Author: Chris Young, PhD

There are four components required to prove compensatory economic damages in a commercial case. The four components include causation, reasonable certainty, foreseeability, and mitigation. Each area will be explained in detail, to help attorneys understand the importance of each component and why they are necessary for a commercial economic damage report.

Causation

The recovery of economic damages is subject to the general principle that damages must be caused by the wrongful conduct of the defendant. This principle governs the recovery of all compensatory damages.[i] [ii] It is important to understand that legal liability and loss causation, although may be related, are often not the same thing. There are many cases where liability is proven true but where the plaintiff was not harmed, or better still, where the plaintiff was in a better position. 

Robert Gray quoted, in the AICPA Business and Industry Newsletter, “In cases involving claims for lost profits damages, the Plaintiff will generally be able to recover damages only if it can be demonstrated that the breach or other wrongful act committed by the Defendant was the proximate cause of the loss.”[iii] But even more importantly, Gray states that a CPA not showing causation may be in violation of the CPA’s professional standards, particularly Rule 102, Integrity and Objectivity. 

Reasonable Certainty

Many cases help define reasonable certainty in New Jersey, and I reference only a few of them. The following are snippets of cases and reference to other cases, which may be beneficial. As a non-lawyer, but as an economic damage professional, I refer only to the damage aspects of the cases.

Looking at the R.S.B. Laboratory Services, Inc. v B.S.I. Corp. case, the plaintiff's expert provided a forecast of future losses, using the company's history as a basis for future results. The court relied on the opinion in V.A.L Floors v. West-minster case[iv] – the "fact that a plaintiff may not be able to fix its [lost profits] damages with precision will not preclude recovery of damages." Similarly, the court further stated, "past experience of an ongoing, successful business provides a reasonable basis for the computation of lost profits 'with a satisfactory degree of definiteness."

In the V.A.L. Floors, Inc. v. West-Minster Communities breach of contract case, there was a real argument on the speculative nature of V.A.L.'s forecast for economic damages.  The court looked to three cases all of which all based reasonably certainty on:

1. "Lost profits, were based on sound fact and not on mere opinion evidence without factual support, is recognized as a proper measure of damages….”[v]

2. "Past experience of an ongoing, successful business provides a reasonable basis for the computation of lost profits "with a satisfactory degree of definiteness."[vi]

3. To warrant a damages recovery, loss of profits must be established with reasonable certainty, for recovery cannot be had for profits that are conjectural or speculative[vii].

Lastly, in the Stanley Co. v. Hercules Powder case, which was about a movie theater owned by the plaintiff but damaged by a bomb detonated by the defendant.  At issue was the lost profits to the plaintiff. The court allowed the plaintiff to develop a damage estimate relying on the historical operations of the theater but also suggested that it may be appropriate to also look at the results of other related theaters owned by the plaintiff.

The three cases highlighted above are treasure troves of case law and include excellent information that can give you a solid understanding of reasonable economic certainty. With respect to my view and the interpretation of these laws it seems clear that reasonable certainty means:

• A claim must be more than the opinion of an expert, 

• A historical review of the financial results of the damaged company is a wonderful starting place for a damage estimate. Analysis of companies like the one seeking damages can provide additional support for a claim,

• Sound and recognized accounting, finance and economic principles are required and expected to be used by the expert, and

• Damages do not require definiteness but rather a reliable estimate.

Reasonable Certainty – New Business

A new business requires greater support for damages. Although the idea of the New Business Rule has been somewhat put to the side by the courts, most courts still require a greater amount of support to justify a damage claim.[viii] Some courts have looked at profits of other businesses owned by the plaintiff to prove economic damages, whereas others have looked to the performance of a particular industry. The courts have also taken into consideration the industry expertise of the plaintiff.[ix] [x]

