How do you measure lost profits in a breach of contract case?

The legal standard for lost profits claims hinges on establishing a clear link between the breach of contract and the financial losses incurred. It's essential to demonstrate that these losses were foreseeable by both parties at the time of contracting and not merely speculative. Moreover, the injured party must show reasonable efforts to mitigate damages. Adherence to these principles ensures that compensation aligns with the fundamental goal of restoring the injured party to the position they would have been in had the contract been fulfilled.

At the outset it must be noted that the measure of damages, including loss of profits, in contracts (and in tort) is “largely a pragmatic exercise and is not subject to hard and fast rules” (Damages in a Commercial Context, S Jacobs). Cognizant of this principle, the fundamental rule regarding damages for breach of contracts is that stated by Parke B. in Robinson v. Harman (1848), being: "where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed".

The estimation of lost profits typically requires the comparison of: a) The financial position in which the injured party is in as a result of the alleged breach ('actual position'), and b) The financial position in which the injured party would have been in had the alleged breach not occurred ('but-for position'). Financial experts often carry out a significant amount of work to construct these two positions. Estimating the 'but-for position' proves inherently more challenging due to its entirely hypothetical nature and dependency on various underlying assumptions. In this process, experts commonly rely on: 1) company’s own forecasts, 2) extrapolation of past business performance and 3) comparison with other similar businesses.

In calculating lost profits, it's crucial to consider the contract's context and breach. The before-and-after method compares revenue and expenses pre- and post-breach, while the yardstick method benchmarks against similar businesses. The projected profits method relies on contractual projections. However, these methods presume performance equivalence. Additional factors such as market conditions, industry norms, and mitigating actions post-breach can also impact calculations, ensuring a comprehensive assessment of damages.

Calculating lost profits involves navigating numerous challenges. These include data reliability, selecting suitable methods and time frames, accounting for variables and contingencies, and adjusting for economic factors like inflation and interest. Expert credibility and expertise are crucial. Additional complexities may arise from legal nuances, industry-specific considerations, and the need for clear documentation and presentation to withstand scrutiny. Striking a balance between precision and feasibility is paramount in this intricate process.

Anticipating objections or challenges from the opposing party or the court is another key step. Be prepared to provide alternative or supplemental calculations if needed. Finally, communicate your results and rationale clearly, avoiding technical jargon to ensure that your explanations are easily understood. Key practices include: - Consulting with a qualified expert for independent calculations - Gathering and preserving relevant data to support your case - Comparing and justifying different calculation methods - Preparing for potential objections and providing alternative calculations - Communicating results clearly and persuasively without technical jargon