Marcourt v Clark - [2012] NSWCA 367

Court of Appeal

Supreme Court

New South Wales

Amendment notes

Medium Neutral Citation: Macourt v Clark [2012] NSWCA 367
Hearing dates: 24 September 2012
Decision date: 09 November 2012
Before: Beazley JA at [1]; Barrett JA at [2]; Tobias AJA at [12]
Decision:
(a) Appeal allowed.
(b) Cross-appeal dismissed.
(c) Set aside the orders made by Gzell J on 8 November 2011.
(d) Direct the parties within 14 days of the publication of these reasons to file short minutes of order to reflect these reasons and within the same period to file and serve, if otherwise there is any dispute, written submissions not exceeding three pages on the issue of the costs of the trial and the appeal.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Catchwords: DAMAGES - assisted reproductive technology practice - damages for breach of various warranties contained in the Deed relating to donor sperm - proper categorisation of the contract - whether the trial judge erred in not concluding that the respondent had fully mitigated her loss - whether the respondent avoided the loss she otherwise would have sustained by having to replace the non-compliant sperm by charging her patients for the cost of replacement sperm - whether the damages suffered by the respondent included the cost of maintaining the appellant's telephone service for six years COSTS - whether the respondent would have been entitled to indemnity costs if the award of damages was upheld in her favour
Legislation Cited: Human Cloning for Reproduction and Other Prohibited Practices Act 2003 Human Tissue Act 1983 Sale of Goods Act 1923 Uniform Civil Procedure Rules 2005
Cases Cited: Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 Barakat v Bazdarova [2012] NSWCA 140 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673 Gagner Pty Ltd (t/as Indochine Cafe) v Canturi Corporation Pty Ltd [2009] NSWCA 413; (2009) 262 ALR 691 Golden Strait Corp v Nippon Yusen Kubishika Kaisha [2007] 2 WLR 691; [2007] 3 All ER 1 Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc [2000] FCA 660; (2000) 173 ALR 263 House v The King (1936) 55 CLR 499 Hussey v Eels [1990] 2 QB 227 Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 Koch Marine Inc v D'Amica Societa di Navigazione ARL (1980) 1 Lloyd's Rep 75 Kuru v New South Wales [2008] HCA 26; (2008) 236 CLR 1 Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 Morgan v Johnson (1998) 44 NSWLR 578 McCrohan v Harith [2010] NSWCA 67 Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1; (1991) 104 ALR 397 Nominal Defendant v Hawkins [2011] NSWCA 93; (2011) 58 MVR 362 Robinson v Harman (1848) 1 Exch 850; (1848) 154 ER 363 Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443; (2006) NSW ConvR 56-145 Ruxley Electronics and Construction Ltd v Forsyth [1994] 1 WLR 650; [1994] 3 All ER 801 South Eastern Sydney Area Health Service v King [2006] NSWCA 2 St George Fertility Centre Pty Ltd v Clark [2011] NSWSC 1276 St George Fertility Centre v Clark (Supreme Court, Macready AsJ, 31 May 2010, unreported) St George Fertility Centre Pty Ltd v Clark (No 2) (Supreme Court, Gzell J, 8 November 2011, unreported) Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2008-2009) 236 CLR 272 Tasman Capital Pty Ltd v Sinclair & Anor [2008] NSWCA 248; (2008) 75 NSWLR 1 The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
Texts Cited: Chitty on Contracts Vol 1, 29th ed (2004) Sweet and Maxwell Andrew Burrows, Remedies for Torts and Breach of Contract, 3rd ed (2004) Oxford University Press Harvey Macgregor, McGregor on Damages, 18th ed (2009) Sweet and Maxwell Edwin Peel, Treitel On The Law of Contract, 13th ed (2011) Sweet and Maxwell
Category: Principal judgment
Parties: David Charles Ross Macourt (Appellant/Cross Respondent) Anne Clark (Respondent/Cross Appellant)
Representation: Counsel: C Harris SC with H Altan (Appellant/Cross Respondent) A Leopold SC with ARR Vincent (Respondent/Cross Appellant)
Solicitors: Redmond Hale Simpson Solicitors (Appellant/ Cross Respondent) Norton Rose Australia (Respondent/Cross Appellant)

File Number(s): CA9248 of 2012
Decision under appeal

Citation:

St George Fertility Centre Pty Ltd v Clark [2011] NSWSC 1276

Date of Decision:

2011-10-25 00:00:00

Before:

Gzell J

File Number(s):

SC255614 of 2006

Judgment

BEAZLEY JA: I agree with the reasons of Tobias AJA and the additional remarks of Barrett JA.

BARRETT JA: I am of the opinion that the orders proposed by Tobias AJA should be made. I agree with his Honour's reasons but wish to add some brief observations of my own on the central issue before this Court.

The primary judge approached the matter of assessment of damages for breach of warranty by reference to principles relevant to contracts for the sale of goods and, in particular, cases of unfitness of goods delivered under such contracts.

The basic rule in sale of goods cases, reflected in provisions of the Sale of Goods Act 1923, is that the buyer is entitled to the difference in value, as at the time of delivery, between what was promised and what was delivered, with value determined by market price. It follows that, if the unfitness of the delivered goods is so fundamental that the goods are useless, the measure of the buyer's damages is the market cost of complying goods.

According to this approach, it is immaterial that the buyer has in fact suffered no loss in consequence of the seller's breach; conversely, however, a buyer who can show actual loss exceeding the market cost of complying goods can in some circumstances maintain a claim for a greater sum.

These principles (if principles they be) concerning the sale of goods are in truth no more than commonly encountered consequences of the application of general rules of contract law to cases of delivery of goods so fundamentally non-compliant as to be useless. They are particular expressions, in such cases, of the presumed result of applying the well-known dictum of Alderson B in Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145 (at ER 151):

"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."

While the consequences that are found to arise in the generality of cases of a certain type may sometimes represent a useful guide, the real question in any given instance is that posed by Alderson B as to what arises according to the ordinary course of things and what may reasonably be thought to have been in the contemplation of the parties to the particular contract. Damages are assessed not by reference to some a priori characterisation of the contract but according to the actual circumstances of the case.

The crucial point in this matter is that there was not a sale of goods in the sense relevant to either the direct operation of the Sale of Goods Act or some analogy. Tobias AJA has set out at [43] and following relevant provisions of the Deed under which the medical practice was purchased by Dr Clark. The price for which the Deed provided was wholly deferred, in the sense that no amount was payable either on contract or on completion. Indeed, the effect of clause 2a was that no amount would ever be payable as consideration unless Dr Clark's gross fee income for at least one of the specified years following the purchase exceeded the identified multiple of her fee income for the 2001 base year. And importantly, no part of the (potentially zero) price was allocated or apportioned to any separate part of the "Assets", including the stock of sperm.

There is no sound basis here on which to find that there existed in respect of that stock of sperm "a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price", to use the words in s 6(1) by means of which the Sale of Goods Act defines or describes a "contract for the sale of goods".

It was accordingly inappropriate to assess damages as if the transaction were actually or in some analogical sense a contract for the sale of goods in respect of the 3,515 straws in fact delivered on completion, the 2,500 of them that Dr Clark, on her own evidence, expected to be able to use or some other number properly to be taken into account.

Having regard to the steps that Dr Clark took to mitigate her loss by purchasing replacement sperm from Xytex and imposing on patients charges by which she recouped most of the acquisition cost and associated expenses, the true measure of damages, according to the Hadley v Baxendale formulation, is as stated by Tobias AJA at [128] to [130]. But given the way in which Dr Clark's case was framed and conducted, there was neither a claim for damages assessed in that way nor any means of making the calculations necessary to such an assessment.

TOBIAS AJA: Prior to 2002 the respondent, Dr Anne Clark (Dr Clark) conducted an assisted reproductive technology practice (known as an ART practice) under the business name "Fertility First". At the same time, the first plaintiff in the court below, St George Fertility Centre Pty Limited (In Liq) (St George) conducted a similar practice known as "St George Fertility Centre". The appellant, Dr David Macourt (Dr Macourt) was at all material times the sole director and controller of St George. Both Dr Clark and Dr Macourt were at all material times registered medical practitioners and each were specialist fertility practitioners.

An ART practice provides treatments aimed at procuring pregnancy by means other than sexual intercourse. Treatments include, amongst others, in-vitro fertilisation (IVF) (a procedure where eggs are collected from the ovaries then fertilised with sperm, outside the woman's body, in the laboratory); and intrauterine insemination (lUI) which involves the transfer of semen via a fine catheter into the uterus. Where "donor sperm" is used in that procedure, this is known as intrauterine donor insemination (IUDI). Donor sperm is sperm donated for use in ART treatment of female patients who are not known to the donor.

In early 2002, a Deed ("the Deed") was entered into between St George (referred to therein as "the Vendor") and Dr Clark (referred to therein as "the Purchaser"). Dr Macourt was also a party to the Deed as he guaranteed the obligations of St George thereunder. Pursuant to clause 1a of the Deed, St George agreed to sell and Dr Clark agreed to purchase what was referred to as "the Assets". The latter term was defined to include "Sperm" which in turn was defined to mean all frozen sperm which in turn was also defined, relevantly, to include donor sperm.

The purchase price for "the Assets" was calculated by clause 2a of the Deed as follows:

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 ultimately common ground between the parties that the total amount payable by Dr Clark to St George under the Deed was the sum of $386,950.91 of which Dr Clark as at 8 April 2005 had only paid $167,000, leaving a balance of $219,950.91 outstanding.

By summons filed on 8 March 2006 St George (which was not then in liquidation) sued Dr Clark for the outstanding amount of the purchase price payable under the Deed. By her Further Amended Statement of Cross-Claim (the Cross-Claim) filed on 8 September 2008, Dr Clark sued St George and Dr Macourt for damages for breach of various warranties contained in the Deed and relating relevantly to the donor sperm held by St George ("the St George sperm") which Dr Clark received as part of the transaction.

