VALUATION OF ECONOMIC DAMAGES

Businesses are exposed to the risk of economic damage. They may occur, for instance, as a result of:

  • improper fulfilment of contracts;
  • abuse of power by company bodies or administrative authorities;
  • unauthorized use of intellectual property;
  • abuse of monopoly position.

These are just some of the examples, as – of course – the catalogue of potential sources of damage is much wider.

Entities who suffer from economic damages often decide to seek legal protection via a court dispute. Information on the value of the claim, which the aggrieved party should file is provided by valuation of the damage. The defendant, on the other hand, is interested in obtaining a counter-opinion on the value. One that would reveal any shortcomings of the valuation presented by the plaintiff or, simply, present the substance of the case in a more favourable light.

Regardless of the valuations presented within the capacity of so-called private opinions, often the court orders that an independent opinion on the value of damagies provided by a court expert. The court expert, however, usually first gets acquainted with the valuations provided by the litigants.

Therefore, it can be argued that presentation of a thoroughly prepared valuation document significantly improves the chances of obtaining the favourable final result of the dispute.

The valuation of claims includes two elements:

  • incurred losses (damnum emergens) - deterioration of the economic situation of the entity (as compared to the situation before the occurrence of economic damage);
  • lost profits (lucrum cessans) - unrealized benefits that would materialize, had the economic damage not occurred.

The claim valuation process includes:

  • analysis of the circumstances of the damage;
  • definition of losses (cost sources) and lost profits,
    in which the damage has manifested;
  • selection of the valuation methodology adequate to the identified scope of damage;
  • estimation of the value of economic damage as at the valuation date;
  • preparation of a report.

The choice of the valuation method depends on a number of factors, including the type of damage and its impact on the aggrieved party. Access to the entity’s financial information is also of key importance –after all, one should keep in mind the specific nature of economic disputes, a feature of which is certain information asymmetry of parties.

Hence, valuation performed by an advisor employed by an entity in possession of key source information will be completely different from the valuation carried out by the advisor of the opposing party.

The starting point for the assessment of economic damage is a comparison of the economic effects of the following two scenarios:

  1. hypothetical continuation of the aggrieved party’s economic activity on terms, which would be applicable, had the damage not occurred,
  2. analysis of the actual condition of the aggrieved party after the occurrence of damage.
The best practices in valuation of economic damages are laid down in the literature. Damage resulting from non-performance or improper performance of obligations can be defined as the difference between the current status of the creditor's assets and the hypothetical condition that would have arisen if the obligation had been properly performed.

The delta between the simulation and the actual state of things can be estimated using one of the following methods:

  • Before-And-After Method, based on the compilation of financial data describing the subject of the valuation before and after the damage has occurred;
  • Market-Model Method, where a financial model is built (based on the financial data of the aggrieved party, as well as industry and macroeconomic data) to determine lost income;
  • Yardstick Method, which consists in analysing the changes to the aggrieved party's financial figures after the damage, compared to companies operating in the same industry on similar markets.

We have gathered extensive experience in the area of valuation of economic damage and financial support in legal disputes. It includes projects delivered to entities operating, inter alia, in the following industries:

  • food manufacturing;
  • metallurgy,
  • small household appliances,
  • IT,
  • fuels,
  • production of means of transport,
  • financial services,
  • housing development,
  • utilities.

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