The Global Damages Review: Rules Governing Expert Evidence on Damages
In a court of law, opinion evidence is generally considered inadmissible. Expert opinion evidence is a special exception to this rule and is introduced in court proceedings when specialised or technical knowledge is required to assist the trier of fact in ruling on matters beyond the common knowledge of the court.
In our adversarial litigation system, expert evidence has long been viewed by stakeholders with some apprehension. Experts occupy a grey area between fact evidence and judicial interpretation – the expert's findings are not strictly factual, but based on opinions, and are therefore subject to the frailties of human nature. Nonetheless, expert evidence plays an important and necessary role in civil litigation. As the complexity of litigation has increased over the years, so too has the role of the expert, expanding to include a broad range of professionals such as accountants, business valuators, forensic investigators, economists, statisticians, scientists and medical professionals, to name a few.
This chapter provides a general framework for the role of the expert in civil litigation, with a particular focus on damages. We first examine the rules governing the conduct of experts. We then examine the content and form of the expert's report. Finally, we discuss common misgivings that stakeholders have expressed with respect to how expert evidence is tendered in litigation and emerging practices concerning the use of expert evidence at trial.
ii Rules Governing the Role of Experts
i Admissibility of expert evidence and the court's role as gatekeeper
Expert evidence is allowed only with permission of the court and trial judges remain vigilant in their role as gatekeepers. The courts must weigh the credibility and probative value of the expert's evidence on a case-by-case basis, routing out faulty or incorrect opinions and excluding entirely those experts who are wholly unqualified or seek to provide opinions outside their area of expertise.
While the case law in different jurisdictions varies slightly, expert evidence is generally considered admissible when the following conditions are met:
- the expert's opinion is relevant to the specific facts at issue in the litigation;
- the expert's opinion is required to assist the trier of fact in ruling on matters that require specialised technical knowledge; and
- the individual proffered as an expert is properly qualified. This requires that the expert have the relevant knowledge, skill, experience, training and education. The expert's analysis should rely on sufficient facts and data and be premised on sound principles and methods.
Experts are commonly retained to opine on issues relating to the quantification of damages and the courts generally recognise the necessity for independent experts in nearly all cases where a claim for damages is made or where financial analysis is required.
ii The expert's duty to the court
The natural tension between experts and the parties that retain them is a seemingly unavoidable consequence of litigation. The expert is at first recruited (and paid) by advocates, and then asked to provide independent assistance to the courts. In large part to mitigate against the risk of 'hired gun' experts, recent amendments to the rules of civil procedure in many jurisdictions have sought two common objectives – placing clear limits on the allowable scope of an expert's evidence and codifying the expert's overriding duty to the court.
Independent experts are retained, above all else, to assist the court on matters within their expertise and this overrides any obligation to the parties that have retained them. While expectations for experts with respect to independence and objectivity are not new, the courts are shining a brighter light on this issue, developing formal codes of conduct that clearly define the expert's role and restrict improper behaviour. In many jurisdictions, experts must now sign a declaration acknowledging that they have read and understand the rules, agree to be bound by an expert code of conduct and accept their overriding duty to assist the court. This declaration is often appended to the expert's report.
iii The expert's report
The objective of the expert's report is to effectively and credibly communicate the facts, assumptions and analysis underlying the expert's opinion. Combined with the expert's evidence at trial, including responses to cross-examination by opposing counsel, the report must assist the trier of fact in assessing the merits of the expert's opinion.
While the rules of civil procedure in most jurisdictions provide a general framework for the content of an expert's report, the courts have generally recognised that the specific requirements of an expert's report will vary based on the nature of the analysis and circumstances of each case. The form of an expert's report is also determined, to a large extent, by the expert's accrediting body, and the practice standards and disclosure requirements governing its members.
