When quantifying damages where the damages period extends beyond the anticipated trial date, there are issues to address with respect to discounting the future damages. An earlier post addressed the issue of applying an appropriate discount rate to present value future damages. [1] The issue of which date the damages should be present valued to, however, was not discussed. The Ex-Ante and Ex-Post approaches address this issue.
The Ex-Ante approach computes damages (e.g. lost income) as of the assumed alleged breach date (or beginning of damages period), relying only upon information known or knowable at that time. Under this approach, projected future damages are discounted to the beginning of the damages period using a discount rate that reflects the risk of the asset.
The Ex-Post approach, however, computes damages (e.g. lost income) as of the anticipated trial date, relying upon all known information at that time. Damages incurred between the beginning of the damages period and the trial date are not discounted back to the beginning of the damages period but are measured as incurred. Future damages that extend beyond the trial date are discounted back to the trial date.
The fundamental differences between the Ex-Ante and Ex-Post approaches lie in which information subsequent to the alleged breach is used, the date of the damages measurement and how the future damages are discounted. These are summarized below:
Ex-Ante Approach
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Ex-Post Approach
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Information
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Use information known or knowable on the date of the alleged breach; ignore subsequent events (hindsight)
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Use all available information (including hindsight information)
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Measurement Date
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Date of alleged breach.
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Date of analysis (or anticipated trial date)
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Discounting
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Discount all cash flows back to date of alleged breach using a rate that reflects the risk of the asset.
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Discount only future cash flows (beyond date of analysis or trial) to date of analysis or trial.
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Proponents of the Ex-Ante approach argue that since the plaintiff was deprived of both asset returns and uncertainty surrounding those returns, it is improper to use hindsight, which effectively removes the uncertainty component. In other words, awarding the plaintiff with all the benefits of a successful project without the plaintiff having to assume the project risk would overcompensate the plaintiff.
Proponents of the Ex-Post approach, however, argue that the Ex-Ante approach effectively imposes a forced sale upon the plaintiff at the time of the violation, which denies the plaintiff of any compensation for the loss of continued ownership property rights. Using hindsight, however, correctly returns both the intrinsic risks and rewards of asset ownership to the plaintiff. In addition, by virtue of the alleged breach, the defendant precluded the plaintiff from taking the risk associated with earning the cash flows. Since the plaintiff wanted to take those risks, the defendant should not benefit from preventing the plaintiff from taking those risks.
Damages experts will sometimes apply a hybrid approach, wherein lost profits are discounted back to the breach date, but subsequent information (i.e. hindsight) is relied upon for purposes of the calculations.
Which approach do you see more commonly applied in expert reports quantifying economic damages?
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