DISPUTE ADVISORY

Economic Damages

If you or your business has suffered a legitimate economic loss, know you can legally be compensated through damages.

Challenges Faced By Clients

Confused about what amount is claimable and the calculation?

A layperson's idea of what's claimable may be different from a Court's

As the adage goes "Anyone can sue someone. The question is, do you have a case?"

Cause vs effect

Can you prove that loss was caused by and only by the defendant's actions?

Is your story consistent?

Are you arguing something or asserting a right that contradicts what was previously said or agreed to by law?

Blueprint: Giveaway

The giveaway guide to discover how to qualify for economic damages compensation.

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What Is Economic Loss?

Imagine a business owner visits his lawyer to complain that his newly constructed hotel roof is defective and asks whom he should sue. The suspects are the architect, the main contractor and the roofing sub-contractor. The usual preliminary documents sought would be the architect’s letter of appointment, the main contract and warranty from the sub-contractor. If the legal terms were clearly laid out, legal recourse would be a straightforward claim based on a breach of contract.

However, the business owner explains the following:

  • The scope of work was never itemized and agreed in writing with the architect;
  • The main contractor has become insolvent; and
  • The business owner did not obtain a collateral warranty from the sub-contractor.

Given the above difficulties and complexities, does the business owner have someone to sue? Conversely, is it fair for the architect and the sub-contractor to avoid responsibility and a duty of care because the business owner overlooked a few formalities before engaging them?

Can the cost of rectifying defective work be considered by law as pure economic loss?

When discussing economic loss, it is important to fully understand the basic meaning as well as the defining components that categorizes a case into such boundaries. Before getting started, know that many factors go into an economic loss case, and it can be challenging at times to come to a clear solution. That’s why Vallars is here to help.

When an individual or organization loses money, it is called an economic loss. An economic loss can be caused by a number of different situations, and range in severity depending on each individual case. Economic loss refers to loss whose size and amount can be determined by calculation. This is unlike non-economic loss, which is subject and non-monetary in nature, e.g. pain suffering, emotional distress. Therefore, a loss must be tangible and quantifiable to be classified as economic, as opposed to non-economic, loss.

A contract deals with bargained expectations of the parties. Economic loss arises due to failed economic expectation, e.g. relating to a breach of contract. When one party fails to perform its obligations under the contract, the other party suffers disappointed economic expectations. Many courts find these types of damages are ‘economic losses’ whose remedy is in contract.

In other words, contract damages are governed by contact law. Personal injury and ‘other property’ damage, on the other land, may arise due to a failure to exercise reasonable and ordinary care. For example, a party’s negligence leads to an accident. In this case, the party may be liable under tort law.

In tort, the rights and obligations are created by the courts applying common law. These fall into three distinct categories:

  • Negligence;
  • Nuisance; or
  • Trespass.

What is Economic Loss Doctrine?

Economic loss doctrine is widely misunderstood and often misapplied. This doctrine can be very complex, which is why we are only going to dive into the basic fundamentals for now.

The economic loss doctrine refers to ‘damages for economic loss not recoverable based on tort theory when unaccompanied by physical property damage or personal injury.’ To further this definition, there are three variants that are involved when applying this doctrine. The doctrine prohibits recovery for economic loss in:

  • tort where there is no personal injury or property damage, without regard to contract;
  • tort where the loss is also compensable by a breach of contract claim; or
  • both contract and tort theories, unless the tort is separate and independent from the claimed contract breach.

What Are the Types of Economic Loss?

Economic loss can take on many forms. Accordingly, economists use several sub-categories to describe loss conditions. The first level of distinction can be divided into two main categories, i.e. pure economic loss and consequential economic loss. Now that we have broken economic loss into two categories, let’s take a closer look at each classification and see how they differ from one another. We first explore the elements that define pure economic loss.

Pure economic loss

Pure economic loss is financial loss visible on a financial statement. While economic loss covers loss of income covered by a person or a business, it excludes personal injury and ‘other property’ damage.

  • Damage that arises when one of the parties to a contract fails to perform as required, e.g. breach of contract;
  • Financial loss excludes physical damage to person or property of the victim; and
  • In other words, the only thing lost is money.

Examples of pure economic loss includes:

  • Loss of business due to competitor, e.g. when a franchisor admits additional franchisees into an exclusive franchisee’s territory; and
  • Goods that do not work for the purposes for which it was sold e.g. a building built in a shoddy manner.

Pure economic loss arising from the above includes:

 

exhibit 1: types of pure economic loss

 

 

  • Repair or replacement costs;
  • Rental costs of temporary substitute;
  • Loss of use; and/or
  • Loss of profits.

Pure economic loss can be calculated from statements, records, medical bills, past and future expenses, wage losses, future lost earning capacity or profits, property damage, and more.

