A recent forensic case involved quantifying loss quantification of profits due to wasted costs.
Our client, an international producer of wine and other alcoholic beverages, entered into a five year production and packaging contract with an international listed brewer in relation to a certain number of its products. Our client became aware that its counterparty was incurring wastage in excess of the tolerances allowed under the terms of the contract.
Our client came to us having quantified wasted costs in the region of £1.7 million under three separate heads.
What we did
Over a period of several months we worked closely with the client’s accounts and production management teams to model the production process, enabling us to build our loss quantification calculations with more accuracy. The manufacturing process involved beverages being produced at maximum strength for the purposes of duty payments before being diluted for final production and finally bottled.
Therefore, although the contract allowed an agreed tolerance for wastage throughout the production and bottling process, it was not possible to compare the volume at the start of the process with the volume of bottled product. The volume bottled was on average 130% of the starting volume!
As might be expected with such a complex production process, when the dispute arose the wording of the contract was capable of numerous different interpretations with regard to the way in which the allowed tolerance should be applied. We liaised with our client, instructing solicitors and Counsel to conclude on the most likely interpretation. We built our loss quantification calculations in such a way that the impact of each interpretation on the wasted costs could be readily quantified.
Throughout the process we also identified additional heads of loss that had not previously been addressed, either because they had not been considered or because they were considered to be too difficult to quantify. The upshot was that our final expert report incorporated wasted costs of £4.2 million under seven heads.
Our report was attached to the Particulars of Claim, following which the parties entered into a series of negotiation meetings. The Defendant raised an objection to the claim during the negotiations which we factored into the loss of profit calculations, ultimately increasing the claim for wasted costs to £5 million.
The parties ultimately settled the dispute with a deal involving cash and guaranteed income from a separate trading relationship. The commercial outcome was that our client received far more in settlement than it originally expected.