KEANE J. At issue in this appeal is the measure of the damages recoverable by a purchaser of assets of a business where the vendor has failed to meet its obligations in relation to the delivery of stock of the business. Because of the unusual nature of the stock involved, the case has given rise to a contest between an approach to the measure of recoverable loss which is focused upon the loss to the purchaser of the value of the stock at the date of completion of the purchase, and one which is focused on the expense incurred by the purchaser to acquire substitute stock in the ongoing conduct of her business. For the reasons which follow, the former approach is correct.
An understanding of the terms of the parties' agreement, and its commercial context, is necessary to gain an appreciation of the competing arguments.
Factual background
The appellant and St George Fertility Centre Pty Ltd ("St George") each conducted an assisted reproductive technology ("ART") medical practice in Sydney. Each practice provided ART treatments for patients aimed at inducing pregnancy by means other than sexual intercourse. The ART treatments included intrauterine insemination ("IUI"), which is the transfer of sperm via a catheter into the uterus. Sperm that has been donated by a male unknown to the female patient is used in some IUI procedures. Sperm from such donors is stored in thin straws about a hand‑length long and up to 5 mm wide.
In January 2002, the appellant and St George entered into a deed ("the Deed") whereby the appellant agreed to purchase, and St George agreed to sell, "assets" used in, or attached to, St George's ART practice. The respondent guaranteed the performance of St George's obligations under the Deed; he is the only respondent to the appeal because St George is now in liquidation.
Clause 18.1 of the Deed contained the following definitions:
"Assets means the following assets of the vendor used in or attached to the Business, being the goodwill of the vendor in respect of the Business, Records, Embryos (to the extent title in them can at law pass to the Purchaser) and Sperm but specifically excluding Plant & Equipment and any debts owed to the vendor in respect of the Business as at completion.
Business means the ART business known as 'St George Fertility Centre' conducted by the Vendor.
…
Records means all of the records of the Business, including all original and copy records of donor and patient screening records (at both storage and 6 month quarantine for the Sperm) lists of Sperm donors and patients, all patient records, consent forms and the vendor's Patient List of the Business excluding the Accounting Records.
RTAC means the Reproductive Technology Accreditation Committee of the Fertility Society of Australia.
Sperm means all frozen sperm whether from donors, stored for patients or reserved for patients with the vendor in the Business."
Clause 2a of the Deed provided that the purchase price for "the assets" was to be calculated according to the following formulation:
"In respect of each of the calendar years 2002, 2003 and 2004, 15% of the amount by which the purchaser's gross fee income exceeds 105%, 110% and 115% respectively of the fee income of the purchaser for the calendar year 2001."
It was common ground that, as at 8 April 2005, the total amount payable by the appellant to St George for the assets under this provision was $386,950.91. The appellant had paid St George only $167,000, leaving a balance of $219,950.91 outstanding. St George sued the appellant to recover that balance.
The appellant counter‑sued St George and the respondent for damages for breach of a number of warranties under the Deed.
Under cl 5.1(a) of the Deed, St George warranted relevantly that:
"the consents, screening tests (including at storage and after 6 months quarantine) and identification (including identification, contact details and physical characteristics) of donors of Sperm … have been conducted in compliance with the guidelines of RTAC".
Under cl 9.1 of the Deed, St George was relevantly obliged at completion to:
"(a) give to the Purchaser:
(i) except as is otherwise provided by this contract, to the extent title in them can at law pass to the Purchaser, unencumbered title to the Assets, free from any charges, liens or restrictions;
(ii) possession of the Assets;
(iii) a copy of the vendor's Patient List;
(iv) all patient records for the Sperm, which must include details of the Sperm donor, consent forms, results of screening tests and sufficient information to allow identification in accordance with RTAC guidelines of all Sperm".
On completion, St George delivered to the appellant 3,513 straws of donor sperm, but the appellant used only 504 of those straws, the balance being discarded due to the breaches of contract by St George.
By September 2005, the appellant had exhausted the stock of usable sperm straws obtained from St George. The only donor sperm available to the appellant to meet the shortfall resulting from St George's breach of contract, and which complied with all requisite regulatory and legislative requirements, was supplied by a company in the United States called Xytex Corporation ("Xytex").
