Supreme Court Rules Against Broad Application of Indemnity Provision in Engineer’s Contract

The United States District Court for the Eastern District of Louisiana grants defendant, Circle K's, Motion to Dismiss concluding that plaintiff has no right to claim loss of opportunity to win the Louisiana Lottery Powerball jackpot, $103,100,000.00, because of an expired ticket issued in error.

This matter arose from plaintiff's purchase of two sets of Powerball tickets on or about January 19, 2012. The drawing that was the subject of the purchase was to be held on January 21, 2012 with a jackpot of $103,100,000.00. Sometime after the drawing date, plaintiff discovered the purchased tickets were printed on January 18, 2012 and worthless for the January 21, 2012 drawing. Plaintiff filed suit seeking damages in the amount of the Powerball jackpot.

After removal to Federal Court, on behalf of Circle K, Keogh Cox moved to dismiss the suit by claiming that Louisiana law affords no relief to plaintiff for the alleged claims. Specifically, Louisiana law explicitly precludes any relief to the plaintiff.

Keogh Cox cited La. R.S. 47:9009 which states "that there shall be no liability on the part of and no cause of action shall arise against the corporation, its governing board, staff, agents, vendors, or employees, arising out of or in connection with the issuance, failure to issue, or delivery of a lottery ticket."

Moreover, Keogh Cox asserted that the Louisiana Statute precludes payment of prize money on the basis of lottery tickets produced or issued in error. The United States District Court found merit in these assertions after extensive briefing and arguments by Keogh Cox attorneys, John P. Wolff, III, Nancy B. Gilbert, Richard W. Wolff and Mark Assad.

The United States District Court found that Circle K was statutorily exempt from the suit and, under the directives of the lottery itself, it is the sole responsibility of plaintiff to verify the accuracy of the game play. Plaintiff failed to do so and, as such, was barred from suit.

Intuitively, contracting parties in commercial transactions understand that legal consequences follow a breach of contract: If a party fails to deliver a product as promised, the breaching party can be liable for the cost to correct the breach; but what is that cost?

Say, for example, a business cancels an order to provide parts to a long-time customer because the relationship has gone sour. Legally, the liability for that breach of contract may extend beyond the cost of the order. A breaching party is liable for damages that are a direct consequence of the failure to perform and that were foreseeable at the time the contract was made, which may include lost profit. If the breach was intentional or malicious, the party's liability may extend even to direct damages that were not foreseeable.

The business that cancelled the order now faces a jury’s decision to identify the direct and foreseeable losses, a decision that, by its nature, is vague. However, the law imposes a limit on the jury’s prerogative to decide the damages. Even for a bad faith breach of contract, liability arises only for the direct, immediate consequences of the breach and there should be no liability for damages determined to be remote, indirect, or that have no necessary relation to the breach.

In a recent case, a jury found that a defendant boat engine manufacturer breached its contract with plaintiff boat manufacturer by cancelling a purchase order for engines, and further, that the engine manufacturer was in bad faith. The jury awarded $1.8 million in foreseeable lost revenues and $1.3 million in unforeseeable lost profits. The trial court threw out the “unforeseen” portion of the award because it was not a direct damage, and emphasized that a breaching party does not “become the insurer for all misfortunes that may arise from the breach.”

The boat manufacturer had argued that the cash flow expected from the sale of the boats rendered engine-less by the breach would have been invested in more personnel and capital to grow its northwest division. But, because of depleted cash flow from lost sales, that opportunity was lost. The court found, as a matter of law, that this loss was not a direct consequence of the breach, and thus, regardless of the bad faith, was not a recoverable contract damage. Simply, loss of cash flow in one part of the business that had a ripple effect in a separate division was too indirect to be a recoverable damage. See Marine Power Holding, LLC v. Malibu Boats, LLC, 2016 WL 7241560 (E.D. La. 12/15/2016).

By contrast, courts have found that loss of cash flow is recoverable where directly related to the damages suffered, such as where breach of a contract to deliver chickens to a chicken farmer caused the forced sale of the chicken farm. See Volentine v. Raeford Farms of La., 50-698 (La.App. 2 Cir. 8/15/16), 201 So.3d 325.

Failure to perform on a contract exposes a business to more than it may realize. Understanding this risk allows for smarter decisions before the breach.

The Supreme Court ruling in Couvillion Group, LLC v. Plaquemines Parish Government, 2020 -00074 (La. 4/27/20) is a reminder that an indemnity claim must be sufficiently related to the principal demand and that contract indemnity provisions are to be strictly construed.

In Couvillion, the general contractor sued the owner of a public works port project for contract delay damages resulting from a cease work order issued to allow redesign of a fuel tank platform. When the contractor submitted its delay claim, the owner requested that its project engineer review it and make recommendations. The engineer recommended payment of a little over $1 million dollars. When the owner refused to pay, the contractor sued. In response, the owner filed a third-party demand against the engineer alleging that its recommendation was erroneous and excessive and that, if it was bound by the engineer’s recommendation, then the engineer must indemnify the owner.

On behalf of the engineer, Keogh Cox attorneys argued that the engineer should not be required to reimburse the owner for any delay costs and asked for dismissal through an exception of no cause of action. Code of Procedure Article 1111 provides that a defendant in a principal action may bring in any person who may be liable to him for all or part of the principal demand. Here, that was not the situation. The engineer was not liable to the owner for any part of the contractor’s delay claim because the engineer did not cause the delay. The delay damages were incurred before the engineer made a recommendation for payment. The events giving rise to the two claims were separate and distinct: the main demand arose from the project delay and the third- party demand arose from the engineer’s recommendation of the claim amount. The Court commented that the principal claim against the owner for delay damages was too attenuated from the owner’s claim against the engineer, thus the third-party demand was improper.

The owner also relied on the indemnity provision in the engineer’s contract that required the engineer to indemnify the owner against any and all claims for personal injury or “damages to property” that may arise from its services. The Court held that the plain meaning of the term did not include the economic-only losses related to the subject delay claim. The Court further reasoned that indemnity agreements are to be strictly construed, rejecting the owner’s broader interpretation.