Suffering a loss of profit due to a breach of contract

Suffering a loss of profit due to a breach of contract can be difficult, and reaching an agreed amount might be more challenging than anticipated. When granting damages, the Courts aims to compensate rather than penalise the other party. The goal is to ensure you are in a position as if the contract breach had not occurred.

What is ‘profit’?

Profit is the gap between the selling price of your goods and the cost of producing them. 

To determine the actual losses, you would need to compare the actual profits earned with what the company estimated the profit would have been if the breach had not happened. Additionally, you need to take anticipated losses into account by creating a forecast using projected revenue and estimated costs.

There are several factors that must also be considered to determine the true profit or loss if a breach has occurred. The court will consider factors, such as:

• costs, both direct and indirect
• external market influences
• strategies to reduce loss
• production capacity and the possibility of sourcing parts from other locations
• tax implications

When there is a significant potential loss and several variables, it might be advisable to engage a forensic accountant to work on your behalf.

You will need to prove your loss but keep in mind that the court acknowledges the imprecise nature of this process.

Variables to consider

1. Pricing

Establish the appropriate sales price and realistic sales price based on previous invoices, market data, existing contracts and pricing strategies of your competitors.

2. Timeframe

The beginning of the loss period is marked by the initial breach date, while determining the end of this period can be more challenging. It could conclude when the breach is resolved, when the contract ends, or when a substitute is found to restore profit potential.

3. Expenditures 

The losses could potentially be balanced out by reducing the need for staff, equipment, or space. This adjustment might also impact other costs like insurance.

4. Capacity for production 

The court considers the company's production capacity, which determines its regular production output. It's crucial to account for any plans to expand production due to missing supplies. If expansion was part of your intentions but hindered by the breach, this should also be taken into consideration.

5. Mitigation 

If you can minimise your losses, such as finding an alternative supplier or reducing staff, you should take that action. Once you've mitigated the situation and returned to a profitable state, the period of loss typically concludes.

6. External influences 

There could be additional factors influencing your loss, for example if the market has declined and your equipment is not expected to generate the projected profit. On the other hand, a shortage of supply from competitors can lead to higher profits.

7. Taxes 

To offset any decrease in sales and profit, it's essential to consider the benefit of not having to pay taxes on those profits.

8. Cash flow advantage 

The court may adjust the award based on the timing, considering the guaranteed fixed sum you will receive. 

How can Hegarty help? 

If you suspect a loss of profit due to a commercial dispute and are seeking damages for your claim, reach out to our team. Our solicitors possess extensive experience in pursuing and defending claims for our clients. They can assist you in navigating the court procedures, including evaluating your damages to optimise your claim and ensuring you receive the full entitlement you deserve.