TO: Reggie Rep, Purchasing Department FROM: In-House Counsel DATE: 24 May 2024 RE: Breach of Contract by Russell Sprout – Appropriate Remedy
Introduction
This memorandum provides advice on the legal position regarding the recent delivery of inferior oats from one of our suppliers, Russell Sprout (RS). You have asked whether the appropriate remedy for this breach of contract is the 'cost of cure' or 'diminution of value'.
The core facts are that RS supplied oats of a lower quality than specified in our contract. These oats were unusable for our production process. Consequently, you sourced and purchased an equivalent quantity of conforming oats from an alternative supplier, Wheat’s End, for the same price. As we had already paid RS for the defective delivery, Whey Better has effectively paid for oats twice.
This advice will outline the basic legal principles for contract damages in New Zealand and conclude that we should pursue a claim against RS for the cost of curing their defective performance.
The Legal Framework for Damages
When a party breaches a contract, as RS has done by supplying non-conforming goods, the innocent party is entitled to claim damages. The purpose of damages is not to punish the party in breach, but to compensate the innocent party for the loss suffered. The guiding principle, established in long-standing case law, is to place the innocent party in the same position they would have been in if the contract had been properly performed (Payne and Dugdale, 2022).
In situations involving defective goods or performance, New Zealand courts generally calculate this loss using one of two measures:
- Diminution in Value: This measures the difference between the value of what was contracted for and the value of what was actually supplied. In our case, it would be the difference in market value between the high-quality oats we ordered and the inferior oats RS delivered.
- Cost of Cure: This measures the cost of remedying the breach. This could be the cost of repairing the defective item or, as in our case, the cost of purchasing a replacement from another source.
Choosing the Appropriate Measure
The central issue is which of these two measures the court is likely to apply. The choice is not arbitrary; the court will select the measure that is most reasonable in the circumstances of the case.
The leading New Zealand authority on this matter is the Supreme Court decision in Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11. In that case, the court confirmed that cost of cure is often the appropriate measure, particularly where the asset purchased was for a specific purpose and the breach undermines that purpose. The court will award the cost of cure unless that cost is wholly unreasonable or disproportionate to the benefit gained by curing the defect.
In our situation, the oats were purchased for a very specific purpose: the production of our protein bars. The production managers confirmed the inferior oats were unusable for this purpose. Therefore, RS’s breach completely undermined the commercial purpose of our contract with them. By purchasing replacement oats from Wheat's End, you took a necessary and reasonable step to 'cure' the defective performance and mitigate our business losses. This action allowed production to continue, which is exactly what a reasonable business would do.
Given these facts, the cost of cure is the more appropriate and reasonable measure of our loss. The diminution in value measure is less suitable. While the inferior oats may have some residual value (e.g., as animal feed), their value to Whey Better for its intended purpose is zero. Calculating the diminution in value could become complicated, whereas the cost of cure is a clear, quantifiable figure: the amount we paid Wheat's End for the replacement supply.
Conclusion and Recommendation
Whey Better acted reasonably in obtaining replacement oats to continue its operations. The cost of obtaining these replacement oats is the 'cost of cure'. As we had already paid RS for the defective batch, our direct financial loss is the full price we paid to RS.
Therefore, the appropriate remedy is the cost of cure. We should pursue a claim against Russell Sprout to recover the full contract price we paid him for the unusable oats. This amount represents the cost we incurred to remedy his breach of contract.
References
Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11.
Payne, J. and Dugdale, A. (2022) Simpson's Law of Contract. 10th edn. Sweet & Maxwell.
