Lost Profit Damages in Connecticut for New Business Ventures

When business lawyers evaluate the merits of bringing a lawsuit, one of the first questions to ask a client should be “what are the damages?”  Many times, in business litigation cases, business owners want to seek recovery of lost profits with a very optimistic view of what is recoverable in a case.  In such cases, the next question to the client should be  “how do we prove the damages.”

When I consult with a new client that wants to bring a claim in court for lost profits, I will often ask the client to articulate how he or she would go about proving the lost profits.  There are no clear, bright line tests in Connecticut for what is or is not recoverable for lost profits.  Instead, attorneys are guided by the general law on lost profit damages and case precedents.

In Connecticut, the plaintiff bringing the case bears the burden of proving lost profit damages by a preponderance of the evidence.  When lost profit damages are available, the general standard is that a plaintiff must prove the damages with reasonable certainty.  Difficulty in establishing damages is not necessarily a bar to recovery and mathematical exactitude is not required.  Nevertheless, the facts and evidence must permit the trier of fact to form an objective basis to award damages, not merely speculation or subjective belief.  Basically, this means that the plaintiff has to provide evidence to support the claim for damages, not merely a subjective belief or speculative theory.

In the case of a new business venture, lost profit damages are available if a plaintiff can prove the damages with reasonable certainty.  Of course, proof of lost profits damages for a new business likely will require some creativity and perhaps an expert to provide the necessary proof.  The reason is that there is a lack of history of profits in the business so it may be difficult to project what would have happened in the future.  As a result, courts typically will look for more evidence from the new business plaintiff than an established business.

A recent appellate court case in Connecticut pointed out that the evidence in the case of a new business will often have to focus on the likelihood of whether the new business would have succeeded including an evaluation of factors such as business climate, business planning, experience of the business owners, and the success of similar businesses.  An expert may be necessary to help with proof of lost profit damages.  Simply providing a subjective belief without documentation or statistical analysis may fall short of the required proof.

Here are some instances where a new business satisfied the required proof for lost profit damages: (1) statistical analysis of future profits deemed reliable by the court; (2) expert testimony including an analysis based on similar new businesses; and (3) expert testimony based on relevant industry models for profits.  It is important to note that expert testimony alone will not necessarily suffice to prove damages.  A damages expert likely will face a reliability challenge from an opponent.  Once challenged in court, an expert’s methodology on determining lost profits must be deemed reliable before the testimony is permitted.  An expert’s subjective opinion alone, or opinion based on speculation, will not satisfy the standards for admissibility.

The take away here is that lost profit damages are available to a new business venture.  However, the level of proof required to recover such damages likely will be more difficult than for an established business.  Subject belief and speculation by the business owner as to the probable success of the business will likely fall short of the required proof.   A plaintiff considering a claim for lost profit damages for a new business venture may want to bring in an expert to evaluate the case and remove the damages from the realm of speculation.




Lost Profits Must Be Reasonably Certain for Breach of Contract Claims

The burden to prove damages is always on the Plaintiff, or the party that brings the lawsuit.  Many times I receive calls from prospective clients who believe they have significant amount of damages.  However, under Connecticut law damages are only recoverable to the extent that the evidence affords a sufficient basis for estimating their amount in money with “reasonable certainty.”  Proving damages in a business lawsuit does not require exactitude but a litigant cannot base a claim solely on subjective opinion.

Although there is no precise formula to prove the amount of damages, a court will not permit an award of damages based on speculation or conjecture.  In certain cases, assumptions are permitted, but the assumptions must be reasonable and relate to the facts of the case.  As a result, before proceeding with a breach of contract case, an attorney will want to explore if the prospective client can prove damages.  Without provable damages, there is likely no case worthy to pursue if money damages are at issue.

The damages also must relate to the specific cause of action in the case.  There are different elements of recoverable damages for different types of cases.  Some cases carry with it statutory damages, and other cases are governed by Connecticut’s common law or history of court decisions.

One category of frequently claimed damage for breach of contract is loss of future profits or loss of anticipated profits.  Generally, in a breach of contract case, you seek to put the injured party in the same financial position they would have been but for the breach.  In a lost profit case, a party in litigation will claim that “but for” the breach of contract, the party would have earned a projected amount of money.

Connecticut case law clearly provides for the availability of an award of lost profits in general breach of contract cases.  Courts construe lost profits as an element of available compensatory damages.  The mere fact, however, that lost profit damages are available generally, does not mean lost profit damages are recoverable in all cases. To determine whether lost profits are available, the parties will need to look to the terms of the contract and whether lost profits were reasonably contemplated by the parties.  Contracts also frequently contain disclaimers or exclusions of lost profit damages even if the parties contemplated that such damages might occur.

Additionally, although lost profit damages are potentially available, it does not necessarily follow that sufficient evidence exists to reliably prove anticipated profits from a business deal gone bad.  Courts will sometimes permit owners of a business to testify as to anticipated profits, but usually only when the owner has knowledge and familiarity with an established history of profits sufficient to project anticipated future profits.  In most cases, the parties need to retain experts to review relevant financial data and to provide an opinion on lost profits.

Litigants and their attorneys typically use economists or accountants as experts to prove lost profits in business cases.  Expert fees can add considerable expense to a case as the expert will likely have to review significant amounts of financial data and the factual details concerning the business deal.  The expert expense may be necessary to incur in many cases to successfully prove damages.  An expert’s opinion on lost profits must also pass a reliability test.  If challenged by an opponent, the expert will have to establish that the method of establishing a damages figure was reliable.  Courts will use a series of factors to consider the reliability of methods and the arguments raised by lawyers to exclude such opinions from trial.

In conclusion, readers should understand that lost profits are available as a potential element of damages in most breach of contract cases in Connecticut.  However, the fact that such damages are potentially available does not establish a right to recover.  The burden to prove lost profit damages remains with the Plaintiff, and must be shown with reasonable certainty and not subjective opinion, conjecture or surmise.