The appellant's case of breach of contract against St George was established primarily on the basis of admissions made by the respondent that "sperm donor records were not maintained in each case as required". St George's breaches of warranty were not at issue in the task of assessment of damages, which fell to the primary judge, Gzell J.
The decision at first instance
His Honour assessed the appellant's damages at $1,246,025.01, being the value of 1,996 warranty-compliant sperm straws at the date of the completion of the acquisition of the assets.
His Honour arrived at the figure of 1,996 sperm straws in the following way:
. St George transferred 3,513 straws of donor sperm, of which only 504 were usable as a result of St George's breaches of warranty.
. Not all of the 3,513 straws could have been used even if all warranties had been complied with because of the effect of the "family limit rule" in par 9.14 of the RTAC Code of Practice. The rule stipulated that an ART practice must have a policy that limits the number of children generated by any one donor to no more than 10 in order to avoid "accidental consanguinity within the community". Of the 3,513 straws transferred, the appellant could reasonably have expected to be able to use "at least 2,500".
. The number of straws actually used was deducted from the amount the appellant could reasonably have expected to be able to use.
. The resulting figure was 1,996.
The primary judge quantified the appellant's loss by calculating what it would have cost the appellant to purchase 1,996 warranty‑compliant sperm straws at the date of St George's breach of contract.
St George and the respondent contended that the date for assessment of damages should have been the date of trial. They argued that any loss suffered by the appellant was suffered during the period between completion of the contract and trial, and during that period the purchaser recovered the cost of acquisition, transport and storage of sperm by charging those costs to patients. On that approach, the appellant had suffered no loss by the date of trial. The primary judge rejected that contention, applying "the general rule of common law … that damages are assessed at the time of breach of contract or when the cause of action arises".
The date of breach was the date of completion of the acquisition, that is, early 2002. The primary judge used the cost of acquiring 1,996 sperm straws from Xytex after September 2005 to determine the notional cost to the appellant of acquiring, transporting and storing Xytex sperm straws in early 2002. His Honour acknowledged that the price at that time was likely to have been less than the price as at September 2005, and adjusted for that circumstance by not allowing the appellant any interest for the intervening three and a half year period.
The decision of the Court of Appeal
The Court of Appeal of New South Wales (Beazley and Barrett JJA and Tobias AJA) allowed the respondent's appeal against the judgment of the primary judge.
Several propositions were brought together in two broad strands of reasoning to support the Court of Appeal's conclusion. First, the Court of Appeal was disposed to regard the Deed as a contract for the sale of a business, not a sale of goods, and to treat this difference as a reason for holding that the measure of damages applied by the primary judge was not applicable in this case. Further, the Court of Appeal said that the method of calculation of the purchase price provided by cl 2a of the Deed made it "extremely difficult, if not impossible, to determine" what portion of the purchase price could be attributed to the sperm. In this regard, Tobias AJA noted that "[t]here was no apportionment in the purchase price of an amount which could be attributed to that sperm and no attempt was made by [the appellant] to do so at trial." On that footing, the Court of Appeal concluded that it could not be demonstrated that the appellant had actually paid anything for the sperm pursuant to the terms of the Deed. On this approach, the appellant suffered no loss by reason of the circumstance that St George's sperm straws were worthless.
The second broad strand of the reasoning of the Court of Appeal was that the appellant had suffered no loss because she recovered her expenditure on the Xytex stock from her patients in the course of providing ART treatments in the period between completion of the contract and the trial.
The two broad strands of reasoning of the Court of Appeal, and the propositions collected to support them, can be seen in the following passage. It is necessary to set the passage out in full:
"Of particular significance to the issues on the appeal was his Honour['s] reference to the contention by St George and [the respondent] that damages should be assessed at the date of trial because Fertility First recovered the cost to it of the acquisition and storage of sperm purchased from Xytex by charging those costs to patients. Accordingly, [the appellant] had suffered no loss.
The primary judge's response to this submission was as follows[]:
'The simple answer to that proposition is that [the appellant] paid twice for the use of sperm and recovery of the cost of acquisition and storage of the sperm purchased from Xytex still left her out of pocket for the amount paid under the deed.'
