Be careful what you warrant for

A recent case in Australia provides a timely reminder that a party should consider the implication of providing a warranty, and if necessary, take steps to manage any possible financial implications.

Clark v Macourt [2013] HCA 56 concerned a breach of a contractual warranty given as part of an asset purchase. The interesting part about this case is that the damages awarded to the purchaser were significantly higher than the purchase price paid for the assets.

Both parties were involved in assisted reproductive technology services. In 2002 Clark agreed to purchase the assets of Macourt’s fertility practice for $400,000. As part of the sale Macourt warranted that the donor sperm samples and relevant identification documents complied with the required guidelines to allow the samples to be used in practice. It was accepted that almost 2000 (over half) of the samples did not comply, and were therefore unusable. The appeal concerned the level of damages for the breach of warranty.

Two interesting points to note are that:

  1. The cost to acquire replacement sperm samples from the US was $1.2million (this was assessed as the reasonable cost to replace the sperm under market conditions); and
  2. In the course of business the purchaser was able to recoup this additional cost by passing it through to customers.

The High Court of Australia agreed that the correct measure of damages is the amount required to put the purchaser in the position they would have been if warranty had not have been broken; and awarded the purchaser $1.2million in damages. The Court also found that the subsequent recovery from patients was irrelevant as damages are required to be assessed at the time of breach.

The net effect of the sale was that the vendor, Macourt, received $400,000 for the sale of assets but then had to pay Clark $1.2m in compensation for breach of warranty. This left Macourt $800,000 out of pocket following the sale of his business, and provides a caution to parties who provide warranties.

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