377 F.2d 795 (3d Cir. 1967)
Vitex Manufacturing v. Caribtex is a staple in contracts courses for its clear articulation of how courts calculate expectation damages, particularly the treatment of fixed overhead when a breaching party challenges a lost-profits award.
In calculating lost profits for breach of a service contract, must a court deduct the plaintiff's fixed overhead expenses from the damages award, or may overhead be included as part of the plaintiff's lost profit when those costs are not saved by the breach?
Expectation damages place the injured party in as good a position as if the contract had been fully performed. The proper measure of lost profits is the contract price (or revenue) minus the costs of performance that the plaintiff is spared by the breach. Only costs actually avoided because of the breach—typically variable or incremental costs—are deducted. Fixed overhead that the plaintiff would have incurred regardless of performance is not a cost saved by the breach and should not be deducted from the damages award.
Fixed overhead was properly not deducted from Vitex's lost-profits award because those expenses were not saved by Caribtex's breach. The judgment awarding Vitex lost profits that included a contribution to overhead was affirmed.
Vitex is a leading case on the treatment of overhead in lost-profits calculations. It teaches that courts compute expectation damages by subtracting only those costs actually avoided as a result of the breach, typically variable or incremental costs. The case is heavily cited for the proposition that fixed overhead is not deducted and for clarifying that the plaintiff's lost profits include the contribution that the contract would have made to covering overhead and generating net profit. For law students, Vitex operationalizes the expectation measure, illustrates the interplay between legal doctrine and managerial accounting, and highlights evidentiary burdens in proving damages with reasonable certainty.