And you thought your contract excluded “lost profits” claims…

In a somewhat surprising recent decision, the Ontario Court of Appeal ruled that a common contractual clause excluding claims for “loss of profits” did not achieve that result.

Atos IT Solutions v. Sapient Canada Inc. involved a subcontract for data conversion and application management support (AMS) services between Sapient (the contractor) and Siemens, a corporate predecessor of Atos (the subcontractor).  These services were to be provided by Sapient under a head contract with Enbridge.

Siemens/Atos made a claim for loss of profits arising from wrongful termination of the AMS portion of the subcontract in the amount of approximately $3.5 million, representing Siemens’ estimate of the total gross profits it would have earned if the subcontract had remained in effect for its full term.

Sapient argued that Siemens was prevented from claiming anything beyond incremental staffing costs of approximately $500,000 by the following limitation of liability clause:

…NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, EACH OF SUBCONTRACTOR AND SAPIENT WILL BE LIABLE TO THE OTHER … ONLY FOR DIRECT DAMAGES … NEITHER SUBCONTRACTOR NOR SAPIENT WILL BE LIABLE TO THE OTHER FOR INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR FOR LOSS OF PROFITS (COLLECTIVELY, “EXCLUDED DAMAGES”), EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. [emphasis added]

The trial judge found that the phrase “loss of profits” referred only to consequential or indirect lost profits, i.e., lost profit from other work foregone as a result of the breach. In the words of the trial judge: “Consequential lost profits do not include profits under the Subcontract but rather are indirect losses which are only recoverable when they are foreseeable or communicated to the defendant.” The Court of Appeal declined to interfere with the trial judge’s interpretation of the contract on the basis that there was no error of law or overriding error of fact.

The lesson to be learned is that direct damages include lost profits and lost profits can only be excluded by clear and unambiguous language in the contract.  Standard contract exclusions may not be adequate for this purpose and should be carefully reviewed.