Sixth Circuit Court of Appeals, Century Aluminum Company v. Certain Underwriters at Lloyd’s, London, Docket No. 23-5543

Maritime Cargo Insurance Policy

 

Unanticipated Shipping Expenses

 

Extra Expense Clause

 

Physical Loss

 

Purely Economic Loss

 

Consequential Loss

 

Loss of Profitability

 

Trade Disruption Policy

 

Arrests, Detainment and Restraint

 

American Institute Cargo Clauses

 

Duty to Mitigate (Sue and Labour Clause)

 

Insurance Law

 

Transportation Law

 

 

 

Appeal from the United States District Court for the Western District of Kentucky at Owensboro. No. 4:18-cv-00118.

 

 

 

Century Aluminum relies on river barges to obtain alumina ore and other materials that it smelts into aluminum. When the Army Corps of Engineers closed key locks on the Ohio River in 2017 due to low water levels and mechanical breakdowns, Century scrambled to secure other transportation. Century filed a claim with the underwriters of its maritime cargo insurance policy, referred to collectively as Lloyd’s of London, for these unanticipated shipping expenses. Lloyd’s paid the company $1 million under the policy’s Extra Expense Clause but denied coverage for the rest of the claim. The district court granted summary judgment to Lloyd’s. We affirm.

 

 

Century lost some production when it purchased lower-grade alumina as a hedge. And the alternative modes of transportation cost more than shipment by barge. Century estimated that, by the end of 2017, it had incurred over $5 million in excess costs. Century sought to recover the costs under its marine cargo insurance policy, which Lloyd’s of London underwrote. Lloyd’s agreed that the policy’s Extra Expense Clause covered up to $1million of Century’s extra transportation expenses, but it claimed that the policy otherwise excluded losses due to delay. After paying its deductible, Century accepted $975,000 for its extra transportation costs and continued to seek coverage for the other costs.

 

 

The policy says that the “applicable state law” applies to disputes over its meaning, and the parties agree that the relevant law is Kentucky’s. R.100-2 at 29. Kentucky respects the language of insurance contracts, reads their provisions in context, and enforces them as written. Foreman v. Auto Club Prop.-Cas. Ins. Co., 617 S.W. 3d 345, 349–50 (Ky. 2021). The marine cargo insurance policy extends coverage to Century’s goods, merchandise, and cargo, “including but not limited to Coke, Alumina, Alumina products and related materials.” R.100-2 at 3. It also covers “Consequential loss” such as Century’s lost profits. Id. At issue in this appeal is whether the policy, namely the “Conditions” on obtaining coverage, requires Lloyd’s to provide Century with more than the $1 million of the Extra Expense Clause. Id. at 4.

 

 

Out of the forty-odd pages of this policy, the parties have identified four potentially material clauses. We consider each in turn.

 

 

All Risks Clause. 

Start with the policy’s initial “Condition”—that it provides coverage “against all risks of physical loss of or damage to the subject-matter insured from any external cause.” Id. Such clauses commonly appear in maritime insurance to clarify that the policyholder will receive compensation for fortuitous losses, meaning those that do not result from inherent defects, ordinary wear and tear, or intentional misconduct by the insured. See Goodman v. Fireman’s Fund Ins. Co., 600 F.2d 1040, 1042 (4th Cir. 1979). Although the policy does not define “physical loss,” Kentucky law says that the phrase means “that a property owner has been tangibly deprived of the property,” such as by theft, “or that the property has been tangibly destroyed,” such as by fire. Estes v. Cincinnati Ins. Co., 23 F.4th 695, 700 (6th Cir. 2022); see Varanese Fusion, LLC v. Erie Ins. Exch., Member Erie Ins. Grp., No. 2022-CA-0822, 2023 WL 4982587, at *2 (Ky. Ct. App. Aug. 4, 2023) (accepting this definition from federal cases as state law). “Loss” standing by itself may be ambiguous. But a “physical loss” conveys that some property has been “tangibly destroyed, whether in part or in full.” Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398, 401 (6th Cir. 2021). The pairing of “physical loss” with “damage” reinforces the emphasis on destruction of the goods. R.100-2 at 4. Hence, the policy excludes “loss or damage” to aluminum coils that result from “rust, oxidisation, bending or twisting”—material changes to the nature of the goods themselves. Id.

