Contract Precludes Plaintiff From Recovering Lost Profit Damages Due to Alleged Breach

• Posted on: Jul 1 2020

It is not uncommon for parties in commercial transactions to include in their contracts a provision that limits the types of damages recoverable in the event of a breach. Typically, these provisions include a limitation on the recovery of lost profits. An example of such a provision, drawn from the agreement in Fresenius Kabi USA, LLC v. Hetero USA, Inc., 2020 N.Y. Slip Op. 03285 (1st Dept. June 11, 2020) (here), provides: “no party shall be liable to the other party for indirect, incidental, special or consequential damages arising out of performance under this agreement, including without limitation, loss of . . . profits.”

In New York, and elsewhere, contractual limitations on the damages recoverable for a breach of contract are routinely enforced. See, e.g., Daily News, L.P. v. Roclavell Int’l Corp., 256 A.D.2d 13, 13 (1st Dept. 1998) (“Plaintiff’s breach of contract claim seeking consequential damages was properly dismissed since the parties’ contract … limits the remedies available thereunder and expressly excludes as a remedy the recovery of consequential damages.”); Mom’s Bagels of New York, Inc. v. Sig Greenebaum, Inc., 164 A.D.2d 820, 822 (1st Dept. 1990) (“We have long held that parties to a commercial contract, absent any question of unconscionability, may agree to limit … damages.”) (citations omitted); see also Chaitman v. Moezinia, 178 A.D.3d 642 (1st Dept. Dec. 26, 2019) (“In view of this unequivocal exculpatory clause stating that no other provision in the lease shall entitle the tenant to consequential damages, the claim for lost profits is barred.”). These provisions “represent[] the parties’ Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed….” Metropolitan Life Ins. Co. v. Noble Lowndes Int’l, 84 N.Y.2d 430, 435, 436 (1994) (enforcing damages limitations for lost profits, loss of business, or other financial loss resulting from breach/non-performance). However, “[l]imitations on a party’s liability … to be enforceable must be clearly, explicitly and unambiguously expressed in a contract [and] are … strictly construed against the party seeking to avoid liability.” Terminal Cent. V. Modell & Co., 212 A.D.2d 213, 218-219 (1st Dept. 1995); compare Madison Hudson Assoc. LLC v. Neumann, 44 A.D.3d 473, 481 (1st Dept. 2007) (enforcing explicit and unambiguously expressed limitation on damages to return of capital contribution). Bad faith, wrongful conduct or gross negligence may bar enforcement of exculpatory agreements. Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 385 (1983).

Since lost profits may be excluded from the types of damages recoverable for a breach, it is important to understand what it means to seek lost profit damages.

 There are two types of damages recoverable as lost profits: (1) lost profits that are general damages; and (2) lost profits that are consequential or special damages. As the New York Court of Appeals has noted: “The distinction between general and special contract damages is well defined but its application to specific contracts and controversies is usually more elusive.” Biotronik A.G. v. Conor Medsys. Ireland, Ltd., 22 N.Y.3d 799, 805-806 (2014) (internal quotation marks and citation omitted).

Lost profits as general damages “are the natural and probable consequence of the breach” of a contract. Biotronik, 22 N.Y.3d at 805, citing American List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 43 (1989); Kenford Co. v County of Erie, 73 N.Y.2d 312, 319 (1989). General damages include “money that the breaching party agreed to pay under the contract.” Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 109 (2d. Cir 2007), citing American List Corp., 75 N.Y.2d at 44. In other words, “a claim for general damages” exists where the plaintiff “seeks only what it bargained for—the amount it would have profited on the payments [the breaching party] promised to make.” Tractebel, 487 F.3d at 110; see also Biotronik, 22 N.Y.3d at 806 (the “direct and immediate fruits” of a contract are general damages) (quoting Tractebel, 487 F.3d at 109 n.20).

