Be Careful of Warranties!
Apr 2014 |Introduction
Almost all purchasers of assets expect to be given warranties by the vendors or sellers. What happens if a given warranty doesn't measure up? What can vendors do to limit repercussions arising from ill founded or misplaced warranties that come back to bite them?
These questions were recently posed in the High Court of Australia case of Clark v Macourt[2013] HCA 56.
The issues in Clark v Macourt
The vendor agreed to sell the assets of a fertility company to the purchaser for a price just under $400,000. The assets included frozen sperm straws. Dr Macourt was a sole director of the vendor and agreed to guarantee its obligations. The purchaser (Dr Clark) found out that only about one in seven of the sold straws was usable, despite the vendor giving a sale warranty that all the straws were compliant with applicable regulations. The purchaser spent over $1,200,000 to buy replacement straws and sued Dr Macourt, as guarantor for the amount she paid, as the seller had gone into liquidation.
What was recoverable and why?
Dr Clark, an obstetrician and gynocologist, was found to have mitigated her loss by using the remaining straws bought, but the question arose as to what damages she should be entitled to, given that when the cost of the defective straws was deducted from the purchase price, the remaining assets had a value of $220,000.
The High Court upheld the commonly applied approach that Dr Clark's entitlement to damages was the amount it would take to restore her to the position she would have been, had the straws not been unusable. In this case, the Court ordered that the cost paid for the replacement sperm straws was the appropriate amount of damages.
Observations
In this case, there was no ceiling or limit placed on the liability of the vendor or the guarantor to limit their exposure to the total sale price of the assets sold. Contractually limiting liability to no more than the sale price is a sensible and accepted safeguard applied by vendors and guarantors to transactions like this. The case also underlines the good fortune of the purchaser to have a guarantor bound to make good the seller's obligations.