 

 

Kentucky also understands physical loss to exclude purely economic losses. If someone suffers only “‘detrimental economic impact’ without a tangible destruction or deprivation of property,” the Commonwealth would not say that a “physical” loss has occurred. Estes, 23 F.4th at 700 (quoting 10A Steve Plitt, et al., Couch on Insurance §148:46 (3d ed.)). Profits or income streams recorded in ledger books and electronic bank accounts lack the physical existence that could suffer loss or damage. Veneman v. Travelers Cas. Ins. Co. of Am., 2022-CA-0021, 2023 WL 3261555, at *6 (Ky. Ct. App. May 5, 2023). Reinforcing this understanding, the insurance policy distinguishes Century’s financial harms from physical loss. The Extra Expense Clause covers up to $1 million for “each and every loss” due to delays in obtaining physical possession of the alumina, as distinct from physical loss or damage. R.100-2 at 10, 14. And the Interests Clause guards against “Consequential loss,” which a subsequent clause defines as certain lost profits or increased debts resulting from “loss of or damage to or delay in the delivery of the property.” Id. at 3, 14.

 

 

Under the All Risks provision, Century’s alumina did not suffer any physical loss or damage. The temporary delay never threatened to deprive Century of its ownership or control of the alumina. The company, on the contrary, retained sufficient control over the alumina to deliver it by other transportation means. Nor has Century alleged any damage. All of the alumina arrived at Century’s facilities no worse for the wear. Century, it is true, suffered a loss of profitability. But the insurance policy addressed this intangible claim under the Extra ExpenseClause, not the All Risks provision. A “Trade Disruption policy,” for what it is worth, could have provided additional “coverage for any event which disrupts service and causes aproduction loss,” but Century declined to purchase that insurance from a different underwriter. R.100-17 at 1.

 

 

Risks Covered Clause:

In addition to the All Risks Clause, the policy contains a second statement of general coverage in a section entitled “Risks Covered.” R.100-2 at 25; see also Opera Boats, Inc. v. La Reunion Francaise, 893 F.2d 103, 104 (5th Cir. 1990) (observing that this clause is also known as the “named perils” provision). The clause has been a staple of maritime insurance contracts for centuries. See McCall v. Marine Ins. Co., 12 U.S. 59, 66 (1814). Its language, as the reader will soon see, reflects that heritage, (…): Touching the adventures and perils which the Underwriters are contented to bear and do take upon themselves in this voyage, they are of the seas and inland waters, men-of-war, fire, enemies, pirates, rovers, thieves, jettison, letters of mart and countermart, surprisals, takings at sea, arrests, restraints and detainments of all Kings, Princes and People of what nation, condition or quality soever, barratry of master and mariners, and of all other like perils, losses or misfortunes that have or shall have come to the hurt, detriment or damage of the said goods and merchandises and ship, or any part thereof. R.100-2 at 25. In the aftermath of British blockades of Atlanti ports during the War of 1812, the Supreme Court explained that arrests and detainment occur when a government authority takes possession of the vessel or its cargo. Olivera v. Union Ins. Co., 16 U.S. 183, 189 (1818); see also 9A Couch on Insurance §137:53 (defining an arrest as a “temporary detention”). It distinguished those contingencies from a restraint, which arises from “the forcible confinement of a vessel in port, and the forcible prevention of her proceeding on her voyage,” such as when a blockade prevents a ship from leaving port. Olivera, 16 U.S. at 194; see also Calmar S.S. Corp. v. Scott, 345 U.S. 427, 441, 442 n.11 (1953) (describing “Allied restraints” and “restraint of princes” under analogous conditions during World War II). The Court also considered the situation of a vessel that changes course after learning that its intended destination faces a blockade. It explained that the vessel has not suffered a restraint because the government has not “directly” forced the vessel to halt its journey. Olivera, 16 U.S. at 192–93; see Smith v. Universal Ins. Co., 19 U.S. 176, 186–87 (1821). The Risks Covered Clause does not cover Century’s situation. The government never took control of the barges or impounded the alumina, ruling out arrest and detainment. Olivera, 16 U.S. at 189. Nor did Century suffer a restraint. Once it learned of the Corps’s closures, it diverted its barges down the Ohio River for unloading on the Mississippi River. The barges never found themselves trapped within the locks, unable to escape. Cf. id. at 193–94. Century also did not suffer any “other like perils, losses or misfortunes” under the general clause found at the end of the Risks Covered provision. R.100-2 at 25. Not only does that clause go on to require “the hurt, detriment or damage of the said goods and merchandises and ship,” id., but its limitation to perils, like those already listed, limits its scope to risks akin to piracy, fire, and similarly destructive harms, 9A Couch on Insurance §137.9. The cargo and its barges did not face any such threats.

