In this action an advertising agency recovered damages for an advertiser’s breach of an exclusive agency contract. The principal question presented is whether the award is excessive because the plaintiff’s fixed costs of doing business were not deducted in computing damages for “lost profits.”
By a written contract effective January 9, 1978, appellant and cross-appellee, David Sloane, Inc., trading as “Sassaf *38 ras!” (Sloane), appointed appellee and cross-appellant, Stanley G. House & Associates, Inc. (House), as Sloane’s “exclusive advertising agency and public relations counsel.” 1 The contract provided for commissions at an effective rate of fifteen percent of the gross billings by “media (such as radio, TV, billboards, out-of-town or suburban papers, magazines, etc.).” The charge for “regular staff production time, from copy to layout to tearsheet” was at a then current, specified hourly rate, while “[c]harges for creative copy and art services on specialties ..., priority assignments, overtime, etc.” were to be quoted in advance for Sloane’s approval. House promised to keep a daily log of time spent on the Sloane account which would be open to Sloane’s review on request.
The initial term of the contract was six months, terminable by either party through written notice. Absent notice of termination the agreement automatically renewed for successive terms of one year each. Either party could terminate at the expiration of a renewal term by ninety days prior written notice.
The contract was breached January 1, 1984, when Sloane, which operates women’s retail clothing stores, began using another agency, Goldberg-Marchesano (G-M). In the spring of 1983, Sloane had determined to enlarge its advertising expenditures. It caused a market survey to be made and then held a competition for its business among advertising agencies, including House. By a letter dated December 19, 1983, Sloane advised House that another agency had been selected to handle Sloane’s 1984 advertising campaign. This letter constituted the earliest written notice of Sloane’s termination of the 1978 exclusive contract which had been *39 renewing automatically. The earliest date for that termination to be effective, however, was the next anniversary, July 9, 1984.
House sued Sloane and the case was tried to the court. G-M’s records of the work it did for Sloane from January 1 through July 9, 1984, were the starting point for House’s damage evidence. Those records reflected media billings to which House applied the commission rate provided under its contract with Sloane. G-M’s invoices to Sloane also enabled House to identify by descriptive categories such as “creative,” “production,” and “finished art,” the amount charged on an hourly basis by G-M for each category of work on a particular job. House divided the amount billed by G-M by the highest G-M hourly rate for a particular category and then multiplied the number of hours of activity thereby determined by the lowest rate utilized by House for that type of work. Under this method the value to House of commissionable and hourly fee work for the relevant period was computed to be $103,050.71.
House made two deductions from that figure. Under the contract between Sloane and G-M there was a discount on media commissions as compared to commissions under the Sloane-House contract. House adjusted its damage calculation to allow Sloane that discount. House also subtracted the $2,500 cost of an artist whom it would have needed to have performed all of the work done by G-M for Sloane during the January 1 to July 9, 1984 period. These deductions produced an adjusted lost profit figure of $74,161.21. 2
The trial court awarded this lost profit figure and based the award on the testimony of Stanley G. House, the owner of the plaintiff agency. He testified that his agency could have performed the same types of work that G-M performed for Sloane and that he had absolutely no question about the ability of his agency to handle the work from a quantitative point of view even though G-M’s hourly billed *40 work for Sloane during the relevant period amounted to 1,693 hours. House also testified that there would not have been any increase in House’s “overhead by virtue of handling [the Sloane] account, in the way of rent, electricity or subcharges.” The only savings House realized by not having to perform the Sloane contract was the $2,500 cost of an artist. The trial judge found that House had been “conservative and reasonable” and had cut the amount of damages “to the bare bones.”
The Sloane-House contract also contains a mutual covenant to pay reasonable attorney’s fees incurred in enforcing the contract. The trial court awarded House “attorney’s fees in the amount of 20% of $74,161.21.” After having decided initially to allow prejudgment interest from July 9, 1984, the trial judge struck prejudgment interest in ruling on a post-judgment motion.
Both parties appealed and we granted certiorari on our own motion before the matter was considered by the Court of Special Appeals.
Stated succinctly these appeals present claims that the trial court erred in:
I. The damage award because
A. comparison to G-M was unfounded and
B. House proved gross revenues rather than net profits;
II. The counsel fee award because it cannot be based on a percentage of the recovery; and
III. The denial of prejudgment interest because the denial was an abuse of discretion.
I
Broadly speaking, Sloane’s many faceted arguments against the damage award have in common the criticism that House did not meet its burden of proving damages with certainty. In
M & R Contractors & Builders, Inc. v. Michael,
(a) [I]f the fact of damage is proven with certainty, the extent or the amount thereof may be left to reasonable inference; (b) where a defendant’s wrong has caused the difficulty of proving damage, he cannot complain of the resulting uncertainty; (c) mere difficulty in ascertaining the amount of damage is not fatal; (d) mathematical precision in fixing the exact amount is not required; (e) it is sufficient if the best evidence of the damage which is available is produced; and (f) the plaintiff is entitled to recover the value of his contract as measured by the value of his profits. [Id. at 349,138 A.2d at 355 .]