Lost profits may be recovered as general damages if there is a “stable foundation for a reasonable estimate.” Tractebel, 487 F.3d at 110 (internal quotation and citations omitted). To plead a stable foundation, a plaintiff must show that “[t]here are some facts upon which a jury could base a judgment, not certain nor strictly accurate, but sufficiently so for the administration of justice.” Wakeman v. Wheeler & Wilson Mfg. Co., 101 N.Y. 205, 216 (1886); accord Plant Planners, Inc. v. Pollock, 60 N.Y.2d 779, 780–81 (1983) (lost profits are “recoverable where plaintiff has supplied some adequate basis for computing the amount.”). This standard flows from the principle that a party who breaches “his contract should not be permitted entirely to escape liability because the amount of the damage which he has caused is uncertain.” Tractebel, 487 F.3d at 110 (quoting Wakeman, 101 N.Y. at 209).  Under the stable foundation standard, therefore, general damages may be awarded for lost profits even where they are uncertain and difficult to estimate. See Randall-Smith, Inc. v. 43rd St. Estates Corp., 17 N.Y.2d 99, 105 (1966) (“The rule to be applied is a flexible one”); see also Tractebel, 487 F.3d at 112 (“New York courts have significant flexibility in estimating general damages once the fact of liability is established.”).

Lost profits as consequential, or special damages, do not “directly flow from the breach.” American List Corp., 75 N.Y.2d at 43. Where the damages were the result of a separate agreement with a nonparty, they are consequential damages. Typically, consequential damages involve a breach of contract that interferes with “the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions” such that “profits from potential collateral exchanges are ‘lost.’” Tractebel, 487 F.3d at 109.

Lost profits as consequential or special damages “are only recoverable when ‘(1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties.’” Biotronik, 22 N.Y.2d at 806, quoting Tractebel, 487 F.3d at 109, citing Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261 (1986). As to the second requirement, the damages must be capable of measurement based upon known reliable factors. Ashland Mgt. Inc. v. Janien, 82 N.Y.2d 395, 403 (1993). They cannot be “speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach.” Id. Finally, the damages cannot be “remote or the result of other intervening causes.” Id.

Notably, if a new business is seeking to recover for the loss of future profits, the courts impose “a stricter standard … for the obvious reason that there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty.” Id., citing Cramer v. Grand Rapids Show Case Co., 223 N.Y. 63 (1918); 25 CJS, Damages, § 42(b).

In Fresenius Kabi USA, LLC v. Hetero USA, Inc., supra (here), the Appellate Division, First Department considered the foregoing principles in dismissing the plaintiff’s claim for lost profits.

Plaintiff sought damages for lost profits resulting from defendant’s alleged breach of the parties’ “Product Distribution Agreement.” The agreement contained a limitation of liability clause that provided, in pertinent part, “Except for indemnification obligations under this agreement, no party shall be liable to the other party for indirect, incidental, special or consequential damages arising out of performance under this agreement, including without limitation, loss of . . . profits.” 

Relying on Biotronik, Plaintiff argued that the lost profit damages were recoverable because “they [were] direct, or general, as opposed to consequential.” Slip Op. at *1. The First Department “reject[ed] this argument” without explanation. Id. 

In addition, because of the clear and unambiguous language of the limitation of liability clause in the Product Distribution Agreement, the Court concluded that the agreement “barred” recovery of lost profits. Id. The Court noted that plaintiff failed to provide “a persuasive explanation for why the parties included the ‘lost profits’ language in the limitation of liability clause if they did not intend to preclude the recovery of lost profits.” Id.

Takeaway

A party may not recover damages for lost profits unless such damages were within the contemplation of the parties at the time the contract was entered into and are capable of measurement with reasonable certainty. The former requirement speaks of foreseeability, while the latter speaks of reasonable certainty. Given the Court’s rejection of plaintiff’s argument, it appears that lost profits were not foreseeable.

Moreover, even if the damages could be categorized as general damages, plaintiff could not explain why the limitation of liability clause did not apply to lost profits as either general or consequential damages. Without such an explanation, the Court enforced the limitation of liability clause according to its terms.