 

 

Shipping Expenses Clause.

Century turns to the policy’s Shipping Expenses Clause. This provision covers “reasonable direct charges incidental to shipping” when “the subject matter insured is not delivered to the destination contemplated due to circumstances beyond the control of the Insured.” R.100-2 at 25–26. But it covers the risk of a failed delivery, not an untimely delivery. Cf. Glennborough Homeowners Ass’n. v. U.S. Postal Serv., 21 F.4th 410, 412 (6th Cir. 2021) (contrasting mail that “was not delivered” with the successful delivery of mail). Century does not dispute that its alumina eventually arrived at its facilities.

 

 

Sue and Labour Clause. 

Last of all comes the Sue and Labour Clause. This provision imposes an obligation on the insured to exercise a duty of care to prevent losses to the insurer and, if need be, to minimize them. See Ope Shipping v. Allstate Ins. Co., 687 F.2d 639, 643 (2d Cir. 1982). The clause promises that, “in case of actual or imminent, loss, damage, cost or expense,” Lloyd’s will reimburse Century for its expenditures in protecting the “interests insured” and in “reducing... any potential loss or liability under this Contract.” R.100-2 at 26. This provision, as Century reads it, requires Lloyd’s to pay for the additional shipping expenses that prevented the physical loss of its aluminum and reduced the possibility of an imminent pot-line freeze and any consequential losses. The Sue and Labour Clause does not assist Century. The Sue and Labor Clause promises to reimburse Century for fulfilling its duty to mitigate Lloyd’s exposure under the policy, but it does not obligate Lloyd’s to pay anything for reducing losses that fall outside the policy. See Continental Food Prods., Inc. v. Ins. Co. of N. Am., 544 F.2d 834, 837 (5th Cir. 1977). While the interests insured under this contract include both the alumina and certain profits, the contract conditions that coverage on “risks of physical loss of or damage to the subject-matter insured.” R.100-2 at 4. Had Century faced a risk of physical loss or destruction, such as if the delay resulted in the cargo rotting or the barges capsizing, the Sue and Labour Clause would have obligated Lloyd’s to compensate Century for reasonable efforts to secure delivery by other means. See St. Paul Fire & Marine Ins. Co. v. Pac. Cold Storage Co., 157 F. 625, 629–31 (9th Cir. 1907); see also Homes Ins. Co. v. Ciconett, 179 F.2d 892, 895–96 (6th Cir. 1950) (observing that a Sue and Labour Clause may operate as a separate contract requiring payment beyond the limits stated elsewhere in the insurance policy). But because Century did not face an actual or imminent risk of physical loss or destruction to its alumina, the Sue and Labour Clause did not require Lloyd’s to compensate Century for these expenses. Cf. GTE Corp. v. Allendale Mut. Ins. Co., 372 F.3d 598, 618 (3d Cir. 2004).

 

 

Before concluding, it is worth noting that the policy also incorporates by reference the “American Institute Cargo Clauses.” R.100-2 at 4. The thirteenth and final clause excludes the risks of “arrest, restraint, [and] detainment” and “loss, damage or deterioration arising from delay” except where the policy affirmatively includes them. Am. Inst. Marine Underwriters, American Institute Cargo Clauses 32B-10 §13(A), (C) (Apr. 1, 1966), https://www.aimu.org/forms/32B-10.pdf. 

These exclusions may have denied Century coverage beyond the Extra Expense Clause even had it been able to identify a covered risk. Cf. Blaine Richards & Co., Inc. v. Marine Indem. Ins. Co. of Am., 635 F.2d 1051, 1056 (2d Cir. 1980).

