Australia: Damages for breach of contract: it's all in the pleading

Given how fundamental the legal concept of damages is to breach of contract, many assume that the law in this area was well settled. However, as the recent High Court decision in Clark v Macourt demonstrates, there are a number of nuances that plaintiffs must bear in mind when pleading their case to avoid losing their entitlement to damages.

Background

In 2002, under an asset sale and purchase agreement, St George Fertility Centre Pty Limited (Vendor) agreed to sell various assets of its assisted reproductive technology practice, including a stock of frozen donated sperm to Dr Clark (Buyer). Dr Macourt (Guarantor) controlled the Vendor and guaranteed its obligations under the sale contract.

Under the agreement, the Vendor warranted that the identification of donors of the sperm complied with specified guidelines, which was a requirement for the sperm to be used. However, of the stock of sperm delivered, 1,996 straws did not have adequate sperm donor records and, as a result, were unusable.

It was not disputed that the Vendor had breached its warranty and that, as the Vendor had gone into liquidation, the Guarantor was liable under the asset sale and purchase agreement.

Issues

The key issues in dispute were:

• valuing the loss, and
• whether the loss had been mitigated.

These issues were complicated by the unusual nature of the stock and the regulations that govern its use and sale.

Valuing the loss

There were two competing approaches to valuation taken by the trial judge, the NSW Court of Appeal and, ultimately, in the High Court. These were:

• loss of the value of the stock at the date of completion of the purchase, or
• the cost of acquiring the replacement stock.

One complicating factor was that the asset sale and purchase agreement did not allocate any value to the sperm. Further, the Buyer did not receive title to the sperm because a donor could always withdraw his consent to the use of his sperm at any time.

The Buyer argued that her loss included the value of what she contracted for but did not receive as at the date of the breach of the warranty. The trial judge agreed with this approach and found that buying 1,996 straws of replacement sperm would have cost about $1 million at the time the contract was breached, despite the purchase price for the assets being less than $400,000.

The Guarantor argued that by purchasing replacement sperm, for which the Buyer could recover the cost from her patients in their treatment, the Buyer had suffered no loss. The Court of Appeal agreed with this approach, also noting that the failure to allocate any value to the sperm in the asset sale and purchase agreement meant that it could not be demonstrated that the Buyer had paid anything for the sperm.

The High Court stated that the guiding principle is that damages should represent an amount that, so far as money can, places the parties in the same situation as if the contract had been performed. Despite each judge agreeing with the principle, the High Court split 4:1 on its application. The majority holding that because the Vendor had not fulfilled its promise to sell sperm that complied with the specified guidelines, the appropriate damages (to put the Buyer in the same position had the contract been performed) was the amount required to purchase those replacement assets.

Mitigation

On the issue of mitigation, the Court of Appeal held that, even if their finding on the valuation of the loss was wrong, the loss claimed by the Buyer was fully mitigated by the recovery of the cost of the replacement sperm from her patients.

The majority of the High Court disagreed and held that the fact that the Buyer could recoup her purchase of replacement sperm through customer fees was irrelevant, as it neither lessened nor increased the loss the Buyer suffered due to the Vendor not supplying what it had agreed. This was because the Buyer did not receive any advantage from the replacement purchase (under the applicable legislation a doctor may only charge the costs of donor sperm and not an amount for profit). Accordingly, after the purchase and sale of the replacement sperm she was left in exactly the same position as before, having not received what she had contracted to receive.

Importance of pleadings

While the various judges disagreed on the outcome, they agreed that the way damages were pleaded affected whether the Buyer had suffered any loss.

For example, the majority of the High Court noted that if the Buyer had pleaded her case based on loss of profit, she would not have been entitled to any damages. In contrast, Justice Gageler (in dissent) held that the Buyer was not entitled to any damages because of the way she had pleaded her case.

Implications for agencies

While the key reason for the differing judgments, and outcomes, through the various courts is likely to be the unusual nature of the stock involved, together with the regulations around its use and fees, the case highlights the importance of getting your pleadings right.

A cause of action will often give rise to various alternative ways of pleading the damages. While it is common that the different ways of pleading will result in the same award, it is not always so. Accordingly, agencies need to carefully analyse how they plead their cases to ensure that they maximise their entitlement to damages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.