In this section we examine the general form and content of the expert's report. While this is by no means an exhaustive list, it highlights some of the critical elements of an effective expert damages report.
i The expert's qualifications and experience
There is a basic requirement for the report to outline the expert's qualifications in the matter at hand so that the expert can be probed by opposing litigants, and the expert's credibility ultimately assessed by the trier of fact. The report should give sufficient details of the expert's qualifications and relevant professional experience. This requirement is often satisfied by appending the author's curriculum vitae directly to the report. It may also be constructive to provide a list of relevant cases in which the expert has testified.
ii Independence and objectivity
Concern over the independence and objectivity of experts, in fact and appearance, continues to be a major focus for stakeholders in litigation. Regardless of which party has retained the damages expert, the report should include a statement that the expert has acted independently and objectively, and that the expert's compensation is not contingent on the views or opinions expressed therein. In most jurisdictions, the rules of civil procedure require that all experts explicitly acknowledge their overriding duty to assist the court regardless of who is paying their fees, a point emphasised in certain jurisdictions where the report is to be addressed directly to the court and not to retaining counsel.
iii Instructions and assumptions
The expert's report should disclose all of the assumptions underlying the damages analysis, distinguishing between those assumptions that are within the expert's area of expertise (and based on the expert's scope of work) and those that the expert was instructed to take. While the courts recognise that disagreements between experts may result from genuine differences in professional opinion, differences often arise simply from the instructions and assumptions provided by retaining counsel.
The report should disclose the procedures followed by the expert to determine the reasonableness and appropriateness of key assumptions. The expert would typically not be expected to apply the same rigour to given assumptions that fall outside of the expert's area of expertise. These assumptions may include facts in dispute between the parties that will be proven (or disproven) at trial or inputs to the damages analysis provided by other parties. In any event, it is important for the expert to obtain clear instructions from the party requesting the report and, to the extent possible, to assist the trier of fact in differentiating between genuine differences of professional opinion and differences arising from instructions or given assumptions.
iv Scope of review
The expert's report should disclose all material information that was reviewed and relied upon in reaching its conclusion. The expert's scope of review in a damages analysis may include, but is not necessarily limited to, agreements, contracts, financial statements, accounting records, inputs from other subject-matter experts and information available in the public domain, as well as correspondence and interviews with relevant parties. It is the expert's responsibility to gather sufficient documentary evidence to ensure that the conclusions contained within the report are properly supported. When access to essential information is denied by retaining counsel or is otherwise unavailable, the expert should consider whether a qualification to the opinion is required owing to limitations imposed on the expert's scope of review.
The rules of civil procedure in most jurisdictions do not provide much in the way of specific requirements for the expert's scope of review. As a result, exposing deficiencies in the expert's scope of work is often left to opposing counsel and the ultimate assessment is made by the trier of fact on a case-by-case basis. The thoroughness of the expert's due diligence and scope of work speaks to credibility and is often cited by the courts as a factor in determining the weight placed on expert opinion evidence.
v Calculations and the damages model
The expert's report should provide sufficient information to allow the reader to understand how the expert arrived at the conclusion. A set of schedules is often appended to the expert's report setting out summaries of important financial documents and the calculations supporting the expert's findings.
Given the heightened complexity of modern business decision-making, the scope of accounting systems and the scale of financial record-keeping for most organisations has grown immensely in recent years. The damages expert is often faced with vast amounts of financial data. As the financial information underpinning the analysis grows in complexity, so too does the damages model, which is often required to accommodate many dynamic inputs and alternative scenarios. While an expert's schedules cannot be expected to reproduce every single calculation underlying a complex damages model, the report should sufficiently document the key mechanics, assumptions and data underlying the analysis to assuage any concern that the damages model acts as a 'black box'.