 

 

 

 

(Sixth Circuit Court of Appeals, April 4, 2024, Century Aluminum Company v. Certain Underwriters at Lloyd’s, London, Docket No. 23-5543, Recommended for Publication)

 

U.S. Court of Appeals for the Eleventh Circuit, Acrylicon USA, LLC v. Silikal GmbH, Docket No. 17-15737

 

Distribution Agreement

 

Licensing Agreement

 

Trade Secret

 

Contract Drafting

 

Remedies:

 

Money Recovery for Both Unjust Enrichment and Actual Damages

 

Direct and Consequential Damages

 

Lost Profits

 

Liquidated Damages

 

Nominal Damages

 

Georgia Law

 

Evidence: Videotaped Depositions

 

 

 

The agreement provided that AC-USA and its affiliate, AcryliCon International, Ltd. (“AC-International”), would be Silikal’s exclusive distributors of 1061 SW and that Silikal would not sell the resin without AcryliCon’s written permission.

 

According to AC-USA, Silikal breached the agreement by selling 1061 SW without its written permission, so it sued Silikal under common law for breach of contract (“Contract” claim) and under the Georgia Trade Secrets Act of 1990 (“GTSA”) for misappropriation of the shared trade secret (“Misappropriation” claim).

 

In 2008, AC-USA was incorporated. That same year, AC-USA entered into a licensing agreement with two affiliates of AC-International—Raliz AG and AcryliCon Distribution Est.—that gave AC-USA the right to import, market, and sell « AcryliCon Systems » in the United States, including the 1061 SW resin. AC-USA was not permitted to sell AcryliCon Systems outside of the United States without permission from AC-International.

 

AC-USA’s Contract claim is based on Paragraph 5 of the GSA Contract, titled “Confidentiality and Use of 1061 SW.” Paragraph 5 provides in full:

Silikal represents and warrants that it has not disclosed the formula for 1061 SW resin or sold or distributed 1061 SW resin, directly or indirectly, to anyone other than AcryliCon during the pendency of the Silikal/AcryliCon relationship. Silikal hereby covenants and agrees that it will preserve the secrecy of the formula for the 1061 SW resin. Silikal will not disclose or use in any way, directly or indirectly, the 1061 SW resin or formula for the 1061 SW resin. Silikal further covenants and agrees NOT to sell or distribute 1061 SW resin to anyone other than AcryliCon, or as expressly permitted in writing by AcryliCon. Within 10 days of this Settlement Agreement, Silikal shall ship by DHL to Bjorn Hegstad . . . all laboratory records and other available documents regarding the formulation and development of the 1061 SW resin.

 

(…) AC-USA presented the testimony of seven witnesses via videotaped depositions.

 

To prove a claim for misappropriation of trade secrets under the GTSA, a plaintiff must show that “(1) it had a trade secret and (2) the opposing party misappropriated the trade secret.” Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284, 1290–91 (11th Cir. 2003).

O.C.G.A. § 10–1–761(2) reads in full: (2) “Misappropriation” means:

(A) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(B) Disclosure or use of a trade secret of another without express or implied consent by a person who:

(i) Used improper means to acquire knowledge of a trade secret;

(ii) At the time of disclosure or use, knew or had reason to know that knowledge of the trade secret was:

(I) Derived from or through a person who had utilized improper means to acquire it;

(II) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

(III) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(iii) Before a material change of position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

 

(…) Silikal’s violation of the duties created by the GSA Contract gave AC-USA a claim for breach of contract, not for misappropriation of a trade secret.

 

(…) Silikal argues in its supplemental brief that the District Court erred in entering the revised judgment for AC-USA on its Contract claim because AC-USA failed to prove actual damages from Silikal’s breach. We agree, and hold that AC-USA is instead entitled only to an award of nominal damages.

 

(…) Actual damages for breach of contract, by contrast, “are given as compensation for the injury sustained as a result of the breach of a contract.” O.C.G.A. § 13–6–1 (emphasis added). The fundamental difference between restitution and actual damages, therefore, is that the former is measured by the defendant’s gain, while the latter is measured by the plaintiff’s loss. Dan B. Dobbs, Law of Remedies § 4.1(1), at 555 (2d ed. 1993).

 

A plaintiff who proves misappropriation of a trade secret under O.C.G.A. § 10–1–763 may recover money for both unjust enrichment and actual damages.

