Issues of Principle in Assessing Contract Damages

Abstract

The facts in Clark v Macourt are deceptively simple. A sale of a business (a medical fertility practice) includes frozen sperm as part of the transferred assets. No part of the sale price is apportioned distinctly to the sperm. It turns out that much of the sperm is unusable because the associated documentation maintained and furnished by the vendor is inadequate. This constitutes a breach of a warranty in the contract of sale. The purchaser incurs significant costs in acquiring replacement sperm from overseas. (The total replacement cost is a little over 3 times the price paid for the entire business). The purchaser begins, and is expected to continue, to recoup that expenditure from patients to whom the sperm is subsequently supplied in connection with fertility services. The purchaser claims as damages the total replacement cost.

Clark v Macourt was decided by a majority of the High Court of Australia as a straightforward application of the rule in Robinson v Harman. On analysis, however, judgment glosses over several important issues of principle in the assessment of contract damages raised by the (unusual) facts. In particular, although the contract was for the sale of a business, the majority chose to determine damages by applying the prima facie measure for breach of a warranty of quality in a contract for the sale of goods to one asset transferred, rather than the business as a whole. This involved upholding an assessment based on questionable evidence of market value, and resulted in an award that was contrary to the intention of the parties and inconsistent with the evidence of mitigation by the purchaser. The majority seems also to have placed more emphasis on the ability of the claimant (rather than the court) to choose the basis for assessment than allowed for by previous decisions of the court. In this article we explain why the dissenting judgment of Gageler J should be preferred and why the majority should have come to different conclusions on the issues of principle.

Keywords: Damages, contract damages, measure of loss, sale of business or sale of goods, breach of warranty of quality, use of default measures of loss, performance or expectation interest, time of assessment of loss, proof of loss, evidence of market value, mitigation, subsequent sale

JEL Classification: K10, K12, K30