Lost Profits and Promises of Future Performance
Print Article- Posted on: Feb 16 2022
By: Jeffrey M. Haber
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 can be found in the agreement before the court in Rising Sun Constr. L.L.C. v. CabGram Dev. LLC, 2022 N.Y. Slip Op. 00989 (1st Dept. Feb. 15, 2022) (here).
In New York, and elsewhere, contractual limitations on the damages recoverable for a breach of contract are routinely enforced.1 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….”2 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.”3
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.”4
Lost profits as general damages “are the natural and probable consequence of the breach” of a contract.5 General damages include “money that the breaching party agreed to pay under the contract.”6 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.”7
Lost profits as consequential, or special damages, do not “directly flow from the breach.”8 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.’”9
To recover lost profits in a breach of contract action, a plaintiff must establish that the damages were caused by the breach, that the “particular damages were fairly within the contemplation of the parties to the contract at the time it was made” and that the alleged loss is “capable of proof with reasonable certainty”.10
As is often the case, a fraudulent inducement claim will accompany a breach of contract claim. Under New York law, “[a] cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.”11
“To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.”12 One way to satisfy this requirement is to allege a present intent to deceive. In doing so, however, the plaintiff cannot allege “a mere misrepresentation of an intention to perform under the contract.”13 Another way to satisfy the requirement is to allege a misrepresentation of material fact, which is collateral to the contract,14 such as a misrepresentation about the ability to perform under the contract.
In today’s article, we examine Rising Sun Construction L.L.C. v. CabGram Developer LLC, a case involving the foregoing principles.
Rising Sun involved the construction of a residential apartment building in New York City (the “Project”). In December 2016, defendant, CabGram Developer LLC (“CabGram”), retained plaintiff, Rising Sun Construction L.L.C. (“Rising Sun”), a masonry subcontractor, to install pre-cast stone panels on the subject building. Among other provisions, the contract between the parties included a waiver clause with regard to consequential damages: “[t]he Contractor/Owner [CabGram] and Subcontractor [Rising Sun] waive claims against each other for consequential damages arising out of or relating to this Subcontract….”
Following defendants’ failure to pay plaintiff for its work, plaintiff filed a mechanic’s lien on the subject property and commenced the action, seeking the foreclosure of its lien and related relief, including monetary damages.
Defendants answered and asserted two counterclaims. The first counterclaim alleged fraudulent inducement in connection with a second contract the parties allegedly entered before the conclusion of the Project. Defendants maintained that plaintiff fraudulently induced it to enter into the second contract by making false and misleading statements about the work to be performed. Defendants contended that plaintiff used the pretense of entering into the new contractual arrangement to obtain hundreds of thousands of dollars from defendants. Defendants alleged that plaintiff never intended to perform the obligations promised under the second contract.
The second counterclaim alleged breach of the second contract and sought the recovery of lost profits relating to the sale of apartments in the subject building.
Plaintiff moved to dismiss the counterclaims. The motion court granted the motion.
The motion court held that the claim for lost profits was barred by a limitation on damages clause in the 2016 contract, which waived any claims for consequential damages relating to the contract. The motion court further held that the second agreement related to the original 2016 agreement “as it concerned the same project.” Thus, the motion court rejected defendants’ attempt to sever the two agreements.
The motion court also held that the fraud counterclaim was barred because it was based on a promise of future performance. Additionally, the motion court held that the claim was duplicative of the contract claim “since defendants could only recover their out-of-pocket damages, which is all that would be recoverable on their breach of contract counterclaim.”
The Appellate Division, First Department affirmed.
