New York's High Court: Lost Profits May Be Recoverable For Breach, Even Where Contracts Preclude Consequential Damages

Many practitioners are quick to label potential claims of lost profits as consequential damages, and draw comfort from (i) contract provisions precluding recovery of consequential damages or, (ii) in the absence of such limitation provisions, challenging legal standards making recovery of such damages difficult. But a recent split decision from New York's highest court serves as a reminder that lost profits can sometimes be general (or direct) damages, and has created uncertainty by expanding the situations in which lost profits will receive that treatment.

In light of the case-specific factual analysis that the New York Court of Appeals undertook in the recent case, Biotronik v. Conor Medsystems Ireland,1 it is unclear how broadly lower courts will interpret this expansion of the law. In the meantime, litigators will need to confront the possibility of much more involved damages disputes in commercial cases, while transactional lawyers may want to encourage their clients to use more explicit language if they seek to preclude recovery of lost profits, especially in agreements governed by New York law. Ignoring these developments may lead to unwelcome surprises.

Consequential Damages – A Primer

The Biotronik decision highlights an often overlooked distinction in New York law, between when consequential damages can be recovered, and what kinds of damages are consequential to begin with. New York's rule on the recovery of consequential damages is set out in a series of cases beginning with Kenford Co. v. County of Erie.2 To recover consequential damages a party must show that damages of the type sought were within the contemplation of the parties at the time of contracting, that the damages were actually caused by the breach, and that the amount of the damages can be shown with reasonable certainty.3

The entire issue of how to go about recovering consequential damages is secondary, however, to the question of whether a particular type of damage is labeled as consequential or general/direct in the first place. The first step is critical since, if damages are considered general/direct, as opposed to consequential, a party could circumvent most limitation-of-liability provisions" entirely, and sidestep challenging standards (as in Kenford) to recover consequential damages in cases where they are not contractually precluded.

Although New York courts have noted that lost profits may be either general or consequential damages, the main focus in...