Lost Profits vs Consequential Damage: Quantifying an Economic Loss

Lost Profits vs Consequential Damage: Quantifying an economic loss

A distributor whose contract is terminated overnight. A partner arbitrarily squeezed out. A company sale in which the audited accounts concealed a hole. A client who stopped buying because a competitor fixed prices behind their back. All these cases have one thing in common: there is a real economic loss, but turning it into compensation that a Spanish Commercial Court (Juzgado de lo Mercantil) will accept is a technical exercise that very few claims get right.

The reason is usually the same. People confuse what has been lost with what has failed to be earned, they claim gross turnover instead of real profit, or they file projections backed by nothing more than the claimant's optimism. Spanish courts have been rejecting this kind of claim for decades, using a phrase as vivid as it is damning: “dreams of profit” (sueños de ganancia).

At Maraz Corporate Finance we prepare economic-financial and forensic expert reports that withstand the court's scrutiny. This article explains, with no shortcuts, how consequential damage is distinguished from lost profits, what the Supreme Court requires to recognise each of them, and with what financial methodology they are quantified so that the compensation is solid, proportionate and defensible.

Two concepts, two standards of proof

The starting point is Article 1106 of the Spanish Civil Code, the rule governing the compensation of damages in Spanish civil and commercial law. Its wording is short but contains the whole architecture of the problem: compensation covers “not only the value of the loss suffered, but also that of the gain the creditor has failed to obtain”. The first limb defines consequential damage (daño emergente); the second, lost profits (lucro cesante). This same principle of full compensation extends to specialised commercial legislation, such as Article 74.1 of the Patents Act or Article 43.1 of the Trademarks Act.

The distinction is not merely academic. Each component demands a radically different standard of proof, and that is where most disputes are decided.

Consequential damage: the loss that has already happened

Consequential damage is the direct, real and measurable decrease in the injured party's assets as a result of the harmful event. It comprises every cost, outlay and impairment of assets that the company would not have incurred had the breach or the wrongful act not taken place. Because it is a historical fact that has already crystallised, its proof is documentary and objective. In forensic practice, its most common items are:

• Remediation and restitution costs: expenses to engage third parties to correct the defect, emergency logistics surcharges and substitute supplies.
• Assets rendered inoperative: net book value or pending depreciation of machinery, software or facilities acquired for a contract that was terminated and which have no alternative use.
• Financial and ancillary costs: default interest, bank charges for returned unpaid instruments, and the cost of guarantees or sureties called upon.

A point often overlooked: where the damage occurred before the judicial claim, the amounts must be financially updated to preserve their real value against the loss of purchasing power of money, so that the compensation reflects the loss as at the date judgment is handed down.

Lost profits: the gain that never arrived

Lost profits are the net gain the injured party has failed to obtain as a direct consequence of the counterparty's conduct. Here everything changes: we are not dealing with a historical fact but with a prospective hypothesis about what the company would have earned in the normal course of events had the harmful event not occurred. And a hypothesis, by definition, cannot be proven with an invoice.

As the Supreme Court itself put it, unlike consequential damage —a fact of reality capable of full proof— the existence and amount of lost profits remain a hypothesis requiring a demonstration suited to their nature as a matter of probability. That is why this is the ground on which most compensation battles are fought — and lost.

What the Supreme Court requires: between rigour and flexibility

The doctrine of the First Chamber of the Supreme Court on lost profits looks contradictory at first glance, but its logic becomes clear once understood. It is demanding on proof and, at the same time, flexible on quantification once the loss itself has been established.

The “prudent restrictive criterion” and dreams of profit

The Supreme Court consistently applies a “prudent restrictive criterion” to lost profits. It requires strict proof that the advantages were indeed foregone, without those advantages being doubtful or contingent or founded merely on hopes. Case law strictly bars compensation based on abstract expectations or on the famous “dreams of profit”: unproven future events cannot be indemnified. The standard required is one of a probability bordering on certainty.

The objective-probability test

That said, requiring “probability bordering on certainty” does not mean requiring absolute certainty —that would make any lost-profits claim impossible. The Supreme Court applies an intermediate test based on objective-probability standards that take into account the normal course of events and the circumstances of the case. In other words: the foregone gains must present a degree of consistency, supported by objective criteria of economic, accounting and financial experience. Where the harmful event is proven, insufficient proof of the exact amount is not, on its own, enough to deny compensation if the loss can reasonably be inferred from the normal running of the business.

The boundary with restitution: Supreme Court Judgment 986/2025

One of the most relevant rulings of recent years is Supreme Court Judgment (STS) 986/2025 of 19 June 2025. The facts are instructive: a sale of a luxury watch in which the buyer paid part of the price and then defaulted; the seller chose to terminate the contract (Article 1124 of the Civil Code) rather than enforce it, and claimed as lost profits the gain it would have obtained had the transaction been completed.

