The case: Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 2014 NY Slip Op 02101 (N.Y. March 27, 2014)
A manufacturer of a new type of coronary stent entered into an agreement designating another company as the manufacturer’s exclusive distributor of the stent in the United States and certain other countries. The agreement required the distributor to pay the manufacturer a percentage of the distributor’s net sales of the stent.
The agreement’s limitation of liability clause excluded consequential damages, among others: “Neither party shall be liable to the other for any indirect, special, consequential, incidental, or punitive damage with respect to any claim arising out of this agreement (including without limitation its performance or breach of this agreement) for any reason.”
At the time the parties entered into the agreement, the manufacturer had not yet obtained regulatory approval for the new stent in Europe or the United States. European approval ensued two years later, and the distributor began selling the new stent.
A year after that, however, the manufacturer was acquired by Johnson & Johnson. At the time, part of J&J’s product line was another stent that competed directly with the manufacturer’s new stent. A few months after that, the manufacturer discontinued its FDA trial of what was purportedly the new stent and issued a worldwide recall of the stent.
The distributor sued the manufacturer for breach of contract. It sought damages for the lost profits it expected from its sale of the manufacturer’s new stent. The manufacturer argued, though — and the district court agreed — that the distributor’s claim for lost profits was barred by the agreement’s limitation of liability.
The Court of Appeals of New York (that state’s highest court) ruled otherwise, holding that for that particular contract, the distributor’s alleged loss of profits might constitute allowable direct damages, not excluded consequential damages:
The distinction between general and special contract damages is well defined, but its application to specific contracts and controversies is usually more elusive.
Lost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and they are the direct and immediate fruits of the contract.
Otherwise, where the damages reflect a loss of profits on collateral business arrangements, they are only recoverable when (1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties.
(Emphasis and extra pargraphing added, citations and internal quotation marks omitted).
Drafting tips: In the Common Draft provisions, the exclusion of consequential damages clause:
- expressly refers to “loss of profits from collateral business arrangements,” to make the scope of the limitation more clear; and
- does not exclude incidental damages.