It is convenient to immediately identify the flaw to this response of the primary judge. The answer may indeed have been simple if [the appellant] had in fact paid twice for the St George sperm on the one hand and the Xytex sperm on the other but that required proof that she was in fact out of pocket for the amount paid for the St George sperm under the Deed. However … there was no evidence that she paid anything for the St George sperm under the terms of the Deed. The method of calculation of the purchase price pursuant to clause 2a of the Deed made this extremely difficult, if not impossible, to determine.
Although the transaction involved her taking possession of the St George sperm as part of the sale of its business to her, it was conceded first, that the St George sperm was in all probability obtained from local donors and, secondly, that apart from any expenses incurred by such donors in making the donation, s 32(1) of the Human Tissue Act 1983 [(NSW) ('the Human Tissue Act')] prohibited any donor receiving valuable consideration for his donation. In these circumstances, it is not surprising that no amount of the purchase price payable under clause 2a of the Deed was (or could be) apportioned to the St George sperm which [the appellant] was to receive as part of 'the Assets'. As I observed … above, the contract constituted by the Deed was for the sale of [St George's] business or practice, not one for the sale of goods, in whole or in part. I would add that it was not suggested that [the appellant] would obtain title to that sperm because she acknowledged that a donor could always withdraw his consent to the use of his sperm at any time.
It must therefore follow that contrary to his Honour's finding … [the appellant] was not 'left out of pocket for the amount paid under the Deed' for the St George sperm. Furthermore, the evidence of [the appellant] to which I have already referred demonstrates that she recovered the full cost of acquiring the replacement Xytex sperm from her patients. Accordingly, she was also not 'left out of pocket' for those costs." (emphasis of Tobias AJA)
It may be noted here, before turning to discuss the arguments agitated in this Court, that, having regard to the measure of damages applied by the primary judge, it was perhaps unfortunate that his Honour spoke of the appellant as having been "left … out of pocket for the amount paid under the [D]eed". This flourish was not necessary to the application of the measure of loss applied by his Honour, and it seems to have served as a distraction to the Court of Appeal.
The appeal
The appellant's challenge to the decision of the Court of Appeal may be stated succinctly. St George's breach of contract meant that the value of the sperm straws as assets acquired by the appellant under the Deed was less than it would have been if St George's promises had been kept. The appellant suffered that loss of value at the date of completion of the acquisition of the assets.
On this approach, the first strand of the Court of Appeal's reasoning failed to appreciate that her claim did not require proof of the price paid by the appellant specifically for the non‑compliant sperm.
As to the second strand of the reasoning of the Court of Appeal, the appellant argued that the Court of Appeal erred in treating her claim as if it was for the recovery of outlays incurred to obtain replacement stock in the course of her practice. The appellant contended that she had claimed the value of the sperm which should have been delivered to her by St George, the amount paid to Xytex being evidence of that value. That being her claim, she was entitled to recover the monetary equivalent of the value which St George failed to transfer to her.
What did the appellant claim?
The respondent contended that the appellant's claim was not for the value of the sperm to which she was entitled, but for the costs and expenses associated with the "procurement of replacement sperm". The respondent said that these costs and expenses were incurred subsequent to the date of breach and, accordingly, should have been assessed at the date of trial.
The forensic advantage to the respondent of framing the appellant's claim in this way was that it opened the way for the argument, accepted by the Court of Appeal, that the appellant recouped from her dealings with her patients the costs and expenses incurred by her in procuring replacement sperm, so that she suffered no loss by reason of St George's breach of contract.
The respondent's contention under this heading should be rejected. The appellant was entitled to frame her claim in the manner most advantageous to her, and to have that claim determined. The nature of the appellant's claim was made clear in par 13(a) of the appellant's reply in the Supreme Court. Her claim for damages was for an award which:
"gives her the benefit of her bargain under the Deed by giving her, so far as money is capable of doing so, something equivalent to the value of the worthless Sperm delivered to her, as opposed to damages to compensate her specifically for her outlay to Xytex (the amount actually paid and payable to Xytex being no more than evidence of an appropriate measure of damages)".
It was this measure which the primary judge applied, notwithstanding the rhetorical flourish criticised by the Court of Appeal. The Court of Appeal disagreed with the primary judge's approach, but did not suggest that the terms in which the appellant advanced her claim meant that the approach taken by the primary judge was not open as a matter of procedural fairness.
One may now turn to consider whether the measure applied by the primary judge was correct in principle.
