Benefits of Hindsight when Quantifying Financial Losses
31 January, 2023-
Dean Das, Ephraim Stulberg -
Canada
Claims for economic losses arising out of failed real estate developments can be complex to prove, requiring evidence concerning many different aspects of the proposed construction project. There can also be different approaches to quantifying losses. Both of these issues are nicely illustrated by a recent decision from the Alberta Court of King’s Bench.
Remington Development Corp. v. Canadian Pacific Railway Co. [2022] A.J. No. 1270 involved a dispute over the breach of a real-estate purchase and sale agreement. The plaintiff, Remington, owned property on both sides of a parcel of land, which was owned by CP Rail. There was an agreement for CP to sell Remington the land, but CP failed to carry through on the agreement.
The court determined that as a result of Remington losing the ability to purchase this parcel of land for development, Remington suffered a loss of profits. The court awarded Remington damages of approximately $163 million. This article provides a brief summary of how the court arrived at its damages award, and it highlights some of the key considerations in quantifying losses in these types of cases.
Damages methodology
After ruling that specific performance was not an appropriate remedy in the circumstances, the court turned to the quantification of Remington’s losses by seeking to put it in the position it would have foreseeably been in had the contract been complied with by CP Rail (para. 465).
The court noted that typically, the proper remedy in a dispute involving the failure to close on a real estate transaction is to quantify the difference between the purchase price and the fair market value of the property (para. 621); however, in this particular instance, because CP Rail was aware that Remington had intended to develop the lands into high-rise mixed-use development, the court determined that an award based on Remington’s lost profit from the planned development was the appropriate remedy.
In quantifying that remedy, the court heard expert evidence on a variety of issues, including:
- The issue of if, and when, municipal approvals for the development would have been granted – provided by experts in various aspects of urban planning and real estate development. The court found it notable (and persuasive) that Remington called the same experts at trial who had actually worked on the planning of the project prior to the breach of contract (para. 836)
- The plans for the development (i.e. the designs and specifications of the buildings that were to have been constructed), as well as commentary on various practicalities of the project such as relocating power lines. The court noted that there was considerable uncertainty over what the eventual development would have looked like. The court added (with approval) that the approach taken by Remington’s expert was somewhat conservative, in that he did not factor in any enhancements to the value of the lands owned by Remington adjacent to the property in dispute; the court noted that such a calculation would have been too speculative (para. 479, 870).
- The operational and financial capacity of Remington to carry out the development during the period in question. There was limited evidence called on this issue. Remington’s damages expert performed an analysis of Remington’s historic construction activity to provide a rough sense of its ability to complete the project during the time in question (para. 893)
- The ability to obtain financing for the development (para. 906-08)
- The costs of construction (para. 909-21)
- The rate at which the retail, office and condominium units would have been absorbed into the local real estate market, and the revenues that would have been generated (para. 922-1001).
All of this information, provided by a variety of experts, was then “packaged” into a report by Remington’s damages expert (or “math guy” (para. 1101) and computed into a final damages estimate. Notably, Remington’s expert did not apply a discount rate to his calculations, on the basis that the inputs he used in his damages model were knowable and measurable with the benefit of hindsight.
The court generally accepted the evidence of Remington’s damages expert, subject to various specific adjustments related to details of the projections used in his estimates.
The court also applied a discount to consider the uncertainty inherent in certain assumptions developed by Remington’s non-damages experts, assumptions that were ultimately used to prepare the damages model (para. 659, 900-903, 1021-22, 1104-09), which it estimated based in part on the sensitivity of the damages calculations to delays in construction, as well as other specific issues.
Notably, Remington’s damages expert used what the court referred to as an ex post approach to measuring damages; that is, he considered all the information available with the benefit of hindsight to plausibly reconstruct the chain of events that would have unfolded had Remington not been prevented from closing on the purchase of the lands. This is a common approach of taking into consideration hindsight when estimating damages. The court remarked that this approach was more accurate than if the expert had used only ex ante information, by looking at or focusing on 2007 forecast data and ignoring subsequent events (para. 1016, 1116).
Key takeaways
The key takeaways from the Remington decision, from the perspective of damage quantification, are therefore as follows:
- Real estate development can be a complex endeavour, and a damages report may require inputs from various financial and non-financial experts. In other cases where these types of expert inputs have not been obtained, courts have rejected or substantially modified damages models; for example, see Inzola Group Limited v. City of Brampton 2019 ONSC 7632, para.
304- 317. - In this particular case, the court adopted an ex post approach to quantifying damages; that is, instead of applying a blanket discount rate to the projected profits (similar to what one would do in a business valuation), it sought to measure the value of each input as the input was incorporated into the damages model, and then tailored any subsequent discounts to specific issues it felt could not be precisely quantified even with the benefit of hindsight.
Dean Das and Ephraim Stulberg are partners with MDD Forensic Accountants’ Calgary and Toronto offices, respectively. Both Dean and Ephraim exclusively specialize in the areas of loss quantification, business valuation and litigation support.
This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, The Lawyer’s Daily, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Dean Das
B.Com. (Honours), CPA, CA, CBV, CFF, Partner/Senior Vice President
- +1 403.218.4050
- ddas@mdd.com
- Calgary, AB, Canada
Ephraim Stulberg
B.A, M.A, M.BA, CPA, CA, CBV, CFF, Partner/Senior Vice President
- +1 416.366.4968
- estulberg@mdd.com
- Toronto, ON, Canada
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