If the claimant’s loss is assessed at the date of trial, the task of assessing that loss will involve determining the present value of the claimant’s pre-trial (past) loss, and may also involve determining the present value of the claimant’s post-trial (future) loss.
Post-trial loss
The simplest part involves valuing the claimant’s post-trial (future) loss. If the claimant’s loss is assessed at the date of trial, the claimant’s post-trial loss of future net cash flow is valued in the manner described above, depending on whether it is certain or uncertain.
Pre-trial loss
Certain past cash flow
The valuation of the claimant’s pre-trial (past) loss is more complicated. If the claimant’s pre-trial loss represents the loss of certain past net cash flow, the value of that loss is computed simply by accumulating that loss forward to the date of trial at an appropriate accumulation rate for the relevant period.
Uncertain past cash flow
More difficult is valuing the claimant’s pre-trial loss of uncertain past net cash flow. There are two methods for valuing this loss.126 Under the first method the claimant’s loss is computed by reference to the claimant’s actual known pre-trial loss. Under the second method, the claimant’s loss is computed by reference to the claimant’s
expected pre-trial loss.
The first method is similar to the approach used to compute the claimant’s pre-trial loss of certain past net cash flow. If the claimant’s loss of pre-trial uncertain past net cash flow is known by the time of the trial, the value of that loss can be computed by accumulating that amount to the date of trial at an appropriate accumulation rate for the relevant period.
The second method involves calculating, at the time of the wrong, the expected value of the claimant’s pre-trial uncertain (future) net cash flow, and then discounting that amount back to the date of the wrong at the claimant’s opportunity cost of capital at the date of the wrong. The resulting figure is then accumulated to the date of trial at an appropriate accumulation rate for the relevant period. In contrast to the first method, the court ignores the claimant’s actual known pre-trial net cash flow loss. The first method is based on the view that the best evidence of the value of the claimant’s loss is the claimant’s actual known loss of net cash flow. The second method, on the other hand, is based on the view that the most precise estimate of the value of the claimant’s loss is the pre-wrong expected value of the claimant’s net cash flow, which reflects the specific risks and returns associated with those cash flows (and the price at which the relevant asset could have been sold at that time), and that estimate is to be preferred to actual (arbitrary) cash flows.
In Australia, general support for the first method can be found in the judgment of Aickin J in Todorovic. His Honour observed, obiter, that in assessing damages in a personal injury context for lost wages up to the date of trial, ‘[i]t is no doubt realistic
126 For a detailed analysis of each method, see Lanzilloti and Esquibel, above n 1, 132–8; Fisher and
and sensible to take an actual figure, where one is known, especially when it represents a highly probable loss to the plaintiff, capable of calculation with reasonable certainty, and to confine estimates and guesses to the uncertain, unknown and unknowable.’127
More direct support can be found in Australian Naturalcare Products Pty Ltd v
McGrath; in the matter of Pan Pharmaceuticals Limited (in liq).128 Gyles J held that the defendant’s contravention of s 18(1) of the ACL had caused the claimant to suffer a pre-trial loss of net profit. His Honour held that the claimant’s damages under s 236(1) were to be assessed by reference to the claimant’s actual known pre-trial losses, accumulated to the date of trial at the rate of interest applicable to an award of statutory pre-judgment interest:129
I do not see the necessity for any discount back to a present value at the date of breach. The time has now elapsed. The amounts in question reflect the dollar values at the time during the period of loss. On that basis, interest would not run from the date of breach but should be calculated to reflect the progressive occurrence of loss.
Ultimately, the appropriate approach for a court to adopt will depend on the precise legal and factual circumstances. The touchstone for the court will be the approach ‘best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered.’130
Accumulation rate
Subject to double counting, in order to make the claimant whole at the date of trial, the claimant’s pre-trial loss should be accumulated from the date of the wrong to the date of judgment. This can be achieved by an award of statutory pre-judgment interest, or by an award of damages for the loss of the use of money, as described
127 Todorovic v Waller (1981) 150 CLR 402, 457.
128 Australian Naturalcare Products Pty Ltd v McGrath; in the matter of Pan Pharmaceuticals Limited (in liq) (2006) 237 ALR 389; affirmed, without reference to the issue, sub nom McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230.
129 Australian Naturalcare Products Pty Ltd v McGrath; in the matter of Pan Pharmaceuticals Limited (in liq) (2006) 237 ALR 389, 419 [105].
130 Johnson v Perez (1988) 166 CLR 351, 355–6 (Mason CJ); 367 (Wilson, Toohey and Gaudron JJ);
above in relation to pre-judgment interest on damages assessed at the date of the wrong.
Conclusion
This chapter examined the methods and role of financial valuation theory in the assessment of damages for economic loss in a commercial context.
This chapter demonstrated that, in a damages context, the value (or loss in value) of an asset is generally determined by reference to a present value of cash flows or hypothetical market value. Market value, in this context, means the hypothetical exchange price of an asset based on its future cash flows and perceived risk-return characteristics. This chapter explained that the particular methodology used to determine the market value of an asset will depend on the precise legal and factual circumstances, and demonstrated that financial valuation theory is an accepted methodology for determining market value in this context.
This chapter also described how financial valuation theory is used to determine the value of loss in a damages context. The chapter outlined the major principles of financial valuation theory relevant to the valuation of loss, and demonstrated how they can be used to determine the present value of a claimant’s loss in two common scenarios: first, where the claimant’s loss is assessed at the date of the wrong; and secondly, where the claimant’s loss is assessed at the date of the trial.