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Current Developments in the Commercial Divisions of the
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Posted: January 20, 2015

Consequential Damages Claim Dismissed Because Such Damages Not Contemplated at Time of Contracting

On January 14, 2015, Justice Friedman of the New York County Commercial Division issued a decision in ERC 16W L.P. v. Xanadu Mezz Holdings LLC, 2015 NY Slip Op. 50035(U), dismissing a claim for consequential damages.

In ERC 16W L.P., the plaintiff sought, among other things, consequential damages on its claim for breach of contract. The Court dismissed the claim for consequential damages, explaining:

The Court of Appeals set forth the standard for recovery of consequential damages for breach of contract in Kenford Company, Inc. v County of Erie (“Kenford I”) and Kenford Company, Inc. v County of Erie (“Kenford II”). In the Kenford cases, the plaintiff and Erie County entered into a contract pursuant to which the plaintiff agreed to donate land to the County and the County agreed to build a stadium on the property. As part of the contract, the plaintiff was to lease or manage the stadium once constructed for a number of years. As a result of financing difficulties, the County ultimately did not build the stadium. The plaintiff sought damages both for lost profits, as no stadium existed for it to manage or lease, and for lost appreciation in the value of the land surrounding the stadium site, which the plaintiff had acquired in anticipation of the construction of the stadium.

In Kenford I, the Court of Appeals addressed only the portion of the award of money damages for lost profits which the plaintiff would have received under a proposed twenty-year management agreement. The Court held that lost profits may only be awarded where (1) the plaintiff demonstrates with certainty that such damages have been caused by the breach; (2) the alleged loss is capable of proof with reasonable certainty; and (3) the plaintiff makes a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made.

The Court cautioned that the damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes. In addition, if it is a new business seeking to recover for loss of future profits, a stricter standard is imposed 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.

. . .

In Kenford II, the Court of Appeals addressed whether the plaintiff could recover damages for the loss of anticipated appreciation in the land owned by the plaintiff surrounding the proposed stadium site. The Court reiterated that in a breach of contract action, the nonbreaching party may recover general damages which are the natural and probable consequence of the breach. However, to impose on the defaulting party a further liability than for damages which naturally and directly [flow from the breach], i.e., in the ordinary course of things, arising from a breach of contract, such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting. As the Court further explained: “In determining the reasonable contemplation of the parties, the nature, purpose and particular circumstances of the contract known by the parties should be considered, as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made.

. . .

New York courts have consistently applied the standards set by the Kenford cases and imposed liability for consequential damages only where the parties contemplated the imposition of such damages at the time of contracting, and the damages were capable of proof with reasonable certainty.

(Internal quotations and citations omitted). The court went on to find that the claim for consequential damages should be dismissed because they were not in the contemplation of the parties.

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