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Measuring Damages in Commercial Litigation: Present Value of Lost Opportunities

In commercial litigation, accurate determination of a plaintiff‘s damages requires the application of economic and financial theory. A weak theoretical foundation increases the likelihood that a damage award will not reflect the harm wrongfully inflicted on a plaintiff. As litigation increases in complexity and magnitude, a proper theoretical foundation becomes increasingly important. Although each case is unique, the law looks to economic and financial theory to provide guiding principles. To establish a framework for determining damages in commercial litigation, some common issues must be identified and a systematic way to resolve these issues must be developed. In commercial litigation, the plaintiff firm generally is suing to recover a loss in going-concern value or lost profits. In other words, a damage award should restore the plaintiff to the profit position plaintiff would have realized but for (he defendant’s wrongful act. Going-concern value is a stream of profits. The defendant’s wrongful act disrupts the flow of this stream, and the repercussions of this disruption continue into the future. By the time a plaintiff actually litigates a suit, the plaintiff already has suffered harm which he expects to continue into the future. Therefore, the plaintiff usually sues to recover both past lost profits and future lost profits. Because of the differing time periods involved, a plaintiff‘s damage award should be adjusted for the time value of money. Hence, in nearly every commercial lawsuit, a relevant issue is the present value of the plaintiff’s damage award. Incorporating some practical aspects of the legal system, the present value framework presented in this paper considers the appropriate discounting and compounding methods with their corresponding interest rates; it also incorporates some practical aspects of the legal system. In addition to these direct losses, the paper also considers the propriety of redressing indirect losses to the plaintiff. Although these losses may be susceptible to the argument that they are too speculative or too remote as a basis for a damage award, they may reflect real losses that should be recognized despite the problems of proof, for example, impaired cash flows that necessitate borrowing at a rate higher than the risk-tree rate and in-