Claim on Wrong Basis Prevents Compensation for Loss

Posted: 10th June 2011

When a business sues for damages because of breach of contract, the damages are based on the loss of profits for the claimant that have resulted from the breach.

However, what is the position when, instead of claiming for loss of profits, the claimant seeks damages for the loss of value to the company that resulted from the breach?
A recent High Court case had to consider this point specifically. It involved a franchise agreement, which was terminated by the franchisor in breach of the franchisee’s contract.
The franchisee claimed damages on the basis that the loss of the franchise had reduced the value of the company. The claim compared the hypothetical value of the company at the point immediately before the franchise was terminated with the value of the company if it ceased doing business.
Mr Justice Flaux was unimpressed with the claim. He pointed out that the company was continuing to trade and that the claim was based on ‘a hypothesis upon a hypothesis’.
Because the claim was based on a loss in valuation argument, not on the basis of the loss of profits, there was no valid claim. Had the claim been for loss of profits, once the breach of contract was proved, the argument would only have been about the quantum of the loss. Alternatively, had the breach of contract caused the failure of the business, then a claim for the loss of value of the business would have been appropriate.
The case was lost simply because the wrong case was brought.