Contract Clause Capping Damages Absent Willful Conduct Must Be Enforced Where Breaching Party's Conduct was Merely Intentional Nonperfomance

On July 15, 2021, the First Department issued a decision in MUFG Union Bank, N.A. v. Axos Bank, et al., 2021 NY Slip Op. 04414, holding that a contract clause capping damages absent willful conduct must be enforced when the breaching party's conduct only rises to the level of “merely intentional nonperformance”, explaining:

Union alleges that due to the breaches of the [contract], it has suffered $100 million in lost profits. "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" (Biotronik A.G. v Conor Medsystems Ireland, Ltd. 22 NY3d 799, 806 [2014] [internal quotation marks omitted]). Lost profits qualify as general or direct damages when they "are the natural and probable consequence of the breach" (id. at 805 [internal quotation marks omitted]; see also American [*2]List Corp. v U.S. News & World Report, Inc., 75 NY2d 38, 42-43 [1989]), while consequential damages "do not so directly flow from the breach"(75 NY2d at 43; see also Tractebel Energy Mktg. v AEP Power Mktg., 487 F3d 89, 109 [2d Cir 2007]["Lost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements."]). While we agree with the motion court that a "fuller record at trial is needed" to determine whether Union's damages qualify as direct or consequential damages, we conclude that the damages must, nonetheless, be capped at $5,ooo,ooo for any breach of section 23 of the [contract], the anti-assignment clause, and at $10,000,000 for any breach of section 13 of the [contract], the confidentiality provision, because Union has not shown that Epiq's breach of the [contract] was "caused willfully or by [ ] gross negligence" as contemplated by the last sentence in the limitation-of liability clause.

In the context of this contract, the term "willful" must be understood to be "truly culpable, harmful conduct" (Metropolitan Life Ins. Co. v Noble Lowndes Intl., 84 NY2d 430, 438 [1994]) and not, as Union contends, "merely intentional nonperformance" (id.). As the Court of Appeals noted in Met Life, "[g]enerally in the law of contract damages, as contrasted with damages in tort, whether the breaching party deliberately rather than inadvertently failed to perform contractual obligations should not affect the measure of damages" and "[t]he policy which runs through the fabric of the law of contracts is to bind a party by what he agrees to do whether or not he intends to do what he agrees" (id. at 435 [internal quotation marks omitted]). The last clause in the limitation-of-liability provision refers to special damages in the context of breaches caused willfully or by gross negligence. Thus,"[u]nder the interpretation tool of ejusdem generis applicable to contracts as well as statutes, the phrase 'willful acts' [or 'caused willfully' as used in the contract] should be interpreted here as referring to conduct similar in nature to the . . . 'gross negligence' with which it was joined . . ." (id. at 438). On this record, there is no evidence that Epiq breached the [contract] intending to willfully inflict harm on Union; rather, the proof is that Epiq sold its bankruptcy software business to Axos in order to advance its own economic self-interest. Accordingly, applying the facts of this case to the limitation-of-liability provision, Union may only recover damages under the liability caps for nonwillful breaches of the [contract.

The attorneys at Schlam Stone & Dolan frequently litigate the enforceability of commercial contracts, including the enforceability of damages caps.

Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding the enforceability of a contract clause seeking to limit the damages available in the event of a breach.