'Quantifying damages for economic loss: Is this the hardest thing commercial lawyers do?'

Tuesday October 7, 2014

The below article from 29 September 2014 has been provided by Robert Angyal SC, Barrister, Mediator and Arbitrator, 6 St James.

Your client has a cause of action sounding in damages for economic loss. Your client seeks advice on the likely quantum of damages that a court might award. A Court of Appeal decision on 16 September 2014, Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324 http://www.caselaw.nsw.gov.au/action/PJUDG?jgmtid=174113 shows just how difficult a task this can be.

The facts:
The respondent, a company that had some track record in developing smartphone apps sought to raise $1.2 million to develop two apps. The appellant, one of its directors, in breach of his director’s duties, dishonestly and fraudulently diverted the funding to a new entity intended to acquire the company’s assets and development opportunities at a discount. What damages could the company recover from the director for breach of his duties?

The Trial Judge:
The Trial Judge quantified its damages as the loss of opportunity to raise $1.2 million and put the loss at $300,000 - a 25% chance of raising the amount sought.

The Court of Appeal:
In the Court of Appeal, all three judges disagreed with this approach, for the reason that raising money would merely create a debt for the amount raised. Instead, one had to look at the profits the company might have earned had it not lost the opportunity to raise $1.2 million.

All three judges differed on the result of taking the correct approach. Gleeson JA used financial projections prepared by the defaulting director for his new entity, rather than those prepared by the company. They estimated profits of $650,000 in 2011. Because of the significant contingencies faced by the company, his Honour applied a discount of 90% - producing damages of $65,000: [139]. On this view, the company only had a 10% chance of earning the forecast profits.

The company’s own financial documents forecast profits before interest and tax at $1.8 million in 2011 and $5.4 million in 2012, totalling about $7.2 million. Macfarlan JA said that “[t]he task of assessment ... is undoubtedly a highly subjective one” which “may involve a degree of speculation”: [82], [83]. His Honour said that Gleeson JA’s assessment of the business opportunity at 10% was too low but did not himself state a percentage: [84].

Taking account of “the very significant business contingencies” faced by the company, his Honour agreed that the Trial Judge’s figure of $300,000, although arrived at for the wrong reasons, was correct: [84]. His Honour did not express $300,000 as a percentage of potential lost profits but, had this been done, it could be seen that his assessment in fact represented only about 4% of the company’s projected profits of about $7.2 million.

The third judge, McColl JA, referred to “the necessarily impressionistic exercise involved in the assessment of damages”, said that she “may not have reached the same figure” as Macfarlan JA but agreed that $300,000 represented “a fair assessment” of the company loss: [4].

The result:
Four judges assessed the company’s damages in this case:
• Two judges assessed the damages at $300,000, although one of them used the wrong method to reach that figure. Based on the company’s forecasts, this represented only about 4% of the potential lost profits. But, based on a much lower forecast, it represented about 45% of the lost profits.
• One judge might have reached a figure different to $300,000 had she herself
assessed damages (it is not clear whether it would have been higher or lower) but was prepared to agree with $300,000.
• The fourth judge assessed damages at 10% of the forecast profits. But because a much lower forecast was used, the damages were only $65,000.
• In the result, by majority, the damages awarded were $300,000.

The take-away lessons:
• Advising a client on the likely quantum of damages for economic loss is
extremely difficult because the process is impressionistic and highly subjective -
which is another way of saying that different judges legitimately can reach very
different results.
• Because of this, it would be prudent to advise a client that it is not possible to give advice on the likely result.
• Instead, the client should be advised of the range of damages that could be awarded and the factors that might push the award toward the upper or lower extreme of the range.

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