Vol 15 (2018) - Issue 2

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Quantifying Loss: The Importance of the 'Counterfactual'

When one party ('the claimant') claims that it has suffered a loss as a result of the actions of another party ('the defendant'), it may seek to recover damages for consequential losses – for example, lost profits or opportunities – that arose as a consequence of those actions. Depending upon the circumstances of the case, such a claim for consequential loss may be for many multiples of the direct costs of those actions. This is particularly true for insolvency and other restructuring cases, where a claimant may seek to recover damages to compensate them for the profits lost as a result of curtailed or abandoned projects.
In the case of Al-Kharafi v Libya, an arbitration panel awarded the claimant $5 million to compensate for wasted costs, but a further $900 million to compensate for the lost profits of not being able to build a tourist development. The values which can be involved in such cases demonstrate the importance of being able to robustly quantify, and importantly evidence, the impact of the defendant’s alleged actions.
An assessment of such losses will consider what the outturn of events would have been had the defendant not behaved in the alleged manner. Such an assessment requires the creation of a 'counterfactual scenario', or consideration of the so-called 'but for' test. This article will focus on the importance of creating a robust counterfactual scenario when assessing the losses claimed to have been suffered. We will first highlight some of the considerations and types of evidence which may be appropriate in such an assessment, and then, through an example of a case in which we were engaged, explore their relevance and impact in the context of an insolvency proceeding.