Damages for Breach of Contract-Lost Profits Versus Liquidated Damages


Issues often arise concerning the appropriate measure of damages in situations where retailers have breached the supply agreement with the supplier. Under Georgia law, damages recoverable for a breach of contract are such as arise naturally and according to the usual course of things from such breach and such as the parties contemplated, when the contract was made, as the probable result of its breach. O.C.G.A. § 13-6-2.

Damages growing out of breach of contract, in order to form a basis of recovery, must be such as can be traced solely to the breach, be capable of exact computation, must have arisen according to the usual course of things, and be such as parties contemplated as the probable result of such breach.

Breach of Supply Agreement

When addressing issues relating to the breach of a supply agreement, the material item of damage is usually the loss of "anticipated profits". As a general principal of law, vague, speculative, or uncertain damages are not recoverable. However, lost future profits are recoverable, although to some extent contingent, where legally or naturally resulting from the breach.

Generally, in order to prove damages resulting from lost future profits (which are not too speculative for recovery), it is necessary to either have a liquidated damages clause within the contract being enforced, discussed hereinafter, or it is necessary to prove that there is a business which has been long established, has uniformly made profits, there is definite, certain, and reasonable data for the ascertainment of such anticipated profits, and such profits were reasonably within the contemplation of the parties at the time of the contract.

In such circumstances, anticipated profits may be recovered, at least for a limited, reasonable future time, even though they cannot be computed with exact mathematical certainty.

Liquidated Damages

One manner of addressing and avoiding the evidentiary problems associated with establishing and proving damages for lost profits is to incorporate within the supply contract, a "liquidated damages" provision. If the parties agree in their contract what the damages for a breach shall be, they are said to be liquidated, and, unless the agreement violates some principal of law, the parties are bound thereby. O.C.G.A. § 13-6-7. It is important to note that whereas a liquidated damages clause will be enforceable, a penalty will not.

In determining whether a provision is for liquidated damages or a penalty, the cardinal tests are the intention of the parties, reasonableness or unreasonableness of the amount fixed, certainty and ease or difficulty in ascertainment of actual damages, and similarity or disproportion between amount provided and actual or probable loss. See Krupp Realty Company v. Joel, 168 Ga. App. 480 (1983). In deciding whether a contract provision for liquidated damages is enforceable, the court makes a tripartite inquiry to determine if the following factors are present;

  1. injury caused by breach must be difficult or impossible of accurate estimation;
  2. parties must intend to provide for damages rather than for a penalty; and
  3. the sum stipulated must be a reasonable pre-estimate of probable loss. Southeastern Land Fund, Inc. v. Real Estate World, Inc., 237 Ga. 227 (1976).

If actual damages are uncertain and difficult to ascertain or prove and the contract furnishes no data for their ascertainment, the provision will, as a rule, be held to be one for liquidated damages, if the amount is not unreasonable. But if actual damages are capable of exact computation under contract and legal rule for their measure, stipulation for an amount in excess of such damages will generally be deemed a penalty.

Cannot Revert to Actual Damages

A feature implicit in the concept of enforcement of liquidated damages provisions is that both parties are bound by their agreement. A non-breaching party who has agreed to accept liquidated damages cannot elect after a breach to take actual damages should they prove greater than the sum specified. Likewise, the breaching party cannot complain that the actual damages are less than those specified as liquidated damages. The liquidated damages become the maximum, as well as, the minimum sum that can be collected.

Therefore, for the non-breaching party there is a potential trade-off between the amount of the actual damages in the event that they exceed the liquidated sum and avoidance of the evidentiary burden and potential that the non-breaching party would be prevented from collecting damages as the result of the anticipated profits being found to be too speculative.

Wrap-up

As the result of the difficulty in proving loss of anticipated profits at trial, mid-level marketers of petroleum products should consider whether it is appropriate to include within their supply agreements, a liquidated damages provision. A liquidated damages provision utilized under the right circumstances can simplify and perfect the supplier's claims for damages against breaching parties.