March 2, 2015

Commercial damages – how to protect your business

You have just cornered the market with a newly improved version of one of your long established products. Then one of your major customers calls you to complain that your new product is defective and is not fit for its intended purpose. On closer examination, you discover that one of the components of your product, which has been sourced from an external supplier, is severely defective and has caused the failure of the product. As result, you are forced to recall the product which in itself causes you to incur a great deal of expense, not to mention very significant loss of future sales.

This is where a Forensic Accountant can help. Forensic Accountants are often asked to assist in assessing the losses allegedly suffered by one party as result of the actions of another.

The law provides for damages to be awarded where one party has breached a contractual obligation or infringed a legal right of another party other than by breach of contract (a tort). So in the fictional example set out above, the manufacturer (Plaintiff) will have an action against the supplier (Defendant), whether the components were supplied under contract or not.

Damages are awarded on a once and for all basis so as to put the Plaintiff back into the position it would have been in, had the Defendants actions not caused the loss. The losses are typically calculated as at the date of the actions that caused the monetary loss. This means the past losses up to the date of the trial and those that are expected to occur after the date of the trial are discounted back to the date of the event or events that originally caused the losses.

Damages are intended to compensate the Plaintiff for past and
future losses. The Forensic Accountant will determine what the Plaintiff’s cashflows would have been but for the actions of the Defendant; these are called the ‘notional cashflows’. The next step is to deduct the Plaintiff’s actual cashflows that have occurred as a result of the actions of the Defendant. The differences between both the past and future notional and the actual cashflows are then discounted using an appropriate discount rate that reflects the time value of money and the risk that the past and future notional cash flows would have and will have occurred but for the actions of the Defendant. Interestingly, the discount rates for the past and future cashflows need not be the same.

Once the losses have been determined, the Judge will typically add interest at the Court rates so as to compensate for the fact the Plaintiff has not had the funds for the period from the date of the actions of the Defendant to the date of the trial.

Complex commercial litigation requires the vision and unbiased insight of experienced professionals who understand the legal system, and have the understanding and proven practical application of traditional and emerging financial theories.

The SV Partners Forensic team are experienced in dealing with complex business issues that may lead to litigation, mediation or arbitration. For further information and advice, please contact one of our experts on 1800 246 801.

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