Article provided by Manala Actuaries
Small businesses may sometimes find themselves in a situation where they either have to defendant a damages claim or pursue one. Many reasons may result in this situation. Some of these reasons are:
- Contracts unfairly cancelled thus prejudicing the SME
- Contracts being unfairly given to competitors when the SME is more deserving
- Shareholder disputes within an SME which may necessitate a buyout of one or more of the shareholders
- Employment claims made by employees against an SME
- And many other types of claims
The general process in such matters is that the legalities i.e. merits of a case need to be sorted first. This may be either through the court or out of court settlements.
What generally becomes challenging for many SMEs is the quantification of appropriate damages claims either for plaintiff purposes or defendant purposes. The nature of such quantification can become very complex and an SME may need to seek an expert for assistance. In most instances, actuaries are involved in such claims.
South African case law favours the once and for all principle in such claims. What this means is that all claims must be summarised in a single Rand amount. This may not be easy to appreciate for the layman due to the long term nature of such claims and the contingencies that the claims depend on. Actuaries are trained to deal with such types of claims. It is therefore important that an SME involved in such claims get the services of a competent actuary in such matters. South African courts do appreciate the use of experts to justify numbers in damages claims and such numbers are generally considered (and may have a big influence ) in the finalisation of damages claims by the courts.
Examples of such claims may be employment-related claims which may entail the quantification of all future lost salaries taking cognisant of salary inflation, mortality, investment returns and tax rates.
Other employment-related claims may be to ensure that any court judgment or CCMA judgements are applied appropriately. Whilst judgement may seem easy to read, the technical interpretation of them may be a bit complex when a single amount has to be put on the claim.
An SME may also want to value of “buyout” against an employee it wants to get rid by offering fair compensation for this. Generally, fair compensation may entail a reasonable compensation of future salaries likely to be lost. The calculation gets complex due to the need to consider age, gender, likely salary progression, mortality and taxation rates, amongst others. Allowance also need to be considered for the investment return benefit of getting an upfront payment as opposed to future monthly salary payments.
Commercial claims for SMEs may be crucial to the survival of an SME. It is therefore important that when an SME is a plaintiff or defendant in a claim, a proper quantification of a damages claim is done.
Commercial claims can be very large, especially if they involved large contracts. An example will be an unfairly termination or cancellation of a tender after awarding to an SME. A fair settlement will entail the quantification of all lost profits from the contract. Due to the once and for all principle, this will mean modelling of the emergence of profits from the contract to enable an appropriate valuation of them.
Similar techniques will be needed in a case where an SME has been unfairly not awarded a contract.
Shareholder related claims
It does happen from time to time that there are shareholder disputes in an SME. In these instances, a quantification of the “dispute” portion may be needed. Depending on the nature of the case, this may include techniques such as mortality, inflation, discounting, scenario analysis etc.
When an SME is faced with damages claims, it is important to get the right skills for the quantification. An incorrect quantification can be very detrimental to the SME. Actuaries competent in such matters can assist the SME and its legal team.
As part of the company’s research on the SMEs innovativeness in Gauteng, we would appreciate your participation in the below anonymous survey.