 

Actual damages under Georgia law may be direct or consequential. Direct damages “arise naturally and according to the usual course of things from the breach.” Denny v. Nutt, 375 S.E.2d 878, 879 (Ga. App. 1988) (quoting Quigley v. Jones, 334 S.E.2d 664, 665 (Ga. 1985)). Consequential damages, by contrast, arise “as the probable result of the breach.” Id. The key distinction between direct damages and consequential damages is that the former compensate for the value of the promised performance, while the latter compensate for additional losses incurred as a result of the breach. See Imaging Systems Int’l., Inc. v. Magnetic Resonance Plus, Inc., 490 S.E.2d 124, 127 (Ga. Ct. App. 1997) (noting that consequential damages “may include profits which might accrue collaterally as a result of the contract’s performance,” while direct damages “may include profits necessarily inherent in the contract”).

 

A plaintiff may not recover consequential damages for breach unless such damages are within the contemplation of the parties at the time the contract was made, are “capable of exact computation,” and “are independent of any collateral enterprise entered into in contemplation of the contract.” O.C.G.A. § 13–6–8.

 

Lost profits that are not part of the benefit of the bargain may be recovered as consequential damages. Imaging Systems Int’l., 490 S.E.2d at 127. However, “the profits of a commercial business are dependent on so many hazards and chances, that unless the anticipated profits are capable of ascertainment, and the loss of them traceable directly to the defendant’s wrongful act, they are too speculative to afford a basis for the computation of damages.” Johnson Cnty. School Dist. v. Greater Savannah Lawn Care, 629 S.E.2d 271, 273–74 (Ga. Ct. App. 2006). Accordingly, a plaintiff seeking lost profits must provide “information or data sufficient to enable the trier of fact to estimate the amount of the loss with reasonable certainty.” Bearoff v. Craton, 830 S.E.2d 362, 373 (Ga. Ct. App. 2019) (quoting Pounds v. Hosp. Auth. Of Gwinnett Cnty., 399 S.E.2d 92, 94 (Ga. Ct. App. 1990). “This ‘information or data’ must include evidence showing that the business claiming lost profits had ‘a proven track record of profitability.’” Id. (quoting EZ Green Associates v. Georgia-Pacific Corp., 770 S.E.2d 273, 277 (Ga. Ct. App. 2015)). “The plaintiff must also show the expected profit for the relevant time period” including “the business’s projected revenues, as well as its projected expenses, for that time frame.” Id. (quoting Johnson Cnty., 629 S.E.2d at 274).

 

(…) In line with this principle, we note that while Georgia law enforces provisions for liquidated damages, O.C.G.A. § 13–6–7, it only does so to the extent such provisions are not penal in nature, Broadcast Corp. of Ga. v. Subscription Television of Greater Atlanta, 338 S.E.2d 775, 776–77 (Ga. Ct. App. 1985). A provision for liquidated damages will be treated as an unenforceable penalty unless (1) the injury caused by the breach is difficult or impossible to accurately estimate; (2) the parties intended to provide for damages rather than a penalty; and (3) the stipulated sum is a reasonable pre-estimate of the probable loss resulting from the breach. Southeastern Land Fund v. Real Estate World, 227 S.E.2d 340, 343 (Ga. 1976). “Where a designated sum is inserted into a contract for the purpose of deterring one or both of the parties from breaching it, it is penalty.” Broadcast Corp. of Ga., 338 S.E.2d at 777 (quoting Florence Wagon Works v. Salmon, 68 S.E. 866, 866 (Ga. Ct. App. 1910)).

 

If a plaintiff proves a breach of contract but fails to prove actual damages, the plaintiff “may recover nominal damages sufficient to cover the costs of bringing the action.” O.C.G.A. § 13–6–6.

 

Georgia law permits recovery of attorney’s fees “where authorized by some statutory provision or by contract.” Smith v. Baptiste, 694 S.E.2d 83, 87 (Ga. 2010).

An award of nominal damages is sufficient to make the plaintiff a prevailing party. King v. Brock, 646 S.E.2d 206, 207 (Ga. 2007).

 

 

(U.S. Court of Appeals for the Eleventh Circuit, January 26, 2021, Acrylicon USA, LLC v. Silikal GmbH, Docket No. 17-15737, Publish)

 

 

Supreme Court of New Hampshire, Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, Docket No. 2019-0548

 

Contract:

Lost Data

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?

Contract Drafting

New Hampshire Law

Negligence:

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.

 

Negligence:

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)