Damages for breach of contract: the ruling principle
The principle according to which damages for breach of contract are awarded is that the damages should put the promisee in the same situation with respect to damages, so far as money can do it, as it would have been in had the broken promise been performed. The appellant was entitled to claim this measure, rather than a measure based, either on the difference between what she paid for the sperm straws and what they were worth, or on the expense "of undoing the harm which [her] reliance on the defendant's promise has caused [her]." This Court said in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd:
"The 'ruling principle', confirmed in this Court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman:
'The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.'"
In Bellgrove v Eldridge, Dixon CJ, Webb and Taylor JJ explained that the practical operation of the ruling principle may vary depending on the commercial context; but that the principle is always applied with a view to assuring to the purchaser the monetary value of faithful performance by the vendor of the bargain. The decision in Bellgrove v Eldridge confirms that the circumstance that a case does not involve the transfer of marketable commodities does not displace the application of the ruling principle. To the same effect, in Tabcorp the Court went on to say:
"Oliver J was correct to say in Radford v De Froberville that the words 'the same situation, with respect to damages, as if the contract had been performed' do not mean 'as good a financial position as if the contract had been performed' (emphasis added [by their Honours]). In some circumstances putting the innocent party into 'the same situation … as if the contract had been performed' will coincide with placing the party into the same financial situation. Thus, in the case of the supply of defective goods, the prima facie measure of damages is the difference in value between the contract goods and the goods supplied. But as Staughton LJ explained in Ruxley Electronics Ltd v Forsyth such a measure of damages seeks only to reflect the financial consequences of a notional transaction whereby the buyer sells the defective goods on the market and purchases the contract goods. The buyer is thus placed in the 'same situation … as if the contract had been performed', with the loss being the difference in market value. However, in cases where the contract is not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract is not possible. In such cases, diminution in value damages will not restore the innocent party to the 'same situation … as if the contract had been performed'."
The ruling principle governs the assessment of damages, not only in the case of a failure to supply goods in accordance with the requirements of a contract for the sale of goods, but also in a case where, as here, the goods are supplied as an aspect of performance under a contract for the sale of assets of a business. The application of the ruling principle does not depend on characterising the Deed as a contract for the sale of goods. The rule in s 54(3) of the Sale of Goods Act 1923 (NSW), whereby a purchaser is "prima facie" entitled to recover "the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty", is a statutory expression of the ruling principle, but it does not exhaust its operation.
The value to be paid in accordance with the ruling principle is assessed at the date of breach of contract, not as a matter of discretion, but as an integral aspect of the principle, which is concerned to give the purchaser the economic value of the performance of the contract at the time that performance was promised. In this way, the measure of damages captures for the purchaser the benefit of the bargain and so compensates the purchaser for the loss of that benefit.
The application of the ruling principle to measure value lost at the date of breach of contract serves the important end of bringing finality and certainty to commercial dealings. It ensures that whatever might befall the purchaser after the date of breach, for good or ill, and whether by reason of the purchaser's acumen, or lack of it, in dealing with other persons who were not party to the contract, and whatever movements may occur in the market, these developments have no bearing on the entitlement of the purchaser and the liability of the seller.
Application of the principle and the reasoning of the Court of Appeal
As to the first strand of the reasoning of the Court of Appeal, it is true to say that the contract did not permit a calculation of the price paid by the appellant specifically for the St George sperm. But that circumstance was irrelevant to the application of the ruling principle. Because the ruling principle is concerned to provide the purchaser with compensation for the loss of the benefit of the bargain, it does not require an apportionment of the components of the bargain. It was not necessary for the appellant to demonstrate that a particular part of the price paid for the business was referable to the sperm acquired as part of the transaction. Her loss fell to be measured, not by reference to what she outlaid as compared with what she obtained from St George, but by reference to the value of what St George had promised to deliver to her but did not. As Warrington LJ said in Slater v Hoyle & Smith Ltd, where the purchaser has "received inferior goods of smaller value than those he ought to have received … [h]e has lost the difference in the two values … In truth … the contract price does not directly enter into the calculation at all."
Accordingly, the circumstance that there was no way of determining under the Deed the cost to the appellant of the St George sperm to which she was entitled, a central element of the first strand of the reasoning of the Court of Appeal, is immaterial to the true measure of damages to which the appellant was entitled.