The issue of liability under the Cross-Claim was heard by Macready AsJ pursuant to a notice of motion filed by Dr Clark on 24 November 2009 in which she sought summary judgment in respect of certain claims made in the Cross-Claim against St George with damages to be assessed. In the course of the hearing of that notice of motion, Dr Clark abandoned a number of those claims. However, the parties agreed that there should be a judgment in favour of Dr Clark against St George in respect of certain of the claims propounded in the Cross-Claim. The debate before his Honour concerned whether there should also be judgment, with damages to be assessed, against Dr Macourt pursuant to his guarantee under the Deed.

In a judgment delivered on 31 May 2010 (St George Fertility Centre v Clark, SC255614 of 2006), the Associate Justice generally found in favour of Dr Clark. Formal orders were made on 9 June 2010 whereby there was judgment, with damages to be assessed, for Dr Clark against St George in respect of certain of the claims propounded in the Cross-Claim and judgment, with monetary relief to be assessed, for Dr Clark against Dr Macourt in respect of his liability on his guarantee relating to the failures of St George to perform its obligations with respect to the claims upon which Dr Clark had succeeded against it. His Honour further ordered that the paragraphs of the Cross-Claim which had been abandoned, be dismissed. His Honour ordered Dr Clark to pay St George and Dr Macourt's costs thrown away by reason of the abandonment of those claims and that St George and Dr Macourt otherwise pay Dr Clark's costs of the notice of motion for summary judgment.

The issue of damages was heard by Gzell J (the primary judge) on 26, 27, 28 September 2011, his Honour delivering his reasons for judgment on 25 October 2011 in St George Fertility Centre Pty Ltd v Clark [2011] NSWSC 1276. His Honour found in favour of Dr Clark assessing her damages, after setting off the amount of $219,950.91 plus interest that was owed by Dr Clark to St George under the Deed, at over $1 million ("the primary judgment").

The primary judge directed the parties to bring in short minutes of order and indicated that he would hear the parties on costs. On 8 November 2011, his Honour dealt with the issue of costs and on the same day delivered judgment (St George Fertility Centre Pty Ltd v Clark (No 2) (Supreme Court, Gzell J, 8 November 2011, unreported)) in which, notwithstanding an Offer of Compromise which had been made under the Uniform Civil Procedure Rules 2005 on 29 May 2009 in the sum of $50,000 plus costs, he denied Dr Clark's application that the costs to which she was entitled after that date be paid on an indemnity basis ("the costs judgment").

Formal orders were made by the primary judge on 8 November 2011 in which, relevantly, he ordered judgment for Dr Clark against each of St George and Dr Macourt in the sum of $1,246,025.01 noting that that amount included interest and was determined after setting off the amount, including interest, to which St George was entitled as against Dr Clark with respect to the outstanding purchase price payable under the Deed. Subject to all costs orders already made in the proceedings, his Honour also ordered St George and Dr Macourt to pay Dr Clark's costs of the proceedings subject to Dr Clark paying to St George and Dr Macourt the costs thrown away (if any) by virtue of three matters the details of which are not presently relevant.

As St George is in liquidation only Dr Macourt has appealed the primary judge's orders. He seeks an order that the Cross-Claim be dismissed with costs. Dr Clark has cross appealed alleging error on the part of the primary judge in the award of damages made in her favour as well as against his Honour's refusal to award her indemnity costs. Dr Clark has also filed a Notice of Contention.

The St George donor sperm

Before referring to a number of provisions of the Deed, it is relevant to note that as at 2002 when the Deed was entered into, as well as at 2005 when Dr Clark realised that St George was in breach of the Deed, the type of practice in which each of Dr Clark and St George were involved was not relevantly the subject of any statutory regulation but was informally regulated by the Reproductive Technology Accreditation Committee (RTAC) of the Fertility Society of Australia. Each of Dr Clark and Dr Macourt was a member of that Society. They therefore considered themselves ethically bound by RTAC's Code of Practice with respect to assisted reproductive technology or, in lay person's terminology, artificial insemination.

As would be appreciated, donor sperm is cryogenically preserved until required for use. Sperm obtained from local donors is donated free as s 32 of the Human Tissue Act 1983 (NSW) prohibits a contract to acquire sperm from a donor for valuable consideration.

Sperm for use in an assisted reproductive technology practice is stored in thin straws about a hand-length long and about 3 mm to 5 mm wide. Each ejaculate provides in the order of 5 to 10 straws. There is a cost with respect to the storage of the straws. Before being frozen the sperm is required to be treated with a human sperm preserving media or cryoprotectant, a chemical agent based on glycerol. When required for use the donor sperm, once thawed, is washed by placing the thawed material in a culture medium so as to remove the cryoprotectant and seminal plasma. There is obviously a cost to the relevant fertility practice in each of these processes including the capital and maintenance costs associated with the storage of the straws in their frozen state.

However, notwithstanding that Dr Clark was exposed to those costs on receipt of the St George sperm the subject of the Deed, she did not seek inclusion of such costs in her damages. This was confirmed by paragraph 11(iii) of the Cross-Claim in which the claim for damages with respect to the St George sperm which was warranty non-compliant was confined to the reasonable costs and expenses associated with the procurement of replacement sperm. It is on this basis that the primary judge assessed Dr Clark's damages and her cross appeal does not challenge that decision.

One of "the Assets" transferred by St George to Dr Clark pursuant to the Deed comprised 3513 straws of donor sperm. Between the date of the Deed and August 2005, Dr Clark used 504 of those straws leaving a balance of 3009 straws all of which were then unusable due to St George's breaches of the warranties contained in the Deed as found by Macready AsJ and had to be discarded.

An issue arose before the primary judge as to whether Dr Clark was entitled to be compensated for the loss of the 3009 straws which were found to be unusable, or for some lesser number. At the time those straws were discarded Dr Clark observed, and had done so at least from early 2002, what was referred to as the 10 family limit rule, which was later incorporated into the RTAC's Code of Practice the relevant part of which took effect on 1 July 2006.

This "rule" was to the effect that the number of children who could be generated by the sperm of any one donor was limited to no more than 10 families. At [45] of his reasons, the primary judge noted that Dr Clark in her evidence had said that because of what was referred to as "the 10 family limit rule" she had not expected to have been able to use all of the St George sperm even if it had been warranty compliant. She said she expected to be able to use "at least 2500 straws". As a consequence of that evidence, his Honour found that Dr Clark would only have been able to use 2500 straws had they been warranty compliant. As she had used 504 of those straws as at August 2005 when the balance were found to be unusable, she should be compensated for the difference between 2500 and 504, namely, for the failure of St George to deliver 1996 rather than 3009 warranty compliant straws. This finding is the subject of Dr Clark's cross appeal.

Dr Clark replaces the discarded straws

Before entering into the Deed Dr Clark acquired sperm, in addition to that from her own donors, by purchase from various suppliers. Thus shortly after opening Fertility First she purchased sperm on a fairly regular basis from the Westmead Fertility Centre and between February 1998 and April 2000 she purchased sperm irregularly from the Queensland Fertility Group. She had also purchased a small number of straws of donor sperm from a Danish sperm bank. However in February 2005 there was a revision of the RTAC's Code of Practice, the effect of which was that donor sperm could only be acquired where the donor had consented to being identified by any children conceived by the use of their sperm.

The consequence to Dr Clark of this requirement was that she could no longer use sperm from the suppliers to which reference has been made. Her only supplier whose sperm complied with the donor consent requirement was the Xytex Corporation (Xytex) in the United States. Dr Clark first purchased straws of donor sperm from Xytex in September 2005 when she acquired 30 straws at a cost of US$350 each for a total of US$10,500 which with freight and discounts of $150, resulted in a total cost of US$10,650, which his Honour converted to AU$15,334.46 or AU$511.15 per straw. As will appear see ([108] below), it was this amount that the primary judge utilised in assessing Dr Clark's damages.

Dr Clark's charges for the cost of the Xytex sperm

As I have indicated once Dr Clark realised that she could no longer use her store of St George sperm, she replaced it by acquiring sperm, as and when required for patient treatments, from Xytex in the USA. At the time of the hearing before the primary judge she had purchased 1546 replacement straws of sperm from Xytex which she had used for insemination procedures. In response to a request from the Quality and Regulation Branch of the National Health and Medical Research Council (NHMRC) on 2 August 2007, Dr Clark informed the NHMRC that the cost of acquisition from Xytex per straw including shipping charges ranged from AU$341.40 to AU$482.20. She also informed the NHMRC that Fertility First had charged its patients $800 per cycle for donor sperm as from August 2005. This took into account the actual purchase price and the cost of the additional laboratory and clinical time necessary to manage Xytex donor sperm. The costs so charged to patients increased thereafter to the point that at the time of the hearing in September 2011 Dr Clark was charging $930 per straw to take account of Xytex's recent price increases.

In paragraph 133 of her affidavit affirmed on 26 November 2010, Dr Clark deposed that at that time Fertility First charged approximately $1300 for an IUI cycle and $6500 for an IVF/ICSI cycle. Patients requiring donor sperm for those treatments were charged an additional $930 for each cycle. That charge, so she deposed, comprised the cost of the sperm, transport, storage, lab expenses including handling the donor sperm and in most cases washing the sperm to prepare it for use in management of the donor programme.

At paragraph 29(a) of their amended defence, St George and Dr Macourt alleged that Dr Clark had suffered no loss in relation to the procurement of replacement sperm from Xytex because she had charged a fee to patients for the supply of that sperm, the amount of which was equal to or exceeded any cost and/or expense to her in its acquisition.

Pursuant to directions made by the court on 20 October 2008, Dr Clark served on St George and Dr Macourt a draft reply to the amended defence in which she admitted at paragraph 7(2) in answer to paragraph 29(a) of that defence that she charged and had charged a fee to patients for the use of sperm acquired by her from Xytex for an amount equal to the cost and expense involved in the acquisition of that sperm although she denied that that charge exceeded the cost and expense involved in its acquisition.

Although the draft reply was not filed, Dr Clark in cross examination said that she recollected instructing her solicitors that she received payments for the supply to patients of Xytex sperm in an amount which did not exceed what it cost her to obtain it. When she was asked whether she had admitted that she charged a fee to patients which was equivalent to what it cost her to acquire the Xytex sperm she responded, relevantly, that she did charge a fee to the patient but that "it did not exceed that" (which I take to be a reference to the fee not exceeding the cost of acquisition of the Xytex sperm).

