Damages may become due when a victim has either suffered the consequences of an action against him/her, as well as a result of the repudiation of an agreement. In order to obtain compensation for damages, the victim would need to institute legal proceedings. In a court case, a plaintiff is subject to harm or suffering due to the actions or inactions of a defendant such as (but not limited to) loss of profit, personal injury, wrongful termination, and breaches in contracts. Several parties can suffer from damages, such as, individuals, firms, customers, suppliers, competitors, and intermediaries, and action-class lawsuits are also possible. What may be claimed as damages changes from jurisdiction to jurisdiction. In countries like the USA, damages may be claimed for provable sustained damages (lucrum cessans and damnum emergens), as well as for moral ones. In others like Malta only real damages may be claimed if proven (lucrum cessans and damnum emergens) and moral damages are only awarded in exceptional situations – such as when there is a breach of human rights – if at all.
In Malta, in line with the provisions at law of the Civil Code (Chapter 16 of the Laws of Malta) in relation to the quantification of damages and who may benefit from them, in measuring the damages to be awarded to the injured party, the Courts need to take account of :
- the actual loss suffered;
- the actual expenses sustained by the injured party (or his dependents);
- any loss of earnings;
- any loss in any future earnings due to the damaging act;
- the non-pecuniary loss arising from the damaging act (e.g. any permanent disability, be it total or partial);
- future expenses associated with or arising from the damaging act.
Damages quantifications attempt to measure the extent of the harm and to quantify it financially. They are therefore not always straightforward, especially when they include elements that do not have an observable market price. These are activities that are not traded on well-defined markets, if they are at all traded, and therefore no indication of their price or cost can be obtained through the observation of market signals and revealed preferences. Contingency Valuation, travel cost, averting behaviour, cost of illness, benefit transfer, shadow pricing and hedonic estimation techniques can be applied to determine a monetary value that can be paid to the sufferer of damages. The team of economists and lawyers at Equinox Advisory can apply economic methodologies along with the relevant legislation and case law to determine an estimate of the damages that a party is entitled to.
Both economics and law make certain assumptions when quantifying damages. Such assumptions are not always incontestable, and once a court of law establishes that there is a case for damages, the next legal bone of contention is usually that of the assumptions used about the situation post hoc, after the damages have occurred and the counterfactual, a situation where the damages would never have occurred. When damages for court cases are being quantified, the main goal is that of obtaining pecuniary reimbursement for the damages incurred by the victim through an estimate of compensation that tries to achieve justice by returning the victim to their original pre-damage state as closely as possible. While being true that some form of damages can never be made good for through a monetary compensation, it is the closest method that a system of justice has to obtain redress for the victim. Quantifications of damages require adequate skill to gather and infer results from the relevant industry, market, financial and economic data available. Through this data, valuation techniques can be applied to arrive at the determination of a fair and true value for the damages suffered that the court would then be petitioned to liquidate.
When damages are being calculated with the intent of obtaining reimbursement for lost income or expenses incurred following a damaging event, several factors might need to be considered in the process. These include the victim’s situation. If the victim is a natural person, these could include: type of employment (self-employed/employee/retired), disabilities, life expectancy, the expected evolution of the career such as developments in salary, the risk of death, and the risk of unemployment. If the victim, on the other hand, is a legal person, these might include: loss of goodwill, loss of trading structures, loss of immediate profits, loss of profits and profitability over time and foreclosure of potential opportunities.
In many courts of law, the human capital approach derived from labour economics is used to quantify damages incurred by natural persons based on lost income. However, this does not always take the full social cost of the injury into account. It can be argued that a person’s life is not only determined by the salary earned throughout the person’s lifetime (which then raises the question of what the person’s lifetime would actually have been had the damage sustained not been sustained), but also through other activities that bring about enjoyment such as walking, seeing and being able to participate in recreational activities that might have been foreclosed following the maiming of the individual concerned. This means that the human capital approach to quantifying damages may not be optimal in approximating the true extent of damages and other techniques such as hedonic damages, contingency valuation, travel cost, averting behaviour and cost of illness may have to be resorted to. A technique used in health economics that is related to contingency valuation and which can be applied to the quantification of damages sustained by natural persons is the calculation of Quality Adjusted Life Years (QALYs). QALYs are used to determine the benefits of a medical treatment where a value of ’1’ is given to a year of life in perfect health and a value of ‘0’ is ascribed to death. QALYs can be used to give a rational estimation of damages depending on the quality of life of the individual after the injury.
