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The calculation
of damages from the breach of a contract involves the analysis of
historical financial data, analysis of the current status of the parties
involved, and projections of future economic activity. In most breach
cases there is a basic formula used to calculate damages. In simple
terms, the difference between what would have happened without the
breach of contract and what did happen as a result of the breach of
contract is the economic damage. Quantifying that difference is based
on a combination of actual verifiable data, assumptions, and
projections.
Phases of Damage
Calculations
There are three phases of most damage
calculations. First is the period from the commencement of the contract
to the date of the "event" (breach). Generally, this is the
period where data is most available, relevant, and reliable. The second
phase is the period from the date of the breach to the date of trial.
The information in this period is also reliable and relevant but,
depending on the circumstances surrounding the breach, may not be
readily available. The third phase is the period of time from date of
trial into the future. This is the period where economic activity is
projected and is, by definition, the least reliable or available. It is
also the phase where assumptions play a significant role in the
calculations. It must be prepared and presented in a form, though, that
is relevant and persuasive.
Role of the Expert
The role of the expert in a breach of
contract matter is to assist the parties in quantifying the damages.
This may involve assistance in discovery, developing reasonable
assumptions, reading and interpreting contracts, compiling financial
data, and presenting the data. Discovery will be based on the theory of
damages being pursued and an experienced forensic accountant can drive
a more efficient process of collecting and using relevant data.
Presentation of Results
is Key
Presentation of the conclusions and
the basis for the conclusions is often critical to the success of the
engagement. There are a lot of experts who can do an adequate or even
superior job in the analysis stage but cannot present the data in a
form that is understandable and reasonable for a trier of fact to
adopt. Conversely, there are experts who tell a good story but do not
have the analytical skills required. They either have others do the
analysis and step in personally only to provide the testimony or they
do scant analytical work and rely on their testifying skills to carry
the day. Finding both skills in one expert brings efficiency to the
damages phase of the case. Regardless of the venue (jury trial, bench
trial, or arbitration) the ability to present the conclusions in an
easily understood presentation that is backed up with substantial data
not only can win the case, it can also assist in settling the case
before incurring the expense of a trial.
Traps to Avoid
The following are some traps to avoid
when retaining an expert to provide consultation and/or expert witness
work in the damages phase of a breach of contract matter:
- Retaining
the damages expert right before trial (at the last minute) is
common but dangerous. Depending on the circumstances, clients are
sensitive to litigation costs and there is a working theory that
the damage phase will be addressed if/when there is a decision
that the damage actually took place. By doing so, any advantage of
having a financial expert assisting with discovery and development
of damages theories is lost. Additionally, experienced and busy
financial experts will either be unavailable or have a policy of
not taking on "last minute" cases.
- Telling
the expert what you want the damages to be is ultimately
self-defeating. Reputable experts will not allow themselves to be
used in that manner. Often, it comes out in trial either directly
or by implication and has a negative impact on results.
- Retaining
an expert that is weak either analytically or in presentation
skills is an unnecessary compromise. The expert should be allowed
to prepare the necessary analysis as well as design exhibits with
the client and lawyers that are clear, expressive, and persuasive.
This is often an interactive process that results in a smooth
presentation.
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According to the Small Business Administration,
about 90 percent of American businesses are family-owned or controlled.
For many of these families, the business is the most significant asset
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If you have any questions about Business
Valuation Services for Estate Planning and Gifting Programs,
please feel free to contact
us.
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