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Contract Disputes |
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At the heart of nearly every business dispute is a contract. Who breached the contract? How bad are the damages? This article talks about how even a new business can prove it has been damaged because someone else breached a contract.
Article:
Proving Lost Profits in Breach of Contract Cases where the Plaintiff is a New Business
This article briefly outlines a number of approaches that new businesses have used successfully in breach of contract lawsuits to substantiate their lost profit damages. This article incorporates cases from a variety of jurisdictions, though Georgia cases are emphasized.
I. General Measure of Damages in a Breach of Contract Lawsuit. 
Under Georgia law, as in many states, the general rule of breach of contract damages is that the plaintiff is entitled to recover money damages sufficient to put it in the position in the financial position it would have enjoyed had the defendant performed the contract. The measure of damages is often referred to as the “benefit of the bargain.”
Additionally, the party seeking damages in a breach of contract case carries the burden to prove the cause and amount of its damages with reasonable certainty.
As a general rule, under Georgia law, certain and non-speculative business profits are recoverable, but speculative profits of a new business are not. See O.C.G.A. § 13-6-8.
Therefore, to recover lost profits in a breach of contract lawsuit, the plaintiff must provide the finder of fact with a rational basis to ascertain plaintiff’s lost profits. See Aon Risk Services, Inc. of Georgia v. Commerical & Military Systems Co., Inc., 2004 WL 2482508, *3 (Ga.App. 2004) (citation omitted) (lost profits must be shown with reasonable certainty).
II. How New Businesses Have Substantiated Their Lost Profits in Breach of Contract Lawsuits.
Calculating lost profits is particularly challenging in the case of a new business without an established financial history. Such a claim is challenging to substantiate in light of the company’s relatively young age and lack of profit history. See e.g. Roboserve, Ltd. v. Tom’s Foods, 940 F.2d 1441, 1451-1452 (11th Cir. 1991) (lost profits recoverable where financial history of profits or diminishing losses makes anticipated profits reasonably ascertainable).
1. Comparable Business Experiences.
Where a business is denied the chance to profit from a contract, it may extrapolate from reasonably reliable data what its profits would have been. According to the Former Fifth Circuit Court of Appeals (now the Eleventh Circuit), a plaintiff that is driven out of business before it is able to compile an earnings record sufficient to allow estimation of lost profits, may use a “yardstick test” which consists of a study of the profits of business operations that are closely comparable to the plaintiff’s. See Lehrman v. Gulf Oil Corp., 500 F.2d 659, 667 (5th Cir. 1974). Utilizing the comparable business experiences, a company that has been in business only a short time may recover breach of contract damages for lost profits. See G.M. Brod & Co., Inc. v. U.S. Home Corp., 759 F.2d 1526, 1537-1538 (11th Cir. 1985).
In cases where lost profit calculations are based on the party’s financial experience, a witness with experience in the plaintiff’s industry may be qualified to address the amount and extent of damages suffered by the new business plaintiff. See Teen-Ed v. Kimball International, 620 F.2d 399 (3rd Cir. 1980). A new business might offer its employees to testify to the extent of breach of contract damages. See e.g. KW Plastics v. U.S. Can Co., 199 F.R.D. 687, 688-689 (M.D.Ala. 2000) (plaintiff’s controller and vice president testifies as expert on lost profits).
2. The Value of the Contract.
Of course, computation of lost profits based on figures contained in the contract is a simple and effective method of proving lost profit damages. If the new business plaintiff executed a $1 million sales contract that the defendant failed to honor, that figure provides a definite starting point for calculating lost profit damages.
Because a new business would have fixed and variable costs associated with carrying out a contract, a new business plaintiff may be required to prove with reasonable certainty its cost of performing the contract to recover profits based on the value of the contract in dispute. See e.g. Richfield Capital Corp. v. Federal Sign Division of Federal Signal Corp., 222 Ga. App. 757, 759, 476 S.E.2d 26, 28-29 (1996); Hospital Authority of Charlton County v. Bryant, 157 Ga. App. 330, 331, 277 S.E.2d 322, 324 (1981).
Some “new economy” businesses use production methods that allow the business to increase output without proportionately increasing costs of production. The model case is one in which plaintiff bears great fixed costs to make a product for its first customer and low variable costs to serve additional customers. In such cases, the new business plaintiff may argue that its fixed overhead expenses should not be deducted from its lost profit damages. See e.g. John A. Cookson Company v. New Hamshire Ball Bearings, Inc., 2001 WL 1640111, *5 (N.H., Dec. 24, 2001); see also Schulke Radio Production v. Midwestern Broadcasting Co., 453 N.E.2d 683, 686 (Ohio 1983).
3. Expert Economic Testimony.
Expert testimony may provide the requisite certainly and exactness on breach of contract damages.
An expert economist may offer opinion testimony as to the amount of profits lost by a business as a result of a breach of contract after considering facts and reviewing relevant documents with the aid of arithmetic and geometric models to determine financial losses. See McDermott, 811 F.2d at 1427-1428 (lost profits calculated using models, averages and estimations); G.M. Brod, 759 F.2d at 1539, citing Lehrman, 500 F.2d at 668 (loss of profit damages may be proven by indirect means resting on adequate data).
Expert analysis of data to calculate lost profits may be necessary because business fortunes are influenced by a variety of variables and relatively sophisticated econometric techniques, such as regression analysis of multiple variables, may be necessary to isolate the effect of defendant’s conduct on plaintiff’s finances. See Real Estate Value Co., 979 F.Supp. at 741 (profits frequently result of several intersecting variables).
The standards for the admission of expert testimony under the Federal Rules of Evidence appears to be tightening as the U.S. Supreme Court encourages federal district court judges to assume a more prominent gate keeping function. On this site: Preparing for Expert Testimony at Trial.
Expert economic testimony on lost profits predicated on untenable assumptions may be successfully challenged. See e.g. Club Car, Inc. v. Club Car (Quebec) Import, Inc., 362 F.3d 775, 780 (11th Cir. 2004) (expert who calculate lost profits based on flawed methodology properly excluded); Target Market Publishing, Inc. v. ADVO, Inc., 136 F.3d 1139 (7th Cir. 1998) (expert calculations on profits lost in failed joint venture properly excluded because based on untenable assumptions about mailing response rate, geographic scope, delays and losses).
III. Conclusion.
A new business faces a substantial challenge in proving lost profit damages in a breach of contract suit because the new business plaintiff does not have an extensive track record as basis for its claims. The defendant may have denied the new business plaintiff its first opportunity to succeed in business. As the foregoing review begins to illustrate, there are a number of methods available to a new business plaintiff to substantiate a claim for lost profits in a breach of contract lawsuit. Determining whether to file a lawsuit and how to proceed requires accurate and thorough assessment of the facts and issues involved in a particular case.
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A high-tech
company had
been in a business
dispute for eight years.
Our lawyers took on the lawsuit for the company, and proved – document by document, witness by witness – why the case was not worth what the other side wanted. We helped the clients settle the case reasonably – so they could get back to business. |
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Most insurance
policies will not
cover breach of
contract disputes. When companies are sued for breach of contract, the cost of litigation alone can have a major impact on the bottom line. Attorney Mary Donne Peters has represented a number of companies in early business conflict management programs. These programs reduce fees and expenses associated with protracted litigation and, at times, allow companies that disagree about the terms of a contract to continue a business relationship after the conflict is resolved. |
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