Tuesday, February 26, 2013

Critiquing an Expert Report: Step 9 - Mitigation

"The key to a successful defense is often proof that the plaintiff failed to mitigate damages.  The plaintiff is required to act reasonably to mitigate damages, but its failure to do so must be proved by the defendant."   [1]

You have now completed the following steps in your review of an expert report on damages:
  1. Review author’s credentials and qualifications;
  2. Identify scope limitations;
  3. Assess underlying assumptions;
  4. Consider conclusion as opinion versus calculation;
  5. Identify and assess damages approach;
  6. Identify and assess damages period;
  7. Ensure future damages appropriately discounted; and
  8. Consider the contract.
Step 9 to critiquing an expert report involves assessing the extent to which the damages calculations consider mitigation.  This is a critical step because mitigating income reduces a plaintiff’s damages claim and mitigation is often "assumed away" by experts when quantifying damages. 
In assessing mitigation, the following questions should be considered as you review the expert report:
  1. What should the plaintiff have done to mitigate its losses?
  2. What did the plaintiff do to mitigate its losses?
  3. What alternate or substitute contracts did the plaintiff receive?
  4. What mitigating activities did the expert consider in the report?
  5. What mitigating income did the expert consider in the report?
In a breach of contract matter, for example, certain resources (e.g. financial, human, capital assets, etc.) would have been used by the plaintiff to fulfill the contract.  Given the alleged breach, the plaintiff no longer had to deploy those resources for that contract.  Those resources, however, may have been put to use (e.g. alternate contract, substitute project, replacement customer, etc.).  Any income (i.e. revenue net of costs) generated from that "alternate use" could be considered mitigation.
I also like to consider a higher level approach to assessing mitigation, which involves reviewing the plaintiff’s financial statements for a period of time before (e.g. three years), during and after the alleged damages period.  If the income statement does not show a drop in revenue during the damages period or if revenues actually increased over the damages period, this could be an indication that the plaintiff was able to successfully mitigate its losses. 
It can be extremely difficult to quantify the impact of mitigation and the resulting mitigating income, if any, actually earned by the plaintiff that would not have been earned but for the breach.  There are, however, many cases illustrating successful proof by the defendant that the plaintiff’s profits earned in mitigation are to be offset against the claimed damages. [2]
If you are acting for the defendant in a breach of contract or other legal dispute and have just been provided with the plaintiff’s expert report on damages, contact us at www.vspltd.ca.  We can help by providing some preliminary comments, a limited critique report or an independent expert report which would be suitable for use at trial, mediation, arbitration or settlement discussions.
1.    Recovery of Damages for Lost Profits, 6th Edition, Robert L. Dunn, page 569.
2.    Recovery of Damages for Lost Profits, 6th Edition, Robert L. Dunn, page 574.

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