The respondent sought to meet the difficulties which application of the ruling principle poses for the first strand of the Court of Appeal's reasoning by arguing that, even if the St George sperm delivered to the appellant had complied with the warranties in the Deed, the sperm would have been valueless.
Would compliant sperm have been valueless?
At the outset of the discussion of this question, it should be noted that, in this Court, the appellant denied making the concession attributed to her by Tobias AJA in the passage cited above, viz "s 32(1) of the [Human Tissue Act] prohibited any donor receiving valuable consideration for his donation." Section 32(1)(a) of the Human Tissue Act provides, it may be noted, that "[a] person must not enter into … a contract or arrangement under which any person agrees, for valuable consideration … to the sale or supply of tissue from any such person's body or from the body of any other person". Tobias AJA went on to say that, having regard to this concession, "it is not surprising that no amount of the purchase price payable under clause 2a of the Deed was (or could be) apportioned to the St George sperm which [the appellant] was to receive as part of 'the Assets'."
In this Court, the respondent was not disposed to dispute the appellant's contention that the concession attributed to her was not made; and the respondent did not, in his submissions, seek to rely upon s 32(1) of the Human Tissue Act. That the respondent was right to take this course is apparent from the terms of s 32(2), which provides that the prohibition in s 32(1) "does not apply to or in respect of the sale or supply of tissue if the tissue has been subjected to processing or treatment and the sale or supply is made for the purpose of enabling the tissue to be used for therapeutic purposes [or] medical purposes". Section 32(2) ensured that neither the sale by St George to the appellant, the sale of replacement sperm to the appellant by Xytex, nor the use of any sperm by the appellant in treating her patients was prohibited by s 32(1) of the Human Tissue Act.
In this Court, the respondent did contend, as the Court of Appeal appears to have accepted, that the appellant could not ethically charge patients for sperm used by her in treatments because she had not actually paid St George for any sperm at all.
The respondent submitted that, at the time of entry into the Deed, it would have been within the "reasonable contemplation" of the parties that the appellant could not ethically, and so would not in fact, make any charge to the patients to whom she supplied the sperm in respect of the cost to her of that sperm.
Somewhat inconsistently, when supporting the second strand of the Court of Appeal's reasoning, the respondent also sought to invoke the rule in Hadley v Baxendale in support of the contention that it was outside the contemplation of the parties that, if the St George sperm did not comply with the Deed, the appellant would incur expense to acquire replacement sperm that she would not pass on to her patients.
Under the rule in Hadley v Baxendale, the entitlement of a plaintiff to recover damages for breach of contract is limited to such damages as arise naturally, that is, according to the usual course of things, from the breach of contract, or such damages as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as the probable result of the breach.
In European Bank Ltd v Evans, French CJ, Gummow, Hayne, Heydon and Kiefel JJ approved the view of Mason CJ and Dawson J in The Commonwealth v Amann Aviation Pty Ltd that the two limbs of the rule in Hadley v Baxendale represent the statement of a single principle, and that the application of that principle may depend on the degree of relevant knowledge possessed by the defendant in the particular case. In the present case, given the terms of the Deed and the commercial context in which it was made, there can be no doubt that St George and the respondent knew that the sperm straws were likely to be deployed in the provision of ART services by the appellant.
The respondent's contention ultimately rested upon the Code of Practice promulgated by RTAC. The respondent relied upon cll 11.9 and 11.10 of the National Health and Medical Research Council guidelines imported into the RTAC Code by cl 7.1 of the Code. These guidelines were concerned to prevent commercial trading in human sperm; and they also contemplated that practitioners were entitled to recover their reasonable expenses. The appellant denied that she had made a profit from supplying sperm, and there was no reason to doubt her evidence. The appellant, in providing ART services for a fee, cannot sensibly be said to be engaging in commercial trading in sperm for a profit.
In this Court, the respondent also sought to base the contention that compliant St George sperm would have been worthless upon s 16 of the Human Cloning for Reproduction and Other Prohibited Practices Act 2003 (NSW) ("the Human Cloning Act"). That provision is in the following terms:
"(1) A person commits an offence if the person intentionally gives or offers valuable consideration to another person for the supply of a human egg, human sperm or a human embryo.
Maximum penalty: Imprisonment for 15 years.
