USING THE YARDSTICK TEST TO PROVE LOST PROFIT DAMAGES

imagesIt’s all about proving your damages! One category of consequential damages that parties sometimes seek is lost profit damages. Lost profits, though, are one of the most difficult damages to prove. If a party is interested in pursuing lost profit damages (such as when the opposing party materially breaches their contract) it is important to understand the burden and expert testimony needed to support these damages with a reasonable degree of certainty.

 

In a prior article, I discussed a tenant supporting a lost profit claim against its landlord due to the landlord’s breach of the lease.  Recently, in Victoriana Buildings, LLC v. Ft. Lauderdale Surgical Center, LLC, 40 Fla.L.Weekly D1169b (Fla. 4th DCA 2015), the Fourth District found that a tenant did not properly support its lost profit damages even though the landlord breached the lease. The Court affirmed that the tenant’s lost profits claim was speculative and, therefore, not recoverable. In reaching this determination, the Court explained:

 

Lost profits are typically proven by one of two methods: (1) the before and after theory; or (2) the yardstick test. The yardstick test is generally used when a business has not been established long enough to compile an earnings record that would sufficiently demonstrate lost profits and compares the profits of businesses that are closely comparable to the plaintiff’s.  Here, the tenant’s expert consultant, in analyzing the viability of the tenant’s proposed facility, did not evaluate any comparable facility’s profitability as a “yardstick,” and the tenant’s expert CPA acknowledged that his report, which was based on the consultant’s report and forecast, was only as good or as bad as [the consultant's] forecast. Thus, the tenant’s proof was insufficient.

Victoriana Buildings, supra (internal quotation and citation omitted).

 

Without a true proven history of profitability, the tenant should have used the yardstick test supported by sufficient expert testimony.  Under this yardstick test, the expert would analyze closely comparable businesses to render an opinion as to the lost profits caused by the defendant’s breach.  Because the tenant’s expert failed to properly perform this yardstick analysis, the tenant was denied lost profit damages since these damages became purely conjectural.

 

If you have incurred damages, it is important to consult with counsel to ensure the damages you have incurred can be sufficiently proven.  Whether those damages are lost profit damages or another category of damages, it is crucial to sufficiently prove these damages in accordance with applicable law. Otherwise, you can wind up in the position of not properly presenting your damages at trial.  In the case of a business that does not have a sufficient track record to prove lost profitability, a yardstick needs to be established to prove lost profits with a reasonable degree of certainty.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

WAIVER OF CONSEQUENTIAL DAMAGES AND LOSS OF USE DAMAGES (IN CONSTRUCTION / DESIGN DEFECT DISPUTE)

imagesIn construction / design defect cases, a plaintiff (party proving defect) may assert a category of damages referred to as loss of use damages.  Importantly, if your contract includes a waiver of consequential damages, these types of damages will not be recoverable.  This is a significant issue to consider when entering into a construction contract, especially when you are the owner of the project, because if you do not want to waive a party you hire of consequential damages (such as loss of use damages), then you do not want to include a waiver of consequential damages in your contract or, at a minimum, you want to carve out exceptions to the waiver of consequential damages.  Stated differently, this is an issue and risk you want to consider on the front end because even though construction / design defects are not anticipated, they do occur.

 

In a construction / design defect scenario, an owner’s consequential damages would generally be those damages unrelated to repairing the defect.  For instance, loss of use of the property or lost rental income to an owner during the implementation of the repairs would be a consequential damage that would be waived by a waiver of consequential damages provision in an owner’s contract.

 

An example of a waiver of consequential damages provision found in the AIA A201 (general conditions of the construction contract between an owner and contractor) is as follows:

 

The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes

.1  damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and

.2  damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

(See AIA A201-2007, s. 15.1.6)

 

Now, if loss of use damages are not contractually waived, the recent decision in Gonzalez v. Barrenechea, 40 Fla. L. Weekly D258a (Fla. 3d DCA 2015), illustrates how an owner can recover these types of damages when there is a construction / design defect.  In this case, an owner sued its architect for design errors with the HVAC system in a newly constructed home.  The owner was forced to engage a new design professional to address the deficiencies.  It took the owner 20 months to repair the deficiencies during which the owner claimed he could not live (or use) his new house.  Although the owner did not live in the house, there was evidence that the owner had some use of the house.  For instance, the owner’s son slept in the house on an intermittent basis, the owner docked his boat at the dock behind the house, furniture was stored in the house, and the owner had cars parked in the garage.

 

Notwithstanding some use of the house, the owner put on testimony of an expert real estate appraiser that testified that the owner incurred lost rental value of approximately $15,500 per month during the 20-month repair period.  The architect argued that this rate was flawed because the expert failed to factor in the use the owner had of the house during the 20-month period.  The trial court agreed and denied the owner the loss of use damages.

 

The Third District Court reversed the trial court finding that the owner was entitled to loss of use damages:

 

Under Florida law, a homeowner that loses the use of a structure because of delay in its completion is entitled to damages for that lost use. Florida courts have held that “[d]amages for delay in construction are measured by the rental value of the building under construction during the period of delay.”

Gonzalez, supra, quoting Fisher Island Holdings, LLC v. Cohen, 983 So.2d 1203, 1204 (Fla. 3d DCA 2008).

 

Furthermore, because the architect failed to put on any evidence as to what the rental value of the house should have been during the 20-month period factoring in the owner’s use of the house during this period, there was nothing to refute the owner’s rental rate.

 

This case touches upon important take-aways:

 

  • Consider the risk of a waiver of consequential damages provision on the front end, especially if you are an owner.  Likewise, if you are a contractor or design professional, you want to consider the risk of not having such a waiver of consequential damages.
  • Loss of use damages are recoverable in a construction / design defect case absent a contractual waiver of consequential damages.
  • An owner can introduce evidence of loss of use damages through an expert real estate appraiser that can testify as to the rental rate of the property during the repair period.
  • A contractor or design professional defending a loss of use damages claim should engage its own expert to counter an owner’s expert.  In this case, if the design professional had an expert real estate appraiser, it would have put on evidence of a rental rate much lower than the $15,500 per month factoring in the owner’s limited use of the house during this time period.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.