Computing Contract-Based Damages When New Business Involved – The Lost Profits Issue

A party that is trying to recover for “lost profits” must prove damages to a “reasonable certainty.”  In the context of contract law, it involves an estimation of one party’s lost profit caused by the contract-related breach of the other party.  If a “new business,” is involved the courts are often hesitant to award damages for “anticipated lost profits” on the basis that they are largely speculative.  A recent opinion by the Iowa Court of Appeals discusses the concept and its application under Iowa law. 

The facts of this case involve mycology- the science of mushroom cultivation. Successfully cultivating mushrooms requires continuous maintenance and stringent crop management.  The plaintiff grew mushrooms at his home.  In 2004, the defendant (a neighbor and owner of a local lumber yard) asked the plaintiff what was needed to grow mushrooms in Iowa and learned that sawdust and steam were important components.  The defendant’s lumberyard generated sawdust and excess steam, useful in mushroom cultivation, at the lumber yard and parties reached a mutual agreement which involved the defendant in the plaintiff’s operation.  Later, however, the parties disagreed over the terms of the agreement and the extent of the defendant’s involvement in the operation. 

In the first year, the parties grew a limited amount of mushrooms but never sold their produce. In 2007, disagreements arose between the parties and the defendant eventually refused to pay for more supplies and equipment. The plaintiff sued the defendant for damages for breach of contract (including lost profits), fraudulent misrepresentation and unjust enrichment.  The defendant counter-sued and claimed quantum meruit (meaning the reasonable value of his services in the mushroom operation). 

At trial, the plaintiff testified that the defendant agreed to provide a new building on the defendant’s land for use in cultivating mushrooms. The plaintiff further claimed that he agreed to procure the necessary equipment and “fix” the building for the operation. Supposedly, the defendant would pay for the labor, materials and costs to equip the building, as well as a salary for the plaintiff. The plaintiff further stated that he was “entitled” to the profit from the first full year of mushroom production. The defendant would be entitled to 49% of the stock of the corporate entity set up to operate the mushroom growing business. 

The defendant had a completely different take on the party’s “agreement” and claimed that the parties agreed that the plaintiff was to use an old shed on the defendant’s family farm to grow the mushrooms. The defendant stated that he did agree to purchase equipment for the business and that the business would own the items purchased. According to the defendant’s testimony, he made no other promises.

The judge threw out the plaintiff’s claims of breach of contract and fraudulent misrepresentation, but allowed the jury to determine the plaintiff’s conversion claim and the defendant’s quantum meruit claim. The jury found that the plaintiff did not prove the conversion claim, because the defendant’s conduct was not a “willful and wanton disregard for the rights or safety of another.” The jury sided with the defendant on the quantum meruit claim awarded damages in the amount of $10,000 for the services he provided the business. 

On appeal, the court affirmed.   The plaintiff’s had argued that the court incorrectly disallowed evidence of the parties’ oral agreement and failed to submit evidence of lost profits based on the “new business rule.”  But, the court found that admitting evidence of an oral, multi-year agreement between the parties would have been contrary to Iowa law.  
Next, the appellate court discussed the plaintiff’s claim for damages for lost profits and concluded that the “new business rule” applied in this case.  The appellate court held that the trial court had properly determined that the plaintiff’s evidence on lost profits for the new business was too speculative.  There was no reasonable basis for awarding damages where no pre-existing data on profits and losses was available.  The court noted that Iowa courts have long-recognized the difficulty of awarding damages for lost profit for new business operations, and that lost profits are awarded only if the new business has a sufficient track record, acquired an existing business or sufficient industry standards exist to establish a baseline against which profitability can be measured. 

In the end, the appellate court affirmed the trial court’s damages award for quantum meruit in favor of the defendants. The defendants sufficiently proved contribution to the business, regardless of any supposed agreement between the parties.Mid-American Bio Ag, Ltd. V. Wieland and Sons Lumber Co., No. 0-565/10-0014 (Iowa Ct. App., Sep. 22, 2010).