A
Sloane questions the court’s use of G-M’s work on the Sloane account as a measure of the amount of work which would have been done for Sloane by House. At the outset Sloane argues that House was required to demonstrate the comparability of the operations at G-M to those at House as a foundation for recovery. House was not, however, attempting to show that the profits, if any, enjoyed by G-M would be the same as those which House would have enjoyed. House looked to the G-M experience to prove the volume of advertising activity actually done for Sloane during the relevant period. To that known output of work House applied the charges agreed to in its contract with Sloane, less the same discount on media placements given by G-M.
Sloane also submits that the amount of advertising placed by it through G-M does not prove the amount which it would have placed through House had Sloane honored the exclusive agency contract. The trial court, however, was not clearly erroneous in accepting the relationship between the two contracts, particularly in light of Sloane’s intent to embark on an expanded advertising campaign in 1984.
One of the recognized methods of proving prospective profits is to use “[p]rofits made by others, as in the case of
*42
the breach of a contract of exclusive agency[,] evidence of the profits made by the infringer are admissible to prove the plaintiffs loss.” 11 W. Jaeger,
Williston on Contracts
§ 1346A, at 249 (3d ed. 1968) (footnotes omitted).
Macke Co. v. Pizza of Gaithersburg, Inc.,
B
The burden was on House to prove its claimed lost profits with reasonable certainty.
Stuart Kitchens, Inc. v. Stevens,
the injured party has a right to damages based on his expectation interest as measured by
(a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
*43 Sloane submits that House did not prove its lost profits and that the judgment erroneously awards gross income instead of net profits. The defendant points out that, other than $2,500 for an artist’s services, House’s proof of damages presented no deductions from the projected gross receipts of the Sloane contract for salaries, rent, and other expenses of doing business.
House submitted to the trial judge and submits to us that it was required to reduce its projected income on the Sloane account only by the additional cost which House would have incurred in performing. Critical to House’s legal argument is the evidence that, but for the services of an artist at a cost of $2,500, House had the continuing capacity to perform all of the work required under the Sloane contract during the relevant period. In our review, we consider that the trial court found those facts to be true and on those facts there was no error in applying House’s theory of damages.
Sloane contracted to use House exclusively but nothing limited House to rendering services exclusively for Sloane. “It can hardly be doubted that an advertising agency, like a builder, can make its special skills available simultaneously to an indefinite number of clients and 'make a profit on all of them.’ ”
American Motor Inns, Inc. v. A.W.L. Advertising Agency, Inc.,
Basically House’s position is that it, as a seller of services under a nonexclusive contract, is permitted to compute expectation interest damages by including reasonable overhead in lost profit in much the same manner as the lost volume seller of goods may compute damages under *44 § 2-708(2) of the Uniform Commercial Code. 3 The theory underlying the award to a seller of damages measured by the contract price less variable costs, but not fixed costs, is illustrated by an example in Childres & Burgess, Seller’s Remedies: The Primacy of UCC 2-708(2), 48 N.Y.U.L.Rev. 833 (1973). The example shows why the seller is not placed in as good a position as if the repudiated contract had been performed if the rule for computing damages requires an allocation of fixed costs to the repudiated contract. 4
*45 The first step of the illustration assumes that all contracts of the seller during the relevant accounting period are fully performed by the buyers with the result from operations set forth below:
Sales (total of all contract prices) $500,000
Variable Costs -325,000
Gross Profit $175,000
Fixed Costs - 50,000
Net Profit $125,000
Next, assume that one of the contracts, with a price of $50,000, is repudiated by the buyer. Assume further that the variable costs of that contract and the portion of total fixed costs which a cost accountant would allocate to the repudiated contract are in the same ratio to expected total variable and fixed costs as is the ratio of the contract price to the total of all contract prices in the accounting period. Under an approach which awards as damages the seller’s “net profit,” our hypothetical seller’s award would be computed as follows:
*46 Price $ 50,000
Variable Costs - 32,500
Gross Profits $ 17,500
Fixed Costs - 5,000
Net Profit $ 12,500
If we recast, however, the seller’s results of operations for the accounting period to reflect nonpayment of the repudiated contract price and the actual savings effected by the seller’s having been excused from performing, the operational results would be:
Sales $450,000
Variable Costs -292,500
Gross Profits $157,500
Fixed Costs - 50,000
Net Profit $107,500
This reflects a $17,500 difference in the seller’s net profit for the accounting period between the full performance scenario and the repudiation scenario. But a rule of damages under which some portion of fixed costs must be allocated to the repudiated contract results in a recovery, in the example, of only $12,500. Allocating $5,000 of fixed costs to the repudiated contract does not award damages which place the seller in as good a position as if the contract had been performed.
