Hot Contract Damages in New York

Ogdensburg PropertySuppose a partnership of two individual real estate developers agrees to buy raw land from a local government authority to develop a retail factory outlet in a special trading zone of upstate New York across the St. Lawrence River from Canada.   A trial court found that the Seller breached this contract “in bad faith.”  

To what damages is the Buyer entitled? According to an intermediate appellate court in New York, which affirmed that Seller breached in bad faith, Buyer is entitled to neither expectancy damages (lost profits) nor reliance damages (as a matter of summary judgment).

Is this likely to be upheld by the New York Court of Appeals, which heard oral argument in the case last week? For the following reasons, I doubt it, but either way look forward to the Court’s opinion.

The lower court denied lost profits by saying they would be too speculative to prove with reasonable certainty. The court acknowledged that Buyer had entered into numerous leases with retailers ready to do business at the factory outlet, but several lessees had since cancelled them. Nor did Buyer show it could have obtained requisite financing to attract and secure tenants for those or other retail spaces (or, perhaps, though the court does not say this, to develop the site).

The court cited a famous New York case, Kenford Co. v County of Erie (1986), announcing that “a start-up commercial enterprise faces a stricter standard when seeking damages for lost profits [because] ‘there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty’” (emphasis added).

For at least four reasons, as a matter of the general common law of contracts and of New York law, this statement may be wrong and certainly warrants review. True, courts hesitate to award lost profits damages to “new businesses.” But it is doubtful that there is a blanket rule barring doing so absolutely (as there may have been in a few jurisdictions a long time ago). See MindGames (federal court predicting applicable state supreme court would overrule an antique precedent barring lost profits to any new business).

Second, it may be a mistake to say new businesses face a “stricter standard.” The standard is the same, not only for new businesses and established businesses, but for lost profits and other damages, and for all aggrieved parties seeking contract damages: they all must prove asserted damages with reasonable certainty. 

The problem a new business faces is absence of probative records of past performance that an existing business has to estimate lost profits. It is not a different standard, but a difference in the capacity to generate requisite evidence. It is also possible to sustain the claim on the basis of comparable businesses run by others. See Fera Village Pizza.

Third, New York’s Kenford case, which the court relies on, involved lost profits asserted under a contract to build a domed stadium. The New York Court of Appeals noted longstanding judicial aversion to awarding lost profits in contexts, such as sporting events, that depend on “the whim of the general public and the fickle nature of popular support for professional athletic endeavors.” The landmark case of Chicago Coliseum v. Dempsey famously makes the same point. It may be far easier to prove lost profits under a sales contract for land to be used as a retail factory outlet than for a sports stadium or event.

Fourth, it is not obvious from the opinion why the various procured lessees cancelled their leases, and explanations could include the highly-publicized failure of the government agency to transfer the land in this case. That tenants cancelled tends to support, not undermine, the basis for a lost profits measure.  Further, although the court rejects Buyer’s claim in part because it did not provide evidence that it would have been able to finance the acquisition of additional tenants, it does not elaborate on what financing this would require or how it affected overall development prospects.  These issues of fact make it seem particularly incorrect to grant summary judgment.

In addition to rejecting Buyer’s lost profits claim on potentially weak grounds, the court also denied its alternative claim to reliance damages. Buyer sought to recover costs it incurred in preparing to develop the retail factory outlet center. While the opinion does not detail the elements, one may imagine that they involve costs like advertising and negotiating leases.

The court denied such damages on the ground that nothing in the Buyer-Seller contract(s) said anything about Buyer doing these things. The contracts contemplated the Buyer appearing at the closing, paying for the land and accepting title.  All these costs it incurred at its own expense, the court says.

This decision may also be incorrect for several reasons and certainly warrants review. First, it is common in cases where an aggrieved party is unable to prove lost profits (or other expectancy) with reasonable certainty, to be permitted to recover reliance damages instead. Indeed, that is a feature of the landmark case of Chicago Coliseum v. Dempsey mentioned earlier.

There is a fighting issue about whether reliance damages can be recovered for costs incurred before the contract was made, but that does not seem to be an issue this court addressed or resolved. Additional difficulties arise in determining which outlays were made in reliance on the contract (those that vary with its performance) and which were not.  But, again, the court does not explore these matters.  The court may have been thinking of the restitution cases, where preparations to perform that do not confer benefits on the other party are not recoverable in quantum meruit.  Curtis v. Smith.  But this does not mean they are not recoverable as reliance damages.

In short, the opinion being reviewed resembles a legal fossil of an earlier age. It suggests reviving something of an absolute ban on lost profits for new businesses, long ago abandoned; fails to see the standard modern alternative of reliance damages when lost profits cannot be proven with reasonable certainty; and seems to erect standard limitations on the restitution recovery as (misplaced) limitations on the reliance recovery.

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1 Response

  1. 1L says:

    Thx for another crisp riff on early K-1.