Calculation of Damages and “Lost Profits” under Japanese Law – A Comparison with German and United States Law

Abstract

In the context of damages claims, the critical point is whether adequate compensation for losses can be obtained. A key issue is the amount of damages awarded, which is closely related to the question of how damages are calculated. As far as commercial contracts are concerned, compensation for lost profits is of major importance. However, the legal scope of the term “profit” remains largely unclear. While in the field of accounting several categories of profit can be identified – i.e., gross profit, business operating profit, ordinary profit, pre-tax profit, and after-tax profit – none of these apply when assessing damages for lost profits. The paper analyzes the losses incurred by an enterprise in cases of breach of contract in accordance with basic principles of the law of damages. Profit is thus defined as gross profit minus variable costs. A comparative analysis of US law and German law shows that this formula is commonly applied in Japan, the US, and Germany. The issues involved are further illustrated by the discussion of a hypothetical example. The analysis is rounded off by a summary of recent Japanese court decisions on the issue of lost profits.

(The Editors)