A claim for monetary compensation presented by one party, the contractor or other “claimant,” to an owner or “respondent,” is predicated on actions or performance by the respondent alleged to be inconsistent with the terms of the parties’ contract or agreement. In order to be effective and legally sufficient, the claim should be prepared in accordance with a well-accepted, standard methodology. Such a methodology should reflect strong factual support and a clear cause-and-effect relationship between the alleged acts and the costs.
For example, in a dispute between an owner and a contractor, presenting a claim based merely on measuring a change in costs between what was originally planned to be spent and the amount actually spent, may be factually correct but fail to present a reasonable explanation as to why the costs were a result of actions by the owner. In this example, the simple claim methodology assumes that any change to the project activities or schedule, and resulting costs, were the responsibility of the owner-respondent, even if changes to the actual construction activities and schedule (i.e., actual costs) were unforeseen by either party at the time of contracting. A claim for monetary compensation should only include those changes in costs directly related to the alleged shortcomings of the respondent’s performance.
Measuring The Costs
The objective of a properly executed claim methodology is to measure the amount of compensation needed to place the claimant in the same monetary position the claimant would have been, absent the alleged improper acts of the respondent. The period over which the methodology is applied (the “claim period”) begins at the point in time when the alleged improper acts of the respondent began and continues through the period of increased costs, lost profits, unjust enrichment, or other types of claim compensation amounts that can be demonstrated. Consequently, the claim period may measure historical or prospective compensation amounts, or both.
A traditional claim methodology compares two streams of financial results. The first is the financial results that occurred (the “actual world”) as of the date of claim quantification, including the estimation of the yet-unexpended claim amounts that are assumed to continue beyond the present. The second is the financial results the claimant would have realized absent, or but-for, the alleged acts of the respondent (the “but-for world”). The difference between the but-for costs and actual financial results is the amount of monetary compensation claimed.
Cause And Effect
A claimed compensation amount cannot be speculative and is expected to be proven to a reasonable degree of certainty, both as to the amount of the claim and to the direct linkage of each claim category and dollar value to respondent’s alleged acts. The facts and arguments presented by claimant’s counsel to demonstrate respondent’s alleged contract violations must also be the foundation or direct causal link to the compensation amounts claimed. Demonstrating that the amounts claimed cannot be linked to the claimant’s liability arguments is one of the most effective means of defending against a claim for compensation.
“The evidentiary threshold in many contexts for establishing the existence and measure of damages is reasonable certainty … If a party cannot demonstrate that damages are reasonably certain, the trier of fact is likely to find that damages have not been proven, and may even exclude an expert’s testimony.”[1]
Steps In Claim Preparation
The preparation of a claim for monetary compensation is a detailed study of the relationship of the parties to the dispute throughout the claims period. Such a study could include: analyses of historical operations and financial results of the claimant both generally and as related to the issues in dispute; reviews of the historical performance of the respondent under similar contracts or agreements; quantification of the future value of the claimant’s business; assessment of the performance of the respondent, including the identification of the activities (or lack thereof) causing the alleged claim elements; and evaluations of economic, regulatory, and political influences and other factors that could affect the quantification of the claim compensation amounts to a reasonable degree of certainty.
A reliable claims methodology is generally completed based on the following steps, which address the ideas indicated above:
- Determine if the alleged claims could reasonably be expected to have resulted from respondent’s actions, including the evaluation of other factors that may have caused, contributed to, or exacerbated claimant’s alleged losses
- Identify and evaluate the reliability of available data and information for quantifying and estimating claim components (including the testing of data sources for applicability, accuracy, and consistency)
- Develop reliable, supportable, and objectively tested assumptions necessary for determining the actual but-for world losses
- Develop assumptions and estimates in support of the future but-for world: revenues, costs, expenses and other financial data
- Compare the results of the financial models (e., but-for world and actual world) to determine the amount of monetary compensation possibly recoverable by the claimant
- Validate the results of the financial models to determine the reasonableness of the claim estimates
Finally, the but-for world financial model is a hypothetical estimate of claimant’s financial outcomes absent, or but-for, the alleged actions of the respondent. Therefore, this important element of any claim is based solely on assumptions of what would have happened. A claims methodology requires the underlying assumptions and related estimates be based on appropriate, reliable, and verifiable evidence that is readily available from the claimant, demonstrative of the relationships of the parties, and instructive and persuasive to the trier of fact.
Conclusion
Actual and estimated costs based on properly developed assumptions should be subject to objective, detailed studies and analyses to ensure consistency with the facts and evidence at issue. Such facts and evidence should, through testing for applicability, accuracy, and consistency, have been determined to be relevant and reliable for estimating the claim components. Absent reliable inputs and assumptions, a claim is at risk of being legally insufficient and consequently deemed unreliable and speculative.
Experience in a wide range of claims, including increased construction cost and delay claims, claims for increased production costs, loss-of-profits claims, insurance claims, class action-price premium claims, and loss valuation claims have illustrated shortcomings in methodologies used to quantify claims. Shortcomings to be avoided include: 1) failing to consider the proper damages period; 2) inadequate design of the but-for financial model; and (3) the use of unreliable, unsupported, and speculative assumptions. These shortcomings may result in a trier of fact finding that a claim for monetary compensation is not demonstrated to be reasonably certain, is inadequately supported, and consequently unreliable for establishing an amount of monetary compensation to be awarded.
[1] Steinkamp, N., Shampnoi, E.J., & Levin, R.L. “Dollars and Common Sense: Understanding Reasonable Certainty in International Arbitration,” The Journal of Damages in International Arbitration, 2015, p. 23.
© Copyright 2019. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice
