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| Business Damages |
by
Andrew B. Sommerman
1. Scope. I am going to discuss business damages as it applies to breach of contract, breach of warranty, common-law fraud, and violations of the DTPA. This paper is just an outline of my talk, and provides references to the book you received today, O'Connor's Texas Causes of Action (2008) (the "COA").
2. COA reference. Business Damages are covered in Chapter 45-F of the COA.
3. Recoverable Business Damages. Types of business damages that can be awarded:
Benefit-of-the-bargain damages;
Out-of-pocket damages;
Lost profits;
Loss of credit; and
Loss of goodwill.
Authority for recovering these damages is cited in the COA, ch. 45-F, 1.2.
4. Benefit-of-the-Bargain Damages. Plaintiffs may recover benefit-of-the-bargain damages.
Benefit-of-the-bargain damages are meant to place an injured party in the same economic position it would have occupied if the breaching party had performed. COA, ch. 45-F, 2.
These damages are recoverable for breach of contract, breach of warranty, common-law fraud, and violations of the DTPA. COA, ch. 45-F, 2.
Both loss of enjoyment and loss of use are included in benefit-of-the-bargain damages. Allowing a party to recover loss of use as a separate element of damages would result in double recovery. COA, ch. 45-F, 2.1.
5. Specific Measures of Benefit-of-the-Bargain Damages.
Benefit-of-the-bargain damages are measured by the difference between the value as represented to the injured party and the value actually received by the injured party. The specific measure of benefit-of-the-bargain damages is determined by the type of action being asserted (i.e., fraud, breach of contract, etc.). COA, ch. 45-F, 2.1.
Common Law Breach of Contract. Benefit-of-the-Bargain Damages = (Value of the Performance Promised) - (Value of the Performance Tendered)
The level of performance given under the contract (i.e., substantial performance, partial performance, or no performance) affects the measure of damages. COA, ch. 45-F, § 2.1.1.
UCC Breach of Contract- Seller’s Breach. Benefit-of-the-Bargain Damages = [(Contract Price) - (Market Price at Time Buyer Learned of Breach)] + [(Incidental and Consequential Damages) - (Expenses Saved Due to Breach)]
COA, ch. 45-F, 2.1.1.
UCC Breach of Contract- Buyer’s Breach. Benefit-of-the-Bargain Damages = [(Unpaid Contract Price) - (Market Price at Time of Breach)] + [(Incidental and Consequential Damages) - (Expenses Saved Due to Breach)]
COA, ch. 45-F, 2.1.1.
Breach of Warranty. Benefit-of-the-Bargain Damages = (Value of the Item as Warranted) - (Value Received)
COA, ch. 45-F, 2.1.1.
Common Law Fraud. Benefit-of-the-Bargain = (Value of the Item Represented) - (Value Received)
COA, ch. 45-F, 2.1.1.
DTPA. Benefit-of-the-Bargain = (Value of the Item Represented) - (Value Received)
COA, ch. 45-F, 2.1.1.
According to the DTPA, a plaintiff can recover either benefit-of-the-bargain damages or out-of-pocket damages— whichever are greater.
Lost Profits. Benefit-of-the-bargain damages may also include lost profits fo the money that would have been made if the bargain were preformed as promised. COA, ch. 45-F, 2.1.2.
6. Pleading and Proving Benefit-of-the-Bargain Damages. Benefit-of-the-bargain damages do not have to be specifically pleaded. These damages can be proved by offering evidence of both the represented value and the value of what was actually received. COA, ch. 45-F, 2.2, 2.3.
Fair market value (FMV)- the price property would bring if offered for sale by a willing but not obligated seller and purchased by a willing but not obligated buyer- is generally used to prove benefit-of-the-bargain damages. COA, ch. 45-F, 2.3.1.
Unaccepted offers to purchase are not evidence of FMV.
The time of valuation varies based on the action asserted. COA, ch. 45-F, 2.3.2.
Common Law Breach of Contract. FMV is determined at the time of breach.
UCC. If seller is sued, FMV is determined at the place of tender or place of arrival. If the buyer is sued, FMV is determined at time and place of tender.
Breach of Warranty. FMV is determined at time and place of acceptance.
Common Law Fraud. The time for valuation of FMV has not been addressed by any reported case. Since benefit-of-the-bargain damages are only permitted in fraud cases where an enforceable contract exists, FMV in fraud cases may be the same as that in common law breach of contract cases.
7. Out-of-Pocket Damages. Plaintiffs may recover out-of-pocket damages.
These damages are supposed to provide actual compensation for the injury suffered. COA, ch. 45-F, 3.
A plaintiff cannot recover both out-of-pocket and benefit-of-the-bargain damages. COA, ch. 45-F, 3.
8. Measuring Out-of-Pocket Damages. These damages are measured by the difference between the amount the plaintiff paid and the value of what the plaintiff received. Lost profits are not included. COA, ch. 45-F, 3.1.1-2.
9. Pleading and Proving Out-of-Pocket Damages. Out-of-pocket damages do not have to be specifically pleaded. A plaintiff must offer evidence of the amount it paid and the amount it received. COA, ch. 45-F, 3.2; 3.3.
The amount paid is simply the purchase price. The value received is determined by the FMV.
The time of valuation depends on the type of action being asserted. See COA, ch. 45-F, § 2.3.2 (referenced above).