It may be constructive for the expert to produce an electronic version of the damages model. Together with the expert's report and schedules, this allows another qualified individual to verify the accuracy of the model and to reproduce the results using the same data, inputs and assumptions.
vi Working papers
The expert's files should be maintained in an organised manner and the scope of work performed by the expert should be documented. The extent of working paper documentation is largely left to the expert's discretion. As a rule of thumb, the expert's files should retain copies of:
- all relevant information relating to the dispute and the specific events giving rise to the claims, including documents and other information produced during the course of the litigation;
- any information reviewed, or analysis prepared to provide the damages expert with a background understanding of the subject matter and the broader economic or industry context, including industry research, analyst reports, macro-economic data, metrics for comparable public companies traded on public stock exchanges and other statistics available in the public domain; and
- all working papers, data and records underlying the damages calculation itself, including models, calculations, projections, statistics, accounting data, financial statements, forecasts, tax returns and management reports.
Counsel and experts communicate regularly and often by email. The courts have generally recognised that consultation between counsel and experts during the course of preparing a damages report is necessary, within reason, to ensure that all relevant issues are adequately addressed in the expert's report and to facilitate a more timely and affordable process.
Whether and to what extent solicitor–client privilege extends to communications with experts remains a live issue in many jurisdictions, particularly so when experts produce several working drafts of their report, some of which may be reviewed by counsel. The expert should clearly mark all work-product that is in the process of being completed as being in draft form and subject to change, specifying that the work-product is being issued strictly for the purpose of obtaining comment, instruction or confirmation of facts required to complete the report. While the courts in most jurisdictions increasingly acknowledge that the draft report review process is an important and necessary step in the expert's scope of work, it would be prudent for the expert to document significant changes to the analysis as the draft report evolves, including new facts, assumptions or findings that result in meaningful changes to the conclusion.
vii Limitations and qualifications
A damages analysis is only credible, and ultimately of probative value to the court, if the information underpinning the expert's findings is accurate and complete. It is critical that users of the expert's report understand the nature of the information that was relied upon and any inherent limitations in the scope of the expert's work. As noted earlier, the expert should consider a qualification to their opinion if access to essential information is limited for any reason.
An expert report in a damages case typically includes an overriding assumption that the financial information provided to the expert is accurate and complete. The report should disclose whether or not the expert has audited, reviewed or otherwise undertaken any procedures to determine the veracity of the information relied upon in arriving at the conclusion.
The expert's opinion is a function of the facts and information available at a particular point in time. The expert may reserve the right to modify the report or reconsider the conclusions therein should any new material information or facts be brought to light after the date of the report.
IV Alternative Approaches to Expert Evidence
Concerns over the cost of litigation are not new. The use of expert evidence in civil litigation and the procedural complications that come along with it are seen by many as contributing, in part, to the rising cost and complexity of litigation. There is also no shortage of cases in nearly every jurisdiction where 'advocacy by experts' has led to a significant miscarriage of justice. For these reasons, the role of the damages expert in civil litigation and the manner in which expert opinions are entered into evidence are evolving. The rules of civil procedure in many jurisdictions are being revised and expanded to permit (or encourage) a number of unique alternatives to the traditional use of expert evidence at trial.
i The traditional approach to expert evidence
In the traditional model to expert evidence, each party to the litigation typically retains their own expert. The experts are asked to prepare their own analysis, commonly exchanging reports and a formal reply report prior to trial. At trial, the qualifications of each expert are first assessed by the courts. If admitted, the experts are then, in turn, examined by retaining counsel and cross-examined by opposing counsel. The experts generally do not communicate directly with one another and comments on the opposing expert's assumptions, methods and findings are limited to the reply report.
ii Jointly appointed experts
The first alternative we will examine is the use of a single, jointly appointed expert. Rules of civil procedure in several jurisdictions now allow for the appointment of a single expert witness to opine on issues in dispute between the parties, including the quantification of damages. The courts have been given increasing latitude to appoint joint experts, showing a particular interest in doing so when the expert is asked to opine on comparatively less controversial quantum issues. The expert may be instructed by the parties or by the court.
