Analyzing Lost Profits in Arbitration

Lost profits arise when financial harm is allegedly suffered by one party due to the actions of another. The objective of a lost profits analysis is to place the Claimant in the same financial position that it would have been if the Respondent had not allegedly breached a contract or interfered with the Claimant. There are three types of situations that can result in a lost profits claim; a business: (i) suffered reduced income, but continued to exist; (ii) ceased or terminated some or all its operations; (iii) or never commence operations.

Some factors to consider when analyzing the lost profits for a business would be the following: (i) was there an opportunity to realize profits; (ii) can an estimate of lost profits be made (iii) the calculation does not require precision; (iv) the loss cannot be based on speculation; and (v) the loss claimed must be to a reasonable degree of certainty.

All the calculations considered must be within the context of “does this conclusion make sense?”  One aspect to consider is whether the computed lost profits are reasonable in relation to the business before the alleged actions of the Respondent.  Some factors to consider in determining the probability of a company attaining its lost profits calculation are its production capacity, market share, and industry knowledge prior to the event.