"That, it seems to me, is a fatal error with the way in which the plaintiffs put their damages claim."
Litigation is often a long and expensive process. So when they win, plaintiffs reasonably expect the financial outcomes are worth it.
Unfortunately, winning with respect to liability doesn't necessarily translate to an award of damages. A number of high-profile judgments in the last 18 months have shown that sometimes gaps between the expert evidence used to quantify losses, and the case put for liability, has turned a win for the plaintiffs on liability into a loss, in terms of financial benefit.
In particular, a recent judgment in the long-running litigation involving
- if liability is established, imprecision in the quantification of loss is not itself a reason to refuse to award damages; and
- if the factual findings in a case, such as the date of the offending conduct, are inconsistent with the expert's assumptions, it would be reasonable to allow them the opportunity to amend their quantification by adopting the Court's finding on those matters; but
- "fundamental flaws" or "fatal errors" in the way damages claims are quantified can lead to no award of damages, even if liability is established.
Following the collapse and receivership of the electronics retailer Dick Smith ('DSH'), there were numerous legal proceedings2. This article looks at just one aspect3 of one of those proceedings, referred to as "the bad stock case". In respect of liability,
So how did the plaintiffs 'win' on liability but 'lose' on damages? Let's first look at the methodology adopted by the experts engaged by the plaintiffs, before considering how that methodology aligned with the plaintiffs' case.
The damages case - the experts' methodology
The plaintiff's expert on inventory, Ms E, identified that DSH had purchased Bad Stock, being inventory purchased for which (according to her) DSH already held excessive amounts of that product. The plaintiffs then submitted that these purchases would not have occurred if DSH had acted appropriately.
The plaintiff's expert accountant, Ms O, calculated losses arising from this Bad Stock. In simple terms, this involved deducting the costs of purchasing the Bad Stock from the revenues made from selling it.
The damages case - the plaintiffs' methodology
- "that an excessive amount of capital was tied up in stock"; and
- "DSH was exposed to an increased risk that the stock would become obsolete."
However, this is where
The plaintiffs' expert disagreed that their methodology was deficient, and argued that it was "the best that could be done with the imperfect information available" .
The judge's view - problems in the plaintiffs' case
- The approach "assumes that DSH would have bought other stock if it had not bought Bad Stock. But that assumption is inconsistent with the plaintiffs' case [ ... ] That, it seems to me, is a fatal error with the way in which the plaintiffs put their damages claim."
-
The calculation assumes losses started in
1 May 2014 , howeverJustice Ball found no breach until the end ofJanuary 2015 .Justice Ball noted that if this had been the only difficulty "it would have been appropriate to give [the plaintiffs'] an opportunity to calculate damages from the correct date. However, that would be pointless given the conclusion I have reached". -
The calculation gives no credit for rebates, however Ms O "accepts that in principle credit should be given". Ms O defended this in saying that it was not possible on the available evidence.
Justice Ball found difficulties with Ms O's position since, inter alia, even in the absence of specific evidence the Court "need[ed] to do the best that it could to make an allowance for them". He noted that the approach taken by the defendant's expert "at least provides a starting point". -
the approach relied on assumptions
Justice Ball found were unproven by the plaintiffs' evidence.
Ultimately
The DSH judgment shows that establishing a robust foundation for the assumptions and methodology adopted in the damages assessment is at least as important as the strength of the legal argument on liability.
Inconsistencies between the inputs into the quantification and the Court's factual findings are not fatal to the assessment of damages, and the Court will generally seek to overcome limitations in the evidence to provide a workable outcome on quantum for successful plaintiffs. However, the Court will not correct for fundamental or fatal flaws in the methodology or assumptions adopted by an expert, even if those flaws are argued to be the consequence of limitations in information.
Conclusion
Our experience suggests that briefing an expert with statements of both claim and defence, and providing relevant information in a letter of instruction is not only useful, but is often critical. It is often also helpful to engage with an expert as to an appropriate method for estimating damages based on the legal position, and the available information, prior to finalising the questions put to them. Otherwise, you might find yourself winning a case on liability, but receiving no award of damages from the Court.
Footnotes
1
2
3 For completeness we note that in the same judgment it was also found that
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Ben Mahler
Level 5,
NSW
2000
Tel: 38623 3333
Fax: 38623 3399
E-mail: bdwyer@kordamentha.com
URL: www.kordamentha.com
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