Not so fast: NY’s highest court rules that “lost profits can sometimes be general (or direct) damages”

Whether or not it makes sense to waive all indirect and consequential damages in a services agreement is a question for another day (we think it is not, by the way) but a recent ruling in Biotronik v. Conor Medsystems Ireland calls into question a contract term that we thought was enforceable: a limitation of liability clause that precludes consequential damages.

Before we get into this ruling, it is worth mentioning that Contracts Associates prefers to exclude limitation of liability provisions from contracts in order to preserve the availability of all types of damages permitted under law for claims our clients may against the other party. It just does not seem like sound practice to advise one not to avail oneself of remedies provided by contract law that has carved out adequate remedies for centuries.

Back to the ruling: As contract attorneys, we advise our clients what is means to agree to a clause that precludes recovery for consequential damages which are generally  accepted to be: damages for business interruption, loss of use, data, revenue or profit, whether arising out of breach of contract, tort (including negligence) or otherwise, regardless of whether such damages were foreseeable and whether or not the breaching party was advised of the possibility of such damages.

Here is a synopsis of the case:

Biotronik (the distributor), agreed to purchase stents manufactured Conor, for resale and paid Conor a transfer price for each stent, calculated as a percentage of Biotronik’s net sales. In 2007, Conor recalled its stents from the market and paid Biotronik in accordance with the “Recall” section of the contract. Despite the fact that the contract had a provision restricting the parties to general damages and prohibiting either from obtaining “any indirect, special consequential, incidental or punitive damage”, from the other, Biotronik sued under a theory of breach of contract and sought as its sole damages $100 million in profits it claimed it would have made reselling the stents over the remaining term of the agreement.

Lower courts relied on the contract’s limitation of liability clause but a divided Court of Appeals reversed, and held that, under this particular contract, Biotronik’s lost profits were general (direct), not consequential, damages, and therefore not barred under limitation of liability clause in the parties’ agreement.   

The twist here is that the Court of Appeals made the distinction between lost profits of the non-breaching party that flow from collateral transactions—separate agreements with third parties (which remain firmly on the side of being “consequential”) and lost profits that flow from a provision in the agreement between the two parties themselves 9in this case, the pricing terms). The Court ruling appears to allow lost profits to be considered direct damages only where the profits at issue flow directly from the parties’ relationship under the contract.

Put another way, the Court found that because the whole point of the contract (the “essence of the contract”) was to resell the stents and the manufacturer agreed to use the distributor’s resale price as a benchmark for the dollar amount it would receive from the distributor,  the lost profits suffered by the distributor after the recall flowed directly from the transfer price (paid to the manufacturer) and were therefore direct/general and by definition, recoverable damages. This is surely a $100 million surprise to the manufacturer.

We have clients that sell kits and other goods to distributors and we are currently working on drafting contract terms to protect them. As always, we are here to help our clients navigate these issues. Call us at 617.275.8080 if we can be of any assistance.