The cross examination of Dr Clark revealed some anxiety on her part to the extent to which it was suggested that she was charging patients more than what it cost her to acquire the sperm as she emphasised on a number of occasions that it would both be illegal and unethical for her to make a profit on the supply of donor sperm and she was thus adamant that the fees she charged her patients for the Xytex sperm, in effect, had no profit element in it.

At Black 88-89, Dr Clark was referred to her response to the NHMRC to which I have referred at [33] above. It was suggested to her that she was there demonstrating to the NHMRC that the money that she charged patients for Xytex sperm was effectively only enough to cover the expense that she incurred in obtaining that sperm. She responded that she was seeking to demonstrate that she was not breaching the Human Cloning for Reproduction and Other Prohibited Practices Act 2003 (NSW) which (from 1 July 2007) prohibited her receiving any valuable consideration in the purchase or use of donor sperm although she was entitled to recover the reasonable expenses of acquiring and storing that sperm. The following exchange then occurred:

Q. But in respect of each of the straws of Xytex sperm that has been purchased by you since August 2005, a charge has been made to the patient to cover the expenses of obtaining that sperm?

A. To cover part of the expenses. The charge to the patient has not been exhaustive, and I wanted to make sure there was always a very significant buffer between what I believed was the real cost of the sperm and the actual

cost I billed the patient.

Q. And you intend to continue to charge patients for whom you obtain Xytex sperm an amount of money which covers you for the expenses with which you were involved in obtaining that sperm?

A. As I said, I do not bill the patient the full cost of the expenses to me, because I always want to ensure I have a sufficient buffer between the actual cost and what the patient pays.

. . .

Q. Well, you are saying, as I understand your evidence now, you are saying that these amounts that I charge the patients for Xytex sperm in fact does not cover me for all of the expenses that I incur in obtaining that sperm?

This last question was objected to but allowed and read to the witness when the exchange continued:

HIS HONOUR

Q. And the answer?

A. No, I don't. Sorry.

The question was then read again to the witness who responded:

A. Sorry, I apologize. Can I qualify that. It depends on the word obtain, because there are more costs involved than just obtaining. So I am sorry, I realize it's semantics, and maybe so the NHMRC, I am responding what they asked, which was collections, storage, transport. So that is obtaining it. But then there are a number of other costs involved in the holding, protecting and dealing with the sperm. So I am sorry, that's maybe why I became a bit confused as well because it's-

From the foregoing it would appear, and his Honour appeared to accept (see [65] below), that although Dr Clark may not have charged her patients the cost of holding, protecting and dealing with the Xytex sperm once received by her, she did recover from her patients the cost of its acquisition, transport and storage. However, as I have already noted (at [20] above), the primary judge assessed damages based solely on the amount charged by Xytex to Dr Clark for the supply and transportation of donor sperm. It does not follow from that that Dr Clark was not entitled to the other costs which she may have incurred but not passed on to her patients relating to the treatment and storage of Xytex sperm provided that those costs were greater than the similar costs that she would otherwise have incurred for the storage and treatment of St George sperm had it been warranty compliant. However, no attempt was made by Dr Clark to quantify those costs and they did not form part of her claim for damages.

The Deed

At this point it is necessary to refer to the Deed in order to characterise its nature given that Dr Clark's case was that it constituted a contract for the sale of goods (the St George sperm) so that the damages to which she was entitled were to be assessed as at the date of breach (2002) in accordance with s 54(3) of the Sale of Goods Act 1923 (NSW). However, in my opinion, when one considers carefully the terms of the Deed, it is apparent that it relates to the sale of a business and not to the sale of goods.

As I have already noted (at [14]), clause 1a provided that St George agreed to sell to Dr Clark and she agreed to purchase from St George "the Assets for the purchase price and on the terms and conditions of this Contract". It is convenient to repeat clause 2a which provided for the purchase price for "the Assets" to be calculated as follows

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.

Clause 18.1 contained a number of definitions of which the following are relevant:

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.

Clause 5 contained a number of warranties by St George the breach of which underpinned the Cross-Claim. Clause 6 contained a restraint on trade in the following terms:

6.1 The Vendor will not directly or indirectly and whether solely or jointly with or as director, manager, agent or servant of any person or corporation carry on, or be engaged or interested in, any business of the nature of the Business, or any significant component of it, or permit the Vendor's name or the names of them to be used in connection with any such business:

(a) within 10 kilometres of Hurstville;

(b) for a period of 3 years from completion.

6.2 Except to the extent otherwise agreed the vendor will not after completion of this contract during the period and within the area referred to in sub-clause 1 of this clause engage in conduct derogating from the Purchaser's right to obtain the full benefit of the goodwill of the Business.

6.3 The area and period are acknowledged by the vendor to be no greater than reasonably required to protect the goodwill sold to the purchaser.

6.4 The vendor will on completion provide to the Purchaser a deed under which Doctor David Macourt will covenant with the Purchaser to accept the same restrictions or competition as are accepted by the vendor in sub clause 1 of this clause.

6.5 This clause does not merge on completion.

Clause 7.1 provided that on completion St George would transfer to Dr Clark the existing telephone service to the "Business" to enable Dr Clark to apply for that service from completion.

Clause 8 provided that whilst the business name "St George Fertility Centre" was not part of "the Assets", St George irrevocably consented to Dr Clark advertising that "the purchaser's business includes the business formerly conducted as St George Fertility Centre".

Clause 9 then provided that on completion, St George would give to Dr Clark, to the extent that the title could pass at law, an unencumbered title to "the Assets" as well as their possession; a copy of St George's Patient List and, relevantly, all patient records for the "Sperm", including details of the "Sperm donor", consent forms, results of screening tests and sufficient information to allow identification in accordance with the RTAC's Code of Practice of all sperm. It was the failure to provide all this information as well as the breach of the warranty to the effect that consent forms, screening tests and identification of donors of sperm had been conducted in compliance with the RTAC's Code of Practice that resulted ultimately in the necessity to discard the 3009 straws of St George sperm as unusable.

In my opinion, the contract in the present case was not one for the sale of goods for a price. It was a contract for the sale of the goodwill and assets of a reproductive medical practice or business. The straws of sperm to which the warranties as to quality applied, were merely part of the apparatus and materials incidental to the conduct of that practice: in other words, part of its stock in trade. Just as a medical practitioner performing surgery needs a stock of sutures and dressings and an orthopaedic practitioner needs a stock of plaster to set broken arms and legs, so in the field of reproductive medicine, the medical practitioner requires a store of donor sperm. The manner in which the purchase price was to be calculated under the Deed gives the lie to any suggestion that what was involved was a sale of goods constituted by the St George sperm. There was no apportionment in the purchase price of an amount which could be attributed to that sperm and no attempt was made by Dr Clark to do so at trial. The method of calculation of the purchase price, the definition of "Assets" and the restraint on trade in clause 6 of the Deed all militate against the arrangement being other than a contract for the sale of a business of which the major asset was its goodwill.

In my opinion, therefore, it was inappropriate for Dr Clark to approach the question of assessment of damages as if there had been a simple contract for the sale of goods and to apply thereto rules of general application to such contracts. I shall return to this issue below.

The findings and reasoning of the primary judge

The primary judge commenced his assessment of Dr Clark's damages by referring to what he perceived to be the relevant legal principles. It was common ground that the leading principle with respect to the assessment of damages for breach of contract at common law was that stated by Parke B in Robinson v Harman (1848) 1 Exch 850 at 855; (1848) 154 ER 363 at 365:

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.

This principle has been adopted in Australia and has been confirmed by the High Court on numerous occasions: see a recent example, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 at [13].

At [6] his Honour referred to what Staughton LJ had observed in Ruxley Electronics and Construction Ltd v Forsyth [1994] 1 WLR 650 at 655; [1994] 3 All ER 801 at 806 to the effect that there were potentially two methods of measuring loss in a breach of contract case: the difference in value and the cost of restoration. His Honour then referred to what his Lordship had said with respect to the former noting, at [8], that his Lordship's statement had been approved by the High Court in Tabcorp at [13] where French CJ, Gummow, Heydon, Crennan and Kiefel JJ observed:

. . . 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 and Constructions 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. . . .

The same result would be achieved, his Honour observed at [10], by reliance upon s 54(3) of the Sale of Goods Act where, in the case of a breach of warranty of quality, the loss is prima facie 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.

Having noted that Fertility First purchased sperm from Xytex, his Honour (at [9]) recited Dr Clark's claim that the cost so incurred was the best evidence of the value of warranty compliant sperm and the best evidence of cost on a hypothetical purchase of replacement sperm. It was claimed that this cost represented the damages sustained by Dr Clark because a hypothetical sale of the defective sperm would have realised nothing.

The primary judge then referred to a corollary to the basic principle stated in Robinson referred to in the judgment of Mason CJ and Dawson J in The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at [28] where their Honours said:

The corollary of the principle in Robinson v Harman is that a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed.

His Honour then turned to the issue as to whether damages should be assessed at the date of breach as submitted by Dr Clark or at the date of trial or alternatively when Fertility First completed a stocktake of the sperm provided pursuant to the Deed as submitted by St George and Dr Macourt. At [13] he noted that in a breach of contract case involving goods, the general rule of the common law was that damages are assessed at the time of breach or when the cause of action arises and that that rule found expression in s 54(3) of the Sale of Goods Act. But his Honour acknolwedged that the rule was not inflexible. Thus in Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 at 355-356, Mason CJ said:

There is a general rule that damages for ... breach of contract are assessed as at the date of breach ... But this rule is not universal; it must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered.

. . .

The general rule that damages are assessed at the date of breach ... has been applied more uniformly in contract than in tort and for good reason. But even in contract cases courts depart from the general rule whenever it is necessary to do so in the interests of justice.

Likewise with contracts for the sale of goods.

See also to like effect at 367 per Wilson, Toohey and Gaudron JJ.

