28/04/2014

Imagine not only not being paid for your goods by the buyer but having to pay the buyer much more because the goods didn’t live up to their promise.

Imagine entering into a contract to sell goods for a value of about $400,000, to only receive part of the purchase price from the buyer and – the cherry on top of the cake – to be ordered by the Court to pay the buyer over $1m.

Sounds crazy?  Well this is the sticky situation in which a seller recently found himself!

In brief, in 2002 the seller entered into an agreement with the buyer to sell certain assets of its practice, including a stock of frozen donated sperm (don’t try this at home!).  The seller promised the buyer that the identification of the donors of the sperm complied with specific guidelines.

To her dismay the buyer soon found out that over half of the straws of sperm she’d purchased were not as promised and were unusable.  As suitable replacement sperm was not available in Australia the buyer had no other choice but to purchase the stock from the United States for approximately $1m.

The seller’s guarantor commenced court proceedings seeking payment of the outstanding purchase price.  The buyer retaliated with a counter claim that the seller should compensate her for breaching the contract.

The matter went all the way to the High Court of Australia where the majority agreed with the trial judge and ordered the seller and its guarantor to pay the buyer over $1m.

The Court reemphasised the old legal principle that the purpose of awarding damages for a breach of contract is to put the plaintiff (in this case the buyer) in the same situation, so far as money can do, as they would have been in had the promise not been broken.

This means that had the seller not sold unusable sperm straws to the buyer, the buyer would not have had to spend over $1m in replacement straws in order to get the same benefits as she was meant to get under the contract.  Since the buyer spent that money as a result of the seller’s broken promise the buyer should be compensated for the amount spent.
 

What does this mean for you?
 

You should think carefully before giving any warranties about products you sell. People love to quote the old ‘caveat emptor’ rule: “let the buyer beware” in the belief that it is really the buyer who bears the risk in a purchase. But this old common law rule is easily negated, particularly if the seller provides a warranty about the product sold which then places the onus on the seller to ensure the warranty is accurate and not misleading or deceptive.

On the practical front, if someone owes you money under a contract you should first consider whether you are yourself in breach of that contract.  The claim can splash-back on you if you’re not careful.

And remember the old adage – in every court case at least one of the legal teams is wrong. In this case the seller’s legal team advised their client to take the case all the way to the High Court without success.  Confidence by your legal team that you can win is not always borne out and it may be a better strategy commercially to reach a negotiated settlement of the dispute.

For excellent practical advice on recovering debts or issues relating to product warranties contact us on (02) 8296 6222.