Date posted: 01/06/2021

Why experts disagree on damages in breaches of contract

Identifying the five key areas of disagreement among experts.

In brief

  • Accounting experts often have to quantify damages for breaches of contract
  • Differing judgements and assumptions can lead to disagreement – and a difference in quantum
  • According to Cook, there are five key areas where experts can often disagree

Simon Cook CA

“In a breach of contract claim the suffering party is to be placed in the same situation, with respect to damages, as if the contract had been performed.”  

Accounting experts are often engaged by opposing sides to quantify damages in a dispute. To do this, they need to identify inputs and sometimes make assumptions. But disagreement on what these inputs and assumptions should be can lead to a large difference in quantum. 

My recent analysis of expert reports in breaches of contract cases identified five key areas where experts disagreed.

1. The method used 

According to Pratt and Trugman, economic damages are often calculated using the before and after method, the comparable method, the + –, or a combination of those.  

In the observed cases, the experts couldn’t reach a consensus on which method was most appropriate, either because they disagreed on:

  • whether the periods before and after the alleged breach were comparable due to the plaintiff’s alleged mismanagement 
  • the extent to which other businesses and benchmarks were relevant and comparable. 

2. The period of loss 

While the loss period often depends on the term of a written contract, experts can disagree on the interpretation and the likelihood of renewal. In these cases, the experts disagreed on:

  • how much time remained on the contract at the time of the breach 
  • whether options would be granted 
  • if the contract had any value at the end of the contract period. 

3. Lost revenue 

A key input to the economic damages calculation is lost revenue – which often requires revenue forecasts based on assumptions. The experts in the observed cases disagreed on factors such as: 

  • historical monthly revenue trend 
  • expected revenue growth 
  • the impact of other factors, such as changes in industry and competition. 
“Like many accounting matters, calculating economic damages requires judgement and assumptions – and it is these that lead to disagreement among experts.”
Simon Cook CA

4. Incremental costs 

According to Gaughan, the true value of the economic damages is the lost incremental revenue, less the lost incremental cost associated with that revenue.  

After establishing the lost revenue, it’s necessary to calculate incremental costs – that is, the costs that would have been incurred if the revenue hadn’t been lost. 

In this area, the experts disagreed on inputs such as:

  • the appropriate gross profit margin 
  • whether past expenses were properly reported
  • whether to attribute a salary to an owner operator
  • how lost sales impacted overheads. 

5. The discount rate 

The discount rate is used to calculate the present value of a stream of cash flows. As it reflects both the time value of money and the risk profile of the cash flow, this calculation requires an assessment of the risks attached to cash flow. The experts disagreed on factors such as: 

  • the risks attached to the cash flows 
  • how to calculate the discount rate 
  • the comparability with other observed discount rates. 

Why experts disagree

Like many accounting matters, calculating economic damages requires judgement and assumptions – and it is these that lead to disagreement among experts.  

Simon is an Accredited Business Valuation and Forensic Accounting Specialist with CA ANZ. Simon is the chair of the business valuation group for Queensland and a member of the CA ANZ Business Valuation committee. Before founding Lotus Amity, Simon was a forensic accounting partner with BDO Australia and led its national forensics practice. 

1 Robinson v Harman (1984) 1 EX 850, per Parke B at 855
2 Pratt, S (2008) Valuing a business - The analysis and appraisal of closely held companies, McGrath Hill. Fifth Edition, p.1024; Trugman, G (2017) A practical guide to valuing small to medium-sized businesses, Fifth Edition, p.1112
3 Gaughan, P.A (2009) Measuring Business Interruption Losses and other commercial damages, John Wiley & Sons, Second Edition, p73

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