Lost Profits for Breach of Contract: Would the Court of Appeals Apply the Second Circuit's Analysis?
Banks, Glen, Albany Law Review
"I coulda been a contender."
--Marlon Brando (1)
A party that establishes a breach of contract claim may recover benefit of the bargain damages to put it in the position it would have enjoyed had the contract not been breached. (2) Such damages may include the profits the party would have made had the contract been fully performed. (3)
The party seeking lost profits usually presents the testimony of an expert who has constructed a damage model that the expert claims shows the profits the non-breaching party would have made had the breach not occurred. The claimed lost profits can be general damages (the profits the party would have made in the performance of the breached contract), (4) consequential damages (the profits the party would have made on other collateral agreements had the breached contract been fully performed), (5) or a combination of both. The damage model is a projection of what purportedly would occur in the future in a "world" that can never exist--the "world" where the contract has been fully performed. The model presents a view of what "coulda been" had the contract not been breached.
The New York Court of Appeals has repeatedly ruled that lost profits must be proved with "reasonable certainty." (6) In adhering to this standard, it specifically rejected a Second Circuit decision (7) that a plaintiff (8) need only provide a "reasonable basis" for its claimed damages. (9)
In 2007, the Second Circuit in Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., (10) applied New York law in a breach of contract case and ruled that the "reasonable certainty" standard applied only when lost profits are sought as consequential damages. The Tractebel court ruled that when a plaintiff seeks to recover lost profits as general damages, the plaintiff only has to present "a stable foundation for a reasonable estimate" of its claimed damages. (11) The Second Circuit's decision raises interesting questions. Would the Court of Appeals also rule that a different standard governs when the claimed lost profits are general, as opposed to consequential, damages? Would it also apply a "stable foundation for a reasonable estimate," (12) as opposed to "reasonable certainty," standard with respect to establishing the amount of lost profits claimed as general damages?
Since the amount of damages sought on a lost profits claim can be substantial, (13) any uncertainty in the standard to be applied in proving lost profit damages would complicate litigation of the claim. By injecting uncertainty in New York law concerning lost profit damages, the Tractebel case impacts the litigation of a lost profits claim in various ways. If there is a basis for federal court jurisdiction, a plaintiff should consider whether a federal court would be more hospitable to its claim for lost profits. (14) A plaintiff may be more aggressive in claiming lost profit damages if it believes it does not have to prove its damages with "reasonable certainty" but only needs to present a "stable foundation for a reasonable estimate" of its damages. If the "stable foundation" requirement of the Second Circuit is a lesser burden than the "reasonable certainty" standard of the Court of Appeals, the damage exposure to defendant would be increased and a plaintiff might gain significant leverage in settlement negotiations. (15)
This article will first review what the Court of Appeals and the Second Circuit have said on the issue of proving the amount of lost profits in a breach of contract case. It will then discuss whether the Court of Appeals also would draw a distinction when lost profits are claimed as general, as opposed to consequential, damages. Finally, it will discuss the burdens of production and proof when the plaintiff seeks lost profits and conjecture whether the Court of Appeals would apply the standard articulated in Tractebel.
The discussion set forth below concludes that the Court of Appeals likely would not recognize different levels of proof of lost profits depending on whether they were sought as general or consequential damages and that the Court likely would continue to require a plaintiff to prove lost profit damages with reasonable certainty. …