I am sorry for the title’s use of James Carville’s famously condescending quote from the 1992 Presidential election, but as a neutral arbitrator I am struck by how often an otherwise strong case derails on the issue of damages. I am not alone in this assessment: “the weakest part of most hearing presentations in a complex construction case concerns damages. Even experienced construction counsel often ‘fall flat’ in proving or refuting the cause and effect and quantum of the claimed losses.” Construction Arbitration – The Advocates Practical Guide, 184 (A. Ness and J Foust, Eds, ABA 2023).
A Problem With Damages
In my experience, the failure to prove damages manifests in a variety of ways. Examples include a failure to connect the theory of liability and resulting damages, i.e., no proximate cause link between liability and damages. Failure to meet the reasonable certainty standard can also present significant obstacles especially when the breach impacts a new business or product without a proven track record.
There is also a temptation to maximize the damage claim even at the expense of the credibility of that claim. Often this happens when the quantum of damages becomes a battle of the experts. Sometimes this is because of an over-aggressive expert making unreliable assumptions or untested information but often the information provided to the expert excludes evidence that negatively impacts the calculation. Even the most credible expert’s opinion is only as valuable as the information upon which she relied. Many experts also lose credibility when they seemingly become advocates rather than an objective conduit for facts and logical conclusions flowing from those facts.
Another recurring issue is the failure to adequately address mitigation and/or the effect of the Claimant’s fault. If the Claimant fails to realistically assess these issues, the entire damages model loses credibility. A party does not have to concede mitigation or fault to present the arbitrator with a quantum that adjusts for these issues IF the panel believes there is a need to reduce damages.
Finally, many times damages are presented based upon the hope/belief that the Panel will rule in that party’s favor on key issues of liability. Assuming that the basis of the Panel’s decision deviates from the prevailing party’s theory, the damages summary may provide very little information tied to the liability decision. In simpler cases, the Claimant should present alternative damages calculations. In complex cases, there may be no way to present alternative calculations that anticipate every decision made by the Panel. In those cases, it may be advisable to present damages in a separate hearing after the Panel has made a determination on liability.
Why Is This A Problem
So, why do even experienced counsel “fall flat” in this area? I do not have answers to this question but I do think there are some fairly obvious potential reasons. First, I think there is a continuing belief that arbitrators will “split the baby” and therefore time is better spent on proving liability. Or more cynically, this belief leads to an attempt to maximize the claim at the expense of credulity. In the 100+ arbitrations in which I have served, not one panel member I have served with has suggested a damage award that was a compromise judgment except where that reduction is based on the proof presented. In other words, “splitting the baby” is a myth that has not been borne out in my experience.
Alternatively, there is a belief among some that in arbitration the panel will ignore the law of damages to reach a “fair” result based upon a compelling liability claim. There is certainly a normal desire to find a remedy to match proven harm but in 15+ years of serving on Panels, I have never served with an arbitrator who advocated for an Award based what is “fair” if that result is contrary to the law of damages. Unfortunately, not all wrongs have a remedy and, at least on the panels I have served, a claimant must prove both the wrong and the remedy. Nevertheless, the perceptions persist.
This list is not exhaustive and perhaps it is not an accurate explanation. For whatever reason, however, proof of entitlement or quantum of damages is often less complete than the evidence on liability. It is without a doubt the most frustrating circumstance as a neutral to hear compelling, sometimes overwhelming evidence of liability only to be presented with no rational way to award damages. However, it is important for an arbitrator to get to the right result based upon the law, including the law of damages, and facts. This is often much easier to do in the context of liability than in the assessment of damages.
All of the arbitrators I have served with are trying to reach a fair result but must balance a fair result with the holes in the proof of damages (or connection between theories of liability and damages claimed) that would require speculation to reach the fair result sought.
Tips
Here are some quick take aways to avoid falling flat and improve your “damages game:”
- Establish a clear “but for” baseline. This might require experts armed with all of the good and bad inputs.
- Growth rates should rely on some recognized industry information — not the wishful thinking of the owners.
- If there is historical information, use it.
- Account for influences not attributable to the breach, such as market conditions, unexpected events etc.
- PROXIMATE CAUSE: Tie any changes to the baseline model to the liability of claimed.
- Where possible, draw a direct connection between specific breaches and specific damages (though helpful to the arbitrator, this is not always possible and not always required).
- Show the Panel more aggressive models that you chose not to use in order to demonstrate the fairness of your model.
- Show how sensitive is the damages model to specific assumptions such as projected growth rates, discount rates used in the discounted cash flow model, etc.
- Do not ignore the issues of mitigation or Claimant’s contribution to the damages.
- Exchange damage summaries early in the process so that the Panel has the benefit of critical examination from both sides before the hearing.
- Do not assume that the Panel will find a way to award damages simply because you have proven liability.
