Imagine producing expensive, high-quality goods & having a network of loyal customers. In an attempt to increase your output, you conclude a contract whereby a modern production line will be installed at your production facility. However, the line isn’t installed properly & your output begins to decrease, causing your customers to look for other suppliers. Purchasing another production has not produced the desired effect either. Everybody is talking about your business collapsing any time soon. It is at this point that you should remember the contract concluded between yourself and the company that supplied & installed the said production line. The contract serves as proof that you can sue the supplier for these losses:
- Lost profit: how much you could have earned if the production line had been installed properly;
- Unreasonable expenses: you have spent a substantial amount of money on renting or purchasing alternative equipment.
- Lost opportunities: you could have signed new contracts with potential customers.
Assessing losses caused by breach of contract requires taking into consideration all hypothetical financial indicators. Those include profits that one might have earned if a production line had been put into operation in a timely manner & functioned as per one’s requirements.
This article will be focusing on legal consequences resulting from breach of contract and ways of handling them.
Damage assessment can include many factors, of which the most important one is causal relationships. The main problem for its establishment consists in the presence of multiple causes that could have triggered losses.
Another potential problem is that different experts make different assessments and come up with different calculations. If this is the case, experts hired by the parties should come up with calculations illustrating the scope & changes in damage assessment. Having received such calculations, courts will be able to make adjustments to initial damage assessment by taking into consideration the experts’ opinion regarding its cause.
It is also important to determine causal relationships resulting from a breach of contract & losses suffered, especially when it comes to unreasonable expenses & missed opportunities.
As far as missed opportunities are concerned, the plaintiff must provide evidence that such a possibility existed, and if no breach of contract had been committed, he could have made use of it.
Determining a Difference Between Profits
Lost profits can be calculated by determining a difference between actual profits and such that might have been made if no breach of contract had occurred. As far as actually earned profits are concerned, they can be found in the plaintiff's financial statements. And here the problem arises because they are difficult to obtain or not detailed enough to evaluate damage.
Losses That May Occur in the Future
Normally, it is far more difficult to evaluate losses that are going to occur in the future than those that have already been incurred. Forecasting profits & cash flows with the next twenty years is, therefore, will be more speculative than evaluating those of them that have already been incurred. That said, it doesn’t necessarily mean that a lawsuit filed by the plaintiff will be rejected.
If there is sufficient proof that the plaintiff will be able to generate profit in the future, then there will be less likelihood that their lawsuit will be dismissed. Also, it depends on an industry, stage of production & overall project. In certain instances, a well-designed business plan & projection of profits for the entire duration of a contract can be a better option than expert estimates. If a project’s infrastructure is already in place & contracts with potential clients have already been signed, this will play a major role in correctly assessing damage. Typically, difficulties occur when an enterprise’s plans were at initial stages of development & a violation of a contract occured.
How Do you Know That the Plaintiff Really Suffer Losses?
In certain situations, determining whether there the plaintiff incurred a loss requires hiring an expert, even though the court has ruled that a contract has been breached.
As far as claims connected with unreasonable expenses are concerned, the plaintiff might have kept a separate record of any supplementary expenses they have suffered. But is the defendant solely responsible for all such additional expenses or are subcontractors or the plaintiff himself to blame? If an expert has at their disposal no exhaustive information allowing them to draw conclusions regarding a waste of money resulting from breach of contract & committed intentionally by the plaintiff, such expenses can be deemed as such that cannot be proved.
Sometimes determining if funds were spent unreasonably or extra costs were incurred is pretty simple. In other instances, telling a difference between supplementary costs suffered due to the breaching of a contract & expenses suffered irrespective of whether a contract has been breached or not can be quite a challenge.
Valuation Date & Loss Period
Normally, duration within which assessing damage suffered due to the breaching of a contract is clearly defined. That said, such issues may result in a dispute, especially if the breaching of a contract continues. And should this occur, it can affect a claim for damages dramatically.
Assessing damage suffered during the wrong period of time may result in adverse consequences, including experts’ conclusion being rejected as irrelevant. Determining an evaluation date plays a particularly important role in cases where cash flow depends rates of interest, inflation, rates of foreign exchange & prices of goods.
Problems Related to Corporate Structures
In certain situations, the plaintiff might not be an organization which initially suffered losses. Therefore, it is experts’ job to determine if the plaintiff himself is susceptible to losses arising in another entity. Another problem is related to integrated corporate structures. Commercial entities can be organized in a way that allows them to avoid taxation, i.e. an individual entity belonging to a holding company may receive no profit whatsoever. Therefore, it will require hiring experts that will have to evaluate cash flows in this structure so they can correctly estimate its impact with respect to damage done.
Apart from evaluating damage-related components & calculating their cost, experts should also take into consideration the plaintiff’s prudence in relation to consequences, percentage of the plaintiff’s negligence, and taxation.
Issues relating to assessing damage have a lot of similarities, irrespective of the nature of a claim or damage the plaintiff has suffered. In addition to having the ability to correctly evaluate accounting-related information, an expert should have sound commercial knowledge as well.
It is a combination of evidence, testimonies of eyewitnesses and assistance from legal experts, that will help experts correctly determine damage occurring due to the breaching of a contract.
Want to avoid problems related to the breaching of a contract? IQ Decision UK can help you draft commercial contracts properly & avoid any undesired consequences.