FRA Partner Andrew Maclay recently attended GAR Live’s Advanced Damages Workshop. Below are his key insights from the event.
How can tribunals work with party-appointed experts to revise damages models?
The panelists felt that it is not fair to criticise arbitrators for not being good with damages calculations; rather arbitrators can be excellent with a well-explained damages model. Arbitrators want a damages model to be presented to them in a way that they can easily manipulate the model to arrive at the correct answer, based on their own findings of fact and law; they do not have time or the modelling ability to spend a lot of time adjusting multiple pages of a model to give the correct answer.
Helpful things quantum experts can do to assist arbitrators in their work include:
- Preparing a Control Panel, so that the arbitrator can simply change each contested assumption in a control panel, and the change will automatically flow through to change the model’s output
- Preparing a dashboard, with charts and graphs, as is commonly used by large companies and the investment community
- If it is possible, it is helpful for both experts to use the same model for the hearing. One arbitrator said this only tends to be possible if the arbitrators start working with the experts early on in the case
- The model should be properly explained, with all the arithmetic explained in words, either alongside the spreadsheet cells or in an accompanying memorandum; the arbitrators should not be expected to look up the formula in each cell to attempt to understand the model
- The quantum experts should explain where their assumptions come from, and back up the assumptions with documentary evidence
- The model should include pictures, graphs and sensitivity analysis, so that the arbitrators can understand which are the key assumptions which affect the quantum of the case
The panelists also considered that the quantum experts’ models should be prepared in a way that the arbitrators and legal counsel can understand, and that they should not be designed only to be understood by the other side’s expert; A good test which experts should use is to see if their own lawyers can understand the model, before it is exchanged with the other side.
Some of the panelists felt that it would be helpful for quantum experts (but not legal experts) to be given an hour to present their findings to the arbitrators at the hearing, and for the quantum presentation to include an explanation of the financial model. One panelist commented that experts tend to be more independent and less of an advocate if they are given a reasonable length of time for their presentation.
The “modern Discounted Cash Flow (DCF) approach”, used in the Tethyan Copper v Pakistan case
The panel explained that the so-called “modern DCF approach” was not modern at all, and that it had been used by investment analysts since the 1970s. The presenter explained that the model in the Tethyan Copper case included two specific aspects, namely:
- The Certainty Equivalent method, which is to adjust the expected cash flows of any project for specific project risks, rather than attempting to include the risk of the project in the discount rate; and
- Real Options analysis, which attempts to exclude some possible options that an investor would not have followed, and therefore to arrive at a more realistic valuation. This is particularly relevant in oil & gas and pharmaceuticals cases.
The panel emphasised that the best approach to estimating quantum would depend on the particular case, and that both quantum experts and arbitrators should not try to force the use of the same approach (for example, traditional DCF analysis) in all cases.