Wednesday, April 23, 2014
I just stumbled upon an interesting damages decision from the Australian High Court in December. In a thouroughly modern context (sale of frozen sperm), it raises the age-old question of how to measure expectation damages when the buyer is able to recoup the costs of replacement in a forward contract.
Plaintiff and Defendant are doctors specializing in “assisted reproductive technology services.” For just over $380,000 (AUD), Plaintiff agreed to buy the assets of a company operating a fertility clinic, a company controlled by Defendant. The asset sale included a stock of frozen sperm. The company warranted that the identification of the donors of that sperm complied with specified regulatory guidelines. (Defendant guaranteed the company’s obligations under the contract).
The stock of sperm delivered contained 1,996 straws that were in breach of warranty. Specifically, it did not comply with regulatory requirements concerning consents, screening tests and identification of donors. For this reason, the sperm was unusable by Plaintiff. Plaintiff was unable to find suitable replacement sperm in Australia and eventually found only one alternative source of sperm from a U.S. supplier for over $1.2million (AUD). Plaintiff “accepted that ethically she could not charge, and in fact had not charged, any patient a fee for using donated sperm greater than the amount [she] had outlaid to acquire it.”
The question before the High Court: how should Plaintiff’s damages for breach of warranty be calculated? The primary judge assessed the damages as the amount that the Plaintiff would have had to pay the U.S. company (at the time the contract was breached) to buy 1,996 straws of sperm. On appeal, the Court of Appeal held that the Plaintiff should have no damages because the Plaintiff was able to pass on the increased costs to her patients. The Court of Appeal held that the Plaintiff had thus avoided any loss she would otherwise have sustained.
The parties did not dispute damages should be "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.” Nor did they dispute that the Plaintiff was entitled to be put in the position she would have been in had the contract been performed. The parties disputed how these principles should be applied to this particular case.
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. Subject to some limitations, none of which was said to be engaged in this case, damages for breach of contract must be measured by reference to the third kind of loss: the loss of the value of what the promisee would have received if the promise had been performed.
After a nod to Fuller and Purdue, Justice Hayne explained how to value what Plaintiff should have received:
Under the contract which the [Plaintiff] made, she should have received 1,996 more straws of sperm having the warranted qualities than she did receive. The relevant question in the litigation was: what was the value of what the [Plaintiff] did not receive? The answer she proffered in this Court was that it was the amount it would have cost (at the date of the breach of warranty) to acquire 1,996 straws of sperm from [the U.S. company]. That answer should be accepted.
The answer depends upon determining the content of the unperformed promise. The answer does not depend upon whether the contract can be described as one for the sale of goods or for the sale of a business. How much the [Plaintiff] paid for the benefit of the promise is not relevant. It does not matter whether the value of what she did not receive was more than the price she had agreed to pay under the contract or (if it could have been determined) the price she had agreed to pay for the stock of sperm. The extent to which the [Plaintiff] could have turned the performance of the promise to profit would be relevant only if the [Plaintiff] had claimed for loss of profit. She did not. She sought, and was rightly allowed by the primary judge, the value of what should have been, but was not, delivered under the contract.
As for mitigation, the Justice wrote:
As already noted, however, the Court of Appeal concluded that the [Plaintiff] had mitigated her loss by buying replacement sperm from [the US. Company]. In respect of "the loss of each straw of replacement sperm actually sourced from [the U.S. company]" before the date of assessment of damages, Tobias AJA concluded that the chief component of the [Plaintiff’s] "loss" would be "the sum (if any) representing that part of the overall cost of acquisition of that straw not recouped from a patient". And in respect of "the residue of the 'lost' 1996 straws over and above those in fact replaced by [U.S.] sperm up to the date of trial", Tobias AJA concluded that "the appropriate course would have been to assume that [the Plaintiff] would continue to source straws of donor sperm from [the U.S. company] at a cost consistent with that which had prevailed since August 2005, and that she would continue to recoup from patients the same proportion of that cost as she had done in the past". On this footing, Tobias AJA concluded that the [Plaintiff’s] damages in respect of straws not "replaced" would be "the aggregate of the discounted present value of the un recouped balances (if any) of that cost as at the date of their assessment" (emphasis added).
