Overhead should be treated as a part of gross profits and recoverable as damages, and should not be considered as part of the seller's costs. A number of cases hold that since overhead expenses are not affected by the performance of the particular contract, there should be no need to deduct them in computing lost profits. The theory of these cases is that the seller is entitled to recover losses incurred and gains prevented in excess of savings made possible; since overhead is fixed and non-performance of the contract produced no overhead cost savings, no deduction from profits should result.
Appellant cloth importer entered into a contract with appellee manufacturer to process appellant’s woolen material at a certain price. Appellee made the necessary preparations to perform its end, but no goods were forthcoming from appellant. Appellee then brought a suit to recover the profits lost due to appellant's breach of contract. A district court, sitting without a jury, determined that appellant breached the contract and awarded appellee damages for loss of profits. On appeal, appellant sought review of the district court’s judgment and argued that overhead costs should have been deducted from appellee's damages. The appellate court affirmed the district court’s judgment.
Did the district court err when it disregarded overhead expenses as part of appellee manufacturer’s costs in determining the amount of profits lost?
There was difficulty in exactly ascertaining appellee manufacture's costs when the loss was due to appellant cloth importer's wrongful conduct in repudiating the contract before performance by appellee. Under the facts presented, the district court was not compelled to consider appellee's overhead costs.