Lost Profits and Consequential Damages in California Contract Cases

Last updated: November 2026

Lost profits are recoverable for breach of contract in California when the evidence makes their occurrence and amount reasonably certain. Profits on the contract itself are usually general damages. Profits on other business lost because of the breach are consequential damages, recoverable only if the breaching party knew or should have known at contracting that such a loss would probably follow. That is the rule from Hadley v. Baxendale, which California follows. Kolmogorov Law, P.C. pursues and defends these claims for businesses in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss a contract dispute where the real money is in the profits lost.

General damages and consequential damages

Contract damages compensate the injured party for the detriment proximately caused by the breach, or likely to result from it in the ordinary course of things. (Civ. Code, § 3300.) Courts divide that detriment into two categories.

General damages flow directly and necessarily from the breach, or are its natural result; because they are predictable, the parties are deemed to have contemplated them. Special damages, also called consequential damages, are secondary or derivative losses arising from circumstances particular to the contract or the parties. They are recoverable only if those circumstances were actually communicated to or known by the breaching party, or were matters it should have been aware of at the time of contracting. (Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960, 968-969.)

That last sentence is the Hadley rule. In Hadley, a mill owner could not recover the profits lost while his mill sat idle waiting for a delayed shaft, because he never told the carrier the mill would be idle.

One further limit applies across the board. No damages can be recovered for breach of contract that are not clearly ascertainable in both their nature and origin. (Civ. Code, § 3301.)

Where lost profits fit

Profits on the breached contract itself are the direct fruit of the bargain, so they are general damages. A supplier whose customer repudiates a purchase order can recover the profit it would have made on that order.

Profits on other contracts are different. In Lewis Jorge, a contractor claimed millions in profits on future projects it never won because the owner's wrongful termination led its surety to cut its bonding capacity. The Supreme Court held those profits were not general damages, because the termination did not directly or necessarily cause them. They were not special damages either, because the school district had no reason to foresee the bonding consequence when it signed. (Lewis Jorge, supra, 34 Cal.4th at pp. 973, 975.) Lost profits, when recoverable, are more commonly special damages, and they must be proven certain as to both occurrence and extent, though not with mathematical precision. (Lewis Jorge, supra, 34 Cal.4th at p. 975.)

The pre-signing communications decide most consequential damages claims. If you told the other side that a missed delivery would shut down your production line, that shutdown is foreseeable. If you did not, it probably is not.

The reasonable certainty requirement

Damages for lost prospective profits are recoverable where the evidence makes reasonably certain their occurrence and extent. (Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747, 773-774.) The standard is applied in two steps. Would there have been profits at all? And how much?

The first step is where unestablished businesses lose. Prospective profits of an unestablished business are generally not recoverable because their occurrence is uncertain, contingent, and speculative. They may be allowed where their nature and occurrence can be shown by evidence of reasonable reliability. (Sargon, supra, 55 Cal.4th at p. 774.) A business with a track record proves lost profits from its own history. A startup has to find comparable businesses and show real similarity, which is harder than it sounds.

Experts, and what the court will not let them say

Lost profits claims of any size are built on expert testimony, and the trial court acts as a gatekeeper. It may exclude an expert opinion that rests on matter an expert may not reasonably rely on, on reasons unsupported by the material relied on, or on speculation. (Sargon, supra, 55 Cal.4th at pp. 771-772.) In Sargon itself, the court upheld the exclusion of an expert who projected that a small company would have grown into an industry leader with no objective basis for the comparison.

The methodology must start from the company's actual history or from truly comparable businesses. When the expert is excluded, the lost profits claim usually goes with him.

How these claims come up for business owners

A distributor loses an exclusive territory when the manufacturer breaches. Its profits on the exclusive line, proven from three years of sales history, are general damages and well within reach.

A logistics company misses a delivery that the customer had explained, in writing, would halt an assembly line. The idle-line losses are consequential damages, and the written warning makes them foreseeable.

A two-month-old restaurant loses its lease through the landlord's breach and claims five years of projected profits. Without an operating history, the comparison to other restaurants will be the whole fight.

Limits written into the contract

Many business contracts exclude consequential damages or cap total liability. California generally enforces these clauses between commercial parties, with exceptions for fraud and willful misconduct, so a lost profits claim often starts with whether the contract allows one. Liquidated damages clauses are the mirror image: a fixed figure that replaces the proof problem.

Mitigation also caps the claim. Profits that reasonable effort would have replaced are not recoverable; our mitigation page covers that rule. Where the loss was caused by a third party's interference rather than a breach, the tort measure applies instead; see our tortious interference page.

What we do, and where these cases are heard

We evaluate early whether the lost profits are general or consequential, whether the contract permits them, and whether the evidence can meet the certainty standard. Where it cannot, we say so before the client spends money on a claim a court will cut down. Our contract damages page covers the other categories, and our prejudgment interest page explains what accrues on top.

Cases are heard in the Orange County Superior Court's Central Justice Center in Santa Ana, the Los Angeles Superior Court's Stanley Mosk Courthouse, or the Central District of California where federal jurisdiction exists. See our breach of contract practice page for how we handle these matters.

What to bring to the first meeting

Bring the contract and any limitation of liability clause, plus the communications before signing about what a breach would cost you. Add financial statements and tax returns for the three years before the breach, and records of the business lost afterward.

Frequently asked questions

Can you recover lost profits for breach of contract in California?

Yes, if the evidence makes their occurrence and extent reasonably certain. (Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747, 773-774.) Profits on the breached contract are general damages. Profits on other business are consequential damages and must also have been foreseeable to the breaching party when the contract was made.

What are consequential damages?

Consequential, or special, damages are losses that do not arise directly from every similar breach but from circumstances particular to the contract or the parties. They are recoverable only if the breaching party knew or should have known of those circumstances at contracting. (Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960, 968-969.)

What is the Hadley v. Baxendale rule?

Hadley is the 1854 English case holding that a breaching party is liable for unusual losses only if it was told of the special circumstances when the contract was made. California follows the rule. (Lewis Jorge, supra, 34 Cal.4th at pp. 968-969.) Tell the other side what a breach will cost you, in writing, before signing.

Can a new business recover lost profits?

It is harder. Prospective profits of an unestablished business are generally considered too speculative, but they may be recovered where their nature and occurrence can be shown by evidence of reasonable reliability, such as the performance of truly comparable businesses. (Sargon, supra, 55 Cal.4th at p. 774.) The comparison has to be objective, not aspirational.

Do I need an expert to prove lost profits?

For any significant claim, yes. The expert must build the projection from the company's actual history or from comparable businesses, and the trial court will exclude testimony based on speculation or unsupported reasoning. (Sargon, supra, 55 Cal.4th at pp. 771-772.) An excluded expert usually means a lost claim, so the methodology matters from the first day.

Talk to a California breach of contract attorney

If your business has lost profits because of a breach, or is facing a lost profits claim, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the contract, the evidence, and the court.