When a company relies on a contract to generate revenue, a breach can cause losses that extend beyond the immediate costs of the broken agreement. For example, a supplier’s failure to deliver products or a business partner’s refusal to perform as promised may result in lost profits. In these situations, the non-breaching party may be entitled to seek lost profits as damages by filing a lawsuit.
However, it’s important to understand that courts in New York do not automatically award lost profits just because a business can show it expected to make money under a contract. Specific requirements must be met. A skilled business litigation attorney can evaluate the agreement, the facts and circumstances surrounding the breach, and assess the available evidence to determine whether a lost-profit claim is viable.
When Can a Business Recover Lost Profits?
A business may be able to recover lost profits when another party breaches a contract, and the breach causes the company to lose profits it reasonably would have earned. Under New York law, lost profits may constitute either general damages or consequential damages, depending on the nature of the contract and the relationship between the breach and claimed profits. While general lost profits are defined as those that are the direct and immediate fruits of the contract, consequential lost profits arise from collateral business arrangements and can be subject to additional hurdles.
Both general and consequential lost profits must be established with sufficient proof of causation and reasonable certainty. Consequential lost profits, however, are subject to an additional requirement: the claimed losses must have been within the contemplation of the parties when they entered into the contract.
To recover lost profits, a business must generally satisfy the following requirements, some of which depend on the type of lost profits claimed:
The Lost Profits Were Actually Caused by the Breach
It isn’t enough to show that a business became less profitable after a contract was broken. Specifically, a business seeking lost profits must show that the breach caused the claimed losses. The business may also need to account for other factors that could have contributed to the alleged losses, such as changes in market conditions, operating expenses, or customer demand.
The Lost Profits Can Be Proven with Reasonable Certainty
Lost profits do not need to be proven with mathematical precision in New York. But while courts recognize that some degree of approximation may be unavoidable, the claimed damages must be capable of measurement using known and reliable factors without undue speculation. Critically, the alleged loss must be “capable of proof with reasonable certainty” under New York law.
Depending on the complexity of the claim, financial records and other business evidence may be sufficient to prove this element. A forensic accountant or other financial expert may be helpful in calculating and explaining the damages in more complicated cases.
The Losses Were Within the Contemplation of the Parties at the Time of Contract
To recover consequential lost profits, a business must also establish that the claimed lost profits were within the contemplation of the parties when they entered into the contract. Essentially, this raises the question of foreseeability: was the type of loss a foreseeable consequence of the breach when the parties made their agreement?
Importantly, the contract does not necessarily have to expressly state that lost profits will be recoverable in the event of a breach. New York courts can consider the nature, purpose, and circumstances of the agreement to determine what damages the parties reasonably would have contemplated when they executed the contract.
What Evidence Can Help Support a Lost-Profit Claim?
In order to prove a lost-profit claim in a business dispute, it’s crucial to have strong evidence that establishes the breach caused the company’s losses and thatthe amount of losses can be calculated with reasonable certainty.
Depending on the circumstances, evidence in a lost-profit claim can include:
- Sales records
- Customer orders
- Financial statements
- Inventory records
- Existing contracts and purchase orders
- Business forecasts and projections
- Communications with customers or the other contracting party
A business litigation attorney can help identify and preserve the necessary evidence to support a claim, and evaluate whether the available records can provide a reasonable basis for calculating damages. They can also work with financial or industry experts when necessary to develop and present a well-supported damages claim.
Contact a Knowledgeable Long Island Business Litigation Attorney
If you are a business owner who has lost profits due to a breach of contract, it’s important to understand your legal options and take the necessary steps to protect your interests. The Long Island business litigation attorneys at Barnes & Barnes, P.C., provide high-quality representation to businesses and business owners for a broad scope of commercial matters. If you are facing a business dispute, we can evaluate your circumstances and discuss your legal options. Contact us to schedule a consultation to learn how we can assist you.
