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Consequential vs. Direct Damages
Supreme Court Provides Guidance Under New Hampshire Law
The New Hampshire Supreme Court recently upheld a decision of the Merrimack County Superior Court – Business and Commercial Dispute Docket and in doing so provided a comprehensive overview of consequential damages, direct damages and the differences between the two under New Hampshire law.
In Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, plaintiff Mentis Sciences appealed the Superior Court’s dismissal of its claim for damages representing the cost of recreating lost data and lost business and for negligence against defendant Pittsburgh Networks. No. 2019-0548, 2020 N.H. LEXIS 155 (Sept. 22, 2020).
In 2010, Mentis Sciences, an engineering firm, contracted with Pittsburgh Networks to provide information technology services. The operative contract included a limitation of liability clause, providing in relevant part that Pittsburgh Networks would not be responsible for consequential damages arising out of services they performed for Mentis Sciences. In 2014, one of Pittsburgh Networks’ servers failed, resulting in the corruption and permanent loss of some of Mentis Sciences’ data.
Mentis Sciences subsequently initiated an action against Pittsburgh Networks, alleging breach of contract and negligence. Specifically, Mentis Sciences took the position that its “actual damages” included the cost of recreating the lost data and lost business, “estimated to be in the millions of dollars.” Pittsburgh Networks moved to dismiss on the basis that the operative limitation of liability clause was enforceable, and therefore barred Mentis Sciences’ claimed damages because they were consequential. The trial court agreed with the defendant, and dismissed Mentis Sciences’ claims.
On appeal, Mentis Sciences argued that the recreation of data and lost business damages were, in fact, actual damages and thus did not fall under the limitation of liability clause. The Supreme Court provided a lengthy analysis on this point. Citing several secondary sources, the Court concluded that “[d]irect damages are based on the value of the performance itself, whereas consequential damages are based on the value of some consequence that performance may produce.” Id. (internal quotations omitted). Accordingly, given that the value associated with recreating the lost data and the potential business lost related to that data were not based on the value of information, but on the benefits it could have produced, the Court concluded that the damages were consequential in nature, and thus barred under the limitation of liability clause. “[T]he claimed lost profit damages are not direct because the profits lost were not inherent in the contract; that is, [Mentis Sciences] did not stand to earn these profits as a direct result of its contact with [Pittsburgh Networks].” Id.
In short order, the Supreme Court also addressed the other bases for Mentis Sciences’ appeal. Mentis Sciences argued that the limitation of liability clause was unenforceable as it was contrary to public policy in that it prevented recovery of “minimum adequate remedy.” The Court rejected this argument; the Court concluded that the clause was enforceable and that it was clear on the face of the contract that the right to pursue consequential damages was contracted away. Similarly, the Court rejected Mentis Sciences’ argument that its negligence claim was not barred by the economic loss doctrine. The Court concluded that this claim related back to and was indistinguishable from Mentis Sciences’ claim that Pittsburgh Networks failed to perform under the terms of the contract. As such, the Supreme Court concluded that the claim was barred by the economic loss doctrine.
Taken together, the Supreme Court’s decision in Mentis Sciences v. Pittsburgh Networks, LLC provides a number of important reminders for practitioners and business owners. For individuals involved in the drafting process, this case highlights the significance of utilizing particular language – specifically limitations of liability provisions – when drafting agreements; for litigators, this case provides a useful overview of consequential versus direct damages under New Hampshire law.
The decision can be found here.
The attorneys at Sulloway & Hollis are here to assist if you have questions regarding this decision or other business or litigation questions raised in the Mentis Sciences decision. Please contact us at (603) 223-2800 with any questions.