When we convert the evidence in the case before us to the terminology of the foregoing example, House's evidence was that its variable costs were $2,500 and that all of the other costs associated with performing the Sloane contract were fixed.
The principle for which House contends was applied in
Katz Communications, Inc. v. Evening News Ass’n,
[W]e agree with the lower court that [plaintiff] could not lighten its overhead costs in the brief period after it received the August 21, 1979 notice of immediate cancellation ... and before the permissible December 18, 1979 termination of the contract. Even if an employee could lawfully have been dismissed before December 18, 1979 by a notice given August 21, 1979 or thereafter, it was not unreasonable for [plaintiff] to keep the employee either in the hope that appellants could be persuaded to change their minds, or that [plaintiff], as a “lost volume seller,” could find new customers. Moreover, we are not persuaded that when a customer or client breaks a contract with an advertising or like professional organization, the wrongdoer may successfully contend that the damages suffered by the wronged party should be diminished if the wronged party does not forthwith at least partially dismantle the organization he has created and thus disable himself from promptly and fully responding to potential opportunities in the near future. Nor are we unmindful that one consequence of our adoption of the appellants’ contention would be that hereafter employees or organizations like [plaintiff’s] would in all likelihood be, in situations such as the one at bar, the undeserved victims of a precipitate determination to discharge them. The wrongdoer’s interest in prompt mitigation of damages is of no greater public concern than is the innocent worker’s interest in avoiding becoming one of the army of unemployed. [M]
*48
Also analogous to the case at hand is
Schubert v. Midwest Broadcasting Co.,
Similarly, an automobile dealer, claiming lost profits for breach by the manufacturer of a dealership contract, was not required to deduct administrative salaries, real estate taxes and insurance, building maintenance and depreciation, auditing and legal expenses, and the cost of heat, light, and water when those fixed expenses were not affected by the defendant’s breach.
Buono Sales, Inc. v. Chrysler Motors Corp.,
Also supporting House’s position in this case are:
Automatic Vending Co. v. Wisdom,
There are cases to the contrary. For example, in
Pahokee Housing Authority v. South Florida Sanitation Co.,
In our view the cases holding that reasonable, fixed expenses need not be deducted from gross income to arrive at lost profit properly recoverable are more persuasive. They are also the weight of authority. See R. Dunn, Recovery of Damages for Lost Profits § 6.5, at 290 (3d ed. 1987).
Sloane’s argument emphasizes
Partridge v. Norair Eng’g Corp.,
We are not here concerned with that aspect of Partridge involving work performed by a partner when computing lost profit damages claimed by a partnership. With respect to employee costs, the engineer assigned to the contract in Partridge was required by that contract to work exclusively for the defendant. Breach of the contract obviously freed him to work on one or more other contracts. Requiring his salary and costs to be deducted simply put the Partridge plaintiff in the position that it would have been in had the contract been performed. In the case before us the trial court accepted that House, using basically its existing personnel, could have performed both the Sloane contract and all of its other work. Under those facts House had no significant savings as a result of Sloane’s breach. Therefore, requiring House to allocate to the Sloane contract part of the cost of those who would have worked on it does not put House, as a lost volume seller of services, in as good a position as it would have occupied had the Sloane contract been performed.
Finally, Sloane also argues that House’s proof failed because it did not prove that the Sloane contract would have *52 been a profitable one, ie., that it would have produced a net profit after deducting variable costs and an allocated portion of fixed costs. Under the applicable theory it is immaterial how much of the damage award represents net profit, if any, and how much represents recovery of so much of the contract price as would have been used to offset fixed costs.
II
Sloane also appeals the awárd of $14,832.24 as counsel fees pursuant to the contract provision for reasonable attorney’s fees. The amount of time actually expended by House’s counsel on the case was not directly proved and the fee agreement between House and its counsel called for a one-third contingent fee. At trial House called as an expert witness an attorney who was experienced in litigation involving commercial disputes. That attorney opined that a contingent fee of 25% to 33V3%, or perhaps higher, of the amount recovered would be reasonable. In colloquy with counsel immediately following receipt of this evidence, the trial judge expressed concern about awarding a contingent fee in addition to any amount recovered. He ended the colloquy by observing that, if the issue of counsel fee were reached, “it is going to be a question of ... what I consider to be reasonable.” Sloane produced no evidence on counsel fees at trial.
