Short Reads

Calculating future damages from the past, Science Fiction or law?

Calculating future damages from the past, Science Fiction or law?

Calculating future damages from the past, Science Fiction or law?

03.10.2019 NL law

Imagine having been blocked from expanding your business in 1975, litigating a claim for lost opportunities for all those years, winning that proceedings on the merits, and then having to start separate legal proceedings to determine the amount of damages to be awarded (schadestaat procedure). How does one value, in 2019, a business opportunity lost in 1975?

Background to the case

In 1975, a legal predecessor of the Municipality of Vianen ("Vianen") breached its contractual obligation to transfer certain grounds to a factory producing concrete piles ("the factory"). As a result of the breach, the factory was unable to execute its plans for a large expansion of its production capacity in 1976.

The factory claimed to have suffered damages, and after lengthy proceedings, this claim was awarded by the Court of Appeal. This resulted in further legal proceedings to establish the amount of damage to be compensated. According to the District Court, the factory had not suffered any damage at all.

Decision of the Court of Appeal

The Court of Appeal decided otherwise, and ordered an examination by experts. The experts used a calculation method which combined examinations of future damage from the 1976 perspective, as well as concrete damage, taking in account certain events that occurred in later years.

Specifically, the experts compared the factory's cash flows (as they had actually been) to how they would have been had the factory succeeded in expanding in 1976. The resulting amount was then capitalised to the reference date in 1976 using a discount rate based on, among other factors, the value of an amount of money now compared to the value of that same amount of money in 1976.

In addition to discounting the relevant amount to 1976, the experts also applied an extra discount for "entrepreneurial risk".

The Court of Appeal aligned with the calculation method applied by the experts, but deviated from the experts' calculation with regard to the discount for entrepreneurial risk (ECLI:NL:GHDHA:2017:2282). It reasoned that the experts had shaped the hypothetical situation with careful reference to both expectations at the time and actual developments, thereby constructing the most accurate and probable hypothetical scenario in which the breach of contract had not occurred.

As such, the court found there was no more room for a discount for entrepreneurial risk, as that would potentially underestimate the actual damage suffered by the factory.

The Court of Appeal's passing over of this discount resulted in an increase of the amount of damages to be awarded. Both Vianen and the factory appealed to the Supreme Court.

Dutch Supreme Court

In its decision of 30 August 2019 (ECLI:NL:HR:2019:1291), the Supreme Court assessed whether the Court of Appeal was correct in:

  • calculating (future) damages as per a reference date in the past, taking in account events that occurred after the reference date; and
  • deviating from the experts' calculation by adjusting the discount rate without giving the parties and the experts the opportunity to share their views on this particular issue with the Court of Appeal.

The Supreme Court affirmed the approach of the Court of Appeal, referring to the freedom of the courts to establish damages under Clause 6:97 DCC. The Supreme Court confirmed that:

  • courts are allowed to calculate damages and capitalise them as per a reference date in the past;
  • if they do so, the damage has to be estimated to be as close to the actual damage suffered as possible; and
  • that courts should not take into account only the expectations with regard to future developments as per the reference date. They also have to take into account the developments that actually occurred between the reference date and the date at which the damages are calculated.

As the discount for entrepreneurial risk had been discussed by the parties in their procedural documents, and by the experts during a hearing, the Supreme Court ruled that the Court of Appeal did not have to go back to the parties or experts to hear their views on its intended decision to deviate from the experts' calculation.

Conclusion

Calculating future damages from the past is a tricky business. The courts have a vast amount of freedom to make their own calculations. Unlike science fiction authors, they are (to a certain extent) aware of what actually happened, and they must use that knowledge. However, because of their freedom to estimate damages and their authority to deviate from expert opinions, it is not easy to challenge their decision. It is therefore important not only to substantiate any objections against an expert opinion, but also to consider and present possible alternatives.

Team

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