10. Lost Profits. A plaintiff can also recover damages for lost profits.
Lost profits are measured by net lost profits, not gross lost profits. Net profits = (Total Expenses) - (Total Receipts)
COA, ch. 45-F, 4.1.
11. Pleading and Proving Lost Profits. Lost profits must be specifically pleaded. They should not be pleaded as "loss of business" because that phrase suggests the plaintiff can recover for lost gross revenues. Lost profits must be proved with (1) reasonable certainty and (2) by competent evidence. COA, ch. 45-F, 4.2; 4.3.
Reasonable Certainty. Plaintiffs do not have to prove lost profits by an exact calculation. Instead, reasonably certain evidence of lost profits turns on the facts. Courts use the following factors when reviewing legally sufficient evidence:
(1) were the profits from an existing business venture;
(2) do profits depend on a new business venture;
(3) are profits based on uncertain, changing market conditions;
(4) are profits based on a risky business opportunity;
(5) are profits based on a tested product; and
(6) are profits based on entry into an unknown or unviable market.
COA, ch. 45-F, 4.3.1.
Competent Evidence. Owner or expert testimony may be used to prove lost profits. The key is familiarity with the business, not an exact calculation. An opinion must be based on objective facts, figures, or data. Documentary evidence, although helpful, is not required. COA, ch. 45-F, 4.3.2.
12. Destruction of Business. The proper measure of damages in the case of a totally destroyed business is the market value of the business. The market value is measured by the difference in value before and after destruction. Lost profits can be recovered for the period between when the injury began and destruction took place. COA, ch. 45-F, 4.4.
13. Loss of Credit Damages Summary. A plaintiff may recover for loss of credit (a.k.a. damage to credit reputation). COA, ch. 45-F, 5.
Damages are measured by the diminished ability to borrow money or obtain goods on time to be established by the degree of certainty to which it is susceptible.
Loss of credit must be specifically pleaded.
Recovery only for loss that is natural, probable, and foreseeable consequence of defendant’s conduct.
Plaintiff must show actual injury and amount of injury. This is shown by applying for a loan and being denied, or being charged a higher interest rate.
14. Loss of Goodwill Damages Summary. A plaintiff may recover for loss of goodwill (a.k.a. loss of business reputation). Goodwill consists of the advantages the business has acquired because of its, name, location, reputation, and success beyond tangible assets. COA, ch. 45-F, 6.
Goodwill is calculated by the amount the net earnings of a business exceeds the normal earnings of a same or similar business.
Loss of goodwill must be specifically pleaded.
A plaintiff may prove goodwill by offering expert testimony. The plaintiff may also offer its own testimony about the value of the business beyond tangible assets.
15. Case Law. The following cases are only a few of the key cases on business damages. For more references, see COA, ch. 45-F.
Arthur Anderson & Co. v. Perry Equip. Corp., 945 S.W.2d 812 (Tex. 1997);
Mead v. Johnson Group, 615 S.W.2d 685 (Tex. 1936);
Tex. Instrs., Inc. v. Teletron Energy Mgmt., 877 S.W.2d 276 (Tex. 1994);
Formosa Plastics Corp. USA v. Presidio Engineers and Contractors, Inc., 960 S.W.2d 41 (Tex. 1998);
Ford Motor Co. v. Cooper, 125 S.W.3d 794 (Tex.App.-Texarkana 2004, no pet.);
Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369, 373 (Tex. 1984);
Playboy Enters. v. Editorial Caballero, S.A. de C.V., 202 S.W.3d 250 (Tex.App.- Corpus Christi 2006, pet. denied);
W.O. Bankston Nissan, Inc. v. Walters, 754 S.W.2d 127, 128 (Tex. 1988);
Haase v. Glazner, 62 S.W.3d 795, 799 (Tex. 2001);
Naegeli Transp. v. Gulf Electroquip, Inc., 853 S.W.2d 638 (Tex.App.-Houston [14th Dist.] 1993, writ denied);
Holt Atherton Indus. v. Heine, 835 S.W.2d 80 (Tex. 1992);
Roberts v. U.S. Home Corp., 694 S.W.2d 129 (Tex.App.-San Antonio 1985, no writ);
Commonwealth Lloyd's Ins. Co. v. Thomas, 825 S.W.2d 135 (Tex.App.-Dallas 1992) writ granted w.r.m., 843 S.W.2d 486 (Tex. 1993);
Tex. & Pac. Ry. v. Mercer, 90 S.W.2d 557 (Tex. 1936);
Taorina v. Culicchia, 355 S.W.2d 569 (Tex.App.-El Paso 1962, writ ref'd n.r.e.);
Checker Bag Co. v. Washington, 27 S.W.3d 625 (Tex.App.-Waco 2000, pet. denied).
16. Secondary Sources. There are some secondary sources that may be particularly helpful, and they include:
2 Dorsaneo, Texas Litigation Guide 20.02[3], 21.22[1] (2007).
5 Edgar & Sales, Texas Torts & Remedies ch. 83 (2007).
Cagle et al, Comment, The Classification of General & Special Damages for Pleading Purposes in Texas, 51 Baylor L.Rev. 629 (1999) (referred to as Classification of Damages).
Kolaski & Kuga, Measuring Commercial Damages via Lost Profits or Loss of Business Value: Are These Measures Redundant or Distinguishable?, 18 J.L. & com. 1 (1998).
Marshall & Beron, Statistics & the Law: Proving Lost Profits, 2 Tex.Wes.L.Rev. 467 (1996).
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