The greatest impediment to the successful resolution of a commercial dispute is the failure of both clients and attorneys to understand and think adequately about the extent, nature and amount of damages at issue in the dispute, says Eric N. Macey, partner at Novack and Macey LLP.
“While clients will invest huge amounts of time and money to focus on the merits of a case to prove they are ‘right,’ they either ignore or fail to give the same consideration to damages issues,” he says.
Yet, in order to resolve the dispute, management needs to properly evaluate damages so they can engage in meaningful settlement discussions or understand what they can expect to get or lose if the case goes to trial.
“Simply put, commercial disputes are about risk, and you need to monetize that risk early in the case to intelligently develop a strategy for the suit,” he says.
Smart Business spoke with Macey about understanding and evaluating damages.
What are the steps in evaluating damages?
Begin your damages analysis very early in the case. Talk to counsel about the various theories of damages available to you or your adversary. Are lost profits an issue? Do you want damages for monies that you gave to your counterparty that you now want back, or do you want damages for the costs you incurred by reason of your opponent’s conduct?
Identify various methodologies to calculate damages. For example, if you or your opponent assert damages in the form of lost profits, you need to identify with great specificity how that figure will be calculated. As part of that analysis, you will need to decide if an expert is necessary and also understand the physical evidence you will need to support your arguments.
Read contracts or purchase orders front to back, including all the fine print. Contracts often contain provisions that limit damages.
You need to identify whether there is any statute that impacts your damages analysis. There are many statutes that limit or expand damages. For example, if you manufacture and/or market consumer goods, you may be subject to claims under consumer fraud statutes like the Illinois Consumer Fraud and Deceptive Business Practices Act. That statute expands damages because it provides that a successful plaintiff can recover both punitive damages and attorneys’ fees. Similarly, Title VII of the Civil Rights Act of 1964 limits certain remedies. If your business is sued for employment discrimination under Title VII, that statute imposes limits on the amount of compensatory or punitive damages that a person can recover, which varies based on the size of the employer. Consequently, you need to include any statutory expansion or limitation on damages in your risk analysis when you try to monetize your exposure from such a claim.
What other factors could affect a case?
Be sure to think through mitigation of damages. If you or your counterparty brings suit to recover damages for breach of contract, the party asserting the claim has a duty to mitigate damages. This is called the doctrine of avoidable consequences and simply means that the party asserting a claim must take all reasonable steps to keep its damages from getting larger and larger.
Let’s say you are in the business of selling a certain type of customized computer hardware, and through your efforts, your business enters into a $2 million contract with a manufacturer that needs your technology. You deliver some of the hardware and get paid $1 million on the contract amount, but for some reason the manufacturer tells you it will not honor the balance of the deal. So now you’re stuck with the equipment and out $1 million. You sue for the $1 million. However, you still have a duty to mitigate your damages, which means that you must use reasonable efforts to sell the equipment to another manufacturer. If you do nothing in this regard, the court or jury can take this into account and reduce your damages even if you win the case.
In sum, do not blindly pursue or defend claims solely on the merits without evaluating what you may recover in damages or risk paying. Remember, commercial litigation is just resolution of a business dispute in another, albeit unique, forum with special rules. This does not mean that you forego monetizing your risk. It is imperative to do so to manage your case successfully. ●
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