Loss of profit

What it means

Loss of profit is the part of damage consisting of a benefit the injured party would very probably have obtained had the damaging event not occurred. Typical examples are an order lost because a supplier's machine broke down and production stopped, or revenue missed while premises were closed.

Under Slovak law, compensation for damage covers actual loss, meaning a reduction of existing assets, and loss of profit, meaning an expected increase in assets that did not happen. Loss of profit is compensated in addition to actual loss if the conditions for liability are met.

In business relationships, the Commercial Code limits compensation to damage the liable party foresaw or could have foreseen when the contract was concluded. Loss of profit may therefore not be compensated in full if it was unusually high and the other party could not reasonably have expected it.

How it works in practice

Loss of profit must be well evidenced. Useful materials include confirmed orders, correspondence with customers, comparisons of revenue with earlier periods or the budget and a calculation of the margin the company would have earned. In complex cases an opinion from a court-appointed expert is often used.

Contracts between businesses often contain a liability cap or a complete exclusion of loss of profit. Such clauses are common in commerce, although their validity has limits, for example where damage is caused intentionally. The risk should be weighed before signing.

Protection against loss of profit from one's own downtime, for example after a fire or flood, comes from business interruption cover. It covers lost profit and fixed costs during recovery and complements property insurance, which deals only with the physical damage itself.

What to watch out for

If the contract includes a contractual penalty, it may, depending on what the parties agreed, limit the right to damages for the same breach. If the parties want damages exceeding the penalty, including loss of profit, to be recoverable, it is wise to say so expressly in the contract.

A claim for loss of profit is subject to limitation, and the period runs from when the injured party learned or could have learned of the damage and of who is responsible. Lengthy negotiations without filing a lawsuit can therefore lead to the claim being lost.