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Only companies put out of business can claim damages based on loss of value, says High Court

A company cannot claim for a reduction in its value because of breach of contract unless it has gone out of business, the High Court has said. Damages in all other cases can be based only on the loss of profits caused by the breach, the Court said.24 May 2011

"Except where the business has ceased as a consequence of the breach, loss of profits is the appropriate measure of damages," Mr Justice Flaux said in the High Court ruling

Even though there was a breach of contract in the case the company concerned was not awarded any damages by the High Court because it had chosen to claim the loss of value as damages and not loss of profits.

Swiss recruitment consultancy MMP formerly had a franchise from international recruitment agency Antal. Antal terminated MMP's franchise after almost five years when it received a complaint about the conduct of an MMP employee, the court ruling said.

Companies are allowed to break out of a contractual agreement when the party it shares an agreement with fundamentally breaches the terms of the contract. The judge said that Antal was wrong to break out of its franchise agreement and ruled that it was Antal that had been in breach of contract by ending the relationship between the companies.

"Antal ... was not entitled to use [the employee's] conduct as a ground for immediate termination of the franchise agreement on 20 June 2008 and its purported termination on that date was wrongful and a renunciatory breach of the franchise agreement," Mr Justice Flaux said in his court ruling.

MMP argued that the judge should award damages for the breach of contract on the basis of the reduction in the company's value, but the judge said that this was not the correct method for assessing MMP's losses.

"In my judgment MMP's approach is open to two fundamental objections. First, an assessment of damages on the basis of a valuation of the company as at the date of breach is essentially ... a hypothesis upon a hypothesis, the hypothetical value of the company as at 20 June 2008 on the hypothesis that it had ceased doing business on that date," Mr Justice Flaux said in his ruling.

"Second, that approach fails to take account of the fact that despite the breach, the company is continuing to do business and thus has the potential to be profitable in the future during the period when but for the breach the franchise would have continued and thus fails to give credit against any damages for the profits which the company will make in any event," Mr Justice Flaux said.

The judge said MMP was not entitled to loss of profits damages because it had chosen to pursue a loss in valuation argument.

"As I said at the beginning of this judgment and as [MMP's lawyer and MMP] were warned more than once, their case would stand or fall on whether valuation of the business at the date of breach was the correct measure of damages and there was no scope for substituting some alternative measure of loss of profits," Mr Justice Flaux said.

"Because I have concluded that the discounted cash flow valuation is not the correct measure of damages, it necessarily follows that MMP has not established that it has suffered any loss as a consequence of the repudiatory breach of the contract and that at most it is entitled to nominal damages," the judge said.