What is a lost opportunity? – Civil right

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A claim for loss of opportunity may arise from breach of contract, negligence, personal injury, or misleading and deceptive conduct where the wrong results in the loss of a chance to profit, to gain or benefit.

Complainants sometimes confuse “loss of chance” with loss of “blue sky” opportunity, the latter being a hypothetical or possible, but not probable, future event. As explained below, case law requires that a loss of chance be more than speculative; it must be substantial. The case law also requires that a plaintiff, first, establish the value of the opportunity and second, prove that there is a reasonable interest
causal link between harm and benefit, luck or lost profit.

In the event of a breach of contract, the plaintiff need only prove the breach to be entitled to nominal damages for the lost benefit. This is so even if the plaintiff is unable to prove what value, if any, the performance of the contractual promises would have had
[i]. Examples of lost opportunity in a breach of contract scenario may include losing the right to terminate a contract
[ii] or the loss of an opportunity to exercise a contractual option
[iii].

In contrast, a plaintiff’s failure to prove damage in a tort claim (such as negligence or breaches of Australian consumer law) precludes an award of compensation since the damage is the “most of the action
[iv]. However, a plaintiff remains free to argue that a loss has been suffered with respect to the right or opportunity to gain a business advantage (or avoid harm), as explained by Justice Brennan in his separate judgment in Sellars v Adelaide Petroleum NL
[v]:

Where a loss is alleged to be a missed opportunity to acquire a benefit, the plaintiff on whom the burden of proving that a loss was caused by the defendant’s conduct rests discharges it. by establishing a causal link that continues until there is a substantial prospect of obtaining the benefit sought by the plaintiff. Until then, the applicant must establish both the historical facts and any necessary assumptions on a balance of probabilities.. A consistent standard of proof applies to a finding that harm was suffered and a finding that that harm was caused by the defendant’s conduct, whether those findings depend on proof of historical facts or evidence giving rise to competing hypotheses. Either way, the standard is proof on a balance of probabilities.

Although the question of loss caused by the defendant’s conduct must be established on a balance of probabilities, assumptions and possibilities which cannot be proven to occur must be weighed in determining the amount or value of the loss suffered. Evidence on a balance of probabilities has no role to play in evaluating such hypotheses or possibilities: evaluation is a matter of educated guessing.” (emphasis mine)

Proving the missed opportunity

The following excerpt from Masters Home Improvement Australia Pty Ltd v North East Solutions Pty Ltd
[vi], highlights the evidentiary challenges a plaintiff must overcome to convince the Court that the alleged result was more than hypothetical. These challenges apparently placed a defendant in the most advantageous position to attack the quality of the plaintiff’s evidence to counter the assertion that the opportunity was a likely outcome.

“In considering damages for loss of business opportunity, the court first asks if there was a business opportunity of some value (which is more than speculative or negligible); that is, was there a chance? Second, the court examines whether this possibility has been lost; that is, would the plaintiff have seized the opportunity? The third step is to determine what amount should be awarded given the likelihood of success had the opportunity been pursued.. In taking this third step, the task of the courts is to apply a discount that reflects the prospects of success. This is sometimes called a Sellars discount. » (emphasis mine)

Quantify the lost opportunity

Although the appropriate approach to assess a loss of opportunity is situational, a commonly adopted approach is as follows:




The value of lost opportunity

X

The likelihood of the outcome occurring

where

  1. The lost opportunity value represents the difference between the present value “if not” of the future cash flows and the present value “as a result” of the future cash flows; and

  2. The probability of the outcome occurring is the “Sellers discountapplied by the Court, reflecting the degree of inherent uncertainties associated with the realization of the claimed benefit. Generally, the longer the period over which the future cash flows are forecast, the greater the haircut for uncertainty that will be applied by the Court.

Given the Court’s role in assigning the probability of the asserted outcome occurring, it is important that the discount rate applied to quantify the value of the lost opportunity is not adjusted for the same uncertainties (for avoid any double discounting)
[vii]. Accordingly, it may be more prudent to discount future cash flows at the risk-free rate, adjusted only for specific situational risks excluding the risks of uncertainty.

Need advice?

Entering forensic accounting early gives you a simple and effective way to proactively manage the costs and risks associated with litigation. Engaging early will help narrow down significant financial and/or accounting issues in litigation and identify critical evidence needed to develop and support the optimal legal strategy. This will help you lay the foundation for building strong and defensible claims.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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