proceedings to recover a debt from a party to a contract in circumstances where you, yourself, are in breach of contract. You may, as Macourt did, pay dearly!