Brennan J in Johnson also observed (at 371):

The general rule as to the date at which damages are to be assessed is subject to the principle governing the measure of damages. A plaintiff who has suffered damage as a result of a defendant's ... breach of contract is entitled to such a sum as will, so far as possible, put him in the same position as he would have been in but for the ... breach of contract. ...:The time at which damages are assessed must be so fixed as to give effect to the governing principle. In giving effect to that principle, matters occurring after the ... breach may be excluded from consideration by selecting the date of ... breach of contract as the date for assessment; conversely, such matters may be included by selecting the date of the trial as the date for assessment. In either case, it is the governing principle rather than the temporal rule which determines what is to be taken into consideration and what is not. ...

At [16] the primary judge also referred to the following passage from the speech of Lord Brown of Eaton-under-Heywood in Golden Strait Corp v Nippon Yusen Kubishika Kaisha [2007] UKHL 12; [2007] 2 AC 353 at [79]. After referring to the UK equivalent of s 54(3) of the Sale of Goods Act, his Lordship observed:

But the rule is by no means confined to the sale of goods context and, as Lord Bingham explains, has been applied by analogy to a variety of other situations. Essentially it applies whenever there is an available market for whatever has been lost and its explanation is that the injured party should ordinarily go out into that market to make a substitute contract to mitigate (and generally thereby crystallise) his loss.

Similar statements were made by Lord Bingham of Cornhill (in dissent in the result) at [13] and Lord Scott of Foscote at [32].

Finally, at [17] the primary judge referred to the following passage from the judgment of Campbell JA, with whom Macfarlan JA and Sackville AJA agreed, in Gagner Pty Ltd (t/as) Indochine Cafe v Canturi Corporation Pty Ltd [2009] NSWCA 413; (2009) 262 ALR 691 at [54]:

It follows that, even though a cause of action for breach of contract has accrued at the time the breach occurs, it cannot now be said that there is an accrued right at that time to receive any particular sum of damages. That is because it must await the trial to decide what is the most appropriate way, in light of the events than known, to give effect to the compensatory principle of damages.

To the authorities referred to by the primary judge I would add at this point a reference to the judgment of McColl JA, with whom Campbell JA and Handley AJA agreed, in McCrohon v Harith [2010] NSWCA 67 at [52] to [56]. Relevantly, for the present case, her Honour observed at [53] that:

[a]n injured plaintiff is not entitled to make a profit in an action in ...contract; in other words, to be awarded damages for a loss never suffered or ... to be placed in a superior position to that which he or she would have been in had the contract been performed.

At [54] her Honour noted that the date of breach rule is not rigid and will yield to some other date if necessary to provide adequate compensation. After referring to Johnson; Golden Strait and Gagner she concluded at [56] that

... the general rule will yield if, at the time damages are assessed, the court is aware of new and material facts relevant to the assessment because courts prefers actual facts to speculation, prophecies, conjecture and guessing.

However, the primary judge held (at [18]) that he saw no reason to depart from the principle that in breach of contract cases involving goods available in a market, damages should be assessed as at the date of breach. His Honour considered that the present case was simplified by the fact that an identifiable number of straws of sperm did not comply with the warranties in the Deed and a market existed in which replacement sperm could be purchased.

Of particular significance to the issues on the appeal was his Honour reference (at [20]) to the contention by St George and Dr Macourt 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, Dr Clark had suffered no loss.

The primary judge's response to this submission was as follows:

21 The simple answer to that proposition is that Dr Clark 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. (emphasis added)

It is convenient to immediately identify the flaw to this response of the primary judge. The answer may indeed have been simple if Dr Clark 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, for reasons to which I have already referred, 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 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 Dr Clark was to receive as part of "the Assets". As I observed at [42] above, the contract constituted by the Deed was for the sale of Dr Macourt'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 Dr Clark 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 at [21] of his reasons, Dr Clark was not "left out of pocket for the amount paid under the Deed" for the St George sperm. Furthermore, the evidence of Dr Clark 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. I return now to his Honour's assessment of damages.

After dealing with a number of issues which are not the subject of either the appeal or cross appeal, his Honour turned to the issue of damages. At [95] he noted that there were three components to the damages sought by Dr Clark. The first was a sum to compensate her for the non-usability of all but 504 straws from the 3513 straws delivered to her of which 3009 were unusable. At [96] he referred to his earlier reasons in support of the view that the appropriate measure was the unusability of 1996 straws being 2500 straws that ought to have been usable less the 504 straws that were used.

The second head of damage claimed was one which was rejected and as it is not the subject of any issue on the appeal, it can be put to one side. The third head of damage concerned a claim by Dr Clark in the sum of $7680 incurred in the maintenance of the St George telephone numbers which, so it was asserted, was caused solely by St George's breach of the Deed. However, she conceded that that amount should be reduced having regard to the use for outgoing calls made of those numbers by Fertility First staff. St George and Dr Macourt submitted that if the telephone lines had not been used by Dr Clark the cost would have been $42 per month for a total of $3024 for the six year period claimed. His Honour considered that that was an appropriate amount of compensation together with interest and made an award accordingly. The latter is the subject of challenge on the appeal.

The primary judge then turned to the first head of damage. At [104] he noted that Dr Clark did not commence acquiring Xytex sperm until 2005. Between then and 2011 she acquired 1546 straws of sperm. She submitted that the proper method of calculation of her damages was to take the actual replacement costs of the 1546 straws together with interest and that the balance of 1463 straws (which made up the total of 3009 for which she claimed) should be priced at the latest price incurred by Dr Clark without interest. However, his Honour had rejected the last part of this submission having reduced the number of straws in respect of which damages was assessable from 3009 to 1996.

At [108] the primary judge observed that Dr Clark had fallen into the error that she had attributed to St George and Dr Macourt by submitting that damages should be assessed with respect to the actual purchases of Xytex's straws of sperm between 2005 and the date of trial when the proper measure of damages was by reference to a hypothetical purchase of that sperm in 2002 (being the date of breach of the Deed). The best evidence of what that hypothetical purchase would have cost was the first purchase by Dr Clark in September 2005 of 30 of straws of Xytex sperm for a total cost, including freight and discounts, of $15,334.46 or $511.15 per straw. His Honour then extraperlated that figure to 1996 straws that resulted in an assessment of damages in the sum of $1,020,252.70.

As the first cost of acquired straws from Xytex occurred in 2005 his Honour considered that the cost of replacement in early 2002 would have been less. He made an allowance for this differential by denying Dr Clark interest on the amount referred to prior to 29 September 2005. To the amount of $1,020,252.70 was to be added $3,024 plus interest in respect of the telephone services claim. The total sum was then offset by $219,959.91 plus interest being the amount owed by Dr Clark to St George as the balance of purchase price payable under the Deed. The result was that on 8 November 2011 his Honour entered judgment for Dr Clark against each of St George and Dr Macourt in the sum of $1,246,025.01.

Dr Macourt's submissions on the appeal

In his amended notice of appeal, Dr Macourt asserted four grounds of appeal. The first alleged that the primary judge erred in concluding that Dr Clark's damages should be assessed at the date of the breach rather than at the date of the hearing. The second, which was stated to be an alternative to the first, was that if the damages were to be assessed at the date of breach, then his Honour erred in not concluding that Dr Clark had fully mitigated her loss by charging fees to patients which were equivalent to or greater than the amount of that loss. The third ground alleged that the primary judge erred in assessing damages as the difference between the value of warranty compliant St George sperm and its actual value as non-compliant sperm in circumstances where Dr Clark had made no claim for loss on that basis but, on the contrary, had claimed the cost of replacement of the non-compliant sperm. The fourth ground alleged that the primary judge erred in concluding that the damages suffered by Dr Clark included the cost of maintaining the St George telephone services for six years.

The third ground raises a procedural issue but in my opinion it is unnecessary to resolve it. What is clear from his Honour's approach to the assessment of damages, which was supported by Dr Clark on the appeal, was that he assessed damages as if the Deed constituted a contract for the sale of goods, namely, for the St George sperm. It is that issue that needs to be addressed.

Dr Macourt submitted before the primary judge and repeated on the appeal first, that Dr Clark's damages ought to be assessed at the date of trial so that when the fact that she charged patients for all amounts that she had outlaid to purchase replacement Xytex sperm were taken into consideration, the result was that she had not suffered any loss because she recovered from patients the cost of the replacement sperm. Secondly, even if damages were to be assessed at the date of breach, then by passing on to her patients the costs and expenses of acquiring the Xytex replacement sperm, she had in fact fully mitigated her loss.

Dr Macourt conceded (in my opinion unnecessarily) that some part of the total purchase price payable under the Deed of $386,950.91 for the St George practice related to the acquisition of the St George sperm. It was accepted that Dr Clark could have sought to recover the portion of the purchase price that she paid to St George under the Deed for the sperm that subsequently had to be discarded. However, she did not seek damages on that basis and did not attempt to introduce any evidence to allow such a loss to be quantified.

In theory, that concession of Dr Macourt may have been appropriate. However, as already observed at [66] above, it is clear from the structure of the Deed that it was a business sale agreement, as a consequence whereof Dr Clark would have been hard pressed to identify the cost which could be attributed to the St George sperm which was no more than part of the stock-in-trade of the business or practice she was acquiring. Thus, had the business suffered a decline under her ownership, so that no positive figure was produced under clause 2a of the Deed for any of the three specified years, the purchase price would have been zero. If, on the other hand, the business had prospered under Dr Clark's ownership, there would have been no obvious or ready means for ascribing to the stock of acquired St George sperm any particular part of the sum payable under clause 2a in respect of any particular year.

Dr Macourt submitted that at [20] - [21] of his reasons the primary judge had accepted that in charging her patients for the supply of the replacement Xytex sperm, Dr Clark had recovered the cost to her of acquiring that sperm. She had thus recovered from patients the cost of 1546 replacement straws already purchased as at the date of trial and she would continue to recover from patients in respect of the balance of the 1996 replacement straws - an amount in excess of the judgment sum of $1,020,252.70.

Reference was made to what was said to be unchallenged expert accounting evidence adduced by St George and Dr Macourt at the hearing which established that as at 21 September 2011, Dr Clark had purchased 1546 straws of sperm at a cost to her of $769,467. Even at the lowest charge to patients (being $800 per straw) she would have recovered $1,236,800 for those 1546 straws, which is $467,333 more than the amount she paid. It was not suggested that in so doing Dr Clark was making a profit, for the last mentioned amount would have been expended by Dr Clark in storing and treating the Xytex sperm in her facility.