The Supreme Court rejected the claim on a substantive ground: contractual termination operates with ex tunc effect, returning the parties to the position they held before signing, as if the contract had never been concluded. If the seller keeps the asset in its estate and does not prove an actual loss of its market value, it cannot additionally claim the full margin of the transaction: that would amount to unjust enrichment — keeping the asset and collecting the profit on a sale that never took place. Compensation is limited to the consequential damage actually proven, such as the bank return charges.

The lesson for any claim is twofold: first, restitution and compensation must be kept strictly separate; and second, lost profits are never presumed from the mere fact of the breach — the real loss must be proven and must not overlap with what is already recovered through restitution.

A note on loss of chance

Lost profits should not be confused with loss of chance (pérdida de oportunidad). Lost profits compensate a gain that was practically certain; loss of chance compensates the frustration of a reasonable but uncertain expectation, and it does so by indemnifying the opportunity itself — a fraction of the expected outcome weighted by its probability — not the full advantage. Claiming as lost profits what is really a loss of chance is a frequent mistake that leads the court to reject the claim as overstated.

The counterfactual scenario: the heart of quantification

The entire technique of quantifying damages revolves around a single idea, known internationally as the “but-for” analysis or counterfactual scenario. It compares the actual economic situation the company experienced with the hypothetical situation it would have been in had the wrongful act not occurred. Lost profits are precisely the difference between that “no-harm” scenario and the actual scenario.

The total economic loss (P) under the full-compensation principle can be expressed as follows:

P = ΔCD + [ (R_but-for − C_but-for) − (R_actual − C_actual) ]

where ΔCD is the sum of the net consequential-damage outlays, R is the operating revenue of each scenario and C the variable costs associated with that revenue. For a court to accept this reconstruction, the expert report must clear three requirements which, in practice, are what separate a solid report from one that gets rejected:

1. Isolating causation. The impact of the breach must be isolated from other variables that may have harmed the company on their own: a market contraction, sector inflation, a regulatory change or the company's own management inefficiencies. If the defendant shows that the fall in revenue was due to a sector recession or the entry of a competitor unrelated to the wrongful act, the causal link is broken and compensation is reduced proportionately.
2. A defined time horizon. The projection must be confined to a reasonable, defensible period, depending on the nature of the market, the useful life of the affected assets or the remaining contract term. Projecting profits into perpetuity is the fast track to judicial rejection.
3. Objective historical support. Projections cannot be built out of thin air: they must be anchored in the company's own historical performance (typically 3-to-5-year series) or in audited metrics of comparable competitors in the same market.

The financial methodologies, one by one

The choice of method depends on the nature of the infringement, the accounting information available and whether the affected business is still a going concern or has been destroyed.

For ordinary lost profits: the contribution margin

Here lies the most expensive and most frequent error in commercial litigation: calculating lost profits by multiplying the foregone sales by the net profit margin or the operating result. It is wrong. The correct metric from a forensic-economics standpoint is the contribution margin, i.e. revenue less the variable costs directly needed to generate it.

Contribution Margin = Sales Revenue − Direct Variable Costs

Why does this matter so much? Because the structural fixed costs —rent, administrative staff salaries, general utilities— should not be deducted from the foregone revenue if the company kept operating and had to keep bearing them anyway. Deducting fixed costs from sales that were never made would penalise the injured party, attributing to it a cost saving that never actually happened. Only the fixed costs genuinely avoided because of the halt in activity are subtracted.

For the destruction of a business: discounted cash flow (DCF)

Where the wrongful act does not frustrate specific sales but destroys a business unit, cancels a long-term concession or causes an irreversible loss of market share, the benchmark method is Discounted Cash Flow (DCF). The free cash flows the company would have generated in the counterfactual scenario are projected and discounted to present value as at the date of the loss:

PV = Σ  FCFF_t / (1 + WACC)^t

The free cash flow for each period is built from the operating result adjusted for tax, depreciation, changes in working capital and CapEx (FCFF = EBIT·(1−τ) + Depreciation − ΔWC − CapEx). The most sensitive element, and the one courts scrutinise most, is the discount rate (WACC): it must objectively reflect the business risk and the company's financial structure under normal market conditions, and be fully justified. A poorly supported rate is a common ground for challenge by the opposing party.

For shareholder and M&A disputes: market multiples

In disputes between partners, arbitrary exclusions or breaches of covenants in company-purchase transactions, the loss is usually quantified through the change in Enterprise Value, calculated using multiples of comparable listed companies or precedent transactions (EV/EBITDA, EV/EBIT). It is the same toolkit we use in our business valuation work, now applied for an evidentiary purpose.

