Damages Expert Witnesses Can Provide Clarity in Lost Profits Cases

Lost profit cases typically involve a wrongdoer, the defendant, who caused economic damage to a wronged party, the plaintiff. To recover what was lost by the defendant’s wrongful action, the plaintiff must prove in a court of law that they suffered general damages, including lost profits. They must show the defendant caused a specific or estimated loss that is reasonably certain, not a guess. Lost profit calculations are necessary to prove damages in breach of contract actions that require plaintiffs to prove damages that the parties could have foreseen at the time they made their agreement.

Lost Profits in Contract Actions

When businesses or individuals enter into an agreement, the contracting parties have expectations to gain advantage or profit. Since contracts by their nature are mutual exchanges of obligations—I will do this if you do that—those entering contracts understand the rights, responsibilities, and rules applicable to each party. An agreement spells out the rules of the relationship and the scope of the work assigned to each. The expectation is that everyone will do their part as they agreed, but the parties also understand that a contract is a legal document enforceable by law if either party fails to keep their end of the bargain. In other words, anticipated losses are assumed by the very nature of a relationship based on mutual gain by each the other’s performance under the contact.

For example, if a paint manufacturing

company enters into an agreement with a supplier of solvent, used to make paint, to buy 5,000 gallons of solvent at the supplier’s price, what happens when the supplier breaches the contract? The paint manufacturer expected to make paint to sell to its customers for profit and the supplier expected to be paid for solvent at a profit. Both parties anticipated a gain. Both parties also anticipated loss if the other party breached, by not paying for solvent or not supplying solvent. A broken promise to perform causes both to lose business profits: the supplier’s profitable payment and the manufacturer’s anticipated profits lost by canceled or delayed orders or even future business customers.

A plaintiff whose contract was wrongfully terminated may seek payment for reliance damages—replacement of the expenses incurred in preparing to perform under the contract, which would place the plaintiff in the same position they were in before entering the contract—or lost profits, which gives the wronged party the benefit of the bargain, the profit they would have made had the contract gone forward as intended. Lost profits are easier to prove for an established business with a track record than a new business. All businesses need verifiable data, like accounts and records, to back a credible lost profit claim.

What are Lost Profits?

Only net profits may be recovered in a lawsuit, meaning the total revenue that a business would have brought in had the wrongful act not occurred less the costs (avoided costs) that were not paid out in order to receive that revenue, for example, using materials, paying employees, and other costs of running a business, less any actual profits earned. Net profits over the time period relevant to the contract must be calculated by a logical formula: by comparing business profits for a period before the breach of contract to the period after the breach, or, for a newer business, by comparing what the profits would have been in comparison to the profits of a similar business.

Proving Lost Profits with Reasonable Certainty

The problem with net profit calculations is that they are based on estimates—what the business would have lost--that must be reasonably certain. A court must be confident that the estimate is accurate for the plaintiff to recover lost profits. That is where a damages expert witness comes in. Using various acceptable methods of accounting and business principles, an expert explains business losses in a logical and reasonable way, not by speculation or exaggeration.

What is a Damages Expert Witness?

A damages expert witness is one qualified in sound business and accounting practices by education, experience, knowledge, skill, and training, to give an opinion in a court of law. A CPA, understanding the facts of a case, applies accepted accounting principles and methods to those facts, relying on their education and experience in accounting and finances to competently make a business loss analysis.

Find a Damages Expert Witness

For contract and other disputes requiring lost profits analysis, calculation and explanation in business litigation, attorneys choose a damages expert knowledgeable in specialized industries, a wide variety of clients and industries, accounting and tax rules and laws, financial analysis projections, and applying statistical methods and concepts to trends analyses. More importantly, they choose an expert who can present complex ideas and information to explain the certainty of lost profits in clear language.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.