SCENARIO; XYZ (the Supplier) entered signed an Agreement with ABC (the Customer) for the supply of certain goods. A reading of Clause 14.1 of the Agreement provides that “neither party shall be liable for any indirect losses of the other party”. The Supplier has failed to deliver the goods to the Customer and had refused to any attempts to resolve the stalemate amicably. The Customer intends on filing a suit against the Supplier and in addition to other prayers, it intends on claiming an award for Loss of Profits arising from the Supplier’s refusal to honor its obligations.
The remedies availed in law for damages arising from a breach of contract are therefore intended to place the claimant in the same position as he would have been in if the contract had been performed. Lost profits is one of the damages that a party can be granted for breach of contract. In this instance, ABC (the Customer) cannot recover damages for loss of profit if the contract states that the parties are not liable for consequential or indirect losses. It follows therefore that in the absence of a contractual exclusion the losses are recoverable.
For a Claimant to succeed in a claim for loss of profits three (3) elements have to be present. These elements where espoused by Justice Mativo in HYDRO WATER WELL (K) LIMITED V SECHERE & 2 OTHERS (SUED IN THEIR REPRESENTATIVE CAPACITY AS THE OFFICERS OF CHAE KENYA SOCIETY) (CIVIL SUIT E212 OF 2019) [2021] KEHC 22 (KLR). The elements are; (a) proximate cause; (b) foreseeability; and (c) reasonable certainty.
(a) Proximate cause; a Claimant has to demonstrate that the Defendant’s act and/or refusal to honor its obligations in a contract was the proximate cause of the loss. The central pillar of this element is the legal principle that “but for” the wrongful act of the Defendant, a Claimant would have not suffered the economic loss. Essentially, there must be a link between the wrongful act and the resulting damages and the Claimant has to prove that the Defendant’s breach was a substantial factor in causing the loss at hand. It is however important to note that the proximate cause element does not apply where there was an independent, and intervening act of someone of a third party other than the Defendant, which was not foreseeable by Defendant, or triggered by Defendant’s act, and the acts of the third party which was sufficient of itself to cause the injury. A persuasive decision on this element is a decision of the Court of Appeals of Georgia (USA) in Union Carbide Corp. v. Holton, 136 Ga. App. 726, 222 S.E.2d 105 (1975).
(b) Foreseeability; this element was established sometime in 23rd February, 1854 by Alderson, B. IN Hadley & Anor v Baxendale & Ors [1854] EWHC Exch J70 where the court found that damages are recoverable only if; (a) the damages were reasonably foreseeable by both parties at the time of the contract; (b) the damages arose naturally from the breach. Essentially, foreseeability relates to the principle that a breach of contract, tort, or wrongful conduct was likely to cause damage. A quick distinction is that in contract, foreseeability limits the ambit of damages for which a breaching party is liable while in tort, foreseeability defines whether the defendant owed a duty to the plaintiff, and whether the injury sustained flowed proximately from the defendant’s tortious act. It follows that the purpose of signing a contract would be to make profit and it is incumbent upon the Claimant to demonstrate that there was a likelihood of making profit from the transaction.
(c) Reasonable certainty; Justice Mativo in HYDRO WATER WELL (K) LIMITED V SECHERE (supra) cited the decision of the Court in Precision Pine & Timber, Inc v United States, 63 Fed Cl 122, 131 (2004) which noted that “the certainty of damages is sufficient if the evidence enables the court to make a fair and reasonable approximation of damages” The import thereof is that lost profits should be measured based on reliable evidence, and that lost profits must be proven with reasonable certainty.
This write-up is for informational purposes only and should not be construed as a legal opinion. If you have any queries or need clarifications, please do not hesitate to contact Gregory Makambo, Partner, (gmakambo@makambolaw.com), Kelvin Mwaniki, (k.mwaniki@makambolaw.com) or your usual contact at our firm, for legal advice.