One of the most vexing challenges in breach of contract cases, (not the least in the context of former employers whose clients have been (allegedly) diverted by ex-employees), is whether lost profits are recoverable as a measure of damages by the non-breaching party. To that end, the primary factor that the New York courts have considered in making that determination is whether the lost profits qualify as general, as opposed to consequential damages - with the evidentiary burden regarding the former category (general damages) being far easier to satisfy than with respect to the latter category (conseqential damages).
But what's the difference between these two categories - and why have the courts drawn the line at this particular point?
The Difference Between General and Consequential Damages
Fortunately, New York's courts have offered some guidance on the subject, citing Hadley v. Baxendale, one of the most famous legal precedents dating back to English law, summarizing the distinction as follows:
"Lost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements. In the typical case, the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions, is contingent on the performance of the primary contract. When the breaching party does not perform, the non-breaching party’s business is in some way hindered, and the profits from potential collateral exchanges are “lost.” Every lawyer will recall from his or her first-year contracts class the paradigmatic example of Hadley v. Baxendale, where Baxendale’s failure to deliver a crank shaft on time caused Hadley to lose profits from the operation of his mill. 9 Ex. 341, 156 Eng. Rep. 145 (1854). In New York, a party is entitled to recover this form of lost profits only if (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. See Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131, 493 N.E.2d 234 (1986).
"By contrast, when the non-breaching party seeks only to recover money that the breaching party agreed to pay under the contract, the damages sought are general damages. See Am. List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38, 44, 550 N.Y.S.2d 590, 549 N.E.2d 1161 (1989). The damages may still be characterized as lost profits since, had the contract been performed, the non-breaching party would have profited to the extent that his cost of performance was less than the total value of the breaching party’s promised payments. But, in this case, the lost profits are the direct and probable consequence of the breach. See id. The profits are precisely what the non-breaching party bargained for, and only an award of damages equal to lost profits will put the non-breaching party in the same position he would have occupied had the contract been performed.
In other words, unlike general damages, where lost profits are the direct result of the breach of contract, consequential damages that are one step further removed from the breach, and therefore, the burden of proof required to still recover lost profits in such a case is correspondingly higher.
As you should probably have surmised from the above, these issues can prove quite thorny, and, assuming the amounts of issue warrant it, should probably be handled by attorneys who specialize in these matters rather than doing so on your own.
