Mentis Sciences, Inc. v. Pittsburgh Networks, Inc.

Supreme Court of New Hampshire · 2020 · Torts

TortsContractsEconomic loss doctrineConsequential damagesLimitation of liabilitydata losslost profitsrecreation costs

Facts

Mentis Sciences hired Pittsburgh Networks to provide IT services, including monitoring, data backup, network services, and maintenance, under a service agreement containing a clause excluding liability for indirect, special, incidental, punitive, or consequential damages, including loss of data, business interruption, or loss of profits. After a server drive failed, some of Mentis's data was corrupted and permanently lost because it had not been properly backed up. Mentis alleged that the lost data was valuable intellectual property, that it had to spend substantial sums to recreate the data, and that it lost business opportunities because it could not bid on projects without the data. Mentis sued for breach of contract and negligence.

Issue

Whether damages for the cost of recreating lost data and for lost business opportunities were direct damages or consequential damages barred by the contract's limitation of liability clause, whether that clause was enforceable, and whether the economic loss doctrine barred the negligence claim.

Rule

Direct damages are based on the value of the promised performance itself, while consequential damages are based on the value of some consequence that performance may produce or on losses caused by the absence of that performance. A limitation of liability clause excluding consequential damages is generally enforceable when freely agreed to and not contrary to public policy. The economic loss doctrine bars tort recovery for purely economic losses arising from a contractual relationship unless the defendant owed an independent duty of care outside the contract; negligent misrepresentation claims survive only when they concern inducement to enter the contract rather than performance of contractual duties.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Denver, Sierra Pulse Analytics hired FrontRange Systems Group, a private IT services company, to maintain its servers and run nightly backups for a fixed annual fee. The contract barred recovery of indirect, special, incidental, and consequential damages, including loss of data and lost profits. After FrontRange failed to back up a research database, Sierra spent $180,000 reconstructing the missing files from paper notes and laboratory logs.

If Sierra sues for breach of contract to recover the reconstruction costs, how should those damages most likely be classified?

Explanation. The majority defined direct damages as based on the value of the promised performance itself, while consequential damages are based on losses caused by the absence of that performance. Reconstructing lost information is not the value of the IT services; it is an expense incurred because those services were not properly performed. So the reconstruction costs are consequential and fall within a valid exclusion of consequential damages. (Derived from Mentis Sciences, Inc. v. Pittsburgh Networks, Inc. (n.d.).)