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The only prerequisite to recovery of lost profits is proximate causation: the lost profits must be the natural and direct consequences of the breach. This rule is to be applied in any action for damages for breach of contract. Cal. Civ. Code § 3300.
Plaintiff accounting firm entered a joint venture with defendant corporation after purchasing defendant's accounting practice. After defendant terminated the joint venture following a series of disagreements, plaintiff opened a new office in the same building where the joint venture had been located. Initially, plaintiff suffered a loss of profits but a profit was realized three years later. Plaintiff sued defendant for breach of contract. The trial court officially dissolved the joint venture and awarded plaintiff lost profits and damages. Both parties appealed.
Was the plaintiff entitled to lost profits?
The court reversed affirmed in part and reversed in part, holding that the damage award was supported by substantial evidence consisting of the expert testimony of a certified public accountant, that the trial court had properly found it reasonable for plaintiff to have mitigated its damages by starting a new practice rather than by trying to purchase another existing practice, that the interest on the damages and on the purchase price offset had been properly calculated, and that damages were properly not awarded against the individual defendant. It further held, however, that the trial court had erroneously failed to offset the profits earned by plaintiff's new practice against the lost profits from the joint venture caused by defendants' breach. However, before calculating the offset, plaintiff's profits from the new practice had to be reduced by the losses it suffered initially, held the court, and since the figure used for fifth year profits had been only an estimate, remand was required for the limited purpose of ascertaining plaintiff's actual net profit earned over the five-year period chosen by the trial court for measuring lost profits, and then recalculating the net loss for which defendant was liable and the interest on the award.