Best prepared will win a claim

What often makes the difference in a loss of profits claim is the extent to which actions are planned just after the event that led to it – the plaintiff who prepares well and early stands the best chance of a favourable judgment. Bringing an expert witness – a forensic accountant for instance – in at this stage could pay dividends in court.

For this reason, the plaintiff should nominate a senior person to take overall responsibility for the claim. This person should ensure that all the information relating to it is assembled and stored separately from the plaintiff's general documents, and that it is uppermost in the minds of the management.

At the outset, it is important to establish in broad terms whether the plaintiff has actually suffered a loss. This may seem obvious, but there have been numerous cases where business interruption has clearly occurred, but where no actual loss has resulted. For example, when the plaintiff was previously trading at a loss, where other adverse factors would have affected the business, or where the sales lost during the period of interruption have been rescheduled and realised once the interruption has ceased.

If it can be demonstrated that a loss has occurred and the plaintiff's claim cannot be settled amicably, then there may be no alternative but to proceed to trial. This can be a drawn-out and expensive process, and all too often the plaintiff will seek to minimise fees by delaying the appointment of a forensic accountant. This deprives the accountant of the opportunity to make a contribution towards the preparation of the claim and may be a false economy.

It can often take a number of years before it is apparent that a settlement cannot be reached and that it will be necessary to prepare witness statements and for experts' reports to be commissioned. This may not be too onerous if the evidence trail is complete and well organised.

However, often the plaintiff has no idea which documents should be retained and made available to the other side via the discovery process. Consequently, documents are not retained or are poorly organised and key personnel are sometimes allowed to leave the company without statements being taken or their files reviewed.

The loss or destruction of documents can cause fundamental problems for a forensic accountant seeking to establish the quantum of a loss. It is often impossible to recreate such documents and the facts contained may be lost forever. By involving a forensic accountant from the outset, it should be easier to identify the documents needed to support the claim.

The forensic accountant should enable the plaintiff to capture and retain data, and complete such simple tasks as noting the last sales or purchase order numbers prior to the year end. At a more sophisticated level, the accountant may use software to extract sales and cost data where the dispute relates to a specific product, or the maintenance of detailed data on machine output, running costs and downtime where the dispute relates to machine malfunction.

Where a loss of profit arises from or results in cancelled orders or contracts it often leads to customer complaints. This correspondence may provide prima facie evidence of loss. A forensic accountant will not only advise the plaintiff to retain such evidence, but also in some instances actually create it by requesting that disgruntled customers commit their complaints to paper. This may seem like overkill, but it will be much more cost-effective, in terms of the plaintiff's time and the fees charged by the forensic accountant, to do this at the outset.

By addressing the contents of those documents that will be made available to the other side at an early stage, it will be possible to focus on the relative strengths of the claim. This may have a bearing as to how the case is pleaded. By pleading the case in a manner that can be substantiated by documentary evidence, it should be easier to ensure that the claim is not too remote or “over-egged”.

There is a presumption that, where possible, a loss should be mitigated, but the evidence relating to mitigation is often the most poorly documented aspect of a claim.

Often, the plaintiff will seek to mitigate losses, but will fail to record the method, the most common reason being that attempts to secure alternative customers or suppliers are often conducted by telephone. An assertion by the plaintiff three years later that “I phoned around” may not convince the judge if it cannot be supported by contemporaneous evidence, such as notes of conversations or lists of the people called.

It is, therefore, important for the plaintiff to document what steps have been taken to mitigate the loss, to demonstrate that options have been considered, and that reasonable steps have been taken.