• Paul Peter Nicolai

ELIMINATING LIABILITY FOR LOST PROFITS

Many contracts try to eliminate liability for lost profits if something goes wrong. Saying it is one thing, doing it successfully is another. The problem is that what kind of damages "lost profits" are differs from state to state. Even in a state the answer can differ based on why the profits were lost.


A recent case highlights the point. A distribution contract said the parties would not be liable for consequential damages. The defendant argued this exclusion meant it was not liable for profits lost from collateral business transactions by the other side. The court ruled that since lost profits from collateral business transactions were the only remedy available for breach of the contract and the exclusion of lost profits caused the contract’s limited remedy to fail of its intended purpose, lost profits were available for collateral business transactions.


New York’s rule is that lost profits from contemplated transactions are direct damages, not consequential. They are not an excluded remedy when a contract excludes consequential damages. Under New York law, lost profits are the direct and probable result of a breach and therefore are general damages not barred by a contract's limitation of liability language.


If you are trying to eliminate liability for lost profits, it is important to understand the state law that will apply to the contract and what the principal sources of lost profit damages could be. Just saying it won’t make it so.

#contractlaw #liabilitylimits #lostprofits