Archives for January 2015

Lost Profits: Direct Or Indirect Damages? (And Why It Matters)

Two species of compensation in breach of contract lawsuits are (1) direct damages and (2) indirect damages.  The former allows a plaintiff to recover money damages that flow directly from a breach while the latter – sometimes labeled “consequential” damages – are more remote and separated from the breach.

Deciphering the difference between the two damage regimes is easy in theory but often difficult in practice.

At the intersection of the two damages types lies the lost profits remedy.  Lost profits damages allow the non-breaching party to recover profits he would have earned had the breaching party performed under the terms of the contract.  They (lost profits) divide into direct or indirect damages depending on the facts.

Westlake Financial Group, Inc. v. CDH-Delnor Health System, 2015 IL App(2d) 140589 spotlights the lost profits question in a dispute between two businesses over an insurance brokerage contract (the “Insurance Contract”) and a separate on-line claims tracking agreement (“the Tracking Contract”).

Both contracts spanned four years with 60-day termination clauses.  The plaintiff sued when the defendant prematurely cancelled both Contracts with more than two years left on them.  Plaintiff sought damages for lost Insurance Contract insurance commissions and for fees it would have earned under the Tracking Contract.

The trial court granted the defendant’s motion to dismiss and the plaintiff appealed.

Result: Reversed in part.

The trial court dismissed the bulk of plaintiff’s claims based on a limitation of damages clause in the Insurance Contract that immunized the defendant from consequential damages.

In Illinois, contract damages are measured by the amount of money needed to place the plaintiff in  the same position he would be if the contract was performed.  Damage limitation provisions in contracts are enforced so long as they don’t offend public policy.  These limitation clauses are strictly construed against the party benefitting from them.  (¶¶ 29-30).

Direct damages or “general damages” flow directly and without interruption from the type of wrong alleged in a complaint.  By contrast, indirect or consequential damages are losses that are removed from the breach and usually involve an intervening event that causes the damage.

Lost profits can constitute either direct damages or indirect damages depending on the facts.  Where a plaintiff’s lost profits damages result directly from a defendant’s breach, the lost profits are recoverable as direct damages.

A prototypical direct lost profits damages example cited by the court is where a phone directory publisher is liable for lost profits caused by its failure to include a business’s name in the directory.  In that scenario, any lost profits suffered by the business are directly attributable to the publisher’s failure to publish the business name in the directory – the very thing it was hired to do.  (¶¶ 32-35).

The Insurance Contract here contained a consequential damages exclusion and specifically mentioned lost profits as a type of consequential damages.  Still, the court found that the exclusion did not bar plaintiff’s direct lost profits claim.  The court noted that the Insurance Contract’s damage limitation provision only mentioned lost profits as an example of consequential damages.  It didn’t say that lost profits were categorically excluded.

The court also rejected defendant’s argument that plaintiff’s claimed damages were too speculative to merit recovery.

Under Illinois law, damages are speculative where their existence is uncertain; not when there amount is uncertain.

Since lost profits can’t be proven with mathematical certainty, the plaintiff only has to show a “reasonable basis” for their (lost profits) computation.  (¶ 51).

Since the plaintiff premised its Insurance Contract lost profits claim on a four-year track record of calculable insurance commissions, the court found the plaintiff sufficiently pled the existence of damages.  Any dispute in the amount of plaintiff’s damages was an issue later for trial.  At the motion to dismiss stage, plaintiff sufficiently pled a breach of contract claim.  (¶¶ 52-53).

Afterwords:

– Consequential damages exclusion that mentions lost profits – as a type or example of consequential damages – won’t preclude lost profits that are a direct result (as opposed to an indirect result) of the breach of contract;

– A business plaintiff’s past profits from prior years can serve as sufficient gauge of future lost profits in a breach of contract claim.

 

Amended Complaints and Quantum Meruit – Some Illinois Reminders

Earlier (http://paulporvaznik.com/quantum-meruit-basics-illinois-law/1367) I discussed how quantum meruit is a valuable fallback or “Plan B” theory of recovery when a client has done work for someone, hasn’t been paid and there is no governing express contract between them.  Quantum meruit (translation: “as much as he deserves”) ensures that my client at least gets something where his  services have benefitted a defendant who welcomed the services or stood silently as my client performed them.

Blietz v. System Integration, 2014 IL App (1st) 132270-U examines the pleading elements of quantum meruit and the importance of assigning a monetary value to the services that form the basis for the quantum meruit suit.

There, the Plaintiff sued his former employer – an architecture firm – to recover about $300K in unpaid compensation for accounting and marketing services the plaintiff rendered for the firm.  He brought claims for breach of contract, a statutory wage payment and collection act claim and an alternative quantum meruit action.

The trial court dismissed the claims for lack of factual specifics and the architect appealed.

Held: Affirmed

Q: Why:

A: The appeals court affirmed dismissal of the plaintiff’s breach of contract and wage payment claim on purely procedural grounds.  When a plaintiff files an amended complaint, he waives objections to the court’s ruling on prior complaints.  Where an amendment is complete in itself and doesn’t refer to or adopt the prior pleading, the prior pleading ceases to be part of the record and it’s viewed as abandoned.  A party only needs to reference an earlier pleading in a footnote or a single paragraph to preserve it for appellate review.

