Overarching Issues

The starting point for the quantification of damages lies in identifying and articulating the underlying legal basis for the damage claimed, whether it be in contract, tort, international law, or another source.

Terminology

The term valuation as used in this damages tool refers broadly to the process of quantifying the monetary value of a damages claim, whether it arise from contract breach, tort, or a treaty or international law violation. Hence, as used herein, valuation and quantification are broadly synonymous.

When the claim concerns a breach of contract or treaty violation, the contract or the treaty and its legal effects will typically be the starting point for the quantification or valuation of damages. Depending on the contract or treaty language and its impact, the quantification of the damages arising from the breach of the contract or the treaty violation may allow a straightforward application of the contract terms (for example, unpaid goods or services, liquidated damages, etc.) or it may require a lost profits or other, more complex, calculation, including the valuation of assets.

As a result, depending on the nature of the claim, the quantification of damages may be as simple as determining the amount of undue invoices. However, it may also be the case that the measure of damages requires the estimation of damages based on the difference between the as-is value resulting from the alleged breach and the “but for” value of a company, asset, legal right, or interest that would have been the case had the breach not occurred. Therefore, undertaking a “but for” analysis of a contract claim or illegal act, for example, requires valuing a specified set of cash flows lost as a result of the legal violation or contract breach, which in practice requires determining issues similar to those required for a going-forward valuation of an asset or business. Hence, the exercise required to value a claim for contract breach may not differ significantly from the forward-looking valuation of an asset.

The nature of the quantification exercise will depend on the claim being made; sometimes, valuing or quantifying damages only requires adding up the invoices due, and in other cases will require undertaking a going-forward valuation of a business. These are both valuations as used in this tool.

Valuations will typically concern either an asset or a liability of a corporation, an interest in the corporation, or the company itself, or a specified set of cash flows lost as a result of the legal violation or contract breach. This may include:

• A security (e.g., debt or equity)
  • Value of claim against assets
  • A specific asset (for example, a plant, a contract, or a patent)

• All assets of a business
  • Known as “enterprise value”

• Specific conduct (e.g., impact of illegal anti-competitive practices)
• A specific opportunity (e.g., loss of ability to launch a new venture)
• A legal or contract right
• A specified set of cash flows lost as a result of allegedly illegal conduct or contract breach (see above)

Methods of Valuing Assets

A valuation of assets for an arbitration is often aimed at calculating the market value of the asset or the impact of the disputed measures or conduct on the asset’s market value. It is well-accepted within the valuation community that in valuing an income-producing asset, one is attempting to place a present economic value on the net cash flows that an asset is expected to generate in the future. It is the amount that a hypothetical willing buyer and a hypothetical willing seller would agree to if both had full information and where the parties had each acted knowledgeably, prudently, and without compulsion. This can sometimes be observed (for example, for publicly traded companies) or, alternatively, may be determined directly through application of an income method or indirectly through a market method. See Valuation > Overarching Issues > Market Value Principles.

• Income approach: The income approach is based on the underlying principle of financial economics that the market value of an asset is determined by its ability to generate cash flows in the future. It therefore relies on projecting an asset’s expected cash flows into the future and calculating the present value of the asset by summing all future projected cash flows, adjusted for timing and uncertainty through the application of an appropriate discount rate, or by undertaking an options or other income-based valuation technique. Similarly, as discussed above, damages might be calculated as the difference between the value of an asset or a business with and without the disputed conduct, or equivalently, as the value of the set of cash flows lost as a result of that conduct, which requires a similar analysis.
• Market approach: The market approach to valuing an asset, also referred to as the “comparables” or the “relative valuation” approach, assesses the market value of an asset relative to, or in comparison with, the observed market values of similar (ideally identical) assets for which information is available, sometimes including other transactions in the same asset.
• Cost-based approaches: In certain cases, parties may advocate for a cost-based method of valuation, such as book value or amounts invested. These concepts are typically distinct from market values and, as such, are often not appropriate for determining market value when that is the valuation standard being applied.

Multiple Methods

It is common for parties to present quantifications analyses based on multiple methods either as the basis of, or support for, their primary valuation of damages. Multiple methods may be presented when quantifying the value of an asset, lost profits, or other rights stemming from contracts or treaties.

Sensitivity Analysis

When undertaking a valuation, it may be appropriate to incorporate a scenario or sensitivity analysis that considers alternative values of key variables with uncertain values, such as discount or inflation rates or trajectories of cash flow under different market expectations. These analyses can provide the Tribunal with an understanding of the parameters most likely to have a major impact on the valuation and what could be a realistic range of asset values in the face of uncertainty.

Ex Ante or Ex Post

Whether the valuation is performed ex post or ex ante can have a significant impact on the valuation of a claim. In an ex-ante analysis, the valuation is performed at the time that the damage was incurred based on information known at the time of the violation, and considers the full range of possible outcomes, accounting for risk. In an ex-post analysis, a valuation is performed at the time of the hearing or the award, and damages are quantified based on past damages and future expected losses from that date forward. The analysis makes full use of hindsight and reflects actual past outcomes.