Consequential Damages v. Direct Damages
Limitation of Liability Clause
Limitation of Liability Clause Precludes the Plaintiff from Recovering Consequential Damages
Can A Limitation of Liability Clause Preclude Recovery of Any Damages Resulting from Any Breach?
New Hampshire Law
Economic Loss Doctrine
Negligence (Tort) Claim v. Contract Claim
The plaintiff, Mentis Sciences, Inc., appeals an order of the Superior Court (McNamara, J.) dismissing its claims for damages representing the cost of recreating lost data and lost business and negligence against the defendant, Pittsburgh Networks, LLC. The plaintiff argues that the trial court erred by: (1) concluding that the damages representing the cost of recreating lost data and lost business were consequential; (2) concluding that the limitation of liability clause in the parties’ contract is enforceable; and (3) dismissing its claim for negligence. We affirm because the damages sought by the plaintiff are consequential and the limitation of liability clause precludes the plaintiff from recovering consequential damages. We also conclude that the economic loss doctrine bars the plaintiff’s negligence claim.
In 2010, the defendant began providing the plaintiff with technological support or “IT” services. In 2014, the parties executed a “Service Agreement” in which the defendant agreed to provide the plaintiff with services including “monitoring of computers and network, data backup, network services, antivirus, and comprehensive maintenance and support for servers, PC’s and the network,” and the plaintiff agreed to pay the defendant an annual fee of $15,864. The parties’ contract included the following limitation of liability clause: “The Service Provider shall not be liable for any indirect, special, incidental, punitive or consequential damages, including but not limited to loss of data, business interruption, or loss of profits, arising out of the work performed . . . by the Service Provider.”
In August 2014, the defendant notified the plaintiff that a drive in one of its servers had failed and would need to be replaced. The defendant thereafter provided the plaintiff a summary of the problem: a “Redundant Array of Independent Disks” controller malfunctioned, causing the corruption of some of the plaintiff’s data. The defendant attempted to recover the corrupted data; however, the data was permanently lost because the defendant had failed to properly back it up.
According to the trial court, the plaintiff could only recover “what it expected to receive, the fair market value of the defendant’s services, which is probably close to . . . the contract price.” The trial court also concluded that the plaintiff’s negligence claim was precluded by the economic loss doctrine. Accordingly, the trial court dismissed the plaintiff’s damages claims for the cost of recreating the lost data and lost business and its negligence claim. Thereafter, in a ruling that is not the subject of this appeal, the trial court awarded the plaintiff $40,000 in direct damages. This appeal followed.
(…) A party’s expectation interest is comprised, in part, of “the loss in the value to him of the other party’s performance caused by its failure or deficiency,” in addition to “any other loss, including incidental or consequential loss, caused by the breach.” Restatement (Second) of Contracts, § 347(a)-(b), at 112. Thus, according to the principles we explain further below, a party’s expectation interest may be fulfilled by an award of both direct and consequential damages. See Joseph M. Perillo, Corbin on Contracts § 55.3, at 10 (rev. ed. 2005) (“Placing a party in the same economic position as performance would have sometimes requires a grant of general [or direct] damages coupled with consequential damages.”).
The line dividing what may be considered direct versus consequential damages “is not capable of exact determination.” Id. § 56.6, at 105. However, we find the following principles instrumental when divining the difference. Direct damages “are based on the value of the performance itself,” whereas consequential damages are based “on the value of some consequence that performance may produce.” Dan B. Dobbs & Caprice L. Roberts, Law of Remedies: Damages — Equity — Restitution § 12.4, at 811 (3d ed. 2018); see Restatement (Second) of Contracts, § 347(a)-(b), at 112; see also Schonfeld v. Hilliard, 218 F.3d 164, 176 (2d Cir. 2000) (describing consequential damages as those that “seek to compensate a plaintiff for additional losses (other than the value of the promised performance) that are incurred as a result of the defendant’s breach”). Thus, consequential damages “are not based on the capital or present value of the promised performance but upon benefits it can produce or losses that may be caused by its absence.” Dobbs & Roberts, supra § 12.2, at 804; see Restatement (Second) of Contracts, supra § 347 cmt. c at 114 (“Consequential losses include such items as injury to person or property resulting from defective performance.”); see also KC Properties v. Lowell Inv. Partners, 280 S.W.3d 1, 10 (Ark. 2008) (describing consequential damages as those that flow “from some of the consequences or results of the breach”).
Applying these principles to the plaintiff’s claim for damages representing the cost of recreating the data and lost business, we conclude that such damages are consequential. Pursuant to the parties’ contract, the defendant agreed to provide services to maintain and manage the plaintiff’s network infrastructure. Even if we assume, as the plaintiff asserts, that the defendant explicitly agreed to provide data protection or backup services, we would conclude that the damages the plaintiff seeks are consequential. The cost of recreating the lost data does not represent the value of the performance of maintaining and managing the plaintiff’s network or data. Rather, this cost represents an amount necessary to repair a loss that was caused by the absence of the performance of those services, and, accordingly, is consequential in nature.