In his oral opinion the circuit judge found that “one-third is an inordinate amount, and that 20 percent is the more appropriate measure of damages.” Clarifying the prior discussion with counsel, he ruled that his award was to be in addition to the judgment of $74,161.21. He then undertook some oral, mental arithmetic and commented that the fee would be twice whatever $7,416.12 would be. The docket entry of the judgment specifies that it includes “attorney’s fees in the amount of 20% of $74,161.21 additionally and costs.”
In its post-judgment motion, Sloane did not seek an opportunity to factually show that the amount of the fee was unreasonable. Starting from the premise that the trial *53 court awarded a contingent fee the defendant argues that a fee may not be awarded against a losing party which is to be paid both at contingent fee rates and in addition to the recovery on which it is computed. That issue is not presented by the record. In substance the trial court concluded that a reasonable fee was $14,832.24.
Here the amount of counsel fees awarded is supported by the trial judge’s knowledge of the professional services involved in preparing and presenting the case before him.
See Kline v. Chase Manhattan Bank,
Ill
House has cross-appealed. The judgment entered at the conclusion of trial on July 31, 1986, specified that it carried interest on $74,161.21 from July 9, 1984. Thereafter, in response to Sloane’s post-judgment motion, the court struck the prejudgment interest feature from the judgment.
The subject of prejudgment interest was extensively reviewed in
I. W. Berman Properties v. Porter Bros.,
JUDGMENT OF THE CIRCUIT COURT FOR MONTGOMERY COUNTY AFFIRMED. COSTS TO BE PAID TWO-THIRDS BY APPELLANTS AND CROSS-APPELLEES AND ONE-THIRD BY APPELLEES AND CROSS-APPELLANTS.
Notes
. The agency appointment also ran to Sight & Sound, Inc., a corporation related to House by common ownership, which was a plaintiff below and is an appellee and cross-appellant here. An additional defendant below which is an appellant and cross-appellee here is Ruth Rider, Inc., the parent corporation of Sloane. The presence in the litigation of parties in addition to House and Sloane is immaterial to the issues on this appeal.
. The plaintiff’s damage calculation was actually $.50 higher, but no point has been made over the discrepancy.
. Maryland Code (1975), § 2-708(2) of the Commercial Law Article provides:
If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this title (§ 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
. Application of the analysis to a specific case requires classifying costs as variable costs or fixed costs. Childres & Burgess give the following description of those concepts.
In the broad sense, all of the seller’s costs are necessary to the production of revenues. Each expense plays a role in the present and continuing operations of the business, and the central object of the business is to make sales in order to produce revenues and ultimately profits. Nevertheless, some costs are more directly related to the performance of individual contracts than are others, and their amount will vary with the volume of sales output. The other expenses will remain relatively stable through a given range of output because they bear no direct relationship to the individual contracts. Accountants and economists refer to these two distinct kinds of costs as variable and fixed; the latter is also commonly referred to as overhead.
The variable element represents those items of cost which may be identified as belonging to a specific contract or product of sale. For example, the cost of materials and labor which go directly into the production of contract goods are considered variable costs—they vary with the number of contracts which are performed. If the contract is not performed they presumably are not incurred. An example of a variable cost for a nonmanufacturing seller is the cost to him of purchasing from his supplier a product intended for resale.
In contrast to items of cost which vary directly with the volume of output, there are costs which have only an indirect relation to output. These costs are necessary to the maintenance of the business but do not change except with significant changes in output. *45 For example, rental payments or depreciation on a plant, warehouse, store or office may be the same whether few products are produced and sold or many are. Executive salaries are usually fixed costs and are set before the precise output has been determined. Clerical and administrative salaries, and advertising and insurance costs also may not vary within certain production or sales ranges. All of these costs may or may not be considered fixed costs in a particular period, but if they are, they are attributed to that period’s total output.
It has been said that fixed costs are those which "continue if the firm is temporarily shut down, producing nothing at all.” Whether this is a completely accurate statement need not be decided, for the precise amount of any seller’s costs has to be established by experts in each particular controversy. What may be a fixed cost to one seller may be a variable cost to another and, in fact, may be a variable cost to the same seller at a different volume of manufacture or sales. For our purposes it is only important that we understand the difference. [48 N.Y.U.L.Rev. at 840-41 (footnotes omitted).]