Florafax International, Inc. v. GTE Market Resources, Inc.

Supreme Court of Oklahoma · 1997 · Contracts

ContractsDamagesLost ProfitsConsequential Damageslost profitscollateral contractcontemplation of the partiesHadley v. Baxendale

Facts

Florafax contracted with GTE to provide telecommunication and telemarketing services for floral orders, and GTE knew Florafax was soliciting and handling business for outside clients, including Bellerose, which operated the 1-800-FLOWERS business. Evidence showed GTE knew Bellerose was considering routing substantial order volume through Florafax and that GTE's contract with Florafax expressly provided for consequential damages and lost profits if GTE ceased performing. The jury heard evidence that GTE intentionally understaffed Florafax's account during critical periods, especially before Mother's Day, and that Bellerose terminated its relationship with Florafax because of GTE's poor performance. Experts for both sides presented competing projections of the profits Florafax would have earned from the Bellerose relationship, and the jury awarded $750,000 in lost profits over a two-year period.

Issue

May a nonbreaching party recover lost profits arising from a third-party collateral contract when the defendant breaches the main contract? If so, does a sixty-day termination clause in the collateral contract limit lost-profit recovery to sixty days as a matter of law?

Rule

Lost profits are recoverable in a breach of contract action, including profits from an existing collateral contract, when (1) the loss was within the contemplation of the parties at the time of contracting, including where special circumstances were communicated or known, (2) the loss flowed directly or proximately from the breach, and (3) the loss is capable of reasonably accurate measurement or estimate, meaning proved with reasonable certainty rather than absolute certainty. A notice-based termination clause in the collateral contract does not bar recovery beyond the notice period where the breaching party had no right to terminate under that clause and competent evidence shows profits probably would have continued absent the breach.

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Maple Ridge Nutrition, based in Denver, hired Summit Call Solutions to run its order hotline for a two-year term. Before signing, Maple Ridge told Summit that it had just secured a deal with Green Basket Markets to route tens of thousands of seasonal supplement orders through the hotline, and the service contract stated that if Summit ceased performing, Maple Ridge could recover consequential damages and lost profits; after Summit repeatedly failed to staff the hotline, Green Basket canceled and Maple Ridge sued for lost profits from that retailer deal.

Are Maple Ridge’s lost profits from the Green Basket agreement recoverable?

Explanation. The majority held that profits from an existing collateral contract are not categorically barred. They are recoverable when special circumstances were communicated or known at contracting, the loss flowed directly or proximately from the breach, and the amount is shown with reasonable certainty. Here, Summit knew of the retailer arrangement and agreed to a lost-profits clause, so recovery is possible if Maple Ridge proves causation and reasonable certainty. (Derived from Florafax International, Inc. v. GTE Market Resources, Inc. (1997).)