The point of the submission was that the loss assessed by the primary judge based solely on the cost of acquisition of the Xytex replacement sperm was wholly covered by the amounts charged by Dr Clark to her patients for the supply and use of that sperm. Accordingly, she had been able to put herself in at least the same position as she would have been had there been no breach of the Deed by St George and she did so without any relevant cost to herself. If there had been no breach she would have had a certain number of St George straws available to supply to her patients. As she was able to replace those straws without cost to her she suffered no loss. It followed that the effect of the primary judge's award of damages is that Dr Clark will have been reimbursed twice for the expense of purchasing replacement Xytex sperm: first by her patients and, secondly, by order of the court.

It was submitted that Dr Clark's damages should have been assessed at the time of the hearing when it was known that she had been able to recover from her patients the total cost of the acquisition of Xytex sperm to replace the unusable St George sperm. The assessment should also have been made on the basis that she would continue to obtain from patients the costs of purchasing replacement Xytex sperm in the future.

There were two statements in Dr Macourt's written submissions on the appeal with which Dr Clark in her written submissions took particular issue. The first was at paragraph 38 where it was asserted that Dr Clark's own evidence demonstrated that the breach of contract by St George had indirectly led to her making a large profit on the supply of Xytex sperm that she would not have made if the St George sperm had been warranty compliant. The effect of the award of damages made by the primary judge was, so it was suggested, to significantly increase that profit.

The second was at paragraph 41 in which it was accepted that had Dr Clark not charged any fee to her patients for the supply to them of Xytex sperm then it could truly have been said that to place her into the same position as she would have been had the contract been performed, her damages could be assessed by reference to the cost of acquiring replacement sperm. The following comment was then added:

However, the fact that she has received money from patients, which she would not have received had it not been for the breach, cannot have no effect on the assessment of her damages, and should have been taken into account when assessing her loss.

Dr Clark, as I have said, took issue with these two statements on the basis that they were bare assertions. The fact was that Dr Clark could not have supplied to her patients hypothetically compliant St George sperm for valuable consideration. Her evidence about passing onto patients a large part of the cost of acquiring, treating and storing Xytex sperm made it clear that she would have considered herself ethically precluded from charging patients for the St George sperm (upon the assumption it was compliant) unless she could clearly identify a cost of that sperm for which she had paid. As I have already observed, she was at pains to emphasise that she could in no way profit from this supply of sperm as such. Thus in the absence of evidence indicating otherwise, it should be assumed that there was no partial recoupment from patients on account of the cost of sperm supplied up to August 2005 when Dr Clark stopped using the St George sperm.

This is not to say that Dr Clark would not have been entitled to charge a fee to those patients to whom she supplied the St George sperm up to August 2005 provided that that fee did not exceed the cost to her of treating and storing that sperm. There was no evidence that she did charge such a fee but that was a matter of choice on her part. The matter was not explored in the evidence and, in my view, does not bare upon the issues to be determined on the appeal.

The point made by Dr Macourt and which I regard as significant, is that Dr Clark chose to limit her claim in respect of the unusable St George sperm in a manner which resulted in the primary judge assessing her loss by reference only to the cost of acquisition and transportation of Xytex sperm to Dr Clark's facility.

Dr Clark's submissions on the appeal

Dr Clark took issue with Dr Macourt's contention that her claim was for reimbursement of the money that she had paid to Xytex for replacement sperm. Rather, it was for damages "equating" to the cost of compliant replacement sperm. The "best indication" of the sum that Dr Clark would notionally have to pay to put her back in the position she would have been in at the beginning of 2002 had the St George sperm been warranty compliant, was the amount which had actually been charged to Dr Clark from time to time by Xytex (albeit from August 2005). It was submitted that the value to Dr Clark of what she had lost by reason of the St George sperm being warranty non compliant was the notional cost of replacing it; and that the actual cost of the Xytex sperm was the best indicator of that cost.

Dr Clark relied upon the primary judge's answer to Dr Macourt's submission that she had suffered no loss and referred to [21] of his Honour's reasons which I have recorded at [65] above. As I then indicated, it is true that in a sense the recovery of the cost of acquisition and storage of the Xytex sperm from her patients still left her out of pocket for the amount (if any) paid under the Deed for the St George sperm. The flaw which I have identified in his Honour's reasoning process and in Dr Clark's adoption of it was that there was no evidence and no attempt to prove what part of the purchase price payable under the Deed could be apportioned to the St George sperm upon the assumption that it was compliant. One thing is clear: Dr Clark did not pay twice for the use of that sperm in an amount equal to what she was required to pay for the Xytex replacement sperm.

In response to Dr Macourt's submission that his Honour should have assessed damages at the date of trial rather than at the date of breach, Dr Clark submitted that it was unnecessary to resolve that issue. This was because once a plaintiff's loss has been assessed in accordance with ordinary principles, a defendant is perfectly entitled to seek to prove that that loss was diminished by the subsequent receipt by the plaintiff of a payment from a third party: what Giles JA referred to as "avoided loss" in Tasman Capital Pty Ltd v Sinclair & Anor [2008] NSWCA 248; (2008) 75 NSWLR 1 at [56] and [58]. It was accepted that by their very nature such financial benefits are received by a plaintiff after the date of breach.

It was further accepted that it had never been suggested that a defendant who seeks to prove such a diminution of loss is confined to the events which have occurred at the date of breach. Accordingly, the "no loss" argument of Dr Macourt did not depend upon whether the primary judge was correct in determining that damages should be assessed at the date of breach. However, it was submitted that the "no loss" argument was incorrect. This was because the argument was based on the proposition that Dr Clark was better off with the Xytex sperm than she would have been with compliant St George sperm. In other words, Dr Macourt's "no loss" argument rested on the proposition that Dr Clark was able to supply to her patients the Xytex sperm for a price which she would have been unable to obtain from them for the St George sperm had that sperm been warranty compliant. So much was evident from those parts of paragraphs 38 and 41 of Dr Macourt's written submissions to which I have referred at [83] and [84] above.

It was submitted that Dr Macourt was forced to put the matter in that way because a defendant who wishes to rely upon an "avoided loss" on the part of a plaintiff is not entitled simply to point to the receipt of a sum of money by the plaintiff. Rather, the defendant must establish that the breach resulted in the plaintiff gaining a benefit which the plaintiff could not have gained if the contract had been performed according to its terms. Otherwise, almost no plaintiff who acquired defective goods which were required for the purpose of re-sale could recover damages. Merely to point to the receipt of money from patients to whom Xytex sperm was supplied was therefore only part of the equation. Dr Macourt was thus forced to assert that Dr Clark made a profit on the supply of the Xytex sperm which exceeded that which could hypothetically have been made on the supply of compliant St George sperm. In other words, Dr Macourt needed to establish a betterment argument.

At [76] to [83] of his reasons the primary judge rejected a betterment argument advanced by St George and Dr Macourt who submitted that the sperm that Dr Clark obtained from Xytex was superior to the sperm which would have been supplied by St George even if it had been warranty compliant. Dr Macourt no longer asserts such a case. Nevertheless, Dr Clark submitted that it could be seen from his Honour's reasoning at [20] and [21], read with his further reasons at [76] to [83] relating to the rejected betterment argument, that he had held that St George and Dr Macourt had not established that even if Dr Clark had recovered the cost of acquisition and storage of the Xytex sperm, that left her in a position in which she had suffered no loss. Reliance was placed upon what the primary judge said at [79].

In my opinion his Honour was there dealing with a quite different aspect of betterment. The question of whether there has been an "avoided loss" in my opinion has nothing to do with the principle of betterment. Betterment is one thing but "avoided loss" is quite another. Contrary to the submission of Dr Clark, the primary judge was not at [76] to [83] of his reasons dealing with the issue of whether St George and Dr Macourt had failed to discharge their onus of proving that Dr Clark had suffered no loss as a result of her receipt of monies from patients for Xytex sperm or whether in the circumstances they had failed to establish the quantum of any proved diminution of her loss.

Finally, on this critical issue, Dr Clark submitted that Dr Macourt had failed to appreciate that he and St George bore the onus at trial of establishing any "avoided loss". Given the primary judge's expression of opinion at [21] of his reasons to the effect that receipt from her patients of an amount equivalent to the cost of the acquisition of the Xytex sperm "still left her out of pocket for the amount paid [for the donor sperm] under the deed", it fell to St George and Dr Macourt, and not to Dr Clark, to adduce evidence to allow the extent of the diminution to be quantified. Of course, this submission raised the question of whether she was relevantly out of pocket at all. For the reasons referred to at [68], there was no evidence that she was although this did not mean that she had not sustained a potential loss due to having to discard in 2005 the then unused straws of St George sperm.

Thus, in summary, it was submitted that to discharge their onus St George and Dr Macourt had to establish that the breach conferred on Dr Clark a benefit that Dr Clark could not have gained if the Deed had been performed. In other words, they had to prove that Dr Clark would have been unable to charge her patients in respect of hypothetically compliant St George sperm, or else to prove that any such charge she could have made would have left her in an inferior position compared with that in which she was in fact in to a proved extent.

A related submission was that St George and Dr Macourt had adduced no evidence proving (in discharge of their onus) that Dr Clark did in fact recover from her patients more than the cost of the acquisition and storage of sperm purchased from Xytex. What evidence there was pointed to the conclusion that the amount recovered by Dr Clark from her patients in respect of the supply of Xytex sperm was less than full recovery of all costs received by her in connection with the acquisition, treatment, storage and eventual supply by her of that sperm.

This last submission may be correct but it has three flaws. First, the evidence did establish that at the very least Dr Clark did recover from her patients the cost of acquisition and transportation of Xytex sperm. Secondly, that cost was the only loss she sought to recover. She did not seek, and the primary judge did not award her "full cost recovery". Thirdly, the storage, treatment and supply costs incurred with respect to the Xytex sperm were the very same costs as she would have incurred had the St George sperm been warranty compliant. They were, therefore, a constant. In fact, as she conceded, she in effect saved costs by only acquiring Xytex sperm as she needed it rather than having to store large numbers of St George straws which she would have been required to do if they had not been discarded for being warranty non-compliant.

