Page 23 - Calculating Lost Profits

actual results will be known for past periods, but the damages period may extend into the future (for ex-
ample, if in the actual world the plaintiff has not been able to get back to the but-for world’s profits, and
the effect of the wrongful acts is ongoing).

Chapter 4 introduces two alternative methods for calculating lost profits, including a simpler method,
which may be appropriate in some situations.

After actual and mitigating profits have been deducted from but-for profits, the next step is normally to
discount to present value the periodic lost profits to the extent that they occur in the future (or for all pe-
riods, if using the ex ante approach) because lost profits damages are typically awarded as a present val-
ue as of the time of the judgment. See chapter 8 for a discussion of the ex ante and ex post approaches.
Chapter 9 includes a discussion of discount rates and discounting.

Causes of Action Giving Rise to Lost Profits Damages Claims

As described previously, lost profits are often awarded as compensatory damages in civil commercial
litigation. Causes of action that typically give rise to damages claims based on the injured party’s lost
profits include breach of contract and tort claims. Each of these is discussed briefly in the following text.

Breach of Contract

In a breach of contract claim, the plaintiff alleges that the defendant has failed to fulfill its performance
obligations under a contract and, thus, has breached the contract. In such matters, compensatory damag-
es based on lost profits may be sought by the nonbreaching party to the contract.

Breach of contract claims may give rise to direct damages (also called general damages), fn 5 as well as
consequential damages (also called special damages). fn 6 Direct damages flow directly from the breach
and are reasonably expected from the breach (for example, costs of replacement goods or services that
were contracted to be delivered but were not). Consequential damages also flow from the breach but are
not necessarily expected consequences of the unlawful act (for example, a failure to perform by the
breaching party, in turn, causes the plaintiff to incur other losses related to other business arrangements).
fn 7 In breach of contract claims, lost profits may be a measure of direct or consequential damages, de-
pending on whether the lost profits were contracted (direct) versus an indirect consequence of the breach
(consequential).

fn 5 Consequential, Incidental, Direct, Actual and Compensatory Damages: What are they and who gets them? Measures of Damages
in Domestic and International Transactions, 2012 American Bar Association Business Law Section Spring Meeting, by Glenn D.
West, Hermann J. Knott, and James R. Waltherp. p. 8, "Basic Damage Definitions[,] Direct or General Damages[,] Damages which, in
the ordinary course of human experience, can be expected to naturally and necessarily result from a breach. These damages are pre-
sumed to have been foreseen or contemplated by the parties as consequences of a breach, and as such are fairly straightforward."

fn 6 Consequential, Incidental, Direct, Actual and Compensatory Damages: What are they and who gets them? Measures of Damages
in Domestic and International Transactions, 2012 American Bar Association Business Law Section Spring Meeting, by Glenn D.
West, Hermann J. Knott and James R. Waltherp. p. 8, "Consequential damages still result directly from the breach, but may not be
obvious to one of the parties in advance without communication of the other party’s special circumstances."

fn 7 Bryan A. Garner, Black’s Law Dictionary, Tenth Edition (2014), West Publishing Co., Thomas Reuters, United States of Ameri-
ca, p. 472.

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