(2) A person commits an offence if the person intentionally receives, or offers to receive, valuable consideration from another person for the supply of a human egg, human sperm or a human embryo.
Maximum penalty: Imprisonment for 15 years.
(3) In this section:
reasonable expenses:
(a) in relation to the supply of a human egg or human sperm includes, but is not limited to, expenses relating to the collection, storage or transport of the egg or sperm, and
(b) in relation to the supply of a human embryo:
(i) does not include any expenses incurred by a person before the time when the embryo became an excess ART embryo within the meaning of the Prohibition of Human Cloning for Reproduction Act 2002 of the Commonwealth, and
(ii) includes, but is not limited to, expenses relating to the storage or transport of the embryo.
valuable consideration, in relation to the supply of a human egg, human sperm or a human embryo by a person, includes any inducement, discount or priority in the provision of a service to the person, but does not include the payment of reasonable expenses incurred by the person in connection with the supply."
The Human Cloning Act was not in force at the date of the making or completion of the Deed. It was not suggested that it operated retrospectively upon the Deed. Accordingly, it does not affect the lawfulness of the Deed, or the expectations of the parties to it, or claims to enforce those expectations.
No title to the sperm
The last point to be made in relation to the first strand of the reasoning of the Court of Appeal is that the observations by Tobias AJA that the appellant did not obtain title to the sperm acquired from St George and that a "donor could always withdraw his consent to the use of his sperm at any time", cited above, are irrelevant. There was no suggestion in the evidence that the value of the appellant's contractual entitlements might be in any way diminished by those circumstances.
Was the appellant's loss mitigated?
In support of the second strand of the reasoning of the Court of Appeal, the respondent contended that, irrespective of whether the Deed was or was not a contract for the sale of goods, or whether it contained a sale of sperm, the loss claimed by the appellant was fully mitigated by recovery from her patients of the outlays she made in respect of the Xytex sperm.
In the reasons of Tobias AJA, his Honour returned to the second strand of his reasoning, focusing upon an argument by the appellant that St George and the respondent:
"had not demonstrated that [the appellant's] prima facie damages were diminished or mitigated by the receipt of payments from her patients for the supply of Xytex sperm. This was because it was not established that receipts of that magnitude could not have been received by [the appellant] in respect of hypothetically compliant St George sperm."
In rejecting that argument, Tobias AJA said:
"In my view, it cannot be gainsaid that [the appellant] took steps to mitigate her loss and that those steps met with a high degree of success. St George's breach of contract made it necessary for her to acquire sperm from an alternative source. She did so at a cost to her. That cost represented the prima facie loss she suffered as a result of St George's breach, subject to the effects of such mitigation as she achieved or ought to have achieved. She in fact achieved mitigation to what was, in practical terms, the maximum extent allowed by the legal and ethical constraints under which she operated and which both parties necessarily had in contemplation as being operative in the particular circumstances."
To say that in the conduct of the appellant's practice she was able to recover the cost to her of the Xytex sperm incurred in the course of her practice after acquiring the assets is to fail to address the claim which the appellant actually made. The loss for which the appellant claimed compensation occurred at the completion of the Deed, at which time the assets which she acquired were not as valuable as they would have been had St George's performance measured up to its warranties. One may make this point, without dwelling impermissibly on "circumstances peculiar to the plaintiff", by observing that, at the completion of the Deed, if the appellant had been minded to on‑sell her business (enhanced by the acquisition of the assets from St George) the value of that business would have been substantially less because much of the stock in trade could not have been profitably deployed by the purchaser. That the appellant was not, in fact, in the market to sell her business or its assets including its stock in trade is beside the point, which point is that the appellant's post‑acquisition assets were less valuable than should have been the case.
The point that the appellant had suffered a real loss in terms of the benefit of her bargain at the date of completion of the acquisition of the assets may be made another way. The appellant may have been able to charge fees for her services in the conduct of her practice which were within the market range but returned her a greater profit because she was not obliged to incur the extra cost of replacement sperm. Whether or not she chose to realise the value of compliant St George sperm in this way was a matter for her. Whether or not she would have been disposed to take such a course was not explored in evidence at trial; but that is not a deficit in her claim. She was entitled to claim the measure of damages under the ruling principle without going into such matters. It would be an unprecedented application of the rule in Hadley v Baxendale to confine the measure of a purchaser's damages by reference to the likely effects of the particular decisions of the purchaser as to how she might choose commercially to exploit the assets acquired from a seller. The point is that one cannot say that the appellant's loss was confined to the expense that she had to incur (but was able to recoup from patients) in acquiring 1,996 straws of sperm from an alternative supplier as and when she needed those straws for the treatment of patients.