Consequential economic loss

Consequential loss is loss caused by another event. Such indirect loss could have arisen from an insured’s inability to use business property or equipment. This means that the loss of money is caused by an additional situation, like property damage of not delivering as promised on services or goods. In simpler terms, consequential loss is the direct result of another event failing.

  • Directly caused by another event.
  • The loss of money is the direct result of another loss or circumstance.

Examples of consequential economic loss includes loss by:

  • negligence,
  • defamation, or
  • statutory torts.

All businesses can be affected by consequential loss. If you are a business owner, you can protect itself through policies and procedures. For example, a business can buy property, fire, flood or casualty insurance. This will help keep you covered, as coverage policies will not compensate for any lost income from an inability to use property or equipment. There are some insurance protection options you can seek as well.

Business income insurance, also known as business interruption insurance, protects against an actual loss sustained by an insured as a result of direct physical loss or damage to the insured’s property by a peril not otherwise excluded from the policy. Additionally, this type of insurance can protect against any income loss from contract disputes and breaches that happen from a supplier or a third party.

There are a variety of insurance requirements, however they do vary depending on the situation. While we won’t go into much detail here regarding insurance and technical details, feel free to connect with a legal consultant or conduct your own research. The key is prevention. As a business owner, you should do everything in your power to prevent this type of loss from occurring in the first place.

Economic, Non-Economic vs Punitive Damages

A non-breaching party has the right to damages, i.e. a money award. The money award in tended to make him/her whole, unless the contract itself or other circumstances suspend or discharge that right.

 

exhibit 2: types of damages

Damages 

Damages refers to money paid by one side to the other. It is a legal remedy. There are five different types of damages: compensatory, statutory, nominal, punitive and restitutory. We highlight below where economic loss and damage sits within this framework:

Compensatory damages

Compensatory damages are payments to the claimant for loss, injury, or harm suffered by the claimant as a result of another’s breach of duty that caused the loss[1]. For example, compensatory damages may be awarded as the result of a negligence claim under tort law Expectation damages are used in contract law to put an injured party in the position it would have occupied but for the breach. Compensatory damages are further categorized into special damages, which are economic losses such as loss of earnings, property damage and medical expenses, and general damages, which are non-economic damages such as pain and suffering and emotional distress[2].

Economic damages

Economic damages refers to compensation for objectively verifiable monetary losses such as past and future medical expenses, loss of past and future earnings, loss of use of property, costs of repair or replacement, the economic value of domestic services, and loss of employment or business opportunities.

Non-economic damages

Non- economic damages refers to compensation for subjective, non-monetary losses such as pain, suffering, inconvenience, emotional distress, loss of society and companionship, loss of consortium, and loss of enjoyment of life.

 

exhibit 3: damages calculation

 

Personal Damage

Personal damages arise most commonly in litigation involving wrongful death, personal injury, employee discrimination. These causes can give rise to economic loss.

Wrongful death is a legal term that refers to circumstances when a person dies due to someone else’s negligence such as mishandled medical procedure, falling of property that caused death and etc.

A personal injury is defined as the physical, mental or emotional injury that is suffered on your body by another. This could arise from a traffic accident, workplace accident, or negligence of others. Victims of personal injury are entitled to financial compensation for their past and future expenses, economic losses, or incidental costs caused by the accident.

Employee discrimination can translate into personal damages when it results in economic losses suffered by an employee who faced discrimination. For instance, an employee was dismissed for race or religious factors. Such wrongful termination caused the employee to lose a job or even affect his or her reputation from further employment search caused economic damage can be recovered.

Business and Intellectual Property Damage

Business losses are associated with antitrust, breach of contract, environmental concerns, intellectual property infringement, or securities fraud. Regardless of the nature of the incident, the assessment of economic damages proceeds from an understanding of the legal theory of the case and the associated remedy.

A common issue in quantifying intellectual property damages is price erosion. In some of the more complicated situations, damages analysis is requested to analyze how an entire sector and industry would be affected by the defendant’s wrongdoing. This includes false advertising causing price erosion. Damage analysis also takes into account that other firms beside the plaintiff might enjoy the benefit. Thus, a comprehensive and full economic damage analysis would give a more accurate representation for the case.  Statistical science is used frequently in assessing economic damages associated with product liability, class actions, business litigation, and various other types of disputes involving alleged losses to individuals or businesses. In such projects, we work with statisticians to collect and analyse sample data to make defensible extrapolations to larger populations of interest, or we may evaluate the validity of extrapolations performed by others.

When estimating business loss, lawyers often mention either expectation or reliance damage.

Expectation damages are frequently awarded when a party breaches a contract. Expectation damages are meant to put the other party in the position they would have been in had the contract been fulfilled.

Reliance damages apply to torts, and sometimes to a breach of contract. Reliance damages are intended to put the injured party in the position they would have been in had the contract never been made in the first place. Reliance damages may also be appropriate in situations where it is difficult to estimate expectation damages.

