Adedapo Tunde-Olowu
AELEX, Lagos
atolowu@aelex.com

Ngozi Efobi
AELEX, Lagos
nefobi@aelex.com

Introduction

Once an arbitral tribunal has settled the issue of liability in a case, the next stage is to quantify the compensation owed. Except when the parties have agreed to limit the amount that may be awarded as damages or have excluded the award of certain heads of damages (e.g., punitive damages), a tribunal has wide discretion when it comes to the award of damages.

In relatively simple disputes, the assessment of the quantum of damages is relatively straightforward. In more complicated disputes, the task of assessing the appropriate level of damages can be daunting as it may involve understanding technical and industry-specific matters like technology, financial analysis, engineering, economics etc. in which an arbitrator may have little or no training or experience. It is at this point that a damages expert becomes expedient.

This article examines the role of the damages expert and his or her importance in evaluating damages in international arbitration

Who is a damages expert?

Damages experts are usually persons that have extensive qualifications, trainings, field experience and a proven ability in measuring, financially, the extent of harm/damage that a party has suffered. They typically have an advanced degree (PHD, JD, MBA)and years of experience in forensic accounting, business valuation, financial forensics, certified public accounting, and/or economic damages analysis. Although the most common are accountants, economists, and quantity surveyors, depending on the nature of the dispute, damages experts can be from or of very differing backgrounds and experience including building/construction engineers, even geophysicists. The specificity of a damages expert’s report is often helpful in determining whether a loss was actually suffered, exactly who suffered the loss, the period of loss, the date the loss should be calculated from (the valuation date). Such experts use various standard methodologies (such as but not limited to the “Before and After” method, the “Yardstick” method, the “Sales Projection” method and the “Market Model” method),- to assess causation and analyse the damages, and also evaluate alternative causes of loss either to rule them out or to factor them into the analysis. All these assist the tribunal to arrive at a correct decision on the appropriate level of damages to award. A damages expert is typically independent of the parties and has a duty to provide an impartial and independent assessment of damages to the tribunal.

Why a damages expert?

An outside, impartial expert assessing damages and offering an opinion is often a vital part of the dispute resolution process. Quantification of damages can be a very complex matter that requires experience in the field under review. Consequently, arbitral tribunals place some importance on the evidence of a competent independent expert evidence when apportioning damages.^[1] When an expert is not retained, the quantification of damages may not be persuasive or reasonable; when the tribunal has relied solely on the disputing parties’ submissions in complex cases, the arbitral awards have produced unreasonable or frail figures, which in turn leads to those awards either being set aside or sent back to the tribunal for recalculation.^[2]

In fact, in deserving cases, even when parties do not rely on a damages expert, the tribunal will appoint one to assist it in this regard. For example, a damages expert can be engaged by the tribunal where there is a non-participating respondent and therefore the appointment of an expert will provide the tribunal with a sense-check as to the claimant’s quantification of loss.^[3]

What is the scope of a damages expert report?

A damages expert is expected to prepare a report within the terms of reference, and cannot go beyond what the parties have remitted to it.^[4] The damages expert’s report should disclose all material information that was reviewed and relied upon in reaching its conclusion,^[5] and should not rely on incomplete underlying assumptions.

In addition, commentators have stated that a damages expert report should reflect the following information:

1. All relevant information relating to the dispute and the specific events giving rise to the claims, including documents and other information produced during arbitration;^[6]
2. Any information reviewed, or analysis prepared to provide the damages expert with a background understanding of the subject matter and the broader economic or industry context, including industry research, analyst reports, macro-economic data, metrics for comparable public companies traded on public stock exchanges and other statistics available in the public domain;^[7]
3. All working papers, data and records underlying the damages calculation itself, including models, calculations, projections, statistics, accounting data, financial statements, forecasts, tax returns and management reports;^[8] and
4. Other matters to be reflected in the damages expert report include issues arising from the Claimant’s corporate structure, mitigation, contributory negligence, taxation, etc

How to find an appropriate damages expert

Damages experts are usually identified based on referrals and recommendations from prior cases or other experts. They can also be found in professional directories (expert witness directories or corporate directories).

Damages experts are also sometimes sourced from university and research institute faculties, or professional bodies (Institute of Chartered Accountants, Nigerian Society of Engineers, Nigerian Institute of Estate Surveyors and Valuer etc.). Sometimes an internet search is useful in identifying a potential list of damages expert for a party.

Key factors considered in selecting a damages expert?

• The amount in dispute: In cases involving small amounts in dispute, it may not be financially reasonable to engage damages experts.
• The complexity of the damages issues: When the facts and issues are easily understood, a damages expert is not likely to be required. However, when the issues are complex and the tribunal may not be versed in the sophisticated concepts involved in assessing damages in that particular industry, a damages expert should be selected.
• The expert’s credentials: The expert must have the right experience and credentials. Industry familiarity and prior experience in the specific type of dispute being dealt with is certainly an advantage.
• The expert’s verbal and writings skills: The expert must be able to communicate complex issues clearly and persuasively both in writing and orally at the hearing in terms that a tribunal can understand.
• The expert’s experience testifying in arbitral proceedings (particularly during cross-examination): A damages expert with actual testifying experience is an advantage because the expert will be better positioned to understand the intricacies of how a case works, and what to expect in cross-examination (or potentially hot-tubbing^[9]). The expert will also bring invaluable insight into the types of questions opposing counsel may ask. The expert’s demeanour and credibility while testifying also matter.
• A party’s financial resources and ability to pay for a damages expert: The availability of financial resources is a key consideration in determining whether to appoint a damages expert (or even who to appoint). In jurisdictions where third-party funding is available, the decision to appoint a damages expert is easier because parties may resort to this option to fund the cost of the damages expert. In jurisdictions where it is not permitted^[10], a party then has to weigh the cost of appointing one against the potential loss it may suffer or amount it may recover.
• The expert’s independence and impartiality: Given that it is fundamental that a damages expert should be impartial and independent of the parties^[11], a party appointing a damages expert should:
  • Conduct a conflict check. The extent to which the potential expert has previously worked for or has any other relationship with any of the parties, counsel (including opposing counsel), or arbitrators should be investigated thoroughly.
  • Review any available publications by the candidate to determine if the expert has positions that may conflict with or undermine positions in the arbitration.
  • Enquire whether the potential expert has any experience with the expert(s) retained by the other party or parties.^[12]

