Tuesday, December 18, 2012

Critiquing an Expert Report: Step 6 – Identify the Damages Period

Step 6 to critiquing an expert report on damages involves identifying and assessing the reasonableness of the period over which the expert has calculated damages.  The damages period is often one of the major assumptions underlying a damages calculation which, if altered, can have a significant impact on the conclusions.
There may be situations where an expert has quantified damages under a breach of contract by calculating the lost profits suffered for a one year period and then capitalizing this annual loss by a multiple to arrive at a lump sum value.  This approach implies an infinite damages period, which may not be appropriate.
Where the expert’s damages period assumption is not reasonable under the circumstances, you should consider the impact of using a more appropriate damages period assumption on the conclusions.
For guidance on assessing the reasonableness of the assumed damages period in a breach of contract matter look to the agreement.  Is the assumed damages period consistent with the term in the contract?  How does the contract deal with termination?  Is the "reasonable notice period" concept relevant and, if so, how has the expert addressed this?
According to Recovery of Damages For Lost Profits:
"When a contract contains a provision that it may be terminated on given notice, unique questions arise.  If the contract is breached, are lost profits recoverable for the entire term of the contract?  Or only for the period of notice?  Most of the cases limit damages recoverable to those suffered within the notice period.  However, there have been cases where the courts have awarded damages for a period of time longer than the notice period."
"If a contract specifies no time period for performance, it may be regarded as cancellable on reasonable notice.  If reasonable notice is implied, the injured party may then recover damages for loss of profits during a reasonable period after cancellation of the contract.  The duration of the reasonable notice, however, is a question of fact for the trier of fact."
What constitutes "reasonable notice" will depend on the circumstances of each case.  Some of the factors considered by Canadian courts in breach of distribution agreement matters include:
  • The length of the association between the parties;
  • The dependency of the distributor on a principal’s line of business;
  • The amount of investment made by a distributor to distribute a principal’s product;
  • The volume of business derived from the sale of the principal’s product; and
  • The established practice, if any, in the trade or the business.
When reviewing expert reports on damages we always consider the expert’s assumption regarding the damages period.  We were retained to review the plaintiff’s expert report in a breach of tender matter with respect to a claim for lost profits.  The plaintiff’s expert quantified damages for an infinite period despite the fact that the tender documents and subsequent contracts were for a specific time period (one year).  Our responding report highlighted this, among other things, as one of our major concerns.  The case ultimately settled out of court for an amount much less than the plaintiff’s expert had quantified.
The damages period is often a major assumption underlying a damages calculation.  Taking the time to understand what the expert assumed in this regard and assess its reasonableness in light of the facts and circumstances of the case is critical to conducting an effective review of that expert’s report.
1.  Recovery of Damages For Lost Profits, 6th Edition, Robert L. Dunn, pages 530 – 535.

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