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Quantification of financial loss

i Introduction

In the United States, the general goal of compensatory damages is 'to restore the injured party, to the extent possible, to the position that would have been occupied had the wrong not occurred'.2 In aiming to achieve that goal, different sets of circumstances necessitate unique approaches. Calculations often need to be made about the value of property, medical expenses, lost sales and lost wages. Even more complicated are the calculations necessary to compensate a plaintiff for lost future earnings, either as wages for an individual or sales for a business, or for future pain and suffering caused by a tortious injury. These varying types of damages can be demonstrated through a corresponding variety of evidence, with the court system striving to achieve the goal of placing a plaintiff in the position he or she was in or would have been in but for the defendant's wrongful conduct.

ii Evidence

Evidence for proving damage in the United States can come in the form of records, documents and testimony from witnesses and experts.3 In business disputes, most reliable commercial records made in the ordinary course of business will be admissible. In some straightforward cases, damages are 'within the common sense of the jury and do not require expert testimony'.4 For example, when assessing damage in a breach of contract case, accurate records could prove with reasonable certainty any financial loss resulting from the breach. Additionally, the plaintiff could testify about any expenses that were incurred because of the breach. In more complicated cases, however, experts may be necessary to testify about calculations derived from the evidence or other factors relevant to a damages evaluation, including, for example, relevant industry norms regarding lost wages, financial projections and economics, or the value of damaged or destroyed property. These types of expert testimony evidence will be discussed further in Section III.

iii Date of assessment

The date from which damages are assessed can vary based on the type of case. In a contract case, damages are assessed from the date of breach.5 In a tort case, damages are assessed from the date of the incident giving rise to the claim (i.e., the date of the injury). That date of injury can often be different from the date of the defendant's conduct giving rise to that injury.6 For example, if a defendant is found liable for a dangerous condition allowed to exist at its place of business, the date of the damages assessment would be when the plaintiff was injured by the hazard. The dates of wrongful conduct and injury could be days, months or even many years apart.

iv Financial projections

Financial projections become relevant when calculating damage that has not yet been incurred, but that with reasonable certainty will be incurred in the future as a result of the defendant's conduct.7 For example, in contract cases, one category of damage can be the future loss of earnings or sales caused by the defendant's breach of contract. Tort cases can also involve damages constituting future loss of earnings or future pain and suffering arising from a defendant's tortious conduct. As previously discussed, these types of prospective damages typically would be demonstrated by expert witnesses who are familiar with typical sales of a business of that size in that industry, typical wage growth of someone of the plaintiff's education and skill level in his or her industry and geographical location, or relevant medical knowledge.8 These projections often are necessary to assist a jury in understanding the full scope of a plaintiff's damage to put the plaintiff in the position he or she would have been in but for the defendant's conduct. A significant limitation on projected damage is that it must be grounded in the facts and not speculative.

v Assumptions

Assumptions are rarely made in damages calculations in United States courts, regardless of the specific jurisdiction, because in most circumstances, damage must be proven as an essential element of the prima facie tort or breach of contract claim. That being said, sometimes assumptions have to be made in certain cases, such as where expert testimony is necessary to calculate future earnings. An example would be that if a plaintiff was physically injured and could no longer work in his or her prior employment, an assumption would be that he or she would have earned as much as someone of his or her education and skill in that area over an average-length career.9 This very well may not have been the case had no injury occurred, but it is an assumption that courts and experts often make to try to put the plaintiff in the appropriate position as accurately as possible.10 Again, such assumptions must be grounded in statistics and reliable evidence and not speculative.

vi Discount rates

In cases involving future economic damages such as lost wages or profits, where the award will be given in a lump sum, calculations must discount the amounts to present value.11 The discount rate is typically some safe form of investment to properly account for the added time value of the award.12 For example, if a business proves it lost future profits over 10 years, its award will be worth its present value, plus its investment over 10 years in a low-risk income-producing bond, bank account or similar vehicle. Because the profits would have come slowly over those 10 years, the lump sum award would need to be discounted by the likely investment returns the plaintiff will (or could) make if awarded the entire lump sum immediately. This all follows from the goal of putting the plaintiff in the position he or she would have been in but for the defendant's conduct – no better, no worse.

vii Currency conversion

Courts in the United States generally award judgments in US dollars and ignore fluctuations in the value of the dollar over the course of time from the injury until the judgment. When plaintiffs allege damage in a foreign currency, many jurisdictions (20 states) have adopted the provisions of the Uniform Foreign-Money Claims Act. For example, Chapter 2337 of the Ohio Revised Code details the definitions under the Uniform Foreign-Money Claims Act, as well as when it is to be applied.13 The Act provides that awards given in foreign currency will be converted at a bank-offered rate on the day the award is paid to the plaintiff or to the official designated to enforce the judgment.14

viii Interest on damages

Pre-judgment and post-judgment interest on damages can vary greatly based on the cause of action and the forum. For example, under the Civil Rights Act of 1964, interest on backpay is statutorily excluded from being awarded.15 However, under common law, pre-judgment interest is generally only allowed for liquidated damages or damages that were 'relatively certain and ascertainable by reference to established market values'.16 Different local jurisdictions are also able to implement specific rules; for example, in the state of Pennsylvania, interest is not allowed to be a part of a damages award for personal injuries.17 In New York, pre-judgment and post-judgment interest is awarded as-of-right in many cases.18

ix Costs

Costs, or out-of-pocket damages, may be awarded along with other compensatory damages in certain circumstances. In breach of contract cases, awardable costs might include expenditure the plaintiff made in reliance on the defendant's agreement under the contract.19 In tort cases, awardable costs might be expenditure the plaintiff had to make because of the defendant's tortious conduct, such as the costs of medical bills or for replacing damaged or destroyed property. Costs may be discounted by mitigation principles. However, under the 'American Rule', attorneys' fees are generally not awarded to the prevailing party in litigation absent an express statutory or contractual fee-shifting provision.20 This is a major distinction from many other jurisdictions.

x Tax

In the United States, compensatory damages awarded for physical injury or physical sickness are not included as taxable income.21 Purely economic damages or those stemming from claims involving emotional distress, however, are included as ordinary taxable income.22 Additionally, interest on any award, awards for lost wages or profits, awards for emotional distress, and attorney fees and costs, are all taxable as ordinary income.23 Generally, the US taxing authorities will 'look through' the litigation to determine whether the underlying claim relates to what would ordinarily be taxable income. To take a simple example, an award of lost income is generally taxable because, had the income been paid when due, it would have been taxable.