key term - Lost profits

Definition

Lost profits refer to the earnings a party could have reasonably expected to gain from a contract if it had been fulfilled, but which were instead lost due to a breach of that contract. This concept is crucial in determining the appropriate damages when a contract is not performed as agreed, linking directly to expectation damages, reliance damages, and restitution remedies.

5 Must Know Facts For Your Next Test

1. Lost profits must be proven with reasonable certainty, meaning parties cannot claim speculative or uncertain damages.
2. The calculation of lost profits typically considers factors like market conditions, previous sales data, and the nature of the breach.
3. Courts may limit lost profits if they are deemed too remote or unforeseeable at the time the contract was formed.
4. Lost profits can be claimed even when a party has not yet made a profit but has a history of similar transactions showing potential profitability.
5. In some cases, lost profits can include future profits that would have been earned over a specific period if not for the breach.

Review Questions

• How can lost profits be established in a breach of contract case, and what evidence is typically required?
  • To establish lost profits in a breach of contract case, the non-breaching party must provide evidence showing the expected profits had the contract been fulfilled. This may include financial statements, sales forecasts, historical performance data, and expert testimony. Courts look for reasonable certainty in these projections, requiring that the losses are not speculative but instead based on solid evidence of what could have been earned.
• Discuss how lost profits differ from reliance damages and when one might be preferred over the other.
  • Lost profits focus on potential earnings that could have been realized from a contract had it been fulfilled, while reliance damages compensate for costs incurred based on reliance on the contract itself. If a party had significant expenses tied to preparing for performance (like purchasing inventory), reliance damages may be more suitable. Conversely, if clear evidence of profitable opportunities exists, lost profits would be more applicable to claim compensation for anticipated earnings.
• Evaluate how courts determine the validity of lost profit claims and what limitations might apply.
  • Courts assess lost profit claims by examining their reasonableness and certainty, ensuring that the claimed amounts are not speculative. Limitations arise if the profits were unforeseeable at the time of contract formation or too remote due to various market dynamics. Additionally, if the breaching party can demonstrate that the plaintiff failed to mitigate their losses effectively, this can also reduce or negate potential claims for lost profits.

Related terms

Expectation Damages:

Compensation awarded to a party based on what they expected to gain from the contract if it had been performed as promised.

Reliance Damages:

Damages awarded for expenses incurred based on the reliance on a contract that was breached, rather than what was lost in profits.

Restitution: A remedy aimed at restoring the non-breaching party to the position they were in before the contract was made, often involving reimbursement for benefits conferred.