Did Dr Clark suffer the loss found by the primary judge?

(a) The relevant principles

Awards of damages for breach of contract are compensatory. They are designed to put the innocent party into the position he or she would have occupied had the contract been performed: Robinson v Harman. Had all the St George sperm acquired by Dr Clark under the Deed been of the warranted quality, she could have used so much of that sperm as, in the ordinary course of her practice, she expected to be usable (on her own account, at least 2500 straws). In those circumstances she would not have had to acquire replacement sperm and the professional fees she charged patients for their treatment would not have included any sum on account of supplied sperm.

As a result of her inability to use the 1996 straws received from St George which she had expected to be useful, Dr Clark took action to deal with the loss of those straws. That action included an element of substantial cost recoupment incorporated into the charges made to patients treated with sperm acquired from Xytex. This made relevant the observations of Viscount Haldane L.C. with whom the other members of the Appellate Committee of the House agreed, in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673, a case upon which Dr Macourt placed particular emphasis but which, apparently, was not referred to at trial. His Lordship said (at 688-689):

The quantum of damage is a question of fact, and the only guidance the law can give is to lay down general principles which afford at times but scanty assistance in dealing with particular cases . . .

Subject to [that observation] I think there are certain broad principles which are quite well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed.

The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.

After observing that the second principle did not impose on a plaintiff an obligation to take any step which a reasonable and prudent person would not ordinarily take in the course of his business, his Lordship continued in the following terms:

But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.

His Lordship also observed (at 690):

[P]rovided the course taken to protect himself by the plaintiff in such an action was one which a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, a jury ... may property look at the whole of the facts and ascertain the result in estimating the quantum of damage.

His Lordship then emphasised (at 690) that

[t]he subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business.

This last mentioned proposition was reiterated by Burchett J, with whom O'Loughlin J agreed, in Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 at 28. His Honour stated that a subsequent transaction or transactions by the party claiming breach, if it is to be taken into account upon the principle of British Westinghouse, "must be one arising out of the consequences of the breach and in the ordinary course of business". See also Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc [2000] FCA 660; (2000) 173 ALR 263 at [115] - [117] per Tamberlin J.

The principle based on Viscount Haldane's speech in British Westinghouse of avoided loss not amounting to a purely collateral or indirect benefit was also the subject of discussion by Giles JA, with whom Santow JA and Hunt AJA agreed in Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443; (2006) NSW ConvR 56-145 at [39] - [50]. His Honour stated the general principle at [40] as follows:

If the innocent party does take action to mitigate the loss to it consequent on the guilty party's wrong, even if the action goes beyond reasonable action, in general the guilty party is entitled to an allowance for the benefit to the innocent party from that action (the avoided loss principle).

At [50], Giles JA noted the observation of Robert Goff J in Koch Marine Inc v D'Amica Societa di Navigazione ARL (1980) 1 Lloyd's Rep 75, referring to and citing from Viscount Haldane's speech in British Westinghouse that

there must be a causative link between the breach of contract and the action or inaction in question to bring into play the principle of mitigation of damage.

His Honour also referred at [47] with approval to the observation of Professor Burrows in his work Remedies for Torts and Breach of Contract, 3rd ed, p 158 where the learned author relevantly said that, where compensating advantages as have been gained from action taken by the claimant subsequent to breach of contract

the test for directness appears to turn on whether the compensating advantage derived from actions taken by the claimant to avoid the consequences of the wrong.

To return to British Westinghouse, Viscount Haldane L.C. summarised the position (at 691-692) by observing that the relevant principle required the finder of fact to look at what actually happened, and to balance loss and gain. To qualify as a gain, the relevant transaction or transactions must not be a res inter alios acta, but one in which the person whose contract was broken took a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach.

Thus in the present case, the question for determination is whether the action of Dr Clark in charging to her patients the cost of the acquisition by her of the Xytex sperm was a natural and prudent course for her to follow in the ordinary course of her practice in order to avoid the loss which, as a direct result of St George's breach of contract, she otherwise would have sustained by having to replace the St George sperm with Xytex sperm. In my view, the answer to the question so posed is in the affirmative.

In McGregor on Damages, 18th ed (2009) Sweet and Maxwell, Viscount Haldane's observations cited above are identified at [7-006] as the source of the following "rule":

[W]here the claimant does take steps to mitigate the loss to him consequent upon the defendant's wrong and these steps are successful, the defendant is entitled to the benefit accruing from the claimant's action and is liable only for the loss as lessened; this is so even though the claimant would not have been debarred under the first rule from recovering the whole loss, which would have accrued in the absence of his successful mitigating steps, by reason of these steps not being ones which were required of him under the first rule. In addition, where the loss has been mitigated other than by steps taken by the claimant subsequent to the wrong, the claimant can again recover only for the loss as lessened, provided that the benefit gained is not to be regarded as collateral. Put shortly, the claimant cannot recover for avoided loss.

In Treitel On The Law of Contract, 13th ed (2011) Sweet and Maxwell at [20-122], British Westinghouse is cited for the proposition that as the purpose of an award of damages is to compensate a claimant for his loss and not to enrich him, any action on the part of the claimant which has the effect of mitigating or reducing his loss must be one which is taken as a direct result of the relevant breach of contract and not constitute a "collateral benefit".

The relevant principle was also stated in Chitty on Contracts Vol 1, 29th ed (2004) Sweet and Maxwell at [26-100] under the heading "Loss which is avoided cannot be recovered". The rule is stated in the following terms:

The second rule of mitigation concerns potential loss which is not actually suffered. If, by taking steps which could not reasonably be required of him, the claimant has in fact avoided the potential loss resulting from the defendant's breach of contract, he cannot recover damages in respect of such potential loss. ... The claimant is entitled to damages only for his actual loss, which is assessed by taking account of all the items in his notional 'profit and loss' calculation for the whole transaction. The court is required to decide whether the claimant's actions arose out of his attempts to mitigate the potential loss resulting from the breach, or whether his actions were 'independent' of his mitigating steps, so that any benefit to him should not be used to reduce the damages payable by the defendant. (Emphasis in original)

Again, British Westinghouse is cited as authority for the above propositions.

(b) Application of the principles to the facts

In my opinion it cannot be gainsaid that first, Dr Clark's action in charging her patients for the acquisition costs of the Xytex sperm arose directly out of the consequences of St George's breach of contract which rendered the St George sperm unusable; secondly, it was in the ordinary course of Dr Clark's business or practice to charge her patients for the cost of supplying to them the Xytex sperm; thirdly, the present case was not one that involved a train of disconnected or collateral transactions: on the contrary, Dr Clark's whole case was that St George's breach of the warranties in the Deed required her to replace the St George sperm with the Xytex sperm. The actions of Dr Clark in charging her patients for the cost of supply of that sperm thus arose directly out of St George's breach of contract: cf Hussey v Eels [1990] 2 QB 227 at 234, 236. Furthermore, it was perfectly legal and ethical for her to so charge her patients.

In oral submissions Dr Clark contended first, that her action in charging her patients for the supply of Xytex sperm was not properly characterised as such a charge as it was part of an overall fertility treatment accompanied by a range of professional services. Such a submission is at odds with Dr Clark's evidence to which I have referred at [33] to [40] above and I reject it.

Secondly, it was contended that the amount charged for the supply of Xytex sperm was a charge which it was anticipated she could charge in any event so that it did not arise as a consequence of the breach and, therefore, had no mitigating effect. Given that Dr Clark did not suggest that she charged her patients for the cost of supplying the St George sperm between 2002 and 2005, this submission has no substance. It was not until she was required, due to the breach of the Deed, to replace the St George sperm that she instituted the practice of charging her patients for its supply. Her acquisition of the Xytex sperm was clearly a consequence of the breach from which it must follow that recovering the cost of that acquisition from the patients to whom it was supplied was a natural consequence of that same breach.

It is true, as Dr Clark submitted, that the onus lay upon St George and Dr Macourt to prove both avoidable as well as avoided loss: Tasman Capital at [56]-[58], [69] per Giles JA, with whom McColl JA; Young CJ in Eq relevantly agreed. But, in the present case, in my view that onus was relevantly discharged by Dr Clark's own evidence to which I have referred at [113] below.

As noted above, both before the primary judge and this Court Dr Clark submitted that the payments received by her from her patients in respect of the supply to them of Xytex sperm neither diminished nor mitigated her loss. The basis of this submission, as I understand it, was that Dr Macourt could not, if hypothetically the St George sperm had been warranty compliant, establish that Dr Clark would not have been able to charge her patients for its supply. It was thus submitted that a defendant who wishes to assert that a plaintiff who received a sum of money from a third party which the plaintiff could not have received but for the breach, is not entitled simply to point to the receipt of that sum of money as establishing an "avoided loss". The defendant must do much more than that. It must establish that the breach conferred on the plaintiff a benefit which the plaintiff could not have gained if the contract had been performed.

Otherwise, so it was submitted, no plaintiff who acquires defective goods (which were required for the purpose of resale) but which are unusable, could recover damages because in the usual case the plaintiff will on resale of the replacement goods recover from the person to whom those goods are on-sold an amount which exceeds their acquisition costs. Thus the onus was on St George and Dr Macourt to establish that, in a hypothetical situation, Dr Clark would have been unable to charge her patients in respect of hypothetically compliant St George sperm a sum of a similar order to that actually charged to her patients in respect of the Xytex sperm.

These propositions which formed the essence of Dr Clark's case on the appeal, may have had some force if in truth the Deed was no more than a contract for the sale of goods. I have already indicated the reasons why I consider that it is not. Accordingly, in my view the propositions advanced by Dr Clark have no relevance to the present case. There was no legal or ethical constraint upon Dr Clark charging her patients for the cost of treating and storing the St George sperm which she in fact used. Nor, if she had been able to apportion some part of the purchase price payable under the Deed to the St George sperm which was transferred to her, would she have been restrained from charging that cost to those patients. The fact that she did not do so or at least there was no evidence that she did, is beside the point.

