Page 38 - Economic Damage Calculations

In some instances, the expected outcome may be best measured as a single point estimate, determined by
assessing facts and supporting financial and nonfinancial information. For example, in a breach of con-
tract matter, the underlying contract may contain specific information with respect to the quantities that
would have been sold under the contract, as well as the related pricing of the product. Assuming these
contractually defined terms are reasonable, presenting such a scenario may provide the trier of fact with
a sound model to evaluate damages.

In other circumstances, the presentation of alternative scenarios based on other inputs, such as a projec-
tion with alternative growth rates or alternative market shares, may allow for the estimate of multiple
cash flow outcomes. In this way, the expert provides informed inputs that enable the trier of fact latitude
to choose between different inputs. A Monte Carlo analysis may also be used to show the probability of
different outcomes estimated by the expert and run in a probability simulator. Such analyses may offer
effective ways to handle the variability and uncertainty risk of different scenarios. Because part of the
foundation of these models is the expert’s ability and willingness to prepare and support assumptions
about the probability distributions associated with various inputs within the cash flow model, the con-
clusion from such an approach essentially reflects the quality of the input into such a model.

Ex Ante Approach Versus Ex Post Approach

When some or all of the but for cash flow amounts occur after the date of the alleged damage event, the
expert will need to determine how to incorporate, if at all, knowledge related to the actual events that
occurred subsequent to the date of the damage. There are two approaches to evaluate knowledge subse-
quent to the damage event: ex ante and ex post analyses. fn 4

In an ex ante model, the expert calculates lost profits as of the date of the damages event, considering in-
formation available before the date of the damages event, discounting all then-future income streams in
the but for and impaired scenarios back to the date of the damages event, and then brings the value (the
difference between the but for and the impaired scenario values) forward from the date of the damages
event to the date of judgment at a prejudgment interest rate. fn 5

This approach has been accepted in numerous matters, including Sharma v. Skaarup Ship Management
Corp., 916 F.2d 820 (2d Cir. 1990), cert. denied, 499 U.S. 907, 111 S. Ct. 1109, 113 L.Ed.2d 218 (1991)
("where the breach involves the deprivation of an item with a determinable market value, the market
value at the time of the breach is the measure of damages."). New York law has called for the use of the
ex ante approach, particularly in breach of contract cases. fn 6

In an ex post model, the expert calculates losses as of the date of the damages event, with future losses
(those from dates after the judgment date) discounted back to the judgment date and prejudgment inter-

fn 4 The expert may also wish to consult paragraphs 106–109 of AICPA Forensic and Valuation Services (FVS) Section Practice Aid
No. 06-4, Calculating Lost Profits, related to this issue.

fn 5 The AICPA has developed a resource for practitioners related to the determination of prejudgment and post-judgment interest
which can be accessed through the FVS website, https://www.aicpa.org/interestareas/forensicandvaluation.html.

fn 6 Lamborn v. Dittmer, 873 F.2d 522, 533–34 (2d Cir. 1989); and Parker v. Hoppe, 257 N.Y. 333, 178 N.E. 550 (1931) (clarifying
that changes to a currency exchange rates subsequent to a breach are not to be taken into account in measuring damages).

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