Claiming loss of profits
A claim for loss of profits arises under a claim for breach of contract or in tort whereby the action or inaction of the one party (usually, a defendant) causes the other party to suffer losses (usually a claimant).
A claim for loss of profits arise in a variety of contractual claims but is most common in the construction industry. For example, a contractor under a construction contract may allege that due to a client delaying the project so that it overruns, the contractor has lost work on other projects and consequently lost the ability to make profit on those other projects. This is an example of 1 of the main barriers to recovering loss of profits – whether the loss was a natural and foreseeable consequence of the breach. This is a difficult hurdle.
Exclusion of claims for loss of profit
If a contract contains an exclusion clause (as often seen in modern contracts), restricting a claimant’s ability to claim loss of profit (direct or indirect), it is likely to be a struggle to claim loss of profits, whether claimed as wasted expenditure or reliance losses.
Therefore, it is important to consider the wording of such exclusion clauses carefully before entering into the contract or when preparing for a claim for loss of profits.
When preparing for a claim for loss of profits, it is important to establish the following:
1) the conduct that caused the loss; and
2) if the parties could have foreseen the losses.
The alleged loss must be a direct consequence of the breach of contract, although the breach need not be the sole cause of the loss.
Forseeability of loss
When assessing foreseeability, the courts make a distinction between direct and indirect losses. Direct losses are losses which arise directly and naturally from the breach in the ‘ordinary course of things’ which are or should have been in the contemplation of the parties. Indirect losses are losses that arise from special circumstances, known to the defendant when it entered into the contract.
In the case of Victoria Laundry (Windsor) Ltd v Newman Industries Limited , the court awarded loss of profits to the claimant who was a launderer and a dryer, from the defendant seller, who failed to deliver a large second-hand boiler in time.
It was held that the claimant could recover damages for loss of profits in respect of contracts where the loss could reasonably be expected, but not the loss of profits on other contracts that the defendant was not made aware of.
Proving loss of profits
In order to award damages, the court must be convinced that without the conduct of the defaulting party, profits would have been achieved.
When a contractor, similar to the example above, is calculating his loss of profits, he must provide evidence of all tender opportunities allegedly lost as a result of the delayed project. He should also be able to prove that he would have likely won the tender and generated profit from the same.
Calculating loss of profit
Calculating loss of profits can be very difficult as various matters are taken into account. The following methods are widely used to calculate loss of profits.
- But for method – this method calculates the profits that would have been ‘but for’ the defendant’s breach.
- Comparison of before and after – this is a method where the profitability before and after the claimant’s breach is assessed to measure the loss of profit baseline.
- Yardstick method – an expert uses data of other companies undertaking similar work and in the same region to calculate profitability and earnings. This method can be used when there isn’t sufficient information about the company’s profitability.
These loss calculation methods are widely used however they have their own shortcomings as they can be prejudicial to the past track record of a company’s performance or rely on expert calculations, statistics, and industry trends.
Claiming loss of profits after a breach of contract is never straightforward. It is an uphill battle to recover loss of profits arising from a party’s action or inaction for the reasons mentioned in this article. However, experienced lawyers will be able to advise clients on whether a loss of profits claim should be pursued and if so, how best to do so.
The whole area of recovering or claiming money after a breach of contract should be considered before starting any court claim. In many cases, proving or settling a claim on legal liability issues is much easier than resolving the issue of what losses should or can be recovered. Sometimes, this is far less than a claimant thinks.
This article is intended to be for guideline purposes only. The subject matter is a complex area of law and if you require advice on your particular claim, you may contact Reema Chugh, a Senior Associate in our Dispute Resolution Team