Recovering Lost Profits in Construction Claims: What Should Project Owners Do?

One common consequence when a construction goes sideways, whether because the project is delayed or defects arise, is that the owner suffers lost revenue. For example, an apartment complex owner loses out on three months of rent when a project is completed three months after the substantial completion date in the project documents. Or a business that owns its own building loses significant revenue after a collapsed roof causes the business to be shut down for an extended period of time. Can the owner recover lost profits from the contractor?

In a recent case, the Oregon Court of Appeals addressed one hurdle that might arise. In Weiner v. International Animal Semen Bank, LLC,[1] the jury awarded a total of $400,000 in damages to two plaintiffs, including damages for lost profits. The defendant appealed, claiming that the plaintiffs had not introduced sufficient evidence of their lost profits.

The Oregon Court of Appeals began by noting that a plaintiff must establish with "reasonable certainty" both the existence and amount of lost profits (not just lost revenue). This includes submitting "evidence of the expenses that the party would have incurred to earn the alleged lost revenue." Moreover, the evidence cannot be "speculative or unverifiable estimates."

The Court of Appeals went on to hold that the plaintiffs had not introduced sufficient evidence of lost profits. One plaintiff introduced an exhibit that explained his costs, but the exhibit also noted that it was exclusive of a number of cost items, i.e., it was only a partial list of expenses. The other plaintiff testified as to his "guess" as to what his costs were in generating revenue. The Court of Appeals held that the exhibit gave an incomplete picture of the plaintiffs' expenses, and thus could not be used to accurately calculate net profits because the testimony was too ambiguous.

Takeaways

Project owners should understand that if they pursue a construction claim that includes lost profit damages, they will likely need to spend some time assembling evidence of both their expected revenues and expenses. In many cases, this will require the use of an expert. If the contractor is able to point to areas of expenses that the owner did not account for in their calculations, the entire claim for lost profits could collapse.

One additional item that both the owner and contractors should consider: does their contract allow for recovery of lost profits? Many construction contracts expressly state that the parties waive any claims for consequential damages, often specifically calling out claims for lost profits. If the contract has such a provision, the suing party will in all likelihood be barred from recovering lost profits regardless of the detail with which they can prove them. If one of the parties wants to preserve the right to sue for lost profits, they should make sure to negotiate a contract that does not have such a consequential damages or lost-profits waiver.