When there is an alleged breach of contract between two businesses, can one sue the other for both damages and loss of business value?
As an example, say that Trusty Trucking Company loses its contract to deliver insulation for its primary customer, Good Insulation Company. Furthermore, the contract loss was due to an alleged breach by Good Insulation Company. Trusty Trucking Company sues Good Insulation Company for damages.
Courts have sometimes allowed both lost profits and the loss in value of the business. Usually, however, only one or the other is permissible. Frequently, an expert can provide valuable input as to which would be best.
The basic difference between the two is that lost profits generally only apply to a certain period of time, after which the business returns to normalcy. But in the case of loss of business value, the loss continues on indefinitely. So the first thing to be done is to determine whether there is any permanency to the alleged damages. This could be the indication of loss of business value. Generally, the courts have been reluctant to extend the period of actual damages beyond a reasonable period because of the difficulty in determining a reliable estimate of damages too far into the future.
If it is a case of business value loss, the valuation expert will be the one to determine the amount of loss of income into perpetuity.
If the appropriate measure is damages, the expert needs to determine with reasonable certainty the periods where the damages occurred and the amount. Damages are usually determined by specifying the revenues and related expenses that were lost, and only direct variable expenses should be included. Fixed and non-direct expenses do not reduce the amount of the damages. This is best explained by calculating the damages on a “with and without” basis.
In other words, the expert makes a calculation of what the business results would have looked like had the damaging event not occurred and compares it with the actual results during the period of damages. The expert will also take into account other factors that might have caused damages. It is key that the expert properly support their estimates and calculations. Their credibility will either win the case or lead to a bad result.
In summary, it is the responsibility of both the expert and the attorney to gain a clear understanding of the true measure of damages in the matter. The expert should assemble a well-reasoned and well-supported calculation (in the case of specific damages) or valuation (in the case of loss of business value) to best serve the client.
For more information about damages and business value loss, contact Filler & Associates.