Comparative table for the Commercial Court

The following table systematises the operational and evidentiary differences between the three main approaches to economic loss:

What makes an expert report admissible

Commercial-court judges assess expert reports under the rules of sound judgment (sana crítica) (Article 348 of the Civil Procedure Act), with no formal hierarchy between the party-appointed expert and the court-appointed one. An economic report only consolidates its evidentiary weight if it strictly meets four standards:

• Objective, audited evidence. Estimates are built on audited financial statements, tax returns, verifiable accounting records and binding contracts. Statements not grounded in accounting records are mere assumptions with no evidentiary value.
• Consistency with the normal course of events. The report must justify why the claimed gain was the foreseeable result of the company's logical development, drawing on consolidated historical series.
• Traceability of variable versus fixed costs. The expert must break down, in accounting terms, which items vary with the level of activity and which remain unchanged within the relevant range. The credibility of the contribution margin depends on that breakdown.
• Sensitivity analysis. A rigorous report presents conservative, base and optimistic scenarios, stress-testing the key variables (volume, discount rate, raw-material cost) and offering the court a properly bounded quantitative range rather than a single, indefensible figure.

The expert's objectivity is not window-dressing: Article 335.2 of the Civil Procedure Act requires the expert to state, under oath or promise, that they have acted with the greatest possible objectivity, taking into account both what favours and what harms either party. An expert perceived as a party's “technical advocate” loses credibility under sound judgment. That is why the burden of proof, which lies with the claimant, is better sustained by a report that also acknowledges the weaknesses of the case.

From theory to litigation: how Maraz works

Quantifying an economic loss demands a perfect alignment between the legal grounds of the claim and the financial architecture of the report. The lawyer defines the theory of the case —contractual or non-contractual liability, wilful misconduct or negligence, foreseeability of the damage—; the expert translates it into a quantification consistent with that theory and with the required standard of proof. A mismatch between the two is the crack the opposing party will exploit at the hearing.

At Maraz Corporate Finance we get involved from the pre-litigation stage, which is where we add the most value: we help to realistically calibrate the recoverable amount, to weigh the litigation risk before incurring costs, and to decide whether to claim, negotiate or desist. Our work rests on the same methodologies we apply in business valuation and in financial due diligence, now geared towards an evidentiary purpose.

We prepare economic-financial and forensic expert reports — breach of contract, internal fraud, shareholder disputes, accounting manipulation, quantification of damages — and we defend them through expert testimony that supports the legal case. If your company faces litigation where the crux of the dispute is a number, let's talk: the difference between a claim that succeeds and one that is dismissed almost always lies in the rigour of the report that supports it.

Javier de Rojas Roca de Togores

Partner – Maraz Corporate Finance

FAQs on Lost Profits vs Consequential Damage

What exactly is the difference between consequential damage and lost profits?

Consequential damage is the loss of assets that has already occurred and can be proven with documents: expenses, repairs, assets rendered useless. Lost profits are the gain that has failed to be earned because of the breach or wrongful act; it is a future gain that never materialised. The practical consequence is that consequential damage is proven with invoices, whereas lost profits require a sound economic hypothesis about what would have happened under normal conditions.

Why do courts reject so many lost-profits claims?

Because the Supreme Court applies a restrictive criterion and requires a probability bordering on certainty, not mere expectations or “dreams of profit”. Claims fail mainly for three reasons: claiming gross turnover instead of the real contribution margin, filing projections with no historical support, and failing to isolate the effect of the breach from other causes (a sector downturn, new competitors) that also reduced revenue.

Is lost profit calculated on lost sales or on profit?

On the contribution margin, i.e. the foregone revenue less the variable costs directly linked to generating it. Claiming lost gross turnover is a very expensive mistake. But so is deducting structural fixed costs (rent, administrative salaries) if the company kept operating and had to keep paying them: those costs were not saved, so subtracting them would unfairly penalise the injured party.

What documentation should I keep to support a future claim?

Everything that helps reconstruct the “normal” scenario before the loss: management and cost accounting, budgets and forecasts, contracts and correspondence, historical sales and margin series of at least 3 to 5 years, and comparable-company data. The stronger the documentary basis for the counterfactual scenario, the greater the chance the court will uphold the claim. It is also advisable to commission the expert report before filing, since it must accompany the statement of claim.

Is lost profit the same as loss of chance?

No. Lost profits compensate a gain that was practically certain. Loss of chance compensates the frustration of a reasonable but uncertain expectation, and what is indemnified is the opportunity itself — a fraction of the expected outcome according to its probability — not the full gain. Confusing the two and claiming as lost profits what is really a loss of chance usually leads the court to dismiss the claim as overstated.

What is the role of the forensic economist versus the lawyer in litigation?

They are complementary, inseparable roles. The lawyer sets the legal theory of the case (type of liability, wilful misconduct or negligence, foreseeability of the damage); the forensic economist builds a quantification consistent with that theory, isolating causation and applying the right methodology. The expert does not merely calculate the amount: they demonstrate the cause-and-effect link between the conduct and the loss, and then defend their conclusions at the oral ratification before the judge. Early involvement of the expert, already at the pre-litigation stage, is what makes it possible to gauge the real risk of the dispute.