THE COUNTERCLAIM FOR LOST PROFITS DID NOT DEMONSTRATE “LOST PROFITS” AS CONSEQUENTIAL DAMAGES WAS CONTEMPLATED BY THE PARTIES AT THE TIME THE CONTRACT FOR THE SALE OF GOODS WAS ENTERED; THE MOTION TO DISMISS THE COUNTERCLAIM SHOULD HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the motion to dismiss the defendant’s counterclaim for lost profits should not have been converted to a summary judgment motion and the counterclaim must be dismissed because defendant did not demonstrate consequential damages for lost profits was contemplated by the parties when the contract for the sale of goods was entered. The contract was for the sale of military ordnance (target practice rounds) for the Mexican Navy. In its counterclaim, the defendant alleged the goods were not timely delivered and were not accepted by the Mexican Navy:

Lost profits are a form of consequential damages that a buyer, such as the defendant, may recover if “the seller at the time of contracting had reason to know [of them] and which could not reasonably [have been] prevented by cover or otherwise” (UCC 2-715[2][a] …). “To determine whether consequential damages were reasonably contemplated by the parties, ‘the nature, purpose and particular circumstances of the contract known by the parties should be considered, as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made'” … . In order to recover consequential damages, a pleading party is required to allege that the damages were foreseeable and within the contemplation of the parties at the time the contract was made … . “[W]here the damages reflect a loss of profits on collateral business arrangements, they are only recoverable when (1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties” … .

Here, the defendant’s allegations, even as supplemented by an affidavit from its president, failed to sufficiently allege that consequential damages as lost future profits resulting from the cancellation of the defendant’s contract with the Mexican Navy due to the plaintiff’s breach of contract were within the plaintiff’s contemplation at the time of entering into the contract for the sale of goods (see UCC 2-715[2][a] …). Island Ordnance Sys., LLC v Amerimex, Inc., 2024 NY Slip Op 00897, Second Dept 2-21-24

Practice Point: With respect to a contract for the sale of goods controlled by the UCC, a claim for lost profits must specifically allege “lost profits” as an element of consequential damages was contemplated by the parties at the time the contract was entered, not the case here.