Similarly, the business and profits that the plaintiff lost because it cannot use the data to bid on projects do not represent the value of the defendant’s performance. Lost profit damages may be direct or consequential, depending upon the circumstances. See Atlantech Inc. v. American Panel Corp., 743 F.3d 287, 293 (1st Cir. 2014) (discussing when lost profit damages may be considered direct or consequential); see also Kerr S.S. Co. v. Radio Corporation of America, 157 N.E. 140, 141 (N.Y. 1927) (“Damage which is general [or direct] in relation to a contract of one kind may be classified as special [or consequential] in relation to another.”). Here, the claimed lost profit damages are not direct because the profits lost were not inherent in the contract; that is, the plaintiff did not stand to earn these profits as a direct result of its contract with the defendant. See Penncro Associates, Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1156 (10th Cir. 2007) (explaining that one situation in which lost profit damages are considered direct is “if a services contract is breached and the plaintiff anticipated a profit under the contract”); see also Atlantech, 743 F.3d at 293 (providing as an example of lost profits that are direct damages “a general contractor suing for its remaining contract price less saved expenses”). Rather, what the plaintiff gained from the contract was the defendant’s services. The plaintiff’s profits were anticipated as a result of its bidding and participating in other “projects,” which relied upon actions and contingencies that would have taken place outside of its contract with the defendant. Accordingly, the lost profit damages the plaintiff seeks are consequential. See Atlantech, 743 F.3d at 293 (determining that the lost profit damages sought by the plaintiff were consequential because “they depend on contingencies beyond the terms of the contract itself”); Penncro, 499 F.3d at 1156 (explaining that lost profits damages are considered consequential if the breach precluded the plaintiff “from performing other work . . . from which it expected to make a profit”).
The cases relied upon by the plaintiff provide no support for its argument that the damages it seeks are direct rather than consequential.
Can a limitation of liability clause preclude recovery of any damages resulting from any breach?
(…) Orthopaedic Center of South Florida, P.A. v. Stryker Corporation, 08-60742-CIV-DIMITROULEAS, 2008 WL 11331981 (S.D. Fla. Sept. 16, 2008). There, the United States District Court for the Southern District of Florida, applying Florida law, concluded that a limitation of liability clause that precluded recovery of “direct, special, incidental or consequential damages resulting from any breach of warranty or condition, or under any other legal theory,” was unenforceable. The court reasoned that a reasonable person would not understand that the clause “contracts away any meaningful remedy” for a breach and enforcing the clause “would allow the Defendants to breach provisions of the contract through its own negligent behavior, with impunity, thereby rendering specific provisions of the contract meaningless.”
In sum, we conclude that the damages representing the cost of recreating the data and lost profits are consequential. Because we also conclude that the limitation of liability clause, which precludes recovery of consequential damages, is enforceable, the plaintiff is unable to recover those damages.
The economic loss doctrine is a “judicially-created remedies principle that operates generally to preclude contracting parties from pursuing tort recovery for purely economic or commercial losses associated with the contract relationship.” Plourde Sand & Gravel v. JGI Eastern, 154 N.H. 791, 794 (2007). The doctrine recognizes that contract and warranty law are better suited than tort law for “dealing with purely economic loss in the commercial arena.” Id. Allowing a contracting party to sue in tort “when a transaction does not work out as expected” in effect allows that party to “rewrite the agreement to obtain a benefit that was not part of the bargain.” Id. Accordingly, the doctrine “precludes a harmed contracting party from recovering in tort unless he is owed an independent duty of care outside the terms of the contract.” Wyle v. Lees, 162 N.H. 406, 410 (2011).
In Wyle, we determined that the economic loss doctrine did not bar the plaintiff’s negligent misrepresentation claim because the misrepresentations induced the plaintiff to enter into a contract. Id. at 411-12. The plaintiff argues that the defendant “negligently misrepresented to the plaintiff that it was routinely backing up the plaintiff’s data.” However, in Wyle we endorsed a distinction between negligent misrepresentation claims “that center upon an alleged inducement to enter into a contract from those that focus upon performance of the contract.” Id. at 411. When a negligence claim is “based merely upon the breach of a contractual duty,” the claim will not lie. Id. On the other hand, when “the misrepresentation of present fact serves as an inducement for the contract,” the negligence claim is not duplicative of the breach of contract claim. Id.
For the reasons stated above, we affirm the trial court’s dismissal of the plaintiff’s damages claims representing the cost of recreating its lost data and lost business and its negligence claim.
(Supreme Court of New Hampshire, September 22, 2020, Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, Docket No. 2019-0548)