Opinion
99 Civ. No. 3054 (GEL).
December 27, 2000.
Linda Moreno, Scotto Georgoulis Dockery, New York, NY., for Plaintiff World-Link, Inc.
Kevin C. Walker, Kelly Drye Warren, New York, NY., for Defendant Citizens Telecommunications Co.
OPINION AND ORDER
In this suit for breach of contract, defendant Citizens Telecommunications Co. ("CTC") argues that a provision of the written contract between the parties precludes the award of consequential damages, which constitute a large part of the relief requested by plaintiff WorldLink, Inc. ("Wold-Link"). Before the case was reassigned to me, this argument was presented to the judge formerly in charge of the case in the form of a short "pre-motion letter," required under that judge's individual practice rules, seeking permission to file a motion for summary judgment. At a conference before me on December 14, 2000, the parties urged that, rather than inviting extensive motion papers, I simply read their short submissions and advise them how I interpreted the contract provision at issue. Armed with such an interpretation, the parties will be in a position to undertake further settlement discussions, make formal summary judgment motions, or seek other relief. This order responds to that request.
DISCUSSION
World-Link and CTC are parties to a formal written contract ("the Agreement"), dated September 2, 1996, under which CTC agrees to provide certain telecommunications services to World-Link, for specified prices, for a three-year period. World-Link alleges that CTC breached the contract by refusing to provide further service after November 15, 1997. CTC argues that even if it did breach the contract, its liability is limited by the express terms of the Agreement, which preclude any consequential damages.
The relevant provision reads, in full:
5. LIABILITY OF CTC
CTC's sole liability under this Agreement for interruption of service or failure of equipment shall be limited to the amount of actual CTC charges incurred by WORLD-LINK during a period of such interruption, provided that such interruption was caused solely by CTC's willful act or omission or negligence. CTC shall not be liable for any interruption caused by the gross negligence or any act or omission of WORLD-LINK or any third party furnishing any portion of the service. CTC MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BY NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. IN NO EVENT SHALL CTC BE LIABLE TO WORLD-LINK OR ANY OTHER PERSON OR ENTITY FOR INDIRECT, CONSEQUENTIAL OR SPECIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOST REVENUES OR PROFITS, EVEN IF CTC HAS BEEN ADVISED OF THE POSSIBILITY THEREOF.
Agreement ¶ 5 (capitalization in original). CTC relies on the last sentence of this paragraph, arguing that it flatly precludes consequential damages of any sort, under any circumstances, regardless of the nature of the breach. World-Link replies that this sentence, taken in context, is limited by the opening sentence of the paragraph, and thus applies only to liability for "interruption of service or failure of equipment." As the Agreement includes a merger clauase, which provides that "This Agreement constitutes the entire understanding" between the parties (Id. ¶ 6), and thus precludes resort to prior oral understandings, my task is limited to determining the most persuasive reading of the text of the document itself. See Grupo Sistemas Integrales de Telecomunicacion S.A. v. ATT Communications Inc., No. 92 CIV. 7862 (KMW), 1996 WL 312535, at *7 n. 3 (S.D.N.Y. June 10, 1996) ("a merger clause puts parties on special notice that reliance on statements extrinsic to the contract is generally unwarranted"). Applying that standard. I find CTC's interpretation of the language more persuasive.
World-Link is correct, to begin with, that the Agreement itself distinguishes "interruption of service or failure of equipment" from other kinds of breaches of contract. A permanent cessation of service by CTC for its own business reasons, such as World-Link alleges occurred here, is clearly not an equipment failure. Neither can a permanent termination be characterized as an "interruption of service," since the term "interruption" implies a temporary loss of service, for some length of time, after which service is resumed. See Webster's Third New International Dictionary 1182 (defining "interruption" as "temporary cessation: intermission, suspension"). Moreover, the Agreement at several places grants CTC the right to "terminate" the agreement under certain circumstances. Agreement ¶¶ 8.1 (failure of World-Link to reach a certain billing level after the first year of the Agreement) and 16 (assignment of World-Link's rights without consent of CTC). CTC is alleged in this complaint to have terminated the Agreement when it did not have the right to do so, not merely to have "interrupt[ed]" service. Thus, if the damages limitation language relied on by CTC only applied in the circumstances referred to in the first sentence of ¶ 5, World-Link would be correct that it did not apply to the breach alleged.
But nothing in ¶ 5 so limits the scope of the exclusion of consequential damages. As CTC points out, the language of the consequential damages prohibition itself is sweeping and absolute. It does not say, "In the event of interruption or service or equipment failure, there shall be no consequential damages." Instead, it is says that "In no event" is CTC to be required to pay consequential damages. Id. ¶ 5 (emphasis added). Standing alone, the sentence quite clearly provides that CTC shall not be liable for consequential damages for any type of breach, not merely that consequential damages shall not be awarded in the case of certain particular types of breach. World-Link's alternative reading of ¶ 5 essentially renders the words "In no event" meaningless, a result discouraged by conventional canons of interpretation. See, e.g., Sayers v. Rochester Telephone Corp., 7 F.3d 1091, 1095 (2d Cir. 1993) (when interpreting a contract, court must "safeguard against adopting an interpretation of a provision that would render any individual provision superfluous"). Indeed, if the last sentence of ¶ 5only applied to service interruption and equipment failures, it would be superfluous, since the first sentence already effectively precludes consequential damages, by specifying a specific, limited damage calculation which does not include them.
