Commercial Damages & the But-For Methodology: Solicitor Guide
Commercial damages experts quantify financial losses arising from breach of contract, IP infringement, professional negligence, and shareholder disputes. The foundational methodology is but-for analysis - constructing the financial position the claimant would have achieved absent the breach and comparing it to actual performance.
This guide explains how solicitors should brief experts on the but-for test, the distinction between expectation and reliance damages, and how Hadley v Baxendale remoteness and mitigation shape the recoverable loss.
The But-For Test Explained
The but-for test asks: but for the defendant's breach, what would the claimant's financial position have been? The expert builds a counterfactual model using pre-breach financial data, management accounts, business plans, and market evidence to project revenues, costs, and profits that would have been achieved. This is compared to actual post-breach performance. The difference - net of avoided variable costs and adjusted for reasonable mitigation - is the loss of expected profit under Robinson v Harman [1848]. Causation must be addressed: where market downturns or the claimant's own decisions also contributed to poor performance, the expert must apportion loss attributable to the breach separately from external factors.
Expectation vs Reliance Damages
Expectation damages (lost profits) place the claimant in the position they would have been in had the contract been performed - the default measure where profits can be calculated with reasonable certainty. Reliance damages (wasted expenditure) return the claimant to the position before the contract was made, recovering expenditure incurred in reliance on performance under Anglia Television Ltd v Reed [1972]. The claimant may elect reliance damages where expectation loss cannot be proved, or where they made a bad bargain - though the defendant may raise the bad bargain defence. The expert should quantify both measures where appropriate, clearly labelling the election implications for the solicitor's advice.
Hadley v Baxendale Remoteness
Not all financial shortfalls are recoverable. Hadley v Baxendale [1854] limits recovery to: (1) losses arising naturally from the breach in the ordinary course of things; and (2) losses within the reasonable contemplation of both parties at contracting as the probable result of breach. Victoria Laundry illustrates the distinction - ordinary lost profits passed Limb 1; exceptional government contract profits failed Limb 2 without specific disclosure. The expert report must address remoteness for each head of consequential loss, identifying the limb relied upon and citing pre-contractual communications supporting contemplation. Quantifying a loss the law does not allow is wasted costs - structure the report to separate recoverable direct loss from consequential loss subject to remoteness challenge.
Mitigation and Avoided Loss
The claimant must take reasonable steps to minimise loss following breach. The expert identifies available mitigation - alternative suppliers, redeployment of resources, substitute contracts - and quantifies the loss that proper mitigation would have avoided. Failure to mitigate reduces recoverable damages, though the burden is on the defendant to prove unreasonableness. Proactive mitigation analysis in the expert report strengthens the claimant's position and anticipates the defence. Where the claimant did mitigate, avoided costs are deducted from gross loss to produce net recoverable damages.
Expert Report Structure for Commercial Claims
A CPR Part 35 compliant commercial damages report should include: executive summary of total loss by head; description of the breach and causation analysis; but-for model assumptions and data sources; period-by-period loss calculation; remoteness analysis for each consequential head; mitigation assessment; sensitivity analysis on key variables (revenue growth, margin, duration); and appendices with supporting financial schedules. For IP claims, separate sections for lost profits, reasonable royalty, and account of profits support the claimant's election. Clear separation of fact, assumption, and opinion assists the court and facilitates productive joint expert meetings.
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