Giving a monetary value to a person’s life in the case of death is a challenging task with several ethical and moral ramifications. However, if economic estimates of a person’s life are not undertaken, the damages ascribed to the incident can be too low relative to their true extent and if compensation is subsequently based on such computations, the compensation may not correspond to the true economic value of the life lost. The Value of Statistical Life (VSL) concept is used in economic literature to determine the value of a life based on the decisions that people make which can influence their health. VSL estimates have been found to be higher than the compensation awarded for fatal accidents in most courts.
Damages that may be claimed by natural persons do not stop short at loss of life and debility. Natural persons can, in their capacity as consumers and persons capable of entering into contractual arrangements, also institute proceedings against other natural persons or industrial undertakings in line with sector-specific or generic law, as well as consumer legislation. They may also initiate private or class-action lawsuits in terms of competition law.
A legal person (or a judicial person) is a non-human entity, such as a company, that is treated as a person (to a limited extent) when taken into consideration from a legal perspective. A legal person is referred to as such due to these entities’ ability to own property, accumulate assets, enter into contracts, take legal action, and be prosecuted and charged. When estimating damages for a legal person, one must keep in mind that legal persons do not have the same rights in all jurisdictions. For example, some jurisdictions do not give legal persons rights given to natural persons such as the right for freedom of speech.
A legal person’s rights and duties within a certain jurisdiction and in the context of international law are called the entity’s legal personality within a jurisdiction. Unlike natural persons who have legal identity upon their birth, a legal person acquires legal obligations and rights upon incorporation of the entity with law.
To measure the loss made by legal persons, the team at Equinox Advisory Ltd. will use their expertise to determine the issue at hand and the best approach as to how to quantify the damages to the legal person in a way that would be admissible in a court of law. Through these techniques, lost economic value of things such as loss of profit can be determined using a combination of legal and economics tools. Economic losses can occur due to accounting or taxation errors, lost opportunities, and/or lost customers. A scenario analysis can determine the difference between the situations at hand versus a business-as-usual scenario (frequently referred to as “the counterfactual”) had the disruption not occurred. Disruptions to the business-as-usual scenario can occur in the case of negligence, accidents, intentional actions and infrastructural failures.
The team at Equinox Advisory can carry out independent expert assessments of damages in tort law, contract law, criminal law, civil law, and competition law (such as antitrust cases). Due to the expertise and knowledge gained over time, a damage assessment that truly represents the costs incurred can be carried out, quantified and defended in Court. The economists at Equinox Advisory are experienced in taking the witness stand to provide expert witness services in court cases. The team can help you in each step of the dispute from preparation to reviews of adversarial expert reports to determine their legal standing. For further information about our dispute/lawsuit economic support services click here
We are able to provide the right mixture of economic and legal expertise to aid the client in quantifying damages for arbitration, court cases and insurance claims, such as:
- Quantification of damages for breaches of contracts; Loss of past profits;
- Loss of future profits;
- Loss of trading structure(s);
- Loss of consumer welfare due to anti-competitive behaviour;
- Loss of income due to non-fatal accidents;
- Loss of life;
- Scenario analyses comparing business-as-usual (counterfactual) to the scenario that gave rise to the legal dispute;
- Qualitative analyses to identify causal relationships, the basis for correlation, and the effects of the disruption to the legal or natural person;
- Quantification of the economic value of a human life through the human capital approach;
- Estimating and applying a natural person’s Quality Adjusted Life Years (QALYs) to damage quantification;
- Using economic methodologies and techniques such as Contingency Valuation, the travel cost method, averting behaviour, cost of illness, benefit transfer, and shadow pricing to estimate damages.