Breached Contract

Assume you have been retained as an expert witness for a client who is the defendant in the

case, and your client is alleged to have breached a contract and caused damages of $3,000,000

which includes added costs and lost profits. The contract required that your client supply

hardwood lumber to a furniture manufacturer for a three-year period. After six months your

client found it could not supply the lumber in the quantity required by the plaintiff in the case

and quit shipping lumber. Your client states that there is no way the damages could be

anywhere near the amount alleged in the suit because your client was selling hardwood lumber

to the plaintiff at “about the market rate.” The plaintiff alleges that because it could not get the

lumber from our client, it had to buy in the open market, and it paid more for the lumber and

lost production output and gross margin on its furniture products. Your preliminary analysis of

the case data finds the following:

1. The plaintiff purchased a total $1,200,000 of hardwood lumber from your client during the

first six months of the contract.

2. Your client was supplying hardwood lumber under the contract at about eight percent below

market rate for similar hardwood sales.

3. The plaintiff’s average gross margin on sales is 35 percent and its average profit on sales is

10 percent.

4. The plaintiff’s average sales volume over the last five years has been $10,000,000 per year.

5. During the six months immediately after the contract was breached, the plaintiff’s average

sales were $800,000 per month.

6. Your analysis of the plaintiff’s average variable costs for operating expenses is 70 percent

fixed and 30 percent variable.

Required: As the defendant’s expert witness:

a. What is your best estimate of the damages that the plaintiff has suffered as a result of

your client’s breach of contract?

The best estimate of the damages that the plaintiff has suffered is $480,000. My client has

influenced only the increase in the Hardwood Lumber supplies and the decrease in the net

profit due to the first one.

b. Based on the information provided, does the plaintiff’s “lost profits and added costs”

allegation have any basis in fact? Show necessary calculations to support your position.

My client did not interfere with the sales of the plaintiff’s, the calculations above show the

variances of net profit and sales, however the allegation of lost profits has not basis since my

client was not affecting them. He only affected the extra costs of the supplies.

c. If asked to provide the court with a “theoretical model” of the basis of your damages, what

would you provide?

The client was providing wood at 8% below the market rate. The plaintiff will have to but their

wood supplies from the open market with a higher cost for the same quantity. Therefore, the

additional costs that the plaintiff will have to incurred for the next two year and a half are as

follow:

d. What additional information, if any, might you like to have to refine your damage

estimates a bit more?

I will consider any interruption of business that the plaintiff might have suffered because of the

breach of contract. Also, I will request the reason for the decrease of sale. “In a breach of

contract action, a plaintiff may recover the amount of damages that are required to place him in

the same position he would have occupied had the breach not occurred”