A supplier delivers products your business cannot sell. A manufacturer misses a critical delivery. A vendor fails to perform, leaving you unable to fulfill customer orders. The immediate expense may be easy to identify, but the larger loss is often the profit your business would have earned.
California law allows businesses to recover lost profits for breach of contract when the evidence supports the claim. Recovery depends on proving that the breach caused the loss, that the loss was foreseeable when the parties contracted, and that the claimed profits can be established with reasonable certainty. The contract itself may also limit recovery.
For business owners, the practical question is what evidence connects the broken promise to the money the business lost—and whether that evidence will persuade a skeptical audience.
Recovery can extend beyond the contract price
Contract damages generally aim to put the injured party in the financial position it would have occupied if the agreement had been performed. Depending on the agreement and the facts, that can include lost profits as well as more immediate expenses. California Civil Code sections 3300 and 3301 provide the basic framework.
Consider a distributor that purchases goods for resale. If the supplier delivers nonconforming products, the distributor may face losses beyond the value of the defective inventory: canceled orders, interrupted sales, or the loss of a customer relationship.
Those additional losses require their own proof. Establishing that the goods were defective does not, by itself, establish how much profit the distributor lost.
Lost revenue and lost profits are different
A decline in sales is a starting point. A lost-profits calculation must account for the costs the business would have incurred to generate those sales and the results it actually achieved. California jury instructions distinguish between situations in which no profits were earned and those in which the business earned less than it otherwise would have. (CACI Nos. 352–353.)
For a simplified example, assume a distributor could have completed a documented customer order for $200,000. Fulfilling that order would have required $140,000 in additional product, shipping, commissions, and other costs. If the supplier’s breach prevents the sale and the distributor avoids those costs, the potential lost profit on the order is $60,000.
That illustration assumes no substitute sale, no overlapping claim for the same loss, and no other relevant cost adjustments. Actual calculations must address expenses the business continued to incur, expenses it avoided, and profits it earned despite the breach. The accounting should explain those distinctions rather than simply applying a margin to every dollar of lost revenue.
Connect the breach to a foreseeable business loss
Timing alone is insufficient. If sales declined after a supplier’s breach, the business still needs to explain why the breach caused the decline. The opposing party may point to weaker demand, pricing changes, competition, or unrelated operational problems.
Useful evidence can include canceled purchase orders, customer messages identifying the reason for cancellation, inventory records showing when sellable stock ran out, and sales data before and after the disruption.
Foreseeability is a separate issue. For losses arising from special circumstances, California law asks whether the breaching party knew or reasonably should have known of those circumstances when the contract was made. (CACI No. 351.)
For example, did the supplier know the goods were needed for an identified customer contract or a time-sensitive selling season? Emails and negotiations preceding the agreement can matter as much as communications after the breach.
For sales of goods, California Commercial Code section 2715 addresses consequential losses arising from requirements the seller had reason to know about when contracting and that could not reasonably be prevented through replacement purchases or other measures.
Prove the amount with reliable evidence
Courts do not require mathematical precision, but they do require a reasonable basis for calculating lost profits. In Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747, the California Supreme Court upheld the exclusion of an expert’s speculative projections that a small company would become a major industry leader.
A useful damages analysis makes its assumptions visible. Historical sales, customer commitments, actual margins, production capacity, and market conditions should support the projected result. If the business claims several years of losses, the analysis also needs to explain why the breach would continue affecting profits throughout that period.
A new or growing business is not automatically barred from recovering lost profits. It may, however, face a more difficult evidentiary task without an established earnings history. Reliable evidence of customer demand, comparable businesses, management experience, and the ability to perform can help support the claim. Optimistic forecasts alone are vulnerable.
For a substantial claim, involving a damages expert early can help identify missing records and test whether the proposed calculation is defensible.
Anticipate skepticism and build the claim to withstand it
In my experience litigating business disputes, lost-profits claims often face substantial skepticism even when they have a sound legal basis. Opposing counsel tend to challenge them aggressively, and mediators and judges may approach them with considerable caution. In settlement discussions, projected profits are particularly vulnerable to discounting because they depend on what would have happened if the contract had been performed.
That skepticism should shape the claim from the beginning. A large damages figure needs a clear explanation of how the business would actually have earned the money. For each significant assumption, we should be able to identify supporting evidence: who would have purchased the product, in what quantity, at what price, with what costs, and over what period. We also need to address the strongest competing explanation for the loss and explain why reasonable alternatives would not have prevented it.
Credibility matters. An aggressive growth forecast can give the other side a reason to question the entire calculation. Where the evidence supports a range of outcomes, identifying a well-supported baseline and explaining what supports additional recovery can make the presentation more persuasive. An expert’s involvement helps most when the underlying business records support the opinion.
This also affects settlement strategy. We should prepare to explain why a proposed discount overstates the weaknesses in the evidence, while giving the client a candid assessment of the uncertainty that remains. The goal is to develop a claim that can survive sustained scrutiny and carry weight in negotiations and at trial.
Take reasonable steps to reduce the loss
A business cannot recover losses the breaching party proves could have been avoided through reasonable efforts or expenditures. California evaluates those efforts in light of the circumstances at the time, including whether they involved undue risk or hardship. Reasonable mitigation expenses may themselves be recoverable. (CACI No. 358.)
For a supplier dispute, that may mean investigating replacement suppliers, substitute products, repairs, or other ways to fulfill customer orders. Whether an alternative is reasonable depends on its actual availability, timing, cost, and suitability.
Document the investigation. Supplier quotes, lead times, technical requirements, and explanations of why an alternative would not work can become important evidence. If a practical substitute becomes available, the damages analysis should account for that development.
The decisions made during the disruption will become part of the case. A contemporaneous record is usually more useful than an explanation assembled months later.
Review the contract before valuing the claim
Even a well-supported loss may encounter a contractual limitation. Agreements may cap damages, exclude consequential damages or lost profits, or make repair or replacement the exclusive remedy.
For goods transactions, California Commercial Code section 2719 permits certain remedy limitations and consequential-damages exclusions. It also addresses circumstances in which a limited remedy fails of its essential purpose. Whether a provision applies or is enforceable requires analysis of its language and the governing law.
Do not assume every lost-profits claim is necessarily consequential, or that an unsuccessful repair automatically eliminates every contractual restriction. The nature of the promised performance and the particular loss matter.
Review the full agreement, including incorporated terms, purchase orders, warranties, and amendments. Notice requirements, choice-of-law provisions, and dispute-resolution procedures can also affect how the claim should proceed.
Preserve the records that will support the claim
As soon as a material breach occurs, preserve the agreements and communications defining what was promised; financial records showing sales and costs; customer orders and cancellations; evidence of the defect or interruption; and records of efforts to obtain replacements or otherwise reduce losses.
Keep underlying data as well as summaries. A spreadsheet calculating damages is more useful when each material assumption can be traced to a sales report, invoice, customer communication, or other record.
Early legal review can help assess the strength of the claim, identify contractual restrictions, and guide business decisions while losses are still developing. It can also help determine whether the likely recovery justifies the cost of pursuing it.
Tajima LLP represents businesses in contract disputes and complex commercial litigation. If a supplier, manufacturer, or business counterparty has disrupted your operations, contact the firm to discuss your potential claims and the evidence needed to evaluate them.
This article provides general information about California law and is not legal advice. The outcome of any dispute depends on its facts, the governing agreement, and applicable law.