Damages in Breach of Contact Cases
By Brent A. McDade
www.mercercapital.com

Damages calculations in breach of contract cases are nothing more than an attempt to determine the amount of money that will make a plaintiff "whole" after suffering some alleged wrongdoing (breach of contract) at the hands of a defendant. In general, this means calculating the present value of the lost profits of the plaintiff caused by the alleged breach of contract.

Business appraisers recognize that the value of a business enterprise is the present value of the future cash flows associated with that business enterprise. The cash flows associated with a contract can be thought of as a sliver of the cash flows of the business enterprise, so some of the same valuation techniques (particularly discounted future benefits methodologies) can be applied in damages calculations. Using the discounted future benefits method to determine damages related to the breach of a contract is a fairly simple exercise from the point of view of the arithmetic involved. The analyst determines the amount and timing of the foregone cash flows related to the breach of the contract and then determines an appropriate discount rate at which to reduce those cash flows to the relevant date (typically, the date of the breach). However, neither step of this process is as straightforward as it might at first appear, and a number of analytical decisions must be made in any damages calculation.

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