Originally from World Arbitration And Mediation Review (WAMR)

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LOST PROFITS AND THE DISCOUNTED CASH

FLOW METHOD OF CALCULATION
by R. Doak Bishop∗ and Craig S. Miles∗∗

I. INTRODUCTION
In most arbitrations involving the impairment or destruction of a
contract or business, the claimant will seek compensation for the future
income that will be lost due to the acts at issue. In general terms, such
damages are known as “lost profits.” The legal systems of most jurisdictions
recognize lost profits, and indeed the United Nations Articles on State
Responsibility specifically provide that compensation is designed to cover
any “financially assessable damage including loss of profits insofar as is
established.”1
Lost profits damage calculations typically require arbitrators to conduct
a “counter-factual” or “but for” analysis. In other words, they must answer
the question: what performance would the asset have been able to achieve
“but for” the damaging acts? Such an analysis necessarily involves an
assessment of what might have happened under a given set of conditions.
The amount of lost profits is then the difference between the “but-for”
profits and the actual profits during the damages period. The concept of
“lost profits” can best be represented by the expected cash flows that the
damaged party would have generated, in the absence of the damage.
It is, of course, a well-settled principle in American law, and in much of
the world, that:
[A] recovery for lost profits will be allowed only if their loss is capable of
being proved with a reasonable degree of certainty. No recovery can be
had for loss of profits which are determined to be uncertain, contingent,
conjectural, or speculative.2
According to the leading treatise on damages in international law:
Prospective profits are frequently allowed in international cases, however,
on the ground that such losses were within the contemplation of the parties
to a contract or, in other cases, that the damage is the direct, or the
proximate, or the immediate consequence of the wrongful act. However,
in order to be allowable, prospective profits must not be too speculative,