Introduction. The Texas Supreme Court (SCOTX), in Signature Indus. Services, LLC (SIS) v. Int’l Paper Co. (IP), reduced the $59.1 million jury award to just under $1.8 million. [638 S.W.3d 179, 186 (Tex. 2022)]. The jury’s verdict was largely based upon consequential damages sustained by SIS as a result of IP’s breach of contract. SCOTX held that, since these consequential damages were either not foreseeable or proven with reasonable certainty, SIS was not entitled to recover them.
Background. SIS is a construction and maintenance company founded in 2010 that performed maintenance for IP as well as other industrial businesses. In March 2014, SIS and IP entered into a contract for SIS to upgrade a vessel known as a slaker. IP used the slaker to recycle chemicals for making paper. Apparently, IP was required to initially pay $775,000 to SIS. However, SIS could also charge for other costs as they were incurred.
Delays and disputes arose, and SIS claimed that it was still owed $2.4 million after it finished the work. In the interim, SIS had entered into confidential negotiations to be acquired for the amount of $42 million, by another company. Apparently, these negotiations faltered, after IP refused to pay the $2.4 million to SIS for its services. Subsequently, SIS began experiencing cash flow problems and was not even able to timely pay payroll taxes, resulting in penalties being assessed.
SIS sued IP for breach of contract and fraud. SIS’s expert testified that as a result of IP’s breach, SIS lost $42 million from the lost sale, SIS’s book value decreased by $12.4 million, and SIS incurred $1.9 million in penalties for non-payment of payroll taxes. The total of these consequential damages was $56.3 million. Based upon the evidence, the jury awarded this $56.3 million plus the $2.4 million in direct damages that SIS was claiming for services provided to IP. The court of appeals reduced the $56.3 million in consequential damages to $12.4 million and upheld the $2.4 million in direct damages. The parties then petitioned SCOTX for review.
SCOTX began its analysis by discussing direct and consequential damages.
Direct damages often include restoration of “the benefit of a plaintiff’s bargain.”…Consequential damages, on the other hand, compensate the plaintiff for foreseeable losses that were caused by the breach but were not a necessary consequence of it.
Signature Indus. Services, LLC v. Int’l Paper Co., 638 S.W.3d 179, 186 (Tex. 2022).
SCOTX found that IP did not know about the pending $42 million sale of SIS to the third party. In fact, the negotiation of this sale was confidential. Since these consequential damages were not foreseeable by IP, then SIS was not entitled to recover them.
SCOTX next addressed the jury’s award of $12.4 million for the loss of SIS’s book value. The Court found that SIS failed to prove these damages with reasonable certainty and that loss of book value was not a proper measure of damages. Therefore, this part of the damages award was also not recoverable.
SCOTX then went onto address the $2.4 million awarded in direct damages for unpaid services. The Court upheld all but $622,560 of this part of the award. This was disallowed because it was based upon charges for overhead, tax penalties, and lost revenue. Unfortunately for SIS, recovery of these charges was prohibited by the contract.
As a result, SCOTX rendered judgment that SIS take nothing on its claim for consequential damages and reduced the award for direct damages to approximately $1,777,440.
Conclusion. The plaintiff must prove that consequential damages, like those being claimed by SIS, are foreseeable. This makes it exceptionally challenging to recover these types of damages. Further, these damages must be proven with reasonable certainty. This will almost always require the plaintiff to support these damages with competent expert testimony.