SW Legal studies in Business

Lost Profits, Not Lost Revenue, Are Proper Measure of Damage for Breach
Description

The Alabama high court held that in case of breach of contract, the trial court is to estimate the profits lost by the party that suffered the breach as the measure of damages, not the total revenues lost due to breach.

Topic Contracts
Key Words

Breach, Damages, Lost Revenue, Profit

C A S E   S U M M A R Y
Facts

Madison developed a patented process for coating corrugated boxes without wax, which made the boxes more desirable as they were fully recyclable. After testing and long discussions, International Paper (IP) agreed to have Madison provide coating for boxes, many of which were used for shipping poultry and meat. The contract specified a minimum monthly purchase level and a price dependent on the volume of coating used. After 14 months, IP hardly used any coating at all and Madison sued for breach. The trial court found IP to have breached the contract because it failed to make the monthly minimum level of purchases from Madison. The jury awarded damages of $8.9 million. That determination was appealed.

Decision

Reversed in part. IP was clearly in breach. The contract was clear as to minimum purchases to be made. However, the damages were for lost revenue. That is, the damages were for the revenue Madison would have earned had IP purchased the minimum requirements. “The proper measure of damages in cases such as this one is the difference between the price agreed upon in the contract and the cost of performance, or, in other words, the profit.” Madison does not recover costs it did not incur. The trial court will recalculate damages using the lost profit method.

Citation

International Paper Co. v. Madison Oslin, Inc., ---So.2d--- (2007 WL 3318050, Sup. Ct., Ala., 2007)

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