Recently some 40 orchid growers suffered serious losses or the failure of their business because of the application of a pest control spray. We were involved in the mediated settlements of 10 of these claimants. Ensuring they received a fair settlement was not straight forward.
To support the claims we created financial models of the “But for” situation and the factual situation where the growers had to rebuild their production. We would consider this the bones for any horticultural assessment.
The calculation options were loss of income while re-establishing or compensation for the total loss of future income.
In a case of damage to a business, if the reinstatement cost is disproportionately high to the financial damage, the Courts may award the value of the business. For horticulturalists and viticulturists the value of the business combines the value of land and buildings and of the plants. A greenhouse is of minimal value empty, and in fact could reduce the value of the property.
If a person has developed a horticultural business that earns a modest sum (not much better than wages) from his lifestyle block, the value of the business is tied up in the plants. His loss is not the realisable value of his business but his future income. Compensatation must be for the loss of his future income.
The “but for” issues are:
What would have been his future net income?
How long would this income have continued?
The factual issues are:
What has he done or what can he do to mitigate the loss?
What is the recovery time for the business?
What is his reasonable future net income?
Most of the orchid growers had a good history of income which provided a sound basis for assessing the future income. Adverse events were reflected in the past financial performance.
It was therefore probable that the same level of income would have been achieved in the future, all other things being equal. These “other things” not reflected in the financial statements were future expansion plans on the one hand and the age of the operator on the other. One must consider the physical capability of the owner and the infrastructure to continue for the period projected. Health issues must be considered.
The factual situation must be determined in assessing the likely future income of the claimant. At 60, the injured party is probably unemployable unless he has skills from a previous career that are in demand. Receipt of an unemployment or sickness benefit must be accounted for but not National Superannuation or any other superannuation as the claimant would receive that anyway.
Having applied factors for contingencies, the assessed loses had to be discounted to lump sum to be settled immediately. This was undoubtedly the most vigorously argued issue. The insurer’s expert argued that the weighted cost of capital should apply which for a small business would be around the 20% mark. We argued the discount rate should be reasonable after tax investment interest rates.
In mediations, rarely do parties concede any principles. What we can say however is that in damages claims, the Courts in New Zealand have considered discount rates ranging from 2% to 7.5%.
The difference is significant. A loss of $100,000 per annum for 10 years discounted at the rate of 20% has a present value of $446,000. At the high end of the rates applied by the Court, 7.5%, the present value is $722,000.
Getting it right and being able to present an effective and soundly reasoned argument supported by precedent is paramount to a successful result.