Focus On
covid_money_sm

COVID-19 and the assessment of economic damages: Part two

Tuesday, September 01, 2020 @ 11:09 AM | By Rachel Ryman and Larry Andrade


Rachel Ryman %>
Rachel Ryman
Larry Andrade %>
Larry Andrade
In part one of this article, we discussed considerations when quantifying economic losses in the COVID-19 environment, including the benefits of consulting an economist and how to account for risk through scenario analysis. In the following paragraphs, we continue our discussion on accounting for risk through the use of higher discount rates, and present our comments on the need for enhanced flexibility when issuing expert reports, including issuing preliminary reports and updating existing reports.

Higher discount rates

Another tool available to capture the risk associated with uncertainty is the discount rate. The weighted average cost of capital (WACC) is a common basis for the discount rate. The WACC considers the cost of equity and the cost of debt, weighted for the optimal capital structure of a given business.

Discount rates can be increased through the application of premiums for uncertainty and illiquidity to the cost of equity. This may be somewhat offset by the reduction in the cost of debt (the Bank of Canada has reduced its policy interest rate by 150 basis points) and the related possible increase in the weight of debt in an optimized capital structure resulting from COVID-19. We note that the cost of debt may alternatively increase if lenders perceive a given business to have increased risk.

Damages experts may also consider using a higher discount rate in the shortvterm and a lower discount rate in the long term once cash flows are anticipated to stabilize.

The Rules of Civil Procedure set out certain procedures for the timing of expert reports. In the current environment, consideration of additional flexibility may be required to ensure that the courts consider the best available information to administer justice (we understand that such flexibility is currently not available under the Rules of Civil Procedure.) Experts may need to issue reports on a preliminary basis (with final reports issued closer to the trial date) and update previously issued expert reports to account for the impacts of COVID-19. Consider increased flexibility when issuing expert reports.

Issuing preliminary expert reports

Professional practice standards require expert reports to contain a conclusion on the quantum of financial gain or loss (in accordance with the Chartered Business Valuator Institute Practice Standards No. 310 Expert Reports). This conclusion is used as opinion evidence in court. A preliminary report may be issued when there are factors present that limit the ability of the expert to conclude on the quantum of financial gain or loss. Whether we issue a preliminary or final report before the impacts of COVID-19 are known, it is likely that scope limitations, caveats and disclaimers will be required.

While providing scenario analysis, probability-adjusting those scenarios and applying a higher discount rate to economic losses mitigate some of the uncertainty reflected in projections impacted by COVID-19, there is nothing more clarifying than time. Only time will tell how COVID-19 will impact the economy. Accordingly, it may be most beneficial to prepare expert reports on a preliminary basis. These reports can be updated or finalized as the impacts of COVID-19 begin to crystalize.

Though it may be a good approach in theory to issue a preliminary report while waiting for the impacts of COVID-19 to crystalize, there are a number of drawbacks. Issuing a preliminary report necessitates issuing an updated or final report. Updating reports can be costly and may delay the judicial process (once the trial is set, the Rules of Civil Procedure govern service of expert reports which must be finalized), possibly resulting in exacerbated financial impacts to the plaintiff. A careful cost-benefit analysis must be done to assess whether this approach is viable.

Updating previously issued expert reports

The courts may encounter expert reports that were issued prior to the impacts of COVID-19 being known or knowable; therefore, a motion may be required to provide a supplementary expert report prior to trial. A request for a delay in trial may have cost consequences. Plaintiffs may experience a windfall if the impacts of the pandemic are not considered. This may motivate defendants to seek updated expert reports to adjust for changes in the economy. The courts must assess whether the impacts of COVID-19 were reasonable and foreseeable and whether they should be contemplated in the calculation of economic damages given the timing of the matter in question.

Conclusion

The challenges COVID-19 poses in executing our duty to the courts are significant. Our preceding comments are intended to spark discussion and collaboration amongst experts, counsel and triers of fact. These are unprecedented times and we all need to work together to ensure businesses, which are the fabric of our economy, continue to have access to justice.

This is the second of a two-part series. Read part one: COVID-19 and the assessment of economic damages: Part one.

Rachel Ryman, is a senior manager in Deloitte’s disputes practice, quantifying economic losses and writing expert reports for lawsuits. Larry Andrade is a partner and national leader in Deloitte’s disputes practice, quantifying economic losses and writing expert reports for lawsuits.

Photo credit / peterschreiber.media ISTOCKPHOTO.COM

Interested in writing for us? To learn more about how you can add your voice to
The Lawyer’s Daily, contact Analysis Editor Richard Skinulis at Richard.Skinulis@lexisnexis.ca or call 437-828-6772.