Similarly, the first sentence seems to limit liability in the case of an interruption even more severely than the last. The last sentence prohibits the award of particular categories of damages, while the first sentence not only prohibits consequential damages, but any other kind of calculation of harm except the formula specifically set forth.
Nor is there any explicit syntactical connection between the paragraph's last sentence and the earlier sentences discussing service interruptions. No word or phrase in the sentence concerning consequential damages connects it grammatically to what precedes it. Contractual drafters are perfectly capable of using language that connects one sentence to another. See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 63 (1995) (reaffirming the "cardinal principle of contract construction: that a document should be read to give effect to all its provisions and to render them consistent with each other"). Compare, for example, the second sentence of ¶ 5, which specifically refers back to the first: "during a period of such interruption, provided that such interruption was the product of CTC's willful act or omission." (Emphasis added.) Such an express connective would be particularly necessary here, since the consequential damages prohibition is separated from the "interruption of service" sentences by an intervening discussion of implied warranties, which itself bears no obvious connection to the "interruption of service" scenario. But even if the sentence about consequential damages immediately followed the first two sentences, its grammatical structure would lend itself more naturally to the interpretation that its opening words ("In no event") marked a contrast to the limited circumstances addressed in the first two sentences, than to the view that it simply continued to address those circumstances.
The overall context in which this language appears actually supports the absolute interpretation of the consequential damages exclusion, rather than, as World-Link contends, undermining it. First, ¶ 5 is headed "Liability of CTC." This heading does not suggest that the paragraph to follow will concern the consequences of "interruption of service or failure of equipment, " but rather that it will deal with the general topic of the extent and/or limitation of CTC's liability under the Agreement. The caption thus leads us to expect a series of provisions about liability, rather than a series of provisions about the consequences of one type of service failure.
Second, the content of ¶ 5 is true to its heading. The paragraph contains four sentences, each appearing to address a separate limitation of liability. The first sentence limits liability for service interruptions or equipment failure to "the amount of actual CTC charges incurred by World-Link during a period of such interruption." As noted above, this sentence already would seem to preclude any consequential damages arising from this kind of breach. The second sentence again expressly refers to the situation of service interruptions, but contains a different limitation of liability applicable to a subset of such interruptions: CTC shall have no liability for an interruption, not even the limited liability specified in the first sentence, if the interruption is caused by acts or omissions of World-Link or of third-parties, as opposed to being the fault of CTC itself.
The third and fourth sentences of ¶ 5, in contrast to the first two, do not expressly refer to "interruption." Instead, they are characterized by broad and sweeping language. In addition, unlike the first two sentences, which are tailored to the specific nature of the services that are the subject of this particular Agreement, and address one particular type of situation that may arise in this particular business, the third and fourth sentences are fairly standard terms that appear frequently in contracts of various kinds. Both disclaimers of warranties and consequential damages provisions are common in various kinds of contracts. For warranty disclaimers, see, e.g., Maltz v. Union Carbide Chem. Plastics Co., 992 F. Supp. 286, 304 (S.D.N.Y. 1998) ("It is well-settled that under New York law, parties to a contract may exclude or modify implied warranties so long as the warranty disclaimer is conspicuous and specific") (citing N.Y.U.C.C. § 2-316(2) (McKinney 1993)). For exclusions of consequential damages, see, e.g., EJS-ASOC Ticaret Ve Danismanlik, Ltd. v. ATT Co., 886 F. Supp. 331, 333 (S.D.N Y 1994) (precluding award of consequential where agreement stated that "[i]n no event shall AT T or its parent or affiliates be liable to Distributor, any Retailer or any other company or entity for any incidental, reliance, consequential or any other indirect loss or damage (including lost profits or revenues) arising out of or in connection with the sale of Products or the supply of Services pursuant to this Agreement"); Met. Life Ins. Co. v. Noble Lowndes Int'l. Inc., 84 N.Y.2d 430, 433 (1994) (precluding award of consequential damages where agreement stated that "[i]n no event shall [plaintiff] be liable for any lost profits, lost savings or other consequential damages, even if [plaintiff] has been advised of the possibility of or could have foreseen such damages") (alterations in original). Moreover, those sentences are distinguished from the first two not only by their content, but also by their typeface, appearing in capital letters of a sort typically and appropriately used to call a party's attention to broad disclaimers of liability. See Landis and Staefa (UK) Ltd. v. Flair Int'l Corp., 60 F. Supp.2d 14, 22 (E.D.N.Y. 1999) ("As the only boldface print in the only four paragraphs on the first page of the agreement, it cannot be said that the disclaimer did not call attention to itself'). There is no obvious explanation for calling such dramatic attention to a disclaimer of consequential damages that applied solely to the circumstance of an interruption of service, where the opening sentence of the paragraph, which is not thus highlighted, had already effected a similar prohibition of consequential damages in that situation.