In certain circumstances, the use of a jointly appointed expert has been credited with reducing the time and cost of litigation, while also mitigating, in fact or appearance, the 'hired gun' mentality of experts. The use of a jointly appointed expert tends to provide a narrow path to resolution on relatively straightforward quantum issues. Settlements are also fast-tracked, perhaps becoming more tenable for litigants when the ultimate outcome on quantum issues is more predictable.
Critics argue that the simple existence of opposing views on a subject are not always indicative of expert bias. Genuine differences of professional opinion may exist within the expert's field. The appointment of a single expert therefore presumes that the view of a particular expert is correct among a field of others. It can be argued that the use of a single expert therefore inhibits a party's ability to sample the range of opinions necessary to advance its case.
While the practice of jointly appointing one expert can reduce the cost to litigate relatively simple cases, in more complex litigation the use of a single expert does not necessarily eliminate the need for each party to retain their own subject-matter expertise. These 'shadow' experts often assist behind the scenes in reviewing the jointly appointed expert's report and in identifying avenues for cross-examination. In these cases, the joint retainer may in fact contribute an additional cost burden.
The success of a jointly appointed expert depends, in large part, on having a clear set of instructions that have been agreed to in advance by all parties. Where the court will instruct the expert directly, the marching orders are normally clear. Where the litigants are responsible for jointly instructing the expert, the process can fall apart quickly if proper ground rules are not established from the outset. The ground rules should include clear instructions for timing of key milestones and final deliverables, communication between litigants and the expert, the process for discovery of relevant information and the draft report review process.
The expert should be given latitude to execute the fact-finding and due diligence process in any manner he or she considers reasonable to satisfy his or her obligation to the court and to execute on the scope of work required to support his or her opinion. The expert should be given final say because it is, after all, his or her conclusion being sought and his or her professional reputation on the line when that conclusion is ultimately reported to the court.
The success of a jointly appointed expert depends in large part on fair and open communication between all parties. Any communication to the expert and all information underpinning the expert's scope of review should be shared among all parties. The need for open communication becomes increasingly important in situations where there is information asymmetry between the parties. For example, in cases where only one party has readily available access to a business' financial records and documentation, the expert must take care to provide the less-informed party with an opportunity to review and provide context for any information proffered by the other party. Failure to do so will ensure that the expert is only given one side of the story.
The jointly appointed expert can be an efficient and cost-effective method for the court to resolve relatively straightforward disputes, but the use of one requires careful planning and it is important for all parties to respect the process.
iii Concurrent evidence
Another alternative being explored in many jurisdictions is concurrent evidence. Concurrent evidence is at first similar to the traditional approach to introducing expert evidence at trial. Opposing experts are first asked to prepare and exchange their own reports. Questioning at trial then proceeds on familiar terms for each expert – direct examination, cross-examination and reply. In a twist to the traditional model, the experts are then asked to return to the witness box and are questioned together. The necessity for experts to share close quarters during this session gives us the colloquial term 'hot tubbing'. The hot-tubbing session is typically moderated by the trial judge and questions can be asked by counsel, the court, or both. When it comes to the hot-tubbing session, there are no hard and fast rules.
The experts are often encouraged by the trial judge to reach agreement, where feasible, on issues in dispute. The discussion quickly reveals the critical points on which a party's case will succeed or fail. If managed effectively, the discussion should clearly identify genuine differences of professional opinion, which are addressed by the experts in real time. The trial judge is given latitude to ask questions of the experts at any time to clarify the court's understanding of key issues. In theory, agreement is reached quicker in a hot-tubbing session because the experts acknowledge that unreasonable assumptions or untenable positions will immediately be exposed by the accompanying expert. The concurrent evidence model puts experts together to address differences in real time, whereas the traditional model could see experts examined days or weeks apart.
The trial judge must play a more active role in the hot-tubbing session. The process is less structured than the traditional counsel-led examination model and the judge must take care to moderate the discussion appropriately to prevent the experts from being side-tracked by minor issues and to ensure that the discussion advances towards the genuine and meaningful areas of difference.