Here, by failing to adopt or reference his breach of contract and wage count claims in his most recent pleading, these claims were abandoned and unappealable.

The court also affirmed plaintiff’s quantum meruit dismissal.  To recover in quantum meruit, the plaintiff must plead (1) he performed services, (2) that benefitted a defendant, (3) that it’s unjust for the defendant to reap the benefits of the plaintiff’s services without paying the plaintiff. 

The quantum meruit plaintiff has the burden to show the defendant received the plaintiff’s services and that it would be unjust for the defendant to retain the services without paying for them.  Critically, the plaintiff must prove his services were of “measurable benefit” to the defendant.  (¶25).

The plaintiff’s quantum meruit claim failed on its face.  The plaintiff didn’t monetize the value of his unpaid work but did say he was paid over $96K during his tenure with the defendant.  By doing so, plaintiff had to plead that he performed work that had a value over and above the $96K paid to him.  Because the plaintiff couldn’t plead work that exceeded the $96K paid him, he failed to allege that he conferred a measurable benefit on the defendant.

Plaintiff’s bare allegations that he “created value” for defendant and “greatly increased” the defendant’s company value during plaintiff’s tenure were too nebulous to survive a motion to dismiss.  Under Illinois fact-pleading rules, these bare bones allegations with no factual support didn’t provide a calculable amount of the claimed services.  As a result, plaintiff’s quantum meruit claim failed.  (¶ 29).

Afterwords:

A.  To preserve your right to appeal a dismissed count, you should reference it in the amended pleading – otherwise the count is abandoned and can’t be appealed;

B.  Quantum meruit only applies where there is no express contract or a contract formation defect (e.g. uncertain price term, duration, etc) that makes a basic breach of contract claim impossible;

B.  The quantum meruit plaintiff must do more than nakedly plead that he performed services that benefitted a defendant.  He must instead allege he provided quantifiable value to the defendant and also plead surrounding facts that show it’s unfair for the defendant to enjoy the fruits of the plaintiff’s services without paying him.

 

 

Statute Of Frauds Doesn’t Prevent Guaranty Claim Where Main Purpose Is To Benefit Guarantor- IL First Dist.

66381928 Photo credit: www.template.net (1.21.15)

 

I’m surprised at how often I see contracts where it’s unclear whom the parties are.  Sometimes, a contract’s main text will say it’s between two companies but it’s clearly signed by two individuals. I’ve also experienced the reverse: the contract body says it’s between two individuals but the signature block provides that it’s signed by corporate agents on behalf of their corporate employers.  When the contract is breached, it becomes a challenge to sort out who’s entitled to sue and who should be named as defendant.

Sullivan & Crouth Holdings, LLC v. Ceko, 2014 IL App (1st) 133028-U examines the impact of conflicting language in a promissory note and how textual contradictions affect the note’s enforceability.

Plaintiff sued the guarantor defendant for breach of a $100K promissory note (“Note”). The Note was between an LLC borrower and a lender but the Note body provided that the individual defendant (the LLC’s manager) will personally guarantee payment of the Note.

The Note signature line read:

 “MGT Lottery, LLC”

 By: [Peter Ceko]

 Peter Ceko, One of Its Managers

The defendant moved for summary judgment on the basis that he signed the Note purely in his capacity as LLC manager – as reflected by the “one of its managers” notation in the signature line.  He also argued that plaintiff’s claim was barred by the Statute of Frauds, 740 ILCS 80/1 (“SOF”) provisions that require a writing to enforce a promise to pay another’s debt (example: a guaranty).  The trial court agreed and entered summary judgment for the defendant and the plaintiff appealed.

Held: Reversed.

Q: Why?

A: There was a facial inconsistency between the Note and its signature line. The Note clearly reflected the intent for the defendant to personally guaranty the LLC borrower obligations yet the defendant clearly signed the Note as LLC manager.

In Illinois, where language in the body of a contract clashes with the apparent representation by the officer’s signature, it’s  an issue of fact for a jury or judge to decide.

The court found that based on its conflicting language, the Note was ambiguous – it was reasonably subject to differing interpretations.  The murky Note, then, required the parties to submit additional evidence of their intent.

The Court also found there was a question of fact as to whether the SOF defeated the plaintiff’s claim.  The SOF requires the promise to pay the debt of another to be in writing.  An exception to this rule is where the “main purpose” or “leading object” of the promisor is to advance his own business interest.  Whether a promisor’s main purpose is to further his personal interest (as opposed to benefit the promisee) is a fact question that defeats summary judgment. 

The court found the record too sparse to discern the LLC manager’s main reason for signing the Note.  As a result, more evidence was needed and summary judgment was improper.

Afterwords:

– Parties to a contract should take pains to specify whether it’s a corporate or individual obligation;

– Where there is a clash between the body of a written contract and its signature block, this will likely signal a fact question that defeats summary judgment;

– The requirement that a promise to pay a third party’s debt be in writing can be tempered where the promisor is signing a contract to advance his own economic interest