What is the appropriate measure of damages?

18 March 2022 by Paul Croft

The appropriate measure of damages will be determined by the circumstances of the claim being litigated and the remedies sought by the parties, and will principally be determined by:

• The nature of the wrongful conduct; and/or
• Whether or not the wrong was committed in contravention of relevant statutory or legislative provisions.

By extension, the approach and loss calculation methodologies adopted by a forensic accountant should be congruent with the appropriate measure of damages contemplated by the remedy sought by the plaintiff. Applying the wrong measure of damages, or applying the measure incorrectly could potentially, in the eyes of the Court, taint the quality of the expert evidence given.

Examples of remedies associated with more frequently pleaded acts of wrongful conduct are set out below. The measures of damages referred to are not intended to be exhaustive, are generic in nature and may not be applicable in all circumstances.

Common law duties

Breach of contract

The objective of an award of damages for a claim brought in breach of contract is to place the plaintiff in the same position in which it would have been had the contract been performed.

Whereas a concurrent claim brought in tort (for example, misrepresentation) seeks to put the plaintiff in the same position it would have been in had the representation not induced the plaintiff to enter into the contract in the first place.

Where a party is entitled to damages in contract, and tort, it is open to the plaintiff to choose the measure that produces the most beneficial outcome. As the measures can produce significantly different outcomes in the amount of damages calculated, the plaintiff’s choice of measure is often influenced by perceptions as to whether a “good bargain” or a “bad bargain” was struck at the outset.

Breach of fiduciary obligations

Set out below are examples of common law fiduciary duties and the indicative measure of damages (noting that the specific nature of the breach may cause alternative measures to be adopted):

Statutory and legislative duties

Breaches of director’s and trustee’s duties under the Corporations Act (2001) (Act)

The obligations imposed by the Act on directors and trustees include principal duties, insolvency-related duties and other duties, including those specific to certain business activities, in particular, financial services entities. For the statutory duties identified below, the table outlines the conventional measure of damages that may be applied where breaches arise.

Misleading and deceptive conduct provisions under the Australian Consumer Law (ACL)

Duties not to engage in misleading and deceptive conduct are set out in section 18 of the ACL (Sch 2 Competition and Consumer Act 2010 (Cth)).

While the measure of damages will vary according to the specific provision of the ACL, the remedy for misconduct generally seeks to put the plaintiff in as similar a position as possible had the misconduct not occurred (reliance damages).

However, specific circumstances may warrant a different remedy, for example, in situations where contractual obligations turn out to be more onerous than represented at the outset. In such situations the appropriate measure of damages may involve putting the plaintiff in the same position assuming that the misstatement had been true (expectation damages).

It is not uncommon for plaintiffs to also claim the loss of an opportunity to pursue or obtain an alternative commercial advantage. In such instances the plaintiff must be able to substantiate the course / investment decisions that would have been taken, but for the wrongful conduct.

Nature of evidence typically required to quantify damages

To quantify damages, forensic accountants typically require at a minimum:

• Financial statements for three financial years prior to the wrongful conduct;
• Financial statements for relevant financial years affected by, and following, the wrongful conduct;
• Monthly management accounts, monthly trial balances and annual general ledgers for three years prior to the wrongful conduct;
• Monthly management accounts, monthly trial balances and annual general ledgers for financial years affected by, and following, the wrongful conduct;
• Copies of contract and other relevant documents pursuant to which the wrongful conduct occurred;
• Board reports, records of key committees (for example, audit, governance).

Depending on the claim being litigated, other documents forensic accountants often require include:

• Monthly cash flow budgets / forecasts for the three years prior to the wrongful conduct;
• Monthly cash flow budgets / forecasts for relevant financial years affected by, and following, the wrongful conduct;
• Correspondence with financiers, suppliers, customers, shareholders and other stakeholders;
• Valuation reports;
• Documents supporting historical investment decisions (where a loss of opportunity is claimed).

Need advice?

Early forensic accounting input offers a simple, effective way for you to proactively manage the costs and risks associated with litigation. Engaging early will help to narrow the material financial and/or accounting issues in dispute, and identify the critical evidence required to develop and support the optimum legal strategy. This will help you lay the groundwork for building robust, defensible claims.

Contact one of our forensic accounting experts to discuss the problems at hand and discover why our services are right for you.