A recurring complaint from stakeholders is that the hot-tubbing format tends to favour those experts who are more confident or persuasive in their testimony and there is the risk that assertive personalities will 'steam roll' the discussion on critical issues. The trial judge can, to a large extent, overcome this deficiency by way of appropriate moderation of the discussion and probing of the experts.
Counsel is often hesitant to cede control of the proceedings. The real-time interaction between the experts and the direct involvement of the trial judge means the discussion is more fluid and considerably less controlled than counsel's traditional question-and-answer examination format.
While there are some practical complications, the hot-tubbing approach is generally seen as an advantageous means of changing the mindset of experts and, under the right circumstances, a valuable tool for the courts to fast track the discussion of otherwise complex issues towards genuine areas of disagreement.
iv Expert witness conferences
We have discussed two alternative approaches to the traditional model of expert evidence – concurrent evidence and jointly appointed experts. A third approach – expert conferences – is viewed as a sort of hybrid of the two.
The concept of expert conferences is fairly simple. Experts retained by opposing litigants meet in advance of trial to exchange information, discuss their findings and identify the significant areas of disagreement. The overriding objective of the expert conference is to narrow the focus of trial to only the genuinely disputed issues.
If so instructed, the experts may draft a joint statement summarising the major areas of agreement and disagreement. This joint statement is then served to the court to assist in better understanding the areas of dispute between the experts, the basis for these differences and the significant 'levers' on which a party's claim for damages will rise or fall. An effective joint statement will also set out the areas of disagreement that are inconsequential to the calculation of damages, allowing the court to set aside these issues and to minimise time spent at trial pursuing any red herrings.
The expert conference must be undertaken in good faith. While counsel may be apprehensive over relinquishing control, it would be improper for an expert to be given, or to accept, instructions not to reach agreement. Experts must approach the conference with a genuine interest in reaching consensus on issues of common professional understanding and identifying errors and omissions in each other's work. Experts may need to abandon positions that do not stand up to the rigours of professional scrutiny or where the underlying analysis is not credible.
The joint statement should provide the court with a clear understanding of the major areas of disagreement and the basis for each expert's opinion. The joint statement should delineate between differences of professional opinion that are within the experts' areas of expertise and differences that result from instructions provided by counsel. Experts should seek further instruction where there are discrepancies in significant facts of the case. Counsel should not be directly involved in drafting the joint statement, although it is not uncommon for counsel for both parties to review a draft of the statement prior to its release.
Preparation is key. If an expert is ill-prepared, the opposing expert's opinions are unlikely to be properly scrutinised and, rightly or wrongly, will dictate the direction of the joint statement. The expert conference should take place at a stage of the proceedings where the important facts of the case are known, typically after production of relevant documents and discovery of key fact witnesses for both parties. It is more effective to hold the expert conference after the experts have issued their reports, ensuring that the position of each expert is on the record prior to meeting.
There has been general support for expert conferences in most jurisdictions, which are commonly ordered by the court prior to, or in conjunction with, the pretrial conference. Expert conferences are now more commonly being used in damages cases to address widespread concerns over the time and cost of litigation. The courts in several jurisdictions have noted widespread support for the practice where expert conferences are already the usual practice. Expert conferences can be particularly effective in damages cases where seemingly vast differences between complex models for calculation damages can often be attributed to a relatively small number of critical assumptions or instructions. The joint statement is an effective method for bringing these differences to light.
Expert evidence will continue to be a necessary and vital part of civil litigation. The courts recognise the importance of the independent expert's report and testimony in nearly all cases requiring the quantification of damages, providing the expert clearly demonstrates an understanding of his or her overriding duty to assist the court above all else. While the courts are yet to find the panacea for all issues plaguing expert evidence, several alternative approaches have emerged that are a step in the right direction towards the delivery of fair, timely and cost-effective access to justice.
1 Erik Arnold is a partner at KPMG LLP in Toronto, Canada.