Can you claim loss of profits in a contract dispute?
Sat 14 October 2023
A claim for loss of profits is most common in the construction industry but can also be claimed in other types of contracts. Under English law, successfully claiming lost profits after breach of contract is difficult. The amount if damages (quantum) of a claim can easily be overlooked when deciding to sue for breach of contract. A full and proper assessment si strongly advisable before starting a legal claim.
To successfully recover lost profits as a result of breach of contract there are 3 key elements :-
- you must be able to prove that the breach of contract directly caused the lost profits; and
- that loss of profits was a foreseeable consequence of the breach of contract; and
- being able to demonstrate that you have attempted to mitigate losses as a result of the breach.
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.
Our team of highly experienced litigation solicitors would be happy to discuss your contract dispute to ensure you make the right decisions. Please do call or email us.
Contractual 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.
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.
How are loss of profits calculated by by the English courts?
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.
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.