What’s the Damage? A Primer on Economic Damages in Business Litigation
Posted on 04.04.16
By Harold G. Martin, Jr., CPA/ABV/CFF, ASA, CFE
Partner, Valuation and Forensic Services
In business litigations, CPAs are often engaged by an attorney to assist as consultants or expert witnesses in quantifying or rebutting economic damages suffered by the plaintiff as a result of an alleged harm committed by the defendant. This article presents an overview of the legal principles and professional standards—as well as the key concepts with which a CPA should be familiar—when expressing an expert opinion on damages in business litigation. The discussion of damages focuses on lost profits for illustrative purposes; other measures of damages may also be applicable depending on the particular facts and circumstances. Both federal and state statutes and case law are cited. With respect to state law, Virginia is used as a representative example.
Types of Damages
The overall objective of a civil litigation is to make the harmed party whole and punish the defendant for committing a wrongful act. To accomplish this, assuming that a defendant is found to be liable, the court may award dam- ages to the plaintiff. Black’s Law Dictionary defines “damages” as: “money claimed by, or ordered to be paid to, a person as compensation for a loss or injury.”1 As discussed in “AICPA Practice Aid 06-04 — Calculating Lost Prof- its,” there are three types of damages awarded:2
- Actual or compensatory: As compensation for an actual harm
- Nominal: As a result of a harm, but the amount is immaterial
- Punitive: In addition to actual dam- ages in the event the defendant acted with deceit, malice or recklessness (not recoverable in a breach of contract)
Damages such as lost profits are an example of actual or compensatory damages. Claims for these types of damages usually arise from either a breach of contract or a tort (e.g., fraud, negligence, personal injury, property damage, unfair competition, unlawful misappropriation).