Two points must be made about this analysis. First, the calculations described would reveal whether, and to what extent, the [Plaintiff] was, or would be, worse off as a result of the breach of warranty. That is, the calculations of the net amount which the [Plaintiff] had outlaid, and would thereafter have to outlay, would reveal the amount needed to put the [Plaintiff] in the position she would have been in if the contract had not been made. The calculations would not, and did not, identify the value of what the [Plaintiff] would have received if the contract had been performed. Second, the reference to mitigation of damage was apt to mislead. In order to explain why, it is necessary to say something about what is meant by "mitigation" of damage.
For present purposes, "mitigation" can be seen as embracing two separate ideas. First, a plaintiff cannot recover damages for a loss which he or she ought to have avoided, and second, a plaintiff cannot recover damages for a loss which he or she did avoid. * * *
The [Plaintiff’s] subsequent purchases and use of replacement sperm left her neither better nor worse off than she was before she undertook those transactions. In particular, * * * the [Plaintiff] obtained no relevant benefit from her subsequent purchases of sperm. The purchases replaced what the vendor had agreed to supply.
The purchase price paid for the replacement sperm revealed the value of what was lost when the vendor did not perform the contract. But the commercial consequences flowing from the [Plaintiff’s] subsequent use of those replacements would have been relevant to assessing the value of what should have been supplied under the contract only if she had obtained some advantage from their use, or if she had alleged that the replacement transactions had left her even worse off than she already was as a result of the vendor's breach. If she had obtained some advantage, the value of the advantage would have mitigated the loss she otherwise suffered. If she had been left even worse off (for example by losing profit that otherwise would have been made), that additional loss may have aggravated her primary loss. But the [Plaintiff] was not shown to have obtained any advantage from the later transactions and she did not claim that they had left her any worse off. Those transactions neither mitigated nor aggravated the loss she suffered from the vendor not supplying what it had agreed to supply. The value of that loss was revealed by what the [Plaintiff] paid to buy replacement sperm from [the U.S. company].
Showing that the [Plaintiff] had charged, or could charge, third parties (her patients) the amount she had paid to acquire replacement sperm from [the U.S. company] was irrelevant to deciding what was the value of what the vendor should have, but had not, supplied. If the contract had been performed according to its terms, the [Plaintiff] would have had a stock of sperm having the warranted qualities which she could use as she chose. She could have stored it, given it away or used it in her practice. In particular, she could have used it in her practice and charged her patients nothing for its supply. But because the vendor breached the contract, the [Plaintiff] could put herself in the position she should have been in (if the contract had been performed) only by buying replacement sperm from [the U.S. company]. Whatever transactions she then chose to make with her patients are irrelevant to determining the value of what should have been, but was not, provided under the contract.
Thus, Justice Hayne, joined by Justices Crennan and Bell, allowed Plaintiff’s appeal and ordered the she receive damages on the terms she sought. Justice Keane agreed with the result. Justice Gageler did not.
The appropriate measure of [the Plaintiff’s] loss is so much of the cost to [the Plaintiff] of sourcing 1,996 straws of replacement sperm for the treatment of her patients as she had been, and would be, unable to recoup from those patients. That measure, adopted by the Court of Appeal, is appropriate because it yields an amount which places [the Plaintiff] in the same position as if the contract had been performed so as to provide her with the expected use in the normal course of her practice of 1,996 straws of the frozen sperm delivered to her by the company.
To [the Plaintiff’s] protest that adoption of that measure leaves her without an award of damages in circumstances where the company has been found to have breached its warranty, the answer lies in the way she has chosen to put her case. She has made a forensic choice to eschew the measure which, together with the Court of Appeal, I would hold to be the appropriate measure.
Clark v. Macourt,  HCA 56 (Dec. 18, 2013).