How Loss of Profits Is Calculated in Commercial Litigation

Loss of profits claims are central to many commercial disputes - yet they are among the most contested areas of quantum. Instructing solicitors need a forensic accountant who can build a transparent model linking breach to financial outcome, and who can defend that model under cross-examination.

The basic framework

At a high level, the claimant must establish:

1. Breach or wrong (legal question for the court)
2. Causation - the breach caused the loss alleged (often joint legal/financial analysis)
3. Quantification - the amount of loss in monetary terms (expert evidence)
4. Mitigation - the claimant took reasonable steps to reduce loss

The expert witness addresses (3) and supports (2) from a financial perspective, using data rather than assertion.

But-for reconstruction

The standard approach compares actual performance with a but-for scenario (what would have happened absent the breach). This may use:

• Historical trading results pre-breach
• Management accounts and budgets contemporaneous with the breach
• Industry trends to isolate external market movements
• Contractual volume or pricing where performance is contract-driven

Each assumption must be visible. Opposing experts (and courts) will stress-test whether the but-for scenario is realistic rather than optimistic.

Margin and incremental costs

Lost revenue alone is rarely the correct measure. Experts distinguish:

• Lost contribution (revenue minus variable costs)
• Lost net profit (after allocable fixed costs, where appropriate)
• Wasted expenditure (reliance loss) as an alternative or additional head

Allocating fixed overheads incorrectly is a common source of dispute. The expert should document why certain costs are treated as variable or fixed for the loss period.

Mitigation

Mitigation evidence might include alternative customers, redeployed capacity, insurance recoveries or price increases. Failure to mitigate reduces recoverable loss. The expert reviews contemporaneous records - not hindsight - to assess whether mitigation was reasonable in the circumstances.

Present value and duration

For losses extending over multiple years, discounting may be required. The choice of discount rate and period can materially affect the claim. Experts should align with legal instructions on pre-judgment interest and whether damages are awarded as a lump sum or structured.

Common pitfalls in disputes

• Confusing turnover with profit - a revenue drop may not equal a profit loss if costs fall proportionately.
• Ignoring capacity constraints - could the business actually have generated additional sales?
• Double counting - consequential loss claimed alongside overlapping heads.
• Weak contemporaneous records - experts cannot manufacture reliability where data is absent.

Rebuttal and joint experts

Where two experts disagree, the gap often lies in assumptions rather than arithmetic. Experts' meetings under CPR Part 35 can narrow issues. A well-prepared joint statement helps the court focus on what truly matters at trial.

Our loss of profits and quantum service page explains how we approach these instructions. For formal appointments, contact us via how to instruct.