When a vendor breaches its contract to deliver goods, or a third party wrongfully induces a contracting party to breach a contract of any kind, or in certain other kinds of cases, often the largest part of the resulting damages will be a loss of the profits that the injured party had expected to receive. But how does a party successfully prove its lost profits claim?

The burdens of proof for recovering lost profits are different in different cases. It isn’t always necessary to prove the exact amount of the damages suffered, but the injured party is invariably required to provide evidence of a sufficient basis for the court or jury to accept an estimate of the amount of lost profits being requested. The proof must be substantial enough for the court or jury to reach a “reasonably certain determination of the amount of gains prevented.” Also, while lost profits must be proved to a “reasonable certainty”, that term can be defined in more than one way. Some courts require proof of future damages by a “fair preponderance of evidence” while others have stated that the amount of evidence to be reasonably certain if it has established that the validity of the claim is “probable or more likely than not.”

One of the most numerous types of cases in which lost profit damages are disallowed are those in which the claimant is a “new business.” It is usually held that the lack of a definite record of past profits makes it impossible to satisfy the “reasonable certainty” requirement and that new-business claims are ‘too speculative.’ But it isn’t always impossible for a new business to meet that burden of proof. For example, when a new company’s operators were very experienced in that field, or when the business was proved to have had a “ready reservoir of customers,” along with other proof for its damage calculations, courts have held that such proofs were sufficient to permit a recovery.

Because the uncertainty of lost profits often makes it difficult to prove them with mathematical exactitude, they must be alleged in detail and proved by admissible evidence that proves that damages were actually suffered. In all cases, what must proved are the claimant’s net profit, and this fact allows the defending party great latitude in the discovery of the claimant’s operations. In some cases, proof of lost profits is relatively uncomplicated, e.g., when it is necessary only to show the profit that would have been made on a transaction after deducting what the claimant’s costs would have been if the transaction had gone through.

Where the calculation is not so simple, courts have recognized that parties can prove their lost profits in various ways. The two most frequently used methods are the “before and after theory” and the “yardstick test.” The “before and after theory” requires the claimant to show its prior earnings. The “yardstick test” involves demonstrating the profits of a business that is closely related to that of the claimant’s business. Regardless of which method is used, the evidence must be carefully compiled and presented to the court from the very beginning of the case.

New-business claims, or evidence that requires speculation or opinion may require presentation of both expert testimony and fact testimony. Some courts have even admitted lay-witness testimony where the witness has direct knowledge regarding the profit calculation, e.g., allowing the plaintiff’s bookkeeper and principal to testify about the lost profits. To ensure that such testimony can be admissible, claimants should make sure that experts balance a “reasonable estimation of damages and speculating about what could have been.”

In cases of breach-of-contract claims, in addition to the standard requirements of proving damages to a “reasonable certainty,” most courts require proof that the lost profits were within the contemplation of the parties at the time of contract. The “contemplation of the parties” test can be met by requiring that the loss be the natural, primary and probable consequence of the breach, . . . the profits arising from the performance of the contract or the loss [resulting] from its nonperformance were within the contemplation of the parties, and . . . the profits are not so uncertain or contingent as to be incapable of reasonable proof.”

The types of intentional torts claims in which recovery of lost profits may be allowed include: tortious interference with the performance of a contract or prospective economic advantage, fraud, breach of fiduciary duty, defamation, and even malicious prosecution. In such cases claimants must prove the foreseeability of the harmful conduct and that it caused the loss of profits. These cases usually entail the claimant showing a comparison of profits before and after the occurrence of the tortious conduct.

Lost-profit claims are often challenged at every stage of a case, from motions to dismiss them at the beginning, through pretrial motions for summary judgment through the trial itself.

Careful attention to making legally sufficient claims in the complaint, providing sufficient evidence to defeat summary judgment and knowing how to get trial evidence admitted are necessary to recover these potentially significant damages..

Richard Turyn is a BSBN Partner and the Editor of BSBN Direct. He may be contacted at rturyn@ballonstoll.com.

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