On behalf of the respondent, reliance was placed on the observations of Lord Atkinson on behalf of the Judicial Committee of the Privy Council in Wertheim v Chicoutimi Pulp Co. His Lordship began by articulating the ruling principle:
"And it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed: Irvine v Midland Ry Co (Ireland), approved of by Palles CB in Hamilton v Magill. That is a ruling principle. It is a just principle. The rule which prescribes as a measure of damages the difference in market prices at the respective times … is merely designed to apply this principle and … it generally secures a complete indemnity to the purchaser. But it is intended to secure only an indemnity. The market value is taken because it is presumed to be the true value of the goods to the purchaser. In the case of non-delivery, where the purchaser does not get the goods he purchased, it is assumed that these would be worth to him, if he had them, what they would fetch in the open market; and that, if he wanted to get others in their stead, he could obtain them in that market at that price. In such a case, the price at which the purchaser might in anticipation of delivery have resold the goods is properly treated, where no question of loss of profit arises, as an entirely irrelevant matter: Rodocanachi v Milburn."
This passage provides general support for the appellant's position rather than that of the respondent.
Lord Atkinson went on, however, to give an example of an exception to the presumption that the market value of goods which comply with contractual requirements reflects their value. His Lordship said:
"[B]ut if in fact the purchaser, when he obtains possession of the goods, sells them at a price greatly in advance of the then market value, that presumption is rebutted and the real value of the goods to him is proved by the very fact of this sale to be more than market value, and the loss he sustains must be measured by that price, unless he is, against all justice, to be permitted to make a profit by the breach of contract, be compensated for a loss he never suffered, and be put, as far as money can do it, not in the same position in which he would have been if the contract had been performed, but in a much better position."
In Slater v Hoyle & Smith Ltd, the Court of Appeal of England and Wales distinguished Wertheim in this respect. Warrington LJ said of the facts in Slater:
"The purchaser here has received inferior goods of smaller value than those he ought to have received. He has lost the difference in the two values, and it seems to me immaterial that by some good fortune, with which the [sellers] have nothing to do, he has been able to recoup himself what he paid for the goods."
The observations of Warrington LJ apply with equal force to the present case. The value of the St George sperm lay not in what it might bring in a market for sperm as a commodity, but, as the Deed contemplated, as stock of a business. And as stock of the business they were distinctly inferior.
As noted above, there is no room to doubt that the parties to the Deed had it in contemplation that the sperm straws acquired from St George would ultimately be deployed in an ART practice. The failure of St George to meet its warranties in relation to the sperm being transferred meant that the appellant's business was not augmented as expected by the addition of a quantity of stock in trade. It was said, however, on behalf of the respondent, to be counter‑intuitive that a contract for the sale of assets of a business for a total price of $386,950.91 should give rise to an award of damages of $1,246,025.01 for failure to deliver some only of the assets. This appeal to intuition is unsupported by evidence, and should not be countenanced for several reasons. First, this is the complaint of any vendor in breach of a contract in which the purchaser made the better bargain. The fundamental value protected by the law of contract is that pacta sunt servanda, bargains are to be kept. That the contract crystallises a state of affairs in which the purchaser's gain is the vendor's loss is a characteristic of commerce in a capitalistic economy.
Secondly, the only source of replacement sperm was Xytex: the appellant was obliged to incur storage and transport costs associated with getting sperm from the United States, and, on the evidence adduced at trial, the exchange rate between the US dollar and the Australian dollar was, at the relevant time, substantially to the disadvantage of the Australian dollar.
Thirdly, the respondent's appeal to intuition ignores the possibility that St George's sperm straws would have been, within the contemplation of the parties, deployed on a higher turnover, as stock of the appellant's expanded business, than had previously been achieved by St George or the appellant. The appellant's acquisition of St George's assets (which included its goodwill and patient lists) expanded her client base, and the sale of the assets by St George meant that the potential for the expansion of the appellant's business would be realised in a market from which St George had been removed as a competitor. The acquisition may have generated greater demand for, and a concomitant increase in the rate of turnover of, sperm straws in comparison with the turnover relevant to the pre‑acquisition gross fee income referred to in cl 2a of the Deed. That possibility would, of course, be consistent with the price formula in cl 2a of the Deed.