Factors that determine acceptance of an expert report by the arbitral tribunal

Arbitral tribunals are typically more willing to allow an expert’s report on damages when:^[13]

• The report is given by an experienced damages expert. A damages expert must have expertise in the particular field under review and have practical experience in addition to theoretical knowledge. The J. A. Jones case reveals that an arbitral tribunal will be persuaded by a report and methodology of such an expert.
   
• In J. A. Jones Construction Co. v The United States, the tribunal (the Corps of Engineers Board of Contract Appeals (ENG BCA)) rejected the contractor’s attempted use of the measured mile approach (a methodology used in calculating loss of productivity in construction disruption claims) where it found the expert’s method to be weak. The contractor’s expert, Paul L. DeMent, gave evidence and sought to calculate the loss of productivity based on his variation of the measured mile approach. In evaluating the evidence of the contractor’s expert, the Board analyzed Mr. DeMent’s education and professional standing. The Board observed that Mr. DeMent had only obtained a bachelor’s degree in building construction. Mr. DeMent had received no formal training in measuring labour productivity. The Board equally observed that he was not a member of any relevant professional associations and had not published any writings. Mr. DeMent had also not obtained any engineering or contractor’s license and he only learnt how to perform productivity measurements from on-the-job experience. 
  
  In contrast, when the Board examined the Government’s defence, it noted that the government’s expert, Dr. H. Randolf Thomas, held a bachelor’s degree in architectural engineering and a Master’s in civil engineering. The Board observed that Dr. Thomas had taught a graduate course on labour productivity for fifteen years. Also, the government expert belonged to many professional organizations, had published many articles on labour productivity, and received many honours relating to his work in labour productivity and productivity quantification. The Board noted that Mr. DeMent’s measured mile approach was one of a kind and equally noted that the opposing expert, Dr. Thomas, who was much more experienced, had never heard of this method. 
   
• The expert’s report and chosen methodology are comprehensive and easy to understand. An arbitral tribunal is likely to rely on an expert report that employs comprehensive methodologies drawn from the facts, not conflicting, and based on tried and tested methods or principles. In the J. A. Jones Case highlighted earlier, the Board observed that Mr. DeMent, the contractor’s expert, did not base his report upon facts and that the report did not contain any accurate analysis. The Board equally noted that Mr. DeMent had made several erroneous assumptions in carrying out his work assignment. In the Board’s final analysis, the specific formula used by Mr. DeMent had not been tested or peer-reviewed. The Board, therefore, rejected Mr. DeMent’s analysis and concluded that the expert opinion was highly questionable, unreliable, and produced patently illogical results.
  
  If methodologies used by the parties’ damages experts are convoluted, the arbitral tribunal will proceed to appoint its own damages expert to assist it. This was the position of the court in the Australian case of White Construction Pty Ltd v. PBS Holdings Pty Ltd^[14] .  In White, the Plaintiff, a developer, brought proceedings against its sewer designer and its water servicing coordinator, for failing to create and submit a sewer design acceptable to the relevant authority, Sydney Water, allegedly causing a delay to the completion of the project and additional costs. Both Plaintiff and Defendant engaged experts to assess the alleged delay. Plaintiff’s expert, using an “as planned versus as-built windows analysis”, concluded there had been a critical delay of 240 calendar days. The Defendants’ expert, using a “collapsed as-built (or ‘but-for’) analysis”, concluded that, at best, the work could have been completed only 19 days earlier than it was, but for the alleged delay.
  
  Although the delay experts managed to agree on the as-built programme, they could not agree on an appropriate delay analysis methodology to be adopted. The experts also disagreed with how the other had applied the methodology the other had selected. In assessing the reports, the judge described both experts as “adept at their art”, and he noted the complexity of the expert reports, describing them as “impenetrable” and as having “reached profoundly differing conclusions”. To resolve the impasse, the judge opted to engage a court-appointed expert, whose methodology and opinion he adopted, dismissing both experts’ evidence and their respective methods. The judge preferred to apply a ‘common law, common sense approach’ in reviewing the evidence to determine whether the delay in providing the sewer design caused a delay to the entire project. 
   
• The report must establish a clear causal link between the contractual breach and the damages. In damages assessment, damages are measured under the “but for” predicate, meaning what would have occurred “but for” the defendant’s alleged conduct. Thus, to be accepted by the courts or tribunal, it is crucial that the report trace/link the damages to the alleged misconduct/action. In other words, from the report, the damages must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.^[15]
• The report rules out other possible causes of the breach not traceable to the other party. In construction arbitrations for instance, where a party seeks to quantify damages for loss of productivity, the party will need to rule out any other cause of breaches that are not traceable to the Defendant.

Conclusion

The role of a damages expert in quantifying damages in international arbitration cannot be overemphasized. To this end, it is important that parties take into consideration the factors that determine appointment of a capable damages expert. Furthermore, the damages expert must note the critical factors that tribunals consider in accepting the report of a damages expert. Knowledge of these crucial issues will greatly assist parties, counsel, and the arbitral tribunal.