March 21, 2016 Articles

Lost Profits: Direct or Consequential Damages?

Significant sums hang in the balance.

By Wendi J. Berkowitz

The question of whether lost profits resulting from a contract breach constitutes direct or consequential damages has vexed practitioners for decades. While we can hardly claim that the answer is now clear, the primary factor appears to be foreseeability of the eventual outcome at the time of contracting. (This analysis will focus mostly on California, as a jurisprudential leader, though the law in many other jurisdictions is similar.) Of course, lost profits is often the single largest component of a plaintiff’s claim for breach of contract damages, and many contracts exclude recovery of consequential damages in the event of breach. Thus, significant sums hang in the balance. Direct or consequential? That is the question.

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