2nd Circuit Suggests Precise Calculation of Damages Not Needed When Applying Contractual Damages Caps

June 24, 2019

Purchase agreements commonly include contractual limitations on the potential liability of breaching parties, absent fraud or other wrongful behavior. These “damages caps” generally set a party’s liability at a fixed amount and serve to protect the breaching party from unexpected or excessive claims for damages in later litigation. In a recent summary order, the 2nd U.S. Circuit Court of Appeals suggested that, in instances where a party is liable for contract damages that are capped at the bargained-for amount, neither the plaintiff nor the court needs to calculate the amount of such damages with precision.

The appeal of Trainum v. Rockwell Collins, Inc. raised, among other issues, the amount of evidentiary support necessary to properly calculate an award of contract damages. During a bench trial, Rockwell Collins (RCI) established that the sellers of International Communications Group (ICG) had breached the purchase agreement at issue. However, RCI failed to demonstrate that the sellers had acted in a manner necessary to invalidate the contractual damages cap. The sellers’ liability for their breaches was therefore capped at $5 million. When analyzing whether RCI had sufficiently proven its damages, and after calculating the exact amount of damages attributable to certain breaches, the U.S. District Court for the Southern District of New York determined that for the remaining breaches, it found “no difficulty in concluding that RCI would have demanded and received a discount” in the sale price of “at least” the amount remaining under the damages cap had it known of the breaches at issue.

On appeal, the sellers of ICG argued that the district court failed to properly substantiate its award of damages. It assumed, without relying on record evidence, that RCI would have demanded and received this discounted sale price to support its conclusion that RCI had proven damages up to the $5 million cap, and in doing so, violated Rule 52 of the Federal Rules of Civil Procedure. Rather than determining that the damages at issue would have accounted for “at least” the amount remaining under the cap, the sellers contended, the district court needed to first calculate the total amount of damages for which they were responsible and then reduce that amount to the capped amount, if necessary. Because this was not done, the sellers argued that RCI and the district court failed to provide a “stable foundation” for damages that could be estimated with a “reasonable certainty,” and therefore, that the damages award should be vacated.

After oral argument, the 2nd Circuit disagreed, ruling that because New York courts are afforded “significant flexibility in estimating general damages once the fact of liability is established,” the evidence that RCI spent approximately $17 million more than estimated to complete the products at issue, and the allegation that the extra costs ran as high as $24 million, was sufficient proof of damages. These findings permitted the district court to conclude that had RCI known of the extra costs, it would have demanded and received a discount in the sale price consisting of at least the amount remaining under the damages cap, which amounted to “a modest reduction” of less than 5 percent of the actual sale price. The 2nd Circuit concluded that because “under the damages cap, the district court could award no more than this amount, it was not necessary for it to engage in a more precise damages calculation,” nor “was any such calculation necessary” for the panel to “engage in a meaningful review of the district court’s ultimate finding.”

Although a summary order with no official precedential effect, this decision suggests a lower standard for calculating damages once a breach of contract has been established but where a damages cap will serve to limit the liability of the breaching party, and calls into question whether any precise calculation of damages is necessary in this context once the fact of damages has been determined. While this primarily will result in increased pressure on the allegedly breaching party — generally the seller — to disprove claims prior to damages, buyers should take note as well and seek to emphasize their damages in the broadest possible terms in post-acquisition litigation.