Case creates new twist on lost profit claims - legal advice for lost profit claims

Real Estate Weekly, July 22, 1992 by Peter Goetz

Under the appropriate circumstances, the recovery of lost profits as an element of contract damages is generally-permitted. Lost profits can apply to an owner who couldn't use his facility when planned or to a contractor who ended up with an unprofitable job. Lost profits, as well as other contract damages, must be proven to a legal standard of reasonable certainty which means they cannot be based on speculation or conjecture. There is no one formula that must be met and each case generally turns on its own facts.

If the construction project involves a facility which will house a "new business", the courts as a general rule are loathe to find liability for anticipated lost profits. This rule is known as the "new business rule." In applying this rule, the courts preclude the recovery of lost profits by a new business based on the rationale that evidence of expected profits from a new business are too speculative to meet the legal standard of reasonable certainty.

As of late, the "new business rule" is being challenged on a national basis.

New York in the past has been characterized as a strict enforcer of the "new business rule." However, in Kenford Co. Inc. v. County of Eric, 108 A.D.2d 132, 489 N.Y.S.2d 939 (4 Dept. 1985), aff'd; 73 N.Y.2d 312, 540 N.Y.5.2d 1 (1989), the Appellate Division held that there is no per se rule precluding a new business from recovering lost profits

In Kenford Co., Inc., id., the plaintiff, a promoter, donated and to the defendant for a domed stadium in exchange for a right to manage the facility. The defendant did not construct the facility and the plaintiff brought an action against the defendant for failing to construct the facility. The plaintiff sought damages, inter alia, for lost profits on the management contract.

The court reviewed the case law in New York regarding this issue and found no cases in New York state court which granted lost profits to a new business. However, the court found Federal cases in New York permitting new businesses to recover lost profits. The court adopted a test employed by the Second Circuit Court of Appeals in Perma Research & Devil Co. vs. Singer Co., 402 F. Supp. 881, aff'd 542 F.2d 111, cert den., 429 U.S. 987. In Perma Research, the test was established that the plaintiff must prove:) that the most profits are the direct and proximate result of the breach; 2) that profits were contemplated by the parties; and 3) that there is a rational basis on which to calculate the lost profits.

In Kenford Co.. Inc., supra, the court found that the first two elements of the test could easily be met. The defendant failed to build the stadium which was the proximate cause of the loss of profits which were foreseeable. However, the court held that the plaintiff failed to establish a rational basis upon which lost profits could be calculated. The plaintiff had retained an expert to determine the anticipated lost profits caused by the defendant's breach. The court found the experts analysis was only conjecture and that too many variables were present to adequately support the plaintiff s claim for lost profits. The court denied the plaintiff s claim for damages.

Despite the abolition of the "new business rule" Per se, it is far easier for an established business with a history of profits to meet the legal standard of reasonable certainty than a new business venture.