loss of profits - a definitive guide

The purpose of this article is to identify matters to be considered in the assessment of the quantum of damages claimed for loss of profits resulting from business interruption.

Such claims may arise in the context of a wide range of issues from personal injury litigation through to commercial litigation. The article is written from the viewpoint of a certified public accountant instructed to report on the loss claimed.

Business interruption claims

A company may suffer loss of profits from a breach of contract or taut. The loss being a consequence of the breach and not necessarily the direct result. Therefore the loss can be described as the 'consequential loss'.

To illustrate this, I would suggest the following example.

A company purchases manufacturing equipment which subsequently malfunctions and explodes. A direct result of this event may be the material damage caused to the building and other equipment.

However, a further consequence may be that the manufacturing operations of the company are interrupted to the extent that customer orders cannot be met for a period of time until normal operations are resumed. In the event that the resulting lost sales in this period of disruption lead to a loss of profits suffered by the company, this loss may be considered to represent a consequential loss of the originating event.

A claim for this consequential loss could also be described as a 'business interruption claim for loss of profits'.

The phrase 'business interruption claim' is also in common usage within the insurance industry where insurance cover is available to protect a company's profits against loss which may arise in the event of 'perils' such as fire, flooding and even terrorist attack.

Evidence

Critical to the success of any claim will be the objective evidence provided to substantiate the claim and quantum of the claim.

This evidence can be considered to fall into two types:

1. Internal evidence, such as the company's statutory accounts, management accountants and other books and records. In a case of breach of contract an examination of the relevant contract will be required: and
2. external evidence, such as information relating to the specific industry and to competitors may also be necessary, including, possibly, expert testimony from an industry specialist.

The collection and examination of such evidence is fundamental in the assessment of quantum.

Limits on damages

Furthermore, reference to factors which may lead to the amount of damages being limited will also be necessary. In summary these may include:

• contributory negligence;
• remoteness of loss;
• mitigation of loss; and
• uncertainty of loss.

Classification of the claim between contract and tort is likely to have a bearing on the particular weight attached to such factors in the assessment.

Conclusion

The complexities involved in the assessment of quantum on a business interruption claim for loss of profits require a detailed and structured approach to be adopted.

In this context I hope the contents of this article will be of use to our clients. You may of course, contact us directly for any help in this area.

London property - opportunities & obstacles

Some Kenyan have been known to take the simplistic view "I'm not British-my investments there must be tax free". However life is not so easy, and it is necessary to be aware that assets in the UK are potentially liable to UK taxation, even though owned by Kenyans who may never even have visited the UK.

A Kenyan businessman who does not intend to live in the UK in the longer term is known as a "foreign domiciliary", and is at an advantage over his UK domiciled competitor in that his assets outside the UK will, broadly speaking, not be subject to UK taxation. Domicile itself is very complicated, but we will proceed in this article on the simple case of a businessman, never having lived in the UK and not planning to take up long term residence there in the future.

UK taxation is highly complex, so it is not possible to set out a full explanation of it in a brief article such as this, but it will not surprise readers too much that rental income of UK properties is liable to UK taxation, notwithstanding that the property is owned by a Kenyan investor; this is generally withheld at source by the collecting agent at 23%, unless prior approval to the contrary has been given by the Inland Revenue.

The liability in principle to taxation in respect of the rental income cannot be avoided, but relief is allowed in respect of expenses such as agents' fees, mortgage interest, rates, repairs, insurance and capital allowances in respect of fixtures and furniture, so it can be seen that the taxation (which must be accounted for by the managing agent) can be substantially, and sometimes even wholly, avoided.

Less well known is that if a foreign domiciliary owns a UK property in his personal name, then on the owner's death the value of the property will be subject to UK Inheritance Tax (IT). The resultant tax charge can be very heavy. If a London property valued at £600,000 is sold, the transfer will attract inheritance tax of £154,000.

Fortunately, there is a ready solution to this aspect of the taxation problem, as the key to liability to Inheritance Tax is the location of the asset; the location will be determined in accordance with the laws of England and Wales which - in the case of limited companies - will recognise the location of the share register as the location of the asset. Kenyan domiciled investors can therefore use a non-British company to acquire the London property, and this will remove the asset from the Inheritance Tax net. The "non-British" company should ideally not be liable to taxation in its place of incorporation, and be incorporated in a jurisdiction which does not have any form of death or Inheritance Taxes, so it is in this context that offshore companies, such as Isle of Man exempt companies, play a leading role.

The London property market offers many opportunities and with mortgage interest allowable in certain circumstances for tax relief it is possible to gear up at the tax man's expense; however, there remain many traps for the unwary, particularly for investors who may wish to live in their London property at a future date - whether for a short or long period - so professional advice should be sought at all times.

ALEXANDER GRANT & ASSOCIATES

VICTOR HOUSE, 4^TH FLOOR, KIMATHI STREET, NAIROBI, KENYA

Telephones : 002542 221306 / 245694 Facsimile : 002542 224314

Although all reasonable care has been taken in the preparation of this news briefing, Alexander Grant & Associates cannot accept any responsibility in law for its contents. Clients are advised to seek independent professional advice before taking action in consequence of anything contained herein.