Claiming and calculating lost opportunity damages

In La Trobe Capital & Mortgage Corporation Limited v Hay Property Consultants Pty Ltd [2011] FCAFC 4, the Federal Court Full Court allowed an appeal by La Trobe against the trial judge’s decision not to allow it damages for lost opportunity arising from a property valuer’s negligent over-valuation of a security property.

La Trobe lent Jet Corporation $2.4 million relying on Hay’s valuation of $4 million.

When the time for repayment arrived, Jet defaulted. In consequence, La Trobe took possession of the property and sold it. The purchaser defaulted but La Trobe retained the deposit of $125,000. It again sold the property, this time for $2.2 million (plus GST).

In its action against Hay, La Trobe claimed damages under several heads under the Trade Practices Act. First, it claimed a capital loss, being the difference between the $2.4 million loan and the net proceeds of sale of the property (taking into account the forfeited deposit). Interest on the lost capital was also sought.

Second, La Trobe claimed damages for “loss of income”. The contention was that but for the valuation it would have lent $2.4 million to another borrower on similar terms. La Trobe said it was deprived of the chance to earn interest from this hypothetical transaction. The lost income is the difference between the interest that would have been received in the hypothetical transaction and the interest actually received from Jet.

The Full Court accepted La Trobe’s proposition but the difficulty was in estimating the loss as there was no direct evidence of loans rejected because of the Jet loss. According to the Full Court “What is required is to estimate the chance of La Trobe finding a substitute borrower willing to borrow on the same terms, whether or not the chance of this happening is more or less than even”.

Assessing the evidence the Full Court observed: “that Mr Gidman (a La Trobe senior manager) could not identify any particular borrower who would take the substitute loan is beside the point. What is important is that, according to his unchallenged evidence, there was a chance that La Trobe could have lent the money to another borrower on the same terms and at the same rate as it had been lent to Jet. Not only was there a chance of that happening, but Mr Gidman’s evidence shows that it was likely that another loan would be made: there were more potential borrowers than money available and La Trobe could not satisfy the demand of potential borrowers. ”

The Full Court calculated the damages as follows:

Calculating the value of the lost opportunity
It is convenient to calculate the value mathematically. This is not to suggest that the assessment of damages in this kind of case can be precise; rather the aim is to provide an analytical framework for the assessment.

It is helpful to begin with some definitions:

Let “LO” be the lost opportunity

Let “P” be the probability of realising the opportunity

Let “V” be the value of the opportunity

LO = P × V

The next step is to calculate V:
V = M × (1 – C) where M = the maximum value of the opportunity and C = the value of any contingencies

M = net income from a substitute loan

M = interest that would have been earned on a substitute loan less the 1.25% management fee

M = $652,143.24 × 0.9875

M = $643,991.45

C = the risk of default. According to La Trobe’s product disclosure statements the value of loans in arrears as a percentage of total loans is between 1.07-1.27% for the 2002-03 and 2003-04 financial years. Some arrears may have been rectified and some may not. Of those that are not, in most cases La Trobe would recover all its capital and outstanding interest payments and would, consequently, suffer little or no loss. Accordingly the risk of loss on default is de minimis and C= 0%

Therefore, V = $643,991.45

The next step is to calculate P:
Based on Mr Gidman’s evidence it is a near-certainty that La Trobe would have lent $2,400,000 to one or more borrowers on the same terms as it lent to Jet. I will allow 5% for the possibility that an alternative loan may not have been entered into.

Therefore, P = 95%

The final step is to calculate LO:
LO = P × V

LO = 0.95 × $643,991.45

Therefore, LO = $611,791.88

This shows that La Trobe lost an opportunity worth $611,791.88.

Calculating La Trobe’s net loss

La Trobe sustained a capital loss of $189,035 as well as an opportunity loss of $611,791.88, which gives a gross loss of $800,826.88. The gains which La Trobe made from its loan to Jet must be offset against its gross losses (whether they are capital or income losses).

La Trobe received $455,460 of income from Jet out of which it had to pay a 1.25% management fee. This left a net gain of $449,766.75. Therefore, La Trobe’s net loss = $800,826.88 – $449,766.75 = $351,060.13.

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