First, the Court held that the motion court “correctly dismissed the portion of the breach of contract counterclaim seeking lost profit damages.”15 The Court explained that “[t]he parties’ initial subcontract unambiguously preclude[d] the recovery of lost profits as it provide[d] that the parties waived claims for consequential damages.”16
The Court agreed with the motion court that the second contract related to the initial one: “The initial subcontract contains provisions regarding ‘Changes in the Work’ and provides that such changes were to be made only in the form of ‘Modifications,’ not an entirely new agreement.”17 The Court noted that there was “no evidence that the purported second agreement somehow superseded the first subcontract.”18
Significantly, the Court held that “[e]ven if the purported second agreement could be considered a fully executed contract, defendants’ counterclaim for lost profits still fail[ed].”19 The Court reasoned that the initial subcontract waived claims for consequential damages that “related” to the subcontract. Thus, even if there was a new agreement reached in 2018, it was “related” to the initial subcontract because it concerned the same project.20
Moreover, noted the Court, “defendants have not sufficiently alleged that the purported second agreement specifically provided for the recovery of lost profits.”21
Second, the Court held that the motion court “properly rejected defendants’ counterclaim for fraudulent inducement.”22 The Court explained that since defendants’ counterclaim was “‘based upon a statement of future intention,’” defendants were required to allege “facts sufficient to show” that plaintiff “‘never intended to honor or act on [that] statement’”.23 “At most,” said the Court, defendants only made “‘general allegations that [plaintiff] entered into a contract lacking the intent to perform.’”24 Such allegations, concluded the Court, were “insufficient to sustain a claim from fraudulent inducement.”25
Takeaway
Rising Sun underscores the fundamental principle of contract interpretation – i.e., contracts are to be construed pursuant to the parties’ intention.26 As the Court of Appeals explained: “[t]he best evidence of what the parties … intend is what they say in their writing.”27 When the parties’ writing is clear and unambiguous on its face – that is, the terms are reasonably susceptible to only one meaning – it should be enforced according to the plain meaning of those words.28
In Rising Sun, the waiver clause was clear and unambiguous. The agreement expressly provided that the parties “waived claims against each other for consequential damages arising out of or relating to this Subcontract.” Moreover, the intent of the parties as to relatedness was evident from the fact that both contracts (the 2016 and 2018 agreements) concerned the Project. As noted by the Court, there was no “evidence that the purported second agreement somehow superseded the first subcontract.”29
Rising Sun also highlights the difficulty of alleging fraudulent inducement in the context of a contract claim for the failure to perform under the agreement. As the Court noted, general allegations that a party made a promise to perform without sufficient facts showing an undisclosed intent not to honor that promise cannot withstand a motion to dismiss.
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
Footnotes
1. See, e.g., Daily News, L.P. v. Roclavell Int’l Corp., 256 A.D.2d 13, 13 (1st Dept. 1998); Mom’s Bagels of New York, Inc. v. Sig Greenebaum, Inc., 164 A.D.2d 820, 822 (1st Dept. 1990); see also Chaitman v. Moezinia, 178 A.D.3d 642 (1st Dept. Dec. 26, 2019).
2. Metropolitan Life Ins. Co. v. Noble Lowndes Int’l, 84 N.Y.2d 430, 435, 436 (1994).
3. 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).
4. Biotronik A.G. v. Conor Medsys. Ireland, Ltd., 22 N.Y.3d 799, 805-806 (2014) (internal quotation marks and citation omitted).
5. Id. (citations omitted).
6. Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 109 (2d. Cir 2007) (citation omitted).
7. Id. at 110.
8. American List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 43 (1989)
9. Tractebel, 487 F.3d at 109.
10. Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261 (1986); see also Ashland Mgt. v. Janien, 82 N.Y.2d 395, 404 (1993); Awards.com, LLC v. Kinko’s, Inc., 42 A.D.3d 178, 183 (1st Dept. 2007).
11. Krantz v. Chateau Stores of Can. Ltd., 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted).
12. Id. (citations and quotation marks omitted).
13. WIT Holding Corp. v. Klein, 282 A.D.2d 527, 528 (2d Dept. 2001) (citation omitted); see also Gorman v. Fowkes, 97 A.D.3d 726, 727 (2d Dept. 2012).
14. WIT Holding, 282 A.D.2d at 528 (citation omitted).
15. Slip Op. at *1.
16. Id. (citation omitted).
17. Id.
18. Id.
19. Id.
20. Id.
21. Id.
22. Id.
23. Id. at *2 (citation omitted).
24. Id. (citation omitted).
25. Id. (citation omitted).
26. See, e.g., Slatt v. Slatt, 64 N.Y.2d 966 (1985).
27. Slamow v. Del Col, 79 N.Y.2d 1016, 1018 (1992).
28. W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990).
29. Slip Op. at *1.