The third sentence of ¶ 5, the first one to be printed entirely in upper-case letters, contains a limitation of liability that is different from the first two in the manner of its operation as well as in its content. Rather than discussing the extent of liability in the event of a specific type of breach, the third sentence is a disclaimer of warranties, express or implied. The first sentence identified a particular form of breach of the agreement, and limited CTC's liability in the event of such a breach by defining the measure of damages; the second, still concerned with that form of breach, eliminates any liability based on the party to whom the failure can be traced. But the third sentence is not concerned with either damages or with fault. Rather, it limits liability by defining the substantive terms of the contract. By disclaiming warranties, including that of mechantability and fitness for a particular purpose, CTC is not simply stating how much it will have to pay if it fails in some way to provide the service; it is defining the quality of the service it is obliged to provide. The disclaimer of warranties must, by its nature, apply more broadly than in the limited event of an interruption of service or equipment failure, for such a disclaimer says that even if the service is not interrupted, but is nevertheless substandard in some way, CTC can't be held accountable on the theory that it had warranted that its services would be of merchantable quality or fit for the intended purposes. In style, language and substance, then, the third sentence seems to mark a transition away from the limited context marked by the first sentence of ¶ 5. Even before getting to the sentence excluding consequential damages, the drafters of the contract have moved beyond that context.
The final sentence of ¶ 5 is the consequential damages provision itself. Like the third, and unlike the first two, it is extremely broad in language and emphatic in its type-face. On its face and in its context, as discussed above, it appears as a complete prohibition of consequential damages of any kind, in any circumstance.
Third, ¶ 5 is parallel to ¶ 6 of the Agreement, which is headed "Liability of World-Link." Paragraph 6 states in full:
WORLD-LINK shall be liable to CTC for any loss or theft of or damage to any of CTC's equipment located on WORLD-LINK's premises, however caused, and shall defend and hold CTC harmless from any claims arising from WORLD-LINK's customers. WORLD-LINK assumes all liability associated with an unauthorized PIC "slamming", however caused. WORLD-LINK shall indemnify and defend CTC from any cost or expense due to claims for libel, slander, infringement of copyright, trademark, trade name or trade secret arising out of the contents of WORLDLINK's transmissions using CTC's service and equipment and claims for patent infringement arising from the combination or connection of the equipment to any property of WORLD-LINK.
Like ¶ 5, this paragraph plainly does not only address a single source of potential liability, and specify its consequences. Rather, it treats a series of situations (theft or property damage, subscriber fraud, "slamming," defamation, etc.), each in a separate sentence, specifying in each case the extent of liability assumed or not assumed (in some situations, World-Link simply assumes liability; in others, it also agrees to indemnify and defend). This parallel provision therefore lends further support to the conclusion that ¶ 5 is intended to address a variety of limitations on liability, and not merely to address the single context of service interruptions.
One difference between ¶ 5 and ¶ 6 is that ¶ 5 ("Liability of CTC") contains four sentences containinglimitations on CTC's liability, while ¶ 6 ("Liability of World-Link") contains four sentences identifying situations in which World-Link assumes liability (plus one additional sentence embodying a substantive limit on World-Link's rights to use CTC's services or equipment). Counsel for World-Link stated at the conference that the document was drafted by CTC, which perhaps accounts for that difference.
Finally, it is not the case, as World-Link apparently contends, that the wording and context of the provision can be disregarded, because a literal interpretation would defeat the practical intentions of the parties by rendering the agreement worthless to World-Link. The Agreement quite clearly obliges CTC to provide the contracted services for three years, and limits CTC's right to terminate the service to particular defined circumstances. If, as alleged, CTC terminated for reasons not authorized by the Agreement, simply for its own convenience, that would be a breach of the contract. Moreover, in that event, unlike the case of a mere "interruption" of service, CTC would not be limited to the specific damage formula provided by the first sentence of ¶ 5, but would be required to respond with the usual contract measures of damages, such as the difference between the contract price of the services and the market price World-Link was required to pay to obtain replacement services. Prohibitions of consequential damages are common and enforceable in contracts for the provision of goods and services. See, e.g., McNally Wellman Co. v. New York State Elec. Gas Co., 63 F.3d 1188, 1195 (2d Cir. 1995) ("It is axiomatic that parties to a contract [are] free to allocate risks and shield themselves from liability"). Indeed, since at least the time of Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. 1854), consequential damages have been regarded as exceptional and problematic, not normal and expected, in contract actions. It may have been unwise, given the nature of its business, for World-Link to enter an Agreement containing such a provision. But it did, and it cannot be said that the exclusion of consequential damages is so odd, or so inconsistent with the obligations undertaken by CTC, that it simply can't mean what it says.
CONCLUSION
I conclude that the Agreement prohibits the award of consequential damages to World-Link. The parties are directed to confer with each other concerning the effect of this conclusion on the litigation, and to appear for a conference on February 14, 2001, at 11:00 a.m., at which time they are to be prepared to discuss what issues, if any, remain for trial or other disposition in light of this ruling.
SO ORDERED: