Tcl - Proving Lost Profit Damages in a Commercial Case - July 2005 - the Civil Litigator

Publication year2005
Pages45
34 Colo.Law. 45
Colorado Bar Journal
2005.

2005, July, Pg. 45. TCL - Proving Lost Profit Damages in a Commercial Case - July 2005 - The Civil Litigator

The Colorado Lawyer
July 2005
Vol. 34, No. 7 [Page 45]

Articles
The Civil Litigator
Proving Lost Profit Damages in a Commercial Case

by John P. Baker

The Civil Litigator column addresses issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year.

Column Editor:

Don Kelso, Denver, of Holme, Roberts & Owen LLP - (303) 861-7000, kelsod@hro.com; Eric Bentley, Colorado Springs, of Holme, Roberts & Owen LLP - (719) 381-8400, bentlee@hro.com

About The Author:

This month's article was written by John P. Baker, Denver, a shareholder and director of Shughart Thomson & Kilroy, P.C. - (303) 572-9300, jbaker@stklaw.com. The author thanks John D. Phillips of Shughart Thomson & Kilroy for his editing and manuscript suggestions.

This article discusses how to establish entitlement to lost profit damages in commercial litigation. It also describes the evidentiary support necessary to successfully quantify such damages.

Lost profit damages are available in almost every successful commercial case. They are the foreseeable consequence of a commercial contract that has been breached and the natural result of economic torts. In any commercial case, internal financial documents admitted through a knowledgeable employee constitute adequate record evidence to quantify future net profits with reasonable certainty.

This article discusses the elements of proof required for a plaintiff to establish an entitlement to lost profits: (1) foreseeability; (2) the fact of damage; and (3) the amount of net profits lost.1 Foreseeability and the fact of damage are simple to prove. Thus, as addressed in this article, plaintiff's counsel should focus on marshaling "probative, credible, and competent evidence"2 on which a judge or jury can make a reasonable calculation of damages. If a party introduces sufficient evidence, a lost profit damages verdict or judgment will likely withstand appellate scrutiny.

Establishing the "Foreseeability of Lost Profits

For a party to be entitled to lost profit damages, the lost profits must be foreseeable. It also must be established whether the lost profits stem from a breach of contract or tort claim.

Breach of Contract Versus Tort Claim

The standard for proving foreseeability is different in breach of contract cases than it is in economic tort cases, because the nature of the duty breached is different under each.3 According to the Colorado Supreme Court: "Where the duty breached stems from a contract, redress must be under the contract. . . . [W]here a duty arises independently of any contractual obligations between the parties, a tort action will lie."4 Further, the Court stated that redress must be consistent with "traditional tort standards."5

A contracting party is responsible only for damages that he or she reasonably should have anticipated would flow from a breach and, theoretically, that the party would have accounted for in negotiating the terms of the contract. A tort victim, on the other hand, "has no opportunity to negotiate with the tortfeasor . . . [or] to allocate the risk."6 Thus, the tort victim may recover damages that are the "natural and probable result of the injury sustained by virtue of the tortious act."7

In the context of measuring lost profit damages, there is a simple way to conceptualize the distinction between foreseeability in a commercial contract case and foreseeability in an economic tort case. Contract damages must be foreseeable at the time of contracting; therefore, a plaintiff can recover net profits that flow from the contract. However, the plaintiff cannot recover net profits from a venture in which the plaintiff would have invested with the monies earned under the contract.

In contrast, because tort damages need only be the natural and probable result of the tortious act, a plaintiff can recover net profits lost as a result of the tortious act plus net profits from a venture in which the plaintiff would have invested (as opposed to profits from a venture in which the plaintiff may have invested).8 As shown below, however, although the standard is different, the requirement of proving foreseeability is not difficult in either type of commercial case.

Commercial Contract Cases

The Colorado Supreme Court noted "it is a principle of the law of contracts that damages for breach should be based on the injured party's lost expectation."9 When a party's contractual expectations are lost because of a breach, the injured party "may recover the amount of damages that are required to place him in the same position he would have occupied had the breach not occurred."10

Expectancy damages are not limitless; they "must be such as may reasonably be supposed to have been within the contemplation of the parties to the agreement at the time of the execution thereof. . . ."11 This is known as the Hadley v. Baxendale12 principle of foreseeability, articulated in 1854 by the Court of Exchequer in England:

[B]y limiting contractual liability to those damages foreseen by the parties at the time the contract was formed, Hadley ensures that the bargain struck reflects a mutually agreeable allocation of the risks and costs of breach. In other words, Hadley guarantees the fairness of a bilateral agreement by protecting the parties from unanticipated liability arising in the future.13

The kinds of damages that are foreseeable to contracting parties at the time they enter into a commercial transaction are profits. Businesses do not enter into contracts intent on losing money. Both sides anticipate profit - sometimes wrongly, but not without expectation.14

In a seminal 1927 case involving a mining lease, the Colorado Supreme Court noted that it is

well settled that the profits which would have been realized had the contract been performed, and which would have been prevented by its breach, are included in the damages to be recovered in every case . . . where from the express or implied terms of the contract itself, or the special circumstances under which it was made, it may be reasonably presumed that they were within the intent and mutual understanding of both parties at the time it was entered into.15 (Emphasis added.)

This 1927 case is still applicable to modern commercial contracts cases. Because the making of profits was the object of the mining lease, that clearly was contemplated by the parties at the time the lease was made, as was, in case of eviction, that the lessee would be entitled to recover profits. Adequate proof, of course, would be required.16

As noted above, the matter of proving foreseeability of profits is not a difficult task in a commercial contract case. Counsel should present a witness involved in the conceptualization of the business deal or negotiation of the contract to testify that the purpose of the commercial transaction was to make a profit. This testimony should be elicited from someone with personal knowledge, through oral or written communications with an agent of the defendant, who can describe how each side expected to profit from performance of the contract. If this kind of testimony is available, satisfying the Hadley rule of foreseeability ordinarily will be easy to do.

Economic Tort Cases

Proving foreseeability in a business tort case is even simpler than in a contracts case. The loss of profits is the probable, and often intended, consequence of a tortious act committed against a business.17 If a party interferes with a commercial contract or prospective business relationship, the injured company generally will suffer a loss of profits.18 If a party's negligence renders business property unusable, or a party wrongfully possesses another's business property, one likely impact of being deprived of such property is a measurable loss of profit.19

There are a number of economic torts for which damages generally are measured by lost profits, either through specific lost sales or lost market share, or lost future cash flows. These include, for example, misappropriation of trade secrets;20 infringement of patents, trademarks, and copyrights;21 anti-trust violations;22 and trade disparagement.23

Breach of a fiduciary duty owed to a company usually results in an injury quantifiable in lost profits, regardless of who commits the breach. For instance, the breach might be committed by a company's officers and directors; majority shareholders; employees in positions of authority; accountants, attorneys, or other agents; or any person or entity with whom the company has confidential relations.24

A witness must testify that a loss of profits is a natural and probable consequence of the tort committed against a business. Testimony about steps taken in reaction to the defendant's tortious act may be given by executives, managers, or impacted employees. Witnesses should tell how they learned of the defendant's conduct and what they did to minimize the impact of that conduct on the company's bottom line. For...

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