Recovery of damages in the form of lost profits in the USA

Abstract

Initially American law rejected any possibility of recovering lost profits as consequential damages, but ultimately agreed. The lost profits claim is for net income from lost business activity, less expenses that would have been attributable to that activity. Generally accepted approaches in calculating lost profits are Yardstick method, Before and After method, Projection method. In addition to the mentioned measures it is admissible to use statistical methods: multivariate regression analysis, matching analysis, stratification, analysis of variance, probit analysis, logit analysis, discriminant analysis, factor analysis and so on. Consequential damages aim to put the non-breaching party in the position that they would have been in if the breach had not occurred. The court is to estimate the reasonable size of compensation needed after a breach to restore the offended party losses yet avoid overcompensation. The lost profits award is limited by the principles of foreseeability, certainty, causation and mitigation. The award isreduced when a portion of the promisee’s loss profit is attributable to circumstances that the promisor could not ordinarily foresee (foreseeability). In order for damages to be recoverable, the loss must have been proximately caused by the breach (causation). Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable (certainty). The non-breaching party is to avoid loss wherever possible (mitigation). Also parties are free to include in a contract an exclusion clause which seeks to exclude or restrict their liability to one another in the event of default. All these rules are not rigid. A court may limit damages for consequential damages if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. Keywords: consequential damages; lost profits; foreseeability; reasonable certainty; mitigation; causation; exclusion clause.