The New York Court of Appeals, the state's highest court,
recently held in a 4 to 3 decision that a plaintiff could recover
lost profits for a breach of contract—even though the
contract precluded recovery of consequential and special damages.
The decision is noteworthy for contract drafters who are advised to
expressly exclude lost profits in a limitation-of-liability
provision when that is the parties' intention.
The decision in Biotronik, A.G. v. Conor Medsystems Ireland,
Ltd. concerned an exclusive distribution agreement for the
sale of a medical device. Prior to the end of the agreement's
term, the defendant manufacturer took the device off the market and
terminated the agreement. The manufacturer paid the plaintiff
distributor € 8.32 million and a 20% handling fee to reimburse
the distributor for its inventory and the costs associated with the
The parties' agreement, governed by New York law, contained
the following provision limiting the damages available in the event
of a breach:
Neither party shall be liable to the other for any indirect,
special, consequential, incidental, or punitive damages with
respect to any claim arising out of this agreement (including
without limitation its performance or breach of this agreement) for
The distributor sued for lost profits of $85 million related to
the discontinued resale of the devices under the agreement. It
argued that lost profits were "general damages" not
precluded by the agreement's damages limitation. The trial
court disagreed and dismissed the lawsuit because it concluded that
lost profits were consequential damages excluded by the
parties' agreement—a unanimous Appellate Division
The Court of Appeals reversed, with the majority holding that
"damages must be evaluated within the context of the
agreement, and that, under the parties' exclusive distribution
agreement, the lost profits constitute general, not consequential
General damages are the natural and probable consequence of the
breach of an agreement, including "money that the breaching
party agreed to pay under the contract." Consequential or
special damages, on the other hand, do not directly flow from the
breach of contract.
In the context of resale and distribution agreements, a
distinction is drawn between lost profits that would have flowed
directly from the contract and those that would have resulted from
a separate agreement with a nonparty, i.e., a collateral
transaction. The distinction is not, however, a bright line and
determining when lost profits are general rather than consequential
damages requires a "case-specific approach." The Court
acknowledged that the application of the rule to specific contracts
and controversies can be "elusive." Indeed, nine judges
(the trial judge, the appellate panel, and the Court of Appeals
dissenters) concluded that the distributor's claimed lost
profits in the Biotronik case were consequential damages,
while only the four judges in the Court of Appeals majority
The majority observed that "[t]he 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
agreement included target volumes and a formula for determining the
price the distributor paid the manufacturer for the devices based
on actual sales and the resale prices. The Court likened the
agreement to a "joint venture" and held that the
manufacturer agreed to pay the distributor's profits because
they flowed directly from the pricing formula. Noting that both
parties depended on the device's resale for their respective
payments, the majority concluded that "the agreement reflects
an arrangement significantly different from a situation where the
buyer's resale to a third party is independent of the
The dissent criticized the majority for accepting the
distributor's "creative" reading of the
agreement's pricing formula and remarked, "[c]reativity on
this scale is no boon in the commercial world, 'where reliance,
definiteness, and predictability are such important goals of the
law itself, designed so that parties may intelligently negotiate
and order their rights and duties.'"
The take-away from the Biotronik case for the
commercial world is that parties to New York-governed contracts
intending to exclude lost profits in the event of a breach cannot
assume that the exclusion of consequential or special damages will
suffice. Contracting parties should expressly exclude "lost
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).