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Thursday, December 1, 2005

Long-Term Lost Profits Too Speculative to Recover

Sutherland When a party breaches a 20-year contract early in the term, are lost profits damages available to the other party for the entire remainder of the term?  The theoretical answer is yes, but a recent decision in a New York federal district court suggests that the practical answer may be no.  Sutherland Asbill & Brennan LLP reports the case here.

In the case, Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., Tractebel and AEP entered into a requirements contract under which AEP would sell electricity to Tractebel from a new co-generation station AEP was building.  The agreement had a 20-year term.  Almost immediately, Tractebel realized it was a bad deal; its estimates of $80 million in profits under the deal turned to estimates of $360 million in losses.  Tractebel took various steps to try to get AEP to cancel the deal, but AEP didn’t bite, and Tractebel finally breached.

The interesting issue was one of damages for the portion of the contract that still remained.  Experts testified for both sides on the profits that AEP could have expected over the 20 year term.  But the court found their projections to be almost entirely speculative, since the future price of electricity was fraught with so many variables that the experts might as well have “consulted tea leaves or a crystal ball.”  Accordingly, AEP could not collect lost profits on the remainder of the contract.

[Frank Snyder]

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