When are Lost Profits “Direct Damages”?

Lost profits are sometimes excluded by a damage limitation provision, however, that was not the case in Biotronik A.G. v. Conor Medsystems Ireland, Ltd., et al., 22 NY3d 799 (2014).  In this New York Court of Appeals decision it was held that to determine whether lost profits constitute consequential damages and, therefore, precluded by an exclusion provision, the damages must be evaluated within the context of the contract.   Under the exclusive distribution agreement at issue in Biotronik, the court held that the lost profits constituted general or direct damages, and not consequential damages, and were therefore recoverable.  In holding that the lost profits constituted general or direct damages, the court cited its prior decision in American List Corp. v. U.S. News & World Report, 75 NY2d 38 (1989), which held that general damages are a natural and probable consequence of the breach, whereas consequential damages do not flow directly from the breach.

Specifically, the Court of Appeals held that “where the damages reflect a loss of profits on collateral business arrangements, they are only recoverable [as general or direct damages] 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”.

In a recent Canadian decision in Dow Chemical Canada ULC v. Nova Chemicals Corporation, 2018 ABQB 482, the court held that for lost profits to constitute direct damages “it must surely have been foreseen by the parties that [the breach of contract] would result in [one of the parties] suffering [a] loss of profit”.  Therefore, to determine whether lost profits were fairly within the contemplation of the parties at the time they entered into the contract, the court inquired into whether or not lost profits were foreseeable by the parties based on the events giving rise to the breach.  In other words, the court held that if it was foreseeable by the parties that the breach would result in one party suffering a loss of profits, then those damages arose naturally from the breach and constitute direct damages.

The court held that because the limitation clause in Dow Chemical excluded only “loss of profits and damages arising in the context of indirect or consequential damages”, only lost profits that were “not objectively or subjectively foreseeable by the parties” at the time they entered into the contract were subject to the exclusion; whereas lost profits foreseeable by the parties at the time they entered into the contract arose naturally and were recoverable as direct damages.

At Rosenfarb LLC we produce well-supported, well-reasoned and well-communicated damage calculations that withstand the rigors of litigation.  We are a firm of forensic accounting and valuation experts.  We understand business, have keen insights and always connect the dots.  We understand the litigation process.  We frame the issues simply and in alignment with the litigation strategy.  We use logic to support our opinions, while creating compelling stories.  We are sincere, professional, and credible.  We are accounting experts with legal acumen.

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