But here’s the bad news: since demonstrating that you actually lost profits based upon the other side’s conduct – and if so, how much – is inherently somewhat speculative, how can you prove such damages under New York law? As you may have guessed, this is not such an easy task.

Here’s the general rule:

“In order to recover loss of future profits as damages for breach of contract under New York law, ² the plaintiff must establish the existence and the amount of lost profits with reasonable certainty, and that the lost profits were within the contemplation of the parties at the time the contract was made. Schonfeld v. Hilliard, 218 F.3d 164, 173 (2d Cir. 2000) (citing Kenford Co., Inc. v. Erie County, 67 N.Y.2d 257, 261 (1986) (“Kenford I”)) …

“To meet this burden, the plaintiff must establish (1) the existence of the lost profits with reasonable certainty, and (2) that the alleged loss is capable of proof with reasonable certainty. Kenford I, 67 N.Y.2d at 261. “[T]he damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.” Id; see also 3497 Austin Boulevard Assoc. LLC v. M.K.D. Capital Corp., No. 04 Civ. 8596 (NRB), 2007 WL 1575265, at *2 (S.D.N.Y. May 30, 2007) (“Projections of future profits which are made on the basis of a ‘multitude of assumptions’ that require ’speculation and conjecture’ with few known factors do not provide the requisite certainty for recovery.”).

But what about in the case of a new, or start-up business? Does the same rule apply to them?

In short, yes, but the following should be borne in mind: since such businesses lack a track record, the courts have stated that  “evidence of lost profits from a new business venture receives greater scrutiny because there is no track record upon which to base an estimate.” Schonfeld, 218 F.3d at 172.

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As I’m sure you know, not all liquidated damages clauses are enforceable under New York law; on the other hand, not all of them are unenforceable either.

To the contrary, New York’s courts have long held (as far back as 1977) that  “a liquidated damages provision is enforceable where the fixed amount bears a ‘reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation’ (JMD Holding Corp., supra, 4 N.Y.3d at 380, 795 N.Y.S.2d at 507 (quoting Truck Rent-A-Center v. Puritan Farms 2nd,Inc., 41 N.Y.2d 420, 425, 393 N.Y.S.2d 365, 369 (1977)).”

New York’s courts have shown an increasing tendency to honor these provisions when they are mutually negotiated between two sophisticated businesses that are on equal, or roughly equal footing; conversely, the courts have refused to honor liquidated damage provisions where they are a penalty that is out of scale with foreseeable losses, or where the provisions are being unilaterally imposed by one side on a far weaker second half to a deal, which is also known as “unconscionability.” JMD Holding Corp., supra, 4 N.Y.3d at 378-85, 795 N.Y.S.2d at 506-10; Stenda Realty, LLC v. Kornman, 67 A.D.3d 996, 889 N.Y.S.2d 639 (2d Dep’t 2009).

As a strictly practical matter, the following bears emphasis: a court’s determination as to the validity – or invalidity – of a particular liquidated damages clause will often have to await the end of a case. And the reason for this should be fairly evident: the relationship – or the lack thereof – between the liquidated damages clause and foreseeable losses is a fact-specific one, and requires a full and detailed analysis of the facts of the case. Consequently, as part of your initial contract negotiations, you should consider whether this provision will have enough bite to make it worthwhile to litigate down the line, if this deal ultimately falls apart.

Stated differently (and to quote many of my gurus, including a 15th century mystic): begin with the end in mind.

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In a case that they brought in Federal Court in Upstate New York, Opto Generic Devices Inc. (“OGD”) sued Air Products & Chemicals Inc. (“ACC”) for breach of contract and for consequential damages, asserting that it lost profits when the defendant did not buy its products. In this case, the defendant admitted that the parties had entered into a series of agreements that delineated the scope of work to develop certain products for plaintiff, and included a $400,000 agreement for license rights to these products. In light of the ongoing working relationship between the parties, and the exchange of nearly $1,000,000 between them with regard to the development of this product, the plaintiff was caught off guard when the defendant never actually bought the finished product.

But the plaintiff had one “small” problem with their case – while the contract set forth the parties’ responsibilities as to patent prosecution and maintenance, commercial rights and licenses (i.e., it was a development contract), there was absolutely no provision requiring ACC to buy any OGD products. Consequently, I can’t say I’m surprised that the Court dismissed this aspect of their breach of contract action.

You know the old saying about what happens when you assume something …

It’s just another example of the costs of failing to reduce your agreements to writing.

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