Recovering Your Lost Profits

So someone or some company has failed to do what they or it agreed to do for you. Maybe, they didn’t deliver some product or service on time, their work or product was shoddy, they gave you information on which you relied that was wrong, or they failed to live up to the terms of a lease agreement for equipment, office space or commercial space.

The other party’s fault may have negatively affected your bottom line well beyond the cost of the goods or services in question. You may have lost significant profits because of the other party or your expenses may have increased (thereby reducing your profit). Can you recover these lost profits from the at-fault party? Generally speaking, the answer is “yes.”

In Tennessee, and other states, the law allows a party to recover lost profits from an at-fault party (provided, of course, certain facts are proven). The recovery for lost profits can include recovery for increased expenses caused by the at-fault party’s conduct. To recover lost profits, you have to prove them with “reasonable certainty.” The reasonable certainty standard is not a bright-line rule. Whether lost profits have been proven with reasonable certainty depends on the unique facts of each case. In order to help you prove your lost profits with reasonable certainty, you should preserve all records and information related to the profits, your increased expenses, and/or the opportunities which you lost.

You cannot recover your gross profits or gross lost sales. The law allows only for the recovery of your lost net profits. What do courts mean by “lost net profits”? Generally, “lost net profits” mean lost gross revenue or sales, less certain expenses. What expenses? Typically, you must deduct direct expenses, but you are not required to deduct fixed overhead. If your lost profits result from the lost sales of goods, you must deduct the cost of the goods, and all sales commissions and other expenses which would have been directly related to the sale of the goods.

Whether your lost profits result from the sale of goods or services, a court will probably not require you to deduct fixed overhead expenses from your lost gross revenue. Fixed overhead expenses have been broadly defined to mean expenses that you would have incurred even if the other party had not wronged you. Some examples of fixed overhead expenses that a court generally would not require you to deduct to arrive at net profits include, rent expenses, insurance expenses, wages and salaries.

For more information about this subject, go to “Recovering Lost Profits” J. Ross Pepper,Tennessee Bar Journal, August, 2008, Vol. 44, No. 8.