There then remained to be determined the issue of costs of the proceedings generally excluding the costs the subject of specific orders in favour of St George and Dr Macourt. In this respect, on 29 May 2009 (prior to the issue of liability being dealt with by Macready AsJ), Dr Clark made an Offer of Compromise pursuant to UCPR r 20.26 in which she offered to compromise the proceedings by St George and/or Dr Macourt paying to her the sum of $50,000 plus costs of the proceedings as agreed or assessed. That offer was not accepted. In those circumstances, where the offeror, being a plaintiff or cross/claimant, obtains an order or judgment on the relevant claim no less favourable to the offeror than the terms of the offer (as occurred in the present case), then UCPR r 42.14(2) provides as follows:

(2) Unless the court orders otherwise, the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim:

(a) assessed on the ordinary basis up to the time from which those costs are to be assessed on an indemnity basis under paragraph (b), and

(b) assessed on an indemnity basis:

(i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made . . .

It was common ground between the parties that given the award of damages in favour of Dr Clark made by the primary judge, she was entitled to have her costs paid on an indemnity basis as and from 30 May 2009 unless the court ordered otherwise. It was also accepted by all parties that the onus lay upon St George and Dr Macourt to demonstrate "exceptional circumstances" in order to escape an order for indemnity costs.

In Barakat v Bazdarova [2012] NSWCA 140 at [42] to [49], I reviewed the authorities with respect to the requirement of exceptional circumstances and concluded that there appeared to be a conflict of opinion in this Court as to whether it could otherwise order for the purpose of the indemnity costs rule in the absence of such circumstances. However, it is unnecessary to further consider that issue in the present case given the parties agreement to which I have referred.

It was submitted, and his Honour accepted at [32] of the costs judgment, that in an appropriate case indemnity costs may be avoided if there has been a significant change in a plaintiff's case between the date of the offer and the date of trial. In this context, his Honour cited the decisions of this Court in South Eastern Sydney Area Health Service v King [2006] NSWCA 2 and Nominal Defendant v Hawkins [2011] NSWCA 93; (2011) 58 MVR 362 at [52] and [58].

At [36] the primary judge found that the changes that had occurred in Dr Clark's case between the date of the offer and trial created circumstances that made it appropriate to exercise his discretion against ordering indemnity costs. His Honour did not descend to any detail as to what precisely those changes were.

The issue of indemnity costs was the subject of both written and oral argument before his Honour on 8 November 2011. In their written submissions St George and Dr Macourt, after referring to the filing by Dr Clark of the Cross-Claim on 8 September 2008, asserted that she had not served any of the evidence upon which she ultimately relied at the hearing at the time of the making of the relevant offer. Accordingly, it was submitted that St George and Dr Macourt were not in a position to give reasonable consideration to the Cross-Claim as ultimately prosecuted when they did not have the evidence on which Dr Clark would rely at the hearing and it was therefore not unreasonable for them not to have accepted the offer.

In her written submission on the indemnity costs issue, Dr Clark submitted first, that she had obtained summary judgment in the proceedings on the issue of liability on the basis of admissions made by St George and Dr Macourt that "sperm donor records were not maintained in each case as required" by the terms of the Deed; secondly, that as his Honour found at [21] of the primary judgment, on any view of it Dr Clark had paid twice for the donor sperm; and thirdly, there was a massive difference between the offer to accept $50,000 and the judgment she ultimately obtained of $1,246,025.01.

In oral argument Dr Clark relied upon the matters to which I have just referred. In their oral submissions before the primary judge, St George and Dr Macourt asserted that there had been a "very significant change to the landscape in the sense that a very great amount of the claim was abandoned by Dr Clark" as reflected in the orders of Macready AsJ. In particular, the only damages claimed after the making of those orders was limited to four sub-paragraphs of the Cross-Claim. Accordingly, a very significant amount of the claim was effectively abandoned subsequent to the making of the offer. It was further submitted that although some affidavit evidence had been served by Dr Clark in 2007, it was all abandoned and she effectively started again. As that evidence was not received until towards the end of 2010, rejection of the offer was not unreasonable.

Dr Clark responded by submitting that although the issues set out in the Cross-Claim both in respect of liability and damages were reduced "as part of a streamlining" on receipt of the judgment of Macready AsJ, the fact that those matters were cut back did not offer any excuse for unreasonably rejecting an offer of just $50,000. If the claim had been increased or somehow amplified the position might have been different but the dramatic cut back took place at the time of Macready AsJ's summary judgment.

A matter of some significance neither referred to by the parties nor by his Honour (but in evidence) was a letter from Dr Clark's solicitors accompanying the offer which outlined Dr Clark's reasons for making the offer at the time it was made. That letter was marked "Without Prejudice save as to costs". Those reasons may be summarised as follows:

with respect to the issue of liability, the offer was made because of a number of admissions made by Dr Macourt during cross examination at the hearing of a notice of motion on 4 and 5 May 2009 which admissions made it clear that Dr Clark would be successful in establishing breach of warranty under the Deed;

at the time of the making of the offer Dr Clark had incurred significant legal costs (approximately $1.1 million). Due to the pre-trial procedures adopted by the court and the manner in which the matter will proceed in the future, further legal costs will be incurred by both sides which will be very substantial so that in an effort to avoid those costs and as a commercial compromise, Dr Clark was prepared to accept a small portion of what she believed she would ultimately be awarded in the hope of achieving a prompt settlement;

due to the weaknesses on the issue of liability which were then noted including a list of 11 admissions made by Dr Macourt during cross examination that went to that issue, it was beyond question that if the matter proceeded to trial the court would determine that St George and Dr Macourt breached their obligations to Dr Clark under the Deed;

as Dr Clark was highly likely to obtain a verdict on liability with respect to her Cross-Claim, it was anticipated that a motion would be filed seeking summary judgment. I pause to note that this in fact occurred and summary judgment was, ultimately, by consent entered in favour of Dr Clark with respect to a number of the allegations of breach which she had asserted;

on the issue of damages Dr Clark was entitled to an amount of money which would place her in the same position as if St George had performed its side of the bargain; that is, as if the warranties had been fulfilled. Contrary to the suggestion of St George and Dr Macourt, Dr Clark was not seeking reimbursement of the monies she had paid to Xytex including reimbursement of her estimated future outlay for Xytex sperm, but was seeking damages equating to the cost of compliant replacement sperm [this was the basis upon which the matter was put to the primary judge by St George and Dr Macourt and by the latter on the appeal];

the amount which Dr Clark had in fact expended thus far on Xytex sperm was relevant to the extent that it gave a reasonable indication of the approximate cost of compliant replacement sperm.

The letter also dealt with a number of the defences which St George and Dr Macourt had raised with respect to Dr Clark's entitlement to damages including an allegation that it was unlawful for her to use Xytex sperm; that there was a 10 year limit on the retention of sperm; and that there had been "betterment" which prevented Dr Clark from seeking damages based on the cost of Xytex replacement sperm. I note that each of these defences were pursued at trial unsuccessfully. It was also pointed out that Dr Clark did not receive any profit from the sale of Xytex sperm. Finally, it was asserted that if the warranties had been fulfilled and if Dr Clark could lawfully have charged her patients the cost for the donor sperm supplied to her by St George, then she was worse off to the extent that, in order to make that charge to patients, she first needed to outlay money to others (such as Xytex) to acquire donor sperm which she was entitled to lawfully use. In other words, she would not have had to outlay money to others to acquire compliant donor sperm, in order to charge a fee to patients, if the warranties had been fulfilled. This argument was also advanced at trial and on the appeal.

Dr Clark made extensive written submissions on this issue before this Court. She took issue with his Honour's finding at [36] of the costs judgment that the changes that occurred in her case between the date of the offer and date of trial were sufficient to justify the exercise of his Honour's discretion against the making of an order for indemnity costs. It was submitted that not only were those changes not identified by his Honour but in fact there was no material change. Paragraphs 67 to 72 of Dr Clark's written submissions on this issue comprised a great deal of detail to justify the submission that there was no material change. In summary, it was submitted as follows:

although Dr Clark did not rely at trial on her affidavit affirmed on 13 July 2007 but on her affidavit affirmed on 26 November 2010 with respect to the issue of damages, the mere fact of serving affidavits after the offer had been refused could not of itself constitute a relevant change for otherwise there would be no utility in ever serving an Offer of Compromise before all affidavit evidence had been filed and served. This would undermine the purpose of the making of an Offer of Compromise and would be inconsistent with the public interest in encouraging early settlement: Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724D-G; Morgan v Johnson (1998) 44 NSWLR 578 at 581-582;

material in Dr Clark's affidavits upon which she relied at trial fell within the ambit of her pleaded case which had not changed since the Cross-Claim was filed on 8 September 2008;

at the time the offer was served on 29 May 2009 the only genuine issue arising in respect of the Cross-Claim was the assessment of damages; the only relevance of the service of those affidavits after the Offer of Compromise would be if St George and Dr Macourt had no indication at the time of the Offer of Compromise that the damages claimed were likely to be awarded and would likely to be in excess of $50,000;

in fact, at paragraph 432 of Dr Clark's affidavit affirmed on 13 July 2007 it was clear, and St George and Dr Macourt were on notice, that she was claiming damages in the sum of no less than $950,000;

comparison between the 2007 and 2010 affidavits affirmed by Dr Clark demonstrated that the latter to a very large extent replicated the former (so as to make the 2010 affidavit a stand alone document).

In their written submissions in reply on the issue of indemnity costs, Dr Macourt submitted that as the question of costs was discretionary, it was necessary for Dr Clark to establish that the primary judge in not awarding costs on an indemnity basis made an error of the kind described in House v The King (1936) 55 CLR 499 at 505-506. The only other submission made was that at the costs hearing before the primary judge Dr Clark did not submit that there was no evidence of any significant difference in the evidence that had been served before the making of the offer compared to that served after the offer. None of the other submissions of Dr Clark were challenged; in particular, first, that as was set out in the covering letter from Dr Clark's solicitors accompanying the Offer of Compromise, St George and Dr Macourt's chances of escaping liability were remote; and, secondly, that as the evidence then stood at the time of the making of the offer, it was clear that Dr Clark was claiming damages, based upon the cost of replacement sperm, which in 2007 she had assessed at $950,000.

