Avoiding The Garden Path Of Mathematics With The Barometer Of Fairness: An Analysis Of Discount Rates In Canadian Case Law, And Lessons For Business Valuator Experts

  1. Introduction

    Commercial litigation dealing with damages for future losses often requires business valuators to give expert evidence on loss quantification and discount rates. These experts face the difficult task of assigning something certain, a number, to something uncertain, the future. This oxymoronic task of predicting the unpredictable is the conundrum of discount rates, and although it may seem illogical, it is the state of Canadian law that a party may be compensated for as yet unrealized losses.

    So, litigants, lawyers, experts and judges must all learn how to live and thrive with the certainty of the uncertain. For those involved in an action dealing with future losses damages, it may be difficult to accept the inherent uncertainty of their quantification when the application of one discount rate over another could mean the "difference between a multi-million dollar recovery and no recovery at all."1

    This uneasiness with uncertainty and with the seemingly haphazard canon of case law on the subject has led to the penning of many articles by business valuators or experts in the field. They attempt to give judges and lawyers the tools to better tackle the mysterious topic of discount rates.2 Canadian provincial legislatures have also attempted to remedy discount rate inconsistency and uncertainty by prescribing in their own civil procedure rules rates to be applied in all cases.3

    This paper, however, takes a bit of a different approach. Our purpose here is twofold:

    to provide an overview of discount rates in Canadian case law with a particular focus on commercial cases. Our principal finding is this: discount rates regarding damages quantification appear to be largely governed by judicial discretion. Judges often eschew the mathematical precision that expert witnesses espouse, and instead rely on "fairness" as their quantifying barometer for navigating the uncertainty of future losses. It is "fairness"- or what a given judge perceives as fairness - that rules the day in the discount rate realm. to offer more practical considerations for business valuators acting as experts, especially on how to approach crafting expert reports and testimony in light of our "fairness" finding above. In our view, experts should approach their evidence keeping in mind that judges (a) are not seeking mathematical precision but, rather, fairness and (b) will perform a final analysis of the facts to determine the discount rate using their own discretion...

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