Contract Clauses Limiting Damages

The NH Supreme Court has enforced contract clauses waiving consequential damages and limiting liability. It has also noted that tort claims asserted when the underlying transaction was based on a contract will be barred by the economic loss doctrine.

The plaintiff was an engineering service firm that works with advanced composite materials for Department of Defense clients. The defendant was an IT service provider. The engineering firm had a problem with a drive in one of its servers, and the IT company was brought in to resolve the issue. Unfortunately, the engineering firm lost data because the IT company had “failed to properly back it up.”

The engineering firm sued for the cost of “massively expensive” testing in order to recover the lost data. It brought claims against the IT company for breach of contract and negligence. The IT company moved to dismiss the costs of testing and any other damages that were not direct damages, and also sought to dismiss the negligence claims. The trial court dismissed the consequential damages, and held that the negligence claim was barred by the economic loss doctrine.

The NH Supreme Court upheld the trial court decision on both issues.

Recognizing that the line between direct and consequential damages “is not capable of exact determination,” the NH high court nonetheless held that the cost of recreating lost data, and the cost of lost business claimed as a result, were consequential damages. Thus, those damages were barred by the parties’ contract.

Speaking more generally, the NH Supreme Court also noted: “Courts cannot improve the terms or conditions of an agreement that the parties themselves have executed or rewrite contracts merely because they might operate harshly or inequitably.” Courts would only do so if the contract term “contravenes public policy.” No such public policy was present here.

Also, the NH court addressed the negligence claim that had been brought in tandem with the breach of contract claim. It noted that contract and warranty standards “are better suited than tort law” to address purely economic loss in the commercial arena. Thus, a contracting party would be barred from pursuing a tort claim unless that party “is owed an independent duty of care outside the terms of the contract.”

Finding no such duty, the court upheld dismissal of the negligence claim against the IT provider, and limited the engineering company to its direct damages. The case is Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, 2020 N.H. LEXIS 155 (Sept. 22, 2020).