Calculating damages for loss of profit

24 January, 2013
This article has been reviewed and is up to date as of 23 August, 2017

Are you ensuring that your clients recover the full amount they may be entitled to in a claim for loss of profits following a breach of contract?  Limiting the claim to the net profit that has been lost could mean that your client loses out.  This is especially important in tough economic times.

Ignoring the worries of a triple dip recession, the UK appears to have just exited the most severe recession since the 1950’s.  Some businesses have survived remarkably well and if previous recessions have taught us anything a few success stories will emerge.  However, most businesses would admit that they have struck deals or entered into contracts on terms that would not have been entertained in more profitable years.  In some cases businesses have been prepared to enter into contracts at cost, or close to cost price in order to preserve jobs and maintain turnover.

This can be a ‘good’ deal when times are hard but what happens if the other side breaches this contract?  Ignoring any claim for consequential losses that may be owed to third parties, before the case of Western Web Offset Printers Ltd v Independent Media Ltd [1996] C.L.C. 77 some lawyers would have said that the claimant’s claim would be limited to the net profit that had been lost by the claimant as a result of the defendant’s breach of contract.  However, this is a rather simplistic approach and could result in the claimant losing out.

Western Web Offset Printers Ltd (“Western Web”) entered into a written agreement with Independent Media Ltd in 1989 to print a local weekly newspaper which was to be published by Independent Media Ltd.  The terms of the agreement stated that the contract could be terminated after 1 February 1992 by either party giving the other 13 weeks’ written notice.  On 30 May 1991 Independent Media Ltd orally informed Western Webb that the printing was to be done elsewhere.  Western Webb accepted this repudiation and brought a claim for damages.

Due to the recession Western Web were not able to replace the contract that it had with Independent Media Ltd and claimed for the gross profit which it had lost as a result of the contract being terminated (i.e. the contract price minus direct expenses (e.g. paper)).  This was assessed by Western Web’s expert at £176,903.88.  This figure was disputed by Independent Media Ltd, who claimed that the loss caused to Western Web should be limited to the net profit lost (i.e. including a deduction for overheads).  This was assessed by Independent Media Ltd’s expert to be £38,245, for which judgment was entered.  Western Web appealed this decision.

Allowing the appeal, the Court of Appeal held that subject to the claimant’s duty to mitigate, the loss that can be claimed from the claimant is the value of the benefit of which it had been deprived as a result of the defendant’s breach (or in other words the claimant’s loss of bargain).  The claimant is entitled, so far as money can do it, to be put in the same position as if the contract had been duly performed and had not been broken. 

The court emphasised the purpose of damages was to compensate the claimant for the loss of bargain that it had suffered as a result of the defendant’s breach and this should not be limited to the net profit that had been lost.  In circumstances where the claimant is not able to mitigate their loss (for example, by replacing the contract) the claimant is able to claim for the damage caused as a result of the defendant’s breach.  This can include a claim for a contribution to overheads (for example, rent and staff).

In many cases the damage caused to the claimant will be equivalent to the net profit which has been lost, however, the above case highlights the importance of considering all the losses that have been suffered, not just the loss of profits.  For Western Web this resulted in an extra £138,658.88 in damages and was probably the difference between the company going into administration or continuing to trade. 

Practice Point

It is important to consider all the losses that have been caused as a result of the defendant’s breach.  For example, if the actions of the defendant have resulted in the claimant being unable to cover its overheads then this can be included in the claim.