A startling statement

By Justice Ward, in Australian Receivables Ltd v Tekitu Pty Ltd (Subject to Deed of Company Arrangement) (Deed Administrators Appointed) & ors [2011] NSWSC 1306 at [305]

Common law damages for breach of a contractual warranty will not be awarded to a party who has not relied on the alleged truth of the warranty because in those circumstances the breach of warranty is not causative of any loss.

The authority she cites for this is Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 114 ALR 355. That is a case about damages for misleading and deceptive conduct under the Trade Practices Act. The general gist of that judgment seems to me to be to distinguish TPA damages from either tortious or contractual damages, rather than to lay down the law as to what the damages for breach of a contract will be. On my reading, it seems to assume exactly the opposite position for contractual warranties to that which Justice Ward has drawn from it, though the position may really be a bit more complicated than that.

It’s a tiny detail buried in a very complex dispute between the vendors and purchasers of a debt collection business.

ARL was the purchaser. Tekitu was the vendor and gave a warranty about the long-service leave entitlements of employees (which ARL as the purchaser would have to take over). These figures turned out to be wrong, probably because the person responsible for preparing them did not understand the difference between the basis on which those entitlements arose in NSW and Victoria. Before the sale went through and indeed before the agreement was entered into, a consultant for ARL looked the figures then provided to him and thought or indeed realised they were a bit low.

The judge held that the purchaser was fixed with his knowledge and this meant that the purchaser was not relying on the truth of those figures, so suffered no loss as a result of their falsity. So there were no damages for breach of the warranty.

That seems odd to me and startlingly so. The case Justice Ward cited is a case about damages under the old Trade Practices Act. Those are generally thought to be reliance-based damages (though not always). Contractual damages are usually thought of as “expectation damages.” The whole point of such a warranty is that you can afterwards claim damages for the difference between the true position and the position warranted to be true or at least for the difference that the true position as opposed to the warranted position made to the value of the business.

When you take over a business, you have to take over the long-service leave entitlements of any employees you take on. That’s not just a point of contract between you and the vendor, but also (going from memory here) a question of the statute. You’d think it stands to reason that if you promised to pay $X for a business promised to have $Y long-service liabilities, then if the liabilities were $Y + $Z then your damages would be $Z.

Of course (as you will see if you read the judgment) it is always a bit more complicated than that in practice, but the principle seems clear enough and also pretty well-established.

A contract might set a time limit on when the purchaser could bring claims under the warranty and a limitation (lower or upper or even both) on the sorts of claims that could be brought. You can have a procedure requiring claims to be brought before completion and adjustments to the price made or retention monies paid on completion for an argument later (as commonly happens for sale of land).

But if the warranty is meaningless when you have reason to doubt its accuracy why have such a warranty in the contract at all?

It’s a small point in an enormous case where ARL was otherwise the victor on most points, so it may never be appealed. That means someone else will then use it as a precedent.

It seems a very odd precedent to me [OK: I’ve said “odd” more than once in this post: I’m struggling for any other relatively measured word.], but it will be handy to anyone wanting to wriggle out of a contractual warranty.

3 Responses to “A startling statement”

  1. 3 November 2011 | Neil's daily readings Says:

    […] A startling statement – Marcellous By Justice Ward, in Australian Receivables Ltd v Tekitu Pty Ltd (Subject to Deed of Company Arrangement) (Deed Administrators Appointed) & ors [2011] NSWSC 1306 at [305] […]

  2. Legal Eagle Says:

    Oooh, interesting. I must go and look at this judgment in greater detail. Have become increasingly interested in overlap between TPA damages, contractual damages and tortious damages…

  3. Tweets – Wednesday 2 November 2011 « CDU Law and Business Online Says:

    […] is meaningless when you have reason to doubt its accuracy why have warranty in contract at all? tiny.cc/mj7o7 2 Nov CDUlawschoolCDU Law School Simon Evans on the constitutionality of plain […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: