Technology Contract Drafting Alert: When Do "Lost Profits" Go From Being Consequential Damages To Being General Damages?
Let me stipulate on at the outset that this is not very sexy. Most normal people don't care about the
arcane distinction that we try to make in this post. However, most attorneys (by definition, not normal people) that write a lot of contracts and technology providers that sign a lot of contracts could find the distinction valuable.
The following is a common provision in the boilerplate of technology (and indeed, most) contracts:
"Neither party will be liable hereunder for penalties or for special, indirect, consequential or incidental losses or damages, such as damages for lost profits, lost or damaged data, failure to achieve cost savings, loss of use of facility or equipment, or the failure or increased expense of operations, regardless of whether any such losses or damages are characterized as arising from breach of contract, breach of warranty, tort, strict liability or otherwise, even if a party is advised of the possibility of such losses or damages, or if such losses or damages are foreseeable.
This provision flows from years of manipulation of contract language, which began with the case that all attorneys must read in the first few weeks of their Contracts course in law school: the famed Hadley v. Baxendale, 9 Exch. 341, 9 Ex. 341, 156 Eng. Rep. 145 - Court of Appeals, 1854. In that case the defendant failed to deliver a broken crank shaft to the repairman on time, so the repair man was late in getting the new crank shaft to the plaintiff and consequently, the plaintiff couldn't get his flour mill on line and sued for loss of profits for the down time. The 1854 court held that this type of damage was not readily foreseeable, was consequential (i.e. not a direct result of the breach) and therefore, speculative and non-recoverable in this instance.
So, are all lost profits non-recoverable? No, particularly when they are part of the thing the plaintiff had bargained for in the contract. Case in point is the 2007 case of Tractebel Energy Marketing v. AEP Power. As part of a highly complicated case with many issues, Tractebel sought to avoid paying AEP for the profits that it would have made had Tractebel fulfilled its commitment under a contract to purchase a minimum amount of power from AEP. The Court described consequential damages thusly:
"Lost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements. In the typical case, the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions, is contingent on the performance of the primary contract. When the breaching party does not perform, the non-breaching party's business is in some way hindered, and the profits from potential collateral exchanges are 'lost'."
The Court then distinguished the lost profits in the Tractebel case by saying:
"By contrast, when the non-breaching party seeks only to recover money that the breaching party agreed to pay under the contract, the damages sought are general damages. *** But, in this case, the lost profits are the direct and probable consequence of the breach.The profits are precisely what the non-breaching party bargained for, and only an award of damages equal to lost profits will put the non-breaching party in the same position he would have occupied had the contract been performed. ***
AEP seeks only what it bargained for—the amount it would have profited on the payments TEMI promised to make for the remaining years of the contract. This is most certainly a claim for general damages."
Therefore, lost profits in this instance are general damages and recoverable. We have often thought that the general contract language excluding recovery for lost profits could potentially put the vendor in danger of having a defaulting purchaser say that they couldn't recover the entire contract price because part of it would obviously be profits that they lost. That probably wouldn't happen under the ruling in the Tractebel case but leaving that to the whim of the court is not good practice. For that reason, we try to add "amounts payable under this Agreement" to the usual litany (indemnity, breach of confidentiality, etc.) of things that are excepted from the limitation of liability to make it abundantly clear that these are recoverable.
OK, we'll try to make the next post sexier.
