Perhaps the most fundamental goal of running a business is to earn a profit. When a vendor fails to live up to its commitments or a competitor interferes with operations, the result is often lost revenues which is detrimental to the business’s bottom line.
Lost Profits: A Hypothetical
Imagine this: lawn care company, MowBetta, hires lawn equipment maintenance and repair business, ShadeTree, to service equipment for the summer season. ShadeTree retrieves MowBetta’s equipment on March 1st and agrees to perform the maintenance and return the equipment by May 1st. But then ShadeTree fails to return the equipment until August 1st.
Without its equipment, MowBetta cannot service any lawns or generate revenue for three of what should be its busiest months. Not only that, but by August 1st, every former MowBetta customer is complaining on Nextdoor about MowBetta’s customer service.
Can MowBetta sue ShadeTree for breach of contract? Probably. Can MowBetta recover damages for the profits it anticipated making in May, June and July? It depends.
The Basics
Proving lost profits in court can be a complex and challenging task for any business owner seeking compensation for financial damages caused by another party’s actions. Lost profits refer to the amount of money that a business would have made if the wrongful action had not occurred.
To recover lost profits, MowBetta must:
- Prove a cause-and-effect relationship between ShadeTree’s actions and MowBetta’s financial losses.
- ShadeTree must have breached a contractual obligation or other duty of care owed to MowBetta; and
- This breach must have caused MowBetta’s financial losses.
Next, MowBetta must demonstrate the amount of the profits it lost; that is, what its financial position would have been had ShadeTree skillfully and timely repaired and returned the equipment.
To do this, MowBetta must consider a range of factors such as historical financial data, market trends, and future projections. In most cases, the plaintiff will need testimony from an expert witness who can provide an objective opinion as to the amount of the loss.
Speculative Skepticism and Devilish Detail
The law differs somewhat from state to state as to what proof is necessary to recover lost profits. Georgia Courts are skeptical about awarding lost profits, but it can be done.
As a general rule, lost profits are unrecoverable because they are deemed too speculative and remote to be calculated with a reasonable degree of certainty. To overcome this presumption, a plaintiff must demonstrate a historical track record of profitability. In other words, projections of the future profits for a new business won’t cut it. To recover lost profits, the business must show that it earned steady profits in the past and that but for the injury, it would have kept doing so.
Other factors that may affect a lost profits recovery are the availability of alternative sources of revenue, efforts made to mitigate damages, and the foreseeability of the losses.
For example, MowBetta may be able to recover lost profits if it can show through banking and accounting records that:
- It consistently earned profits of $20,000 per month during the summer months over the past three to five years;
- Its revenue results solely from its use of lawncare equipment; and
- It was unable to rent, borrow or buy new equipment to get it through the season.
But if MowBetta is a new enterprise, embarking on its first summer mowing season, and made little or no effort to mitigate the harm caused by ShadeTree’s breach, MowBetta will likely not be able to recover its lost profits.
Final Thoughts
Recovering lost profits in court requires a detailed understanding of the relevant legal and financial principles, as well as access to the necessary evidence and expert testimony. By working closely with experienced legal and financial professionals, businesses and individuals can increase their chances of success in pursuing lost profits claims in court.
As always, let us know if we can help.
Healthy business relationships are an essential component of business success. When disputes cause business relationships to sour, declining productivity and revenues are sure to follow. Bill works with business owners to bring successful and efficient resolution to a wide variety.