Foreseeability

The major analytical question presented by cases seeking recovery of lost profit damages on contract claims is whether and to what extent those damages, to be recoverable, must have been foreseeable as the natural and probable result of a breach of contract at the time the contract was made.[xi] [xii] A few courts have applied an exclusive subjective test. These decisions require a showing in any lost profits case that there was actual communication between the parties of the possibility of loss of profits so that these potential damages were in fact foreseen by the parties at the time the contract was made. [xiii]

Mitigation

A plaintiff is required to act reasonably to mitigate damages, and that the proof of this lies with the defendant.[xiv] The law requires the plaintiff to mitigate economic loss, by making reasonable efforts to replace it.  In The Comprehensive Guide to Economic Damages, the authors write, “Under this rule, known as mitigation, a party must mitigate its damages and may not recover for losses that it could have reasonably prevented. Also known as the doctrine of avoidable consequences, the rule “prevents a party from recovering those lost profits attributed to a  wrongdoer, which the injured party could have mitigated without undue risk, burden or humiliation.”[xv]

Next time you are working with your expert on a commercial case that involves compensatory damages, make sure your expert has all four components clearly explained within the report. 

[i] Dunn, Robert L (6th Edition). Recovery of Damages for Lost Profit. Volume 1, §1.1.

[ii] See Western Union Telegraph Co. v. Hall, 124 US 444 (1888); Energy Capital Corp. v. United States, 302 F.3d 1314

[iii] See “Causation is Key to Developing Credible Economic Damages: Are you up to speed?, https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2008/CPA/Aug/causation.jsp.

[iv] (V.A.L.Floors,supra,355 N.J.Super.at 425, 810 A.2d at 631 (quoting Weiss v. Revenue Bldg. & Loan Ass’n, 116 N.J.L. 208, 212, 182 A. 891, 893 (E & A 1936)).

 [v] Stanley Co. v. Hercules Powder Co., 16 N.J. 295, 108 A.2d 616 (1954).

[vi] See Weiss v. Revenue Bldg. & Loan Ass'n, 116 N.J.L. 208, 212 (E&A 1935)

[vii] South Carolina Fin. Corp. v. West Side Fin. Co., 113 S.E.2d 329, 336 (S.C. 1960)(quoting 15 Am. Jur. Damages 150)

[viii] NACVA (2019). “Lost Profits, Modern New Business Rule.” https://quickreadbuzz.com/2019/03/06/litigation-needham-lost-profits-new-business-rule/.

[ix] See Rubicon Global Ventures, Inc. v Chongqing Zongshen Import/Export Corp., 226 F. Supp.3d 1141

[x] See Kallista, S.A. v. White & Williams, LLP, 51 Misc. 3d 401, 423, 27 N.Y.S.3D 332 [NY Sup. St. 2016])

[xi] The major case of consideration here is Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854).

[xii] Also, see George H. Swatek, Inc. v. North Star Graphics, Inc., 246 N.J. Super. 281, 587 A.2d 629 (1991).

[xiii] In New Jersey, see P.F.I., Inc. v. Kulis, 363 N.J. Super. 292, 832 A.2d 931 (2003), cert. denied, 178 M/K/ 453, 841 A.2d 91 (2004).

[xiv] Frank Stamato & Co. v. Borough of Lodi, 4 N.J. 14, 21 (1950); Sandler v. Lawn‑Mat Chemical & Equipment Corp., 141 N.J. Super. 437, 455 (App. Div.), certif. denied, 71 N.J. 503 (1976); Harvard v. Bushberg Bros., 137 N.J. Super. 537, 542 (app. Div. 1975); Henry Clay v. Jersey City, 74 N.J. Super. 490 (Ch. Div. 1962), aff’d, 84 N.J. Super. 9 (App. Div. 1965).  See also Restatement (Second) of Contracts §350, comments a, b and c (1979).

[xv] Fannon, N, and Jonathan M. Dunitz (Fifith Edition).The Comprehensive Guide to Economic Damages, BVR Publishing, p. 215.

[xvi] Fannon, N, and Jonathan M. Dunitz (Fifith Edition).The Comprehensive Guide to Economic Damages, BVR Publishing, p. 215.