Commercial Division Blog
Posted: April 2, 2014 / Categories Commercial, Contracts
Lost Re-sale Profits Recoverable as General Damages When Those Profits Were Contemplated By the Contract
On March 27, 2014, the Court of Appeals issued a decision in Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 2014 NY Slip Op. 02101, holding that the plaintiff's lost re-sale profits were recoverable as "general damages" on a claim for breach of a distribution contract and did not fall within a contract provision that eliminated liability for "consequential damages."
In Biotronik, the plaintiff (a distributor of medical devices) sued the developer and manufacturer of a "drug-eluting coronary stent" for breaching the parties' distribution agreement by failing to provide the stent. The lawsuit sought to recover the distributor's lost profits from sales of the stents. The First Department affirmed the trial court's dismissal of the claim based on a damages limitation provision in the distribution agreement that restricted the parties to general (as opposed to consequential) damages. In a decision by Judge Rivera (joined by Judges Lippman, Graffeo and Smith), the Court of Appeals reversed, concluding that under the distribution agreement at issue, the distributor's "lost profits were the direct and probable result of the breach of the parties' agreement and thus constitute general damages." The Court explained the sometimes "elusive" distinction between general and consequential damages:
General damages are the natural and probable consequence of the breach of a contract. They include money that the breaching party agreed to pay under the contract. By contrast, consequential, or special, damages do not directly flow from the breach.
The distinction between general and special contract damages is well defined, but its application to specific contracts and controversies is usually more elusive. Lost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and they are the direct and immediate fruits of the contract. Otherwise, where the damages reflect a loss of profits on collateral business arrangements, they 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.
Applying these principles, the Court rejected a bright line rule classifying lost resale profits as consequential damages "simply because they involve a third-party transaction." Instead, employing a "case specific approach," the Court concluded that the distributor's lost profits were general damages because the resale of the stents was not a "collateral business arrangement" but an integral part of the distribution agreement:
The agreement was not a simple resale contract, where one party buys a product at a set price to sell at whatever the market may bear. Rather, the price plaintiff paid defendant reflected the actual sales, and sales price, of [the] stents. The agreement required plaintiff to pay defendant a transfer price calculated as a percentage of plaintiff's net sales . . . . Each quarter, the parties would calculate a minimum price based on net sales during the preceding quarter. Plaintiff remained obligated to pay defendant the full transfer price for its sales, even when the actual sales price exceeded the minimum price. Thus, the contract would only operate if plaintiff sold stents, and the payment defendant received bore a direct relationship to the market price plaintiff could obtain. . . .
[Therefore,] the agreement reflects an arrangement significantly different from a situation where the buyer's resale to a third party is independent of the underlying agreement.
A dissenting opinion authored by Judge Read (and joined by Judges Pigott and Abdus-Salaam) argued that the distributor's lost profits fell within the contractual exclusion because "[t]hese damages flow from collateral transactions—[plaintiff's] contracts with its resale customers—rather than from any provision of the Agreement requiring the breaching party to make a payment to the non-breaching party." The dissenters contended that the majority's holding would sow uncertainty as to the meaning of the terms general and consequential damages as used in commercial contracts.
One upshot of this decision is that contracting parties who wish to exclude claims for lost resale profits should do so explicitly and should not assume that any damages arising from the non-breaching party's loss of business with third parties will automatically be regarded as consequential damages.