Legal Principles of Lost profits

LOST PROFITS LEGAL PRINCIPLES

When forensic accountants are retained to prepare damage reports or lost profit reports, they can normally assume that there is a strong legal principle that will back up these damages.

As I often tell clients, in order for our damage report to be successful the attorney must win on legal issues.

I was recently in a mediation where the mediator was very happy with our damage report, but it was apparent to everyone in the room that the attorney did not have a strong understanding of the legal liability issues. It also was concerning to me that even if my lost profit report was accepted without any adjustments, the defendant  did not have enough assets to pay the damages.

This is why it is important as a forensic accountant to have some background for understanding of legal principles in lost profit cases.

In effect we are counting on the attorney who has fully researched the applicable law and determined that there is a strong basis for the lawsuit.

The principle behind lost profits is fundamentally compensatory: the defendant’s wrongful actions caused the plaintiff to lose profits that the plaintiff otherwise would have earned. The result of an award of the damages will make the plaintiff whole.

Two Types of Damages

Direct or General Damages-naturally and generally result from a breach according to the course of things. Plaintiff is seeking general damages when you try to recover the value of a performed promise. For example, there was a contract, and the plaintiff performed the required work but was not compensated.

Consequential or Special Damages-seek to compensate the plaintiff for additional losses that are the result of defendant’s breach. For example, if the oven was not properly installed in a bakery factory, the plaintiff could sue based on contracts they were not able to fulfill.

We often hear the attorneys use the term Benefit of Bargain Damages; this is generally used when you want to put the plaintiff back in the position they would have been had they not been damaged.

To Prove Lost Damages the Following Must be Shown

1. Existence of lost profits
2. Proximate cause of lost profits
3. Foreseeability
4. Amount of lost profits
5. Mitigation of damages