WPI 303.04 Contract—Damages—Lost Profits

Use this instruction with WPI 303.01 (Measure of Expectation Damages—Breach of Contract—No Counterclaim) or 303.02 (Measure of Expectation Damages—Breach of Contract—Counterclaim), as appropriate.

When appropriate, insert a sentence to describe net profits, such as “Net profits in this case mean the difference between the contract price and plaintiff's costs [times ].” In some instances, the final phrase should include a specific ascertainable quantity (e.g., the number of months remaining in a contract), while in other cases it may be appropriate to have the jury determine the amount (e.g., the number of units that plaintiff could reasonably have expected to sell during the contract period).

It is preferable to keep this instruction separate from WPI 303.03 (Contract—Measure of Damages—Direct Damages—Special Cases), even where that instruction is given regarding some other item of damage distinguishable from the general instructions regarding contract damages in WPI 303.01 (Measure of Expectation Damages—Breach of Contract—No Counterclaim) and WPI 303.02 (Measure of Expectation Damages—Breach of Contract—Counterclaim). The reason is that the “reasonable certainty” requirement applies only to the fact of lost profits, and therefore warrants separate treatment.

Lost profits may be an item of direct or general damages, see the Comment to WPI 303.03 (Contract—Measure of Damages—Direct Damages—Special Cases), as when the buyer has breached a contract for the sale of a service, Bracy v. United Retail Merchs., 189 Wash. 162, 63 P.2d 491 (1937), or property, Rathke v. Roberts, 33 Wn.2d 858, 207 P.2d 716 (1949).

When there is an evidentiary basis for recovery of lost profits as special or consequential damages, they may be recovered in addition to the general measure of damages applicable to the type of contract breach in question. See, e.g., Pappas v. Zerwoodis, 21 Wn.2d 725, 153 P.2d 170 (1944) (direct damages of diminished rental value plus consequential damages of tenant's lost profits); Alpine Indus, Inc. v. Gohl, 30 Wn.App. 750, 637 P.2d 998 (1981) (direct damages of cost of repair of construction defect plus consequential damages of lost profits from construction delay). Generally, lost profits are consequential damages only when they would have been generated by transactions that were separate from, but depended upon, the contract that was breached.

The rule regarding lost profits as a matter of special, or consequential, damages stems from Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854). In that case, defendant's delay in shipping a broken shaft to an engineering company resulted in the lengthened closure of plaintiff's mill with attendant loss of profits. The court reversed the jury award of the lost profits as damages, on the ground that an aggrieved party may recover only those damages “as may fairly and reasonably be considered [as] … arising naturally, i.e., according to the usual course of things, from such breach of contract itself,” or those damages “as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.” Hadley, 156 Eng. Rep. at 151. As is evident from this quotation from Hadley, the requirement of “reasonable certainty” may be related historically to the requirement of “foreseeability,” which is already included in WPI 303.01 (Measure of Expectation Damages—Breach of Contract—No Counterclaim) and 303.02 (Measure of Expectation Damages—Breach of Contract—Counterclaim).

The consequential damages rule regarding lost profits applies to the Hadley situation of the on-going profits of an enterprise, rather than a profit that may be expected on a single transaction that is the subject of the contract at issue. See Gilmartin v. Stevens Inv. Co., 43 Wn.2d 289, 295, 261 P.2d 73 (1953) (lost “profit” really diminution of value of land from breach of contract to supply water, item of direct damages).

Reasonable certainty requirement. A party is entitled to recover lost profits in a breach of contract action when “(1) they are within the contemplation of the parties at the time the contract was made, (2) they are the proximate result of defendant's breach and (3) they are proven with reasonable certainty.” Tiegs v. Watts, 135 Wn.2d 1, 17, 954 P.2d 877 (1998); Larsen v. Walton Plywood Co., 65 Wn.2d 1, 15, 390 P.2d 677 (1964). “Lost profits cannot be recovered where they are speculative, uncertain and conjectural.” Tiegs, 135 Wn.2d at 18. The “reasonable certainty” language appears in many Washington cases, although it has never been defined.

The language may be qualified in several significant respects. First, there are cases permitting latitude in the amount of damages once the fact of damages has been proved. “The doctrine respecting the matter of certainty, properly applied, is concerned more with the fact of damage than with the extent or amount of damage.” Alpine Indus., 30 Wn.App. at 754 (quoting Gaasland Co. v. Hyak Lumber & Millwork, Inc., 42 Wn.2d 705, 712–713, 257 P.2d 784 (1953)). “[W]here the fact of damage is firmly established, the wrongdoer is not free of liability because of difficulty in establishing the dollar amount of damages.” Reefer Queen Co. v. Marine Constr. & Design Co., 73 Wn.2d 774, 781, 440 P.2d 448 (1968). “Difficulty in ascertaining the damages, or uncertainty as to the amount, provides no basis in logic for denial in toto.” Sposari v. Matt Malaspina & Co., 63 Wn.2d 679, 689, 388 P.2d 970, 975 (1964). “If the evidence affords a reasonable basis for establishing the loss, an issue arises to be resolved by the trier of facts.” Sposari, 63 Wn.2d at 689.

A second qualification of the “reasonable certainty” language relates to apportionment of damages among different causes. “[A]bsolute certainty is not required” when “the amount of damage is not susceptible of exact apportionment between the defendant's fault and other factors contributing to the loss.” Alpine Indus., 30 Wn.App. at 755. If a plaintiff claiming lost profit damages “proves that the defendant's fault was a cause of lost profits, the plaintiff is not required to prove the entire loss was due to the defendant's fault.” Alpine Indus., 30 Wn.App. at 755. Again, “[t]he trier of fact must exercise a large measure of responsible and informed discretion where the fact of damage is proved.” Long v. T-H Trucking Co., 4 Wn.App. 922, 927, 486 P.2d 300 (1971).

A third qualification of the “reasonable certainty” language relates to the “new business rule.” In some cases, the rule precludes recovery of lost profits for a new business without a profit history or records of similarly situated businesses. See, e.g., Farm Crop Energy v. Old Nat'l Bank of Wash., 109 Wn.2d 923, 750 P.2d 231 (1988).

For a detailed discussion of damages issues, see DeWolf, Allen, & Caruso, 25 Washington Practice, Contract Law and Practice ch. 14 (3d ed.).