The District Court of New South Wales found that an expert report assessing the value of lost opportunity should be given little or no weight because:
This article considers the nature of assumptions and inputs the expert is required to adopt, and the impact on the persuasiveness of the opinion given.
In relation to an expert’s reliance on financial and other information upon which to express an opinion:
In assessing the value of a lost opportunity, the expert should consider all risk factors that could impact the commercial success of the enterprise, including:
In assessing the impact of the identified risk factors on the value of the opportunity, an explicit adjustment to individually affected inputs is of greater assistance to the court than a collective adjustment for a range of risks.
This matter involved, inter alia, a cross-claim by a vegetable farming company against an Australian-Korean cross-defendant for losses arising from a terminated joint venture agreement with a state-owned entity in North Korea.
The Australian vegetable farming company was to supply seeds, logistics and agricultural expertise to the North Korean state-owned entity, in consideration for which it would receive profits from the sale of produce.
The cross-claimant alleged that the actions of the cross-defendant had caused the termination of the joint venture agreement. It relied on an expert report that responded to instructions to address and value the loss of chance suffered by the cross-claimant as a consequence of the termination.
The expert assessed the loss using the discounted cash flow methodology. The expected future cash flows used in the assessment were said to be based on:
The expert adopted a discount rate of 45-50% to take into account the following risks associated with the investment by the cross-claimant:
The court identified that the facts of the case raise for consideration the approach which the court must adopt in circumstances where the success of the commercial agreement may, on a proper assessment, be less than 50%.
The court noted that:
In relation to the cross-claimant’s evidence, the court found that the following key assumptions made in the expert report were not established on the evidence:
The court expressed the view that these important assumptions were significant to the report and therefore the report should be given little or no weight.
The court then went on to indicate that the expert report was largely a theoretical exercise which had been conducted on the basis of certain assumptions without appropriate consideration, including:
A proper basis for a risk-free rate for a joint venture in North Korea other than applying a premium to a risk-free rate in Australia.
Dicker SC DCJ concluded that there were very serious risks that the joint venture would lead to heavy losses as opposed to profits, and that no amount should be allowed for a loss of chance.
His Honour added that if he was wrong in this approach, and some weight is given to the expert report, he would allow for a 1% loss of chance, which was equated to 1/45 of the mid-point value assessed by the expert, plus interest.
Read the full judgment here
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1 Malec v J C Hutton Pty Ltd (1990) 169 CLR 638;  HCA 20
2 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332;  HCA 4
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