In a business context, there are good reasons why we typically award expectation damages for breach of contract. Unless there is an opportunity for an efficient breach, we want to encourage people to stick to their deals. Business runs on deals, and rules that encourage people to break deals would increase uncertainty. Uncertainty is bad for business, so we favor rules that increase stability and predictability.

Business Interruption

Business interruption refers to the disruption of operations as a result of a definable event that is beyond the entity’s control. In legal contract terms, business interruption means the financial impact of such a disruption over a period of time.

Business interruption insurance claims

Business interruption insurance policies provide a business with insurance coverage for an unexpected interruption of its earnings stream as a result of a covered peril. Such an interruption can result from natural or man-made disasters. The underlying basis for recovery, however, is damage to income-producing property. A business interruption policy is often an endorsement to a property coverage form or sold as part of a property insurance program.

Most litigated insurance disputes arise from disagreements over policy coverage issues and include the following:

  • Does the contract cover the event that caused the losses (causation) or the full impact of the losses (scope of coverage)?
  • Does the contract cover the costs to repair or restore versus the cost to replace items or building?
  • What is the duration of the indemnity period?
  • Do conflict but concurrent causes of loss exist?
  • Does the policyholder have other coverage?

Understanding business interruption claims

 

exhibit 4: business interruption claim formula

 

In contrast to tort and most other contractual claims for consequential damages for lost profits, experts look to the methods specified in the applicable insurance policy when calculating business interruption insurance claims. Disputes arise over how to interpret the contract language about quantifying business interruption damages, but the formula for quantifying the recoverable damages is generally an overt term of the contract and will ultimately establish the bounds of recovery.

How is Economic Damage Calculated?

We describe a generalized approach to quantify economic damages below. In reality, economic damages are harder to quantify than expected as we need various factors such as missed opportunities cost as a result of entering into a contract under impressions.

Focus only on the effect of the harmful act

The first step is to analyse the economic impact of the event in the plaintiff suffered monetary losses. An analysis is to be done to find out the difference between the plaintiff’s economic position if the harmful event had not occurred and the plaintiff’s actual economic position.

Economic damage is the difference between that forecasted vs actual value that the plaintiff achieved because of the harmful event. For most cases, it starts with the hypothesis that the wrongful party (defendant) has committed the harmful act and that the act was unlawful while the victim (plaintiff) is entitled to compensation for losses sustained from a harmful act of the defendant. The characterization of the harmful event begins with a clear statement of what occurred and a description of the defendant’s unlawful actions and the economic situation absent the wrongdoing. The “but for” scenario will create the settling defendant’s proper actions replacing the unlawful ones which damages is then being a measure to calculate the plaintiff’s hypothetical value.

Agree on heads of damage

Decide on the heads of damages. These are the elements in a compensation claim that the Court awards a monetary amount towards. These elements make up your total ‘damages’ or the amount of compensation awarded.

When VALLARIS works with your lawyer to investigate economic loss, our role is to describe, assess and quantify either pure or consequential economic loss. This can be either personal or business in nature, or relate to a business interruption insurance claim.

Estimate economic damages

The actual calculation of economic damages can be rather complex. It may even be uncertain which economic or valuation expert is needed. To illustrate with an extreme example, hedonic damages are a subjective court award to compensate the plaintiff for experiencing a loss of enjoyment of life that due to pain and suffering caused by a damaging event. Accounting valuation typically does not measure these forms of damages as its highly subjective nature leads to unreasonable certainty and difficulty in quantifying.

Such economic loss estimates often requires access to specialized technical or financial skill sets, as well a seamless collaboration with the rest of your advisory team.

 

How VALLARIS Can Help

Economic loss may arise from a breach of confidence, unlawful conspiracy, infringement of intellectual property or confidential information. If you or your business has suffered a legitimate economic loss, know that you can legally be compensated for your damages.

Laws change on a regular basis, so if you have a question as to whether the economic loss rule may apply to you, then you should contact a lawyer who can advise you appropriately. In some cases, while injuries may be limited under one theory by the economic loss doctrine, another theory may allow it. So, be sure to seek advice of counsel if you are in doubt or you may end up short-changing yourself.

If you are a lawyer working on an economic damages claims suit, please contact us for an overview of how VALLARIS has advised in similar engagements.

 

exhibit 5: dispute advisory specialist areas of assistance 

If you are a business owner that has suffered economic loss, please contact VALLARIS to start a conversation.

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One who has rights can recover a loss.

Mun Siong Yoong, Founder & CEO

Reference

[1] Bartels, Natalia M.; Madden, M. Stuart (2001). “A Comparative Analysis of United States and Colombian Tort Law: Duty, Breach, and Damages”

[2] Larson, Aaron (25 July 2016). “How Are Damages Calculated After an Injury or Lawsuit”. ExpertLaw. Retrieved 19 September 2017.

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