It is true that the authorities establish that where a plaintiff's case has changed significantly between the date of the plaintiff's offer and the trial in which judgment is obtained for a higher amount, that change provides a sufficient basis for an order denying the plaintiff's entitlement to indemnity costs because it would otherwise be unfair to the defendant to make such an order when the evidence at trial is different from that known to the defendant at the time of the offer. In the present case the primary judge did not identify those changes. However, the parties were granted leave to file a note identifying those changes. Dr Macourt filed such a document with which Dr Clark generally agreed with some corrections. It revealed (in its corrected form) that the Cross-Claim contained in paragraph 10 some 24 alleged breaches of warranty of which all but five were abandoned or dismissed by Macready AsJ on 9 June 2010. Dr Clark obtained summary judgment for those five on that date.

The document further revealed that the Cross-Claim claimed damages under six heads of which one was abandoned on 9 June 2010. The other five went to trial of which three were pressed, Dr Clark failing on one and succeeding on two. As I have noted above, his Honour ordered Dr Clark to pay the costs of the three heads of damage on which she failed.

In oral submissions, Dr Macourt pointed to the fact that had he accepted Dr Clark's offer, he would have had to pay all her costs up to the time of acceptance and which her solicitors in the letter accompanying the offer had estimated at $1.1 million. The relevant rule governing the question of costs where a plaintiff's offer is accepted is UCPR r 42.13A which relevantly provides:

(1) This rule applies if the offer concerned:

(a) is made by the plaintiff and accepted by the defendant, or

(b) . . .

(2) The plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made, unless:

(a) . . .

(b) the court orders otherwise.

Dr Macourt submitted that had he accepted the offer he would have had to pay not only his own costs but also those of Dr Clark including her costs incurred with respect to allegations in the Cross-Claim which had been abandoned prior to the making of the offer. He further submitted that much of the costs assessed up to that time related to a 270 page answer to particulars sought by St George and Dr Macourt as well as the costs of inspecting a mass of documents discovered by Dr Clark which extended over many days.

There are a number of problems with this last submission. First, it did not necessarily follow that had he accepted the offer, St George and/or Dr Macourt would have been ordered to pay the whole of Dr Clark's costs to the date of acceptance including those costs relating to claims that had been abandoned pre-offer. An application could have been made to the court for an "order otherwise" pursuant to UCPR r 42.13A(2)(b). Secondly, it would appear from the schedule of abandoned claims provided by Dr Macourt that only two liability allegations had been abandoned when the Cross-Claim was filed on 8 September 2008 and six heads of damage. Thirdly, there was no evidence as to the costs of St George and Dr Macourt which were thrown away by the abandonment of these claims on the filing of the Cross-Claim. The schedule did not suggest that any other claims were abandoned prior to the making of the offer although a number were when the matter came before Macready AsJ on Dr Clark's application for summary judgment. Fourthly, the submission was not made to the primary judge and therefore he cannot be criticised for failing to take into account a matter which was not put to him.

Accordingly, whether his Honour's discretion miscarried needs to be judged on the basis of the submissions which were advanced before him. In this respect in my opinion his Honour's discretion did miscarry. Although it is true that many allegations of breach of warranty were abandoned and dismissed by Macready AsJ on 9 June 2010, Dr Clark was ordered to pay the costs thrown away by the abandonment of those claims. However, the primary judge failed to take those costs orders into account as relevant considerations when exercising his discretion to "order otherwise". Furthermore, he failed to take into account the costs orders he had made himself against Dr Clark.

Importantly, his Honour gave no consideration to whether, in all the circumstances then prevailing, it was reasonable for St George and Dr Macourt to reject what was, to say the least, an Offer of Compromise which, given St George's hopeless case on liability and the extremely modest amount of damages which Dr Clark was prepared to accept, would not only have been in the public interest but also in the interest of St George and Dr Macourt.

In summary, in my opinion the primary judge failed to appreciate that the changes in Dr Clark's case upon which he relied to justify exercising his discretion to refuse an order for indemnity costs were, as Dr Clark submitted, reduced rather than expanded the allegations of breach contained in the Cross-Claim. Her abandonment of many of those allegations as well as of some of the heads of damage claimed did not in my view involve the type of changes to a party's case that would otherwise justify denying Dr Clark an order for indemnity costs given the timing and nature of her offer.

For the foregoing reasons, I am therefore of the opinion that his Honour's discretion miscarried and that had Dr Clark otherwise succeeded in upholding his Honour's award of damages in her favour, she ought to have obtained an order that Dr Macourt pay the costs of the proceedings on and after 30 May 2009 on an indemnity basis.

Conclusion

It follows from the foregoing that in my opinion the appeal should be allowed and, in the circumstances, the cross appeal dismissed. It also follows that a number of the orders made by the primary judge should be set aside. The only damages to which Dr Clark is entitled is the sum of $3024 in respect of the telephone lines. On the other hand, St George is entitled to judgment against Dr Clark in the sum of $219,950.91 together with interest. It thus seems to follow that there should be judgment for St George against Dr Clark on its claim and judgment for Dr Clark on her Cross-Claim in the amount of $3024 together with interest. When one is set off against the other, it would seem that there should be a monetary order in favour of St George. The question of the costs of the trial would then need to be dealt with as well as the costs of the appeal.

Accordingly, the orders and directions I would propose at this point are as follows:

(a) Appeal allowed.

(b) Cross-appeal dismissed.

(d) Direct the parties within 14 days of the publication of these reasons to file short minutes of order to reflect these reasons and within the same period to file and serve, if otherwise there is any dispute, written submissions not exceeding three pages on the issue of the costs of the trial and the appeal.

*****

Amendments

24 September 2013 - Corrected paragraph numbering.

Amended paragraphs: After [42] to the end.

Decision last updated: 24 September 2013

Medium Neutral Citation:	Macourt v Clark [2012] NSWCA 367
Hearing dates:	24 September 2012
Decision date:	09 November 2012
Before:	Beazley JA at [1]; Barrett JA at [2]; Tobias AJA at [12]
Decision:	(a) Appeal allowed. (b) Cross-appeal dismissed. (c) Set aside the orders made by Gzell J on 8 November 2011. (d) Direct the parties within 14 days of the publication of these reasons to file short minutes of order to reflect these reasons and within the same period to file and serve, if otherwise there is any dispute, written submissions not exceeding three pages on the issue of the costs of the trial and the appeal. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Catchwords:	DAMAGES - assisted reproductive technology practice - damages for breach of various warranties contained in the Deed relating to donor sperm - proper categorisation of the contract - whether the trial judge erred in not concluding that the respondent had fully mitigated her loss - whether the respondent avoided the loss she otherwise would have sustained by having to replace the non-compliant sperm by charging her patients for the cost of replacement sperm - whether the damages suffered by the respondent included the cost of maintaining the appellant's telephone service for six years COSTS - whether the respondent would have been entitled to indemnity costs if the award of damages was upheld in her favour
Legislation Cited:	Human Cloning for Reproduction and Other Prohibited Practices Act 2003 Human Tissue Act 1983 Sale of Goods Act 1923 Uniform Civil Procedure Rules 2005
Cases Cited:	Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 Barakat v Bazdarova [2012] NSWCA 140 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673 Gagner Pty Ltd (t/as Indochine Cafe) v Canturi Corporation Pty Ltd [2009] NSWCA 413; (2009) 262 ALR 691 Golden Strait Corp v Nippon Yusen Kubishika Kaisha [2007] 2 WLR 691; [2007] 3 All ER 1 Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc [2000] FCA 660; (2000) 173 ALR 263 House v The King (1936) 55 CLR 499 Hussey v Eels [1990] 2 QB 227 Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 Koch Marine Inc v D'Amica Societa di Navigazione ARL (1980) 1 Lloyd's Rep 75 Kuru v New South Wales [2008] HCA 26; (2008) 236 CLR 1 Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 Morgan v Johnson (1998) 44 NSWLR 578 McCrohan v Harith [2010] NSWCA 67 Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1; (1991) 104 ALR 397 Nominal Defendant v Hawkins [2011] NSWCA 93; (2011) 58 MVR 362 Robinson v Harman (1848) 1 Exch 850; (1848) 154 ER 363 Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443; (2006) NSW ConvR 56-145 Ruxley Electronics and Construction Ltd v Forsyth [1994] 1 WLR 650; [1994] 3 All ER 801 South Eastern Sydney Area Health Service v King [2006] NSWCA 2 St George Fertility Centre Pty Ltd v Clark [2011] NSWSC 1276 St George Fertility Centre v Clark (Supreme Court, Macready AsJ, 31 May 2010, unreported) St George Fertility Centre Pty Ltd v Clark (No 2) (Supreme Court, Gzell J, 8 November 2011, unreported) Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2008-2009) 236 CLR 272 Tasman Capital Pty Ltd v Sinclair & Anor [2008] NSWCA 248; (2008) 75 NSWLR 1 The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
Texts Cited:	Chitty on Contracts Vol 1, 29th ed (2004) Sweet and Maxwell Andrew Burrows, Remedies for Torts and Breach of Contract, 3rd ed (2004) Oxford University Press Harvey Macgregor, McGregor on Damages, 18th ed (2009) Sweet and Maxwell Edwin Peel, Treitel On The Law of Contract, 13th ed (2011) Sweet and Maxwell
Category:	Principal judgment
Parties:	David Charles Ross Macourt (Appellant/Cross Respondent) Anne Clark (Respondent/Cross Appellant)
Representation:	Counsel: C Harris SC with H Altan (Appellant/Cross Respondent) A Leopold SC with ARR Vincent (Respondent/Cross Appellant) Solicitors: Redmond Hale Simpson Solicitors (Appellant/ Cross Respondent) Norton Rose Australia (Respondent/Cross Appellant)
File Number(s):	CA9248 of 2012
Decision under appeal	Citation: St George Fertility Centre Pty Ltd v Clark [2011] NSWSC 1276 Date of Decision: 2011-10-25 00:00:00 Before: Gzell J File Number(s): SC255614 of 2006