"For want of a nail": applying Florida's reasonable certainty test to lost profit damage claims.

• Author: Coleman, Jonathan S.

A time-tested proverb that can be traced back to the 14th century illustrates how a seemingly small event can lead to catastrophic consequences:

For want of a nail the shoe was lost. For want of a shoe the horse was lost. For want of a horse the rider was lost. For want of a rider the battle was lost. For want of a battle the kingdom was lost. And all for the want of a horseshoe nail. (1) This is a follow-up to a previous article discussing the future lost profits (2) prong of what has been called the "flexibility theory of damages." (3) Under this doctrine of alternative remedies, a claimant in either contract or tort may seek recovery of out-of-pocket expenses or reasonable future lost profits, but not both. As succinctly explained in Beefy Trail, Inc. v. Beefy King Intern., Inc., 267 So. 2d 853, 856 (Fla. 4th DCA 1972):

(1) [H]e may prove the gains he would have made had the defendant performed in full as the contract required subtracting therefrom the costs of the operations necessary to realize those gains, i.e., the injured party may seek lost profits and in such case the interest he seeks to protect is his "expectation interest"; (2) he may omit an attempt to show lost profits and prove instead his actual expenditures made before the repudiation or nonperformance by the defendant insofar as those expenditures were reasonably to have been foreseen, i.e., ... his "reliance interest."

The flexibility theory is equitable in nature. As explained recently in Ehrman v. Mann, 979 So. 2d 1011, 1012 (Fla. 4th DCA 2008) (quoting Liddle v. A.F. Dozier, 777 So. 2d 421, 422 (Fla. 4th DCA 2000)): "The purpose of the election of remedies doctrine is to 'prevent double recoveries for a single wrong.'" The remedy available, however, is not entirely up to the claimant. While reliance expenditures are allowed as an alternative to expectation damages, future lost profits "may be too speculative to form a part of any damage award." (4)

Election of Remedies Must Not Be Confused with Alternative Pleading

Lost profits, as seen above, constitute an alternative remedy to out-of-pocket losses under the flexibility theory. This does not mean that lawsuits must be framed or tried under an "either or" damage limitation. On the contrary--successful suits can, and often do, include the pleading of alternative legal theories. It is only after liability is determined that the appropriate damage model should be applied. The remedy is elected at the award stage of the litigation.

Florida Rule of Civil Procedure 1.110(g) specifically allows a pleader to "set up in the same action as many claims or causes of action" as he has, and a "claim for relief may be stated in the alternative." This use of alternative pleading is "a perfectly acceptable practice under Florida law." (5) Since different legal theories may be presented, an "election between inconsistent remedies need only occur before judgment is entered." (6) The election of a plaintiff's ultimate remedy--be it lost profit, out-of-pocket, quantum meruit, or other damages--cannot be required before the trial takes place. A plaintiff is entitled to put on all proper legal theories. (7)

While the alternative pleading rule appears to be straightforward, some trial judges (not to mention practitioners) have confused alternative pleading with the flexibility theory of damages. As a result, some properly pleaded (but alternative) theories of recovery have been dismissed through trial court error before trial. (8) This problem is often manifested when a cause of action for fraud in the inducement is coupled with a cause of action for breach of contract: These theories can properly be pursued concurrently, and a trial court's pretrial elimination of either theory is reversible error. (9)

In addition to showing that it is reversible error to dismiss a proper legal theory before the trial, the Williams case illustrates that a double recovery is still precluded by the flexibility theory even though separate legal claims may be pursued simultaneously. "It is well settled that a party may not recover damages for both breach of contract and fraud unless the party first establishes that the damages arising from the fraud are separate and distinguishable from the damages arising from the breach of contract." (10)

Eliminating viable alternative claims before judgment is a misapplication of the "election of remedies" doctrine. The election in question, as the phrase indicates, refers to the ultimate remedy and not the theory by which a remedy is recovered. There is no remedy available until liability has been established, so eliminating a theory of liability before entitlement to recovery has been determined puts the conceptual cart before the horse.

Levitt-Ansca Towne Park Partnership v. Smith & Co., Inc., 873 So. 2d 392 (Fla. 4th DCA 2004), which involved a trial court error, illustrates this point. There, a contractor/ plaintiff's remedies under a partially performed construction contract were both equitable (via a quantum meruit recovery) and legal (as in a lost profit calculation). (11) The jury awarded damages under both theories. That double award violated the flexibility theory and required a remand back to the trial court so the contractor could "elect" between the two mutually exclusive forms of relief. (12) There was nothing improper about presenting the two alternative theories to the jury; the windfall recovery was the problem.

Louie's Oyster, Inc. v. Villaggio Di Las Olas, Inc., 902 So. 2d 901 (Fla. 4th DCA 2005), represents the proper method of awarding damages when independent theories of recovery are pursued. There, the claimant in a lease dispute sought two mutually exclusive forms of damage via alternative pleaded theories, thus, allowing the trial court to consider the alternative award of either loss of use or loss of future profits. Because damages were awarded based only on lost profits, the result was acceptable: "[W]e find the tenant is entitled to seek damages by alternative theories so long as the judgment does not result in a double recovery for the same wrong." (13)

The difference between Williams and Levitt-Ansca on one side, and Louie's Oyster on the other, can be summarized as follows: Lawsuits can seek alternative remedies under alternative theories up through trial, but damages will be awarded based on only one theory. Williams violated Florida's alternative pleading rules and Levitt-Ansca correctly applied Florida's "flexibility theory." If the damages awarded are lost profits, they are proper only when they can be proven and measured with "reasonable certainty."

Lost Profits Hinge on Legal "Certainty"

All lost profit claims hinge on at least some speculation, as they depend on "would have" assumptions about the future, and assume an anticipated future gain that did not actually materialize. Additionally, determining the profits that would have been realized requires some educated guesswork, which by definition is not subject to absolute precision.

What is the reasonable certainty standard applied? "The mind of a prudent impartial person should be satisfied that the damages are not the result of speculation or conjecture." (14) This test is, therefore, an objective reasonable man standard, however imprecise, and is not subjective.

Florida Has Long Recognized the Certainty Rule

For more than 70 years, the law in Florida has been that lost future profit damages are recoverable for an established...