Fourthly, at trial St George and the respondent did not seek to advance an evidentiary basis for a finding as to the true value of the St George sperm had St George kept its contractual obligations. In this respect, the elements of the primary judge's calculation based on the cost of replacement sperm from Xytex were not challenged. It may also be noted here that the respondent sought leave to file out of time a notice of contention to the effect that, if the appellant was entitled to recover damages assessed by reference to the non‑delivery of the contract sperm, then the cost of the acquisition of the Xytex sperm was not an accurate proxy for that value. But the respondent did not adduce any evidence to establish a more reliable proxy. The view formed by the primary judge on this factual matter was not unreasonable. The submission advanced pursuant to the notice of contention should be rejected.
Betterment discount?
The respondent also argued that the appellant was better off by utilising replacement donor sperm in patient treatments, as compared to if she had been able to use contractually compliant St George donor sperm. At trial, the respondent advanced an argument that the sperm the appellant obtained from Xytex was superior to the sperm that would have been supplied by St George if it had complied with its warranty obligations.
The primary judge accepted that the information available concerning Xytex's donors was more extensive than would have been available for compliant St George sperm; but his Honour held that St George and the respondent failed to prove "the presence of betterment and its quantum". His Honour concluded:
"Here the market comprised but one seller, Xytex. [The appellant] had no choice. It was not suggested that she could have acquired the sperm more cheaply elsewhere. It was not suggested that the price paid was inflated by the agreement for exclusive supply to [the appellant]. And St George Fertility and [the respondent] failed to establish the quantum of any benefit."
The Court of Appeal did not address this aspect of the case.
The respondent's argument should be rejected. This case is not analogous to British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd, on which the respondent relied. In that case, the cost of machines purchased as substitutes for defective machines was recoverable but subject to a reduction to take account of any extra profit to the buyer resulting from the replacement of the defective machines. It is not suggested that the evidence established extra profitability attributable to the use of the Xytex sperm. As noted above, the respondent did not advance evidence which might have permitted a finding that the Xytex sperm was of a quality which would have commanded a higher price than the St George sperm would have had it satisfied the warranties in the Deed. Rather, the respondent's case was that the appellant's claim was flawed in point of principle so that no damages were recoverable, and he advanced no evidence to establish a basis for a "betterment discount".
British Westinghouse is irrelevant in this case for the further reason that the buyer in that case did not claim the difference between the actual value of the goods at the time of delivery and the value they would have had if they had complied with the seller's contractual obligations. Because the buyer claimed the cost of buying substitute goods several years after the original delivery, the House of Lords held that the buyer's action "formed part of a continuous dealing with the situation in which [the buyer] found [itself], and was not an independent or disconnected transaction." As Benjamin's Sale of Goods explains, if the buyer in British Westinghouse had claimed the difference between the value of the goods and the value of compliant goods at the time of delivery, that claim could not have been reduced.
The purchase price covered the breach
The respondent also advanced an argument that it was within the parties' contemplation that any consequence for breach of warranty in respect of the donor sperm was built into the contract itself. According to this argument, if the appellant was unable to use some or all of the sperm in medical procedures and treatments, there would be a resultant reduction in the increase in fees that she might otherwise have received from performing those procedures and treatments. This would, in turn, result in a reduction in the purchase price the appellant would be required to pay St George under cl 2a of the Deed.
This argument should be rejected. It is predicated on the assumption that the protection afforded to the appellant's interests by the warranties in the Deed was exhaustively addressed by the prospect of downward adjustment in the purchase price payable by her. But the terms of the Deed contain no hint that the parties had any such common intention. Indeed, the argument is contrary to the evident intention of cl 2a of the Deed, whereby both vendor and purchaser expected to share in the benefit of the greater profitability of the appellant's business to be expected from the deployment of the assets in that (expanded) business. That common intention would not be advanced if St George's warranties were not made good.
Conclusion and orders
The appeal should be allowed and consequential orders should be made.