Lost Profits

Legal Compliance Resource
June 4, 2012 — 967 views  

No one likes to lose money, and when large sums of cash are involved, any related legal action is certain to get downright hostile. Every manager, from the smallest start-up to the largest corporation, should be aware of the laws governing lost profits that result from a breach of contract. The following are some of the most common methods an attorney can use to help a seller estimate damages.

Lost profit fundamentals

The key behind a lost profit investigation is the amount of income lost due to the breach of contract. This number is analyzed so that a discount rate can be applied on services or fees to even out the financial margins.

The specific rate can vary greatly, for it depends upon businesses, clients and other profits or assets that would have theoretically been obtained if not for the monetary loss. It can be difficult to prove that these gains would have been achieved, but any prior agreements or contracts will be scrutinized to determine if there is any mention of these in the contract language.

Other things that must be evaluated include interest rates, labelled risk and the intrinsic value of services rendered. When all of these are taken into account, a legal expert or attorney comes up with a theory of damages, which outlines what "would" have happened if a loss of profit did not occur. Lawyers and managers must be prepared to back up such accusations with mathematical figures to avoid having a litigation case thrown out.

Other lost profit remedies

While determining lost profit is central to an attorney's strategy, there are other legal methods that may be of great help during a case. Compensatory damages, for example, are basically a financial acknowledgement by the defendant that a breach of contract occurred. Therefore, rather than paying for the entire lost profit, the company in violation might cover the cost of securing new services.

Companies should also remember that hefty legal fees can be paid by the defendant as well. In addition, private equity that changes hands before, after or during the length of contract can negate any contract, because the respective contractor might consider this a payment for services rendered. Therefore, be sure to establish a clear payment plan in a legal contract.

A large number of other remedies may be employed by a reliable attorney, so remember to consult with law professionals if you believe you have lost a significant amount of money.

Legal Compliance Resource