Canada: Facts vs. Assumptions - Experts Need To Know The Difference

Last Updated: January 18 2013
Article by Kim Jezior

Chartered Business Valuators (and other financial experts) are often retained to provide their professional opinion as to the quantum of a financial gain or loss in the context of litigation or a dispute. One or more experts are generally retained by each of the opposing parties and as a result, at least two differing opinions are often presented to the Court. In most cases, the differences in opinion often arise as a result of the assumptions underlying the experts' analysis.

Quantifying the financial impact of an event that did not (or will not) occur, by its very nature, requires the adoption of certain assumptions. However, drawing conclusions of fact and making unreasonable or unsupportable assumptions may result in an expert's report being granted little weight by the Court and therefore being of limited use. It is essential that Counsel and their client understand the differences between the facts that the expert relied upon and the assumptions that the expert made (or was asked to make), including the impact that these assumptions have on the expert's overall findings and opinion. This understanding is also critical for purposes of assessing the client's litigation position and strategy as well as possible settlement offers.


The difference between a fact and an assumption may not be obvious. A fact is something that has occurred or is actually the case. The usual test for a statement of fact is verifiability; that is, whether it can be proven.

An assumption, on the other hand, is a belief without proof. We, as a society, have grown accustomed to assumptions being presented to us as facts. Advertisers routinely present assumptions as facts as a means of influencing our purchasing decisions; political candidates present assumptions as facts in order to garner public support; friends and colleagues often present assumptions as facts in order to obtain our approval or agreement.

There are times when we need to act on certain assumptions without checking for the proof (or support) behind them. However, when it comes to the credibility, reliability and acceptance of an expert report for purposes of litigation it is essential that the key assumptions underlying the expert's opinion be clearly disclosed and, where possible, supported by consideration of the relevant facts.

Standard No. 310 issued by The Canadian Institute of Chartered Business Valuators ("CICBV") requires that expert reports disclose the "assumptions used and the procedures followed to determine the reasonableness and appropriateness of key assumptions". In applying Standard No. 310, the CICBV suggests that the Chartered Business Valuator classify the key assumptions as follows:

i) Category 1 - Those assumptions that the Expert is directed to take, that are not within his/her area of expertise;

ii) Category 2 - Those assumptions made by the Expert, within his/her areas of expertise and based on a scope of work executed by him/her; and

iii) Category 3 - Those assumptions that the Expert is directed to take on matters that are within his/her area of expertise, but where the Expert was not provided the opportunity to execute a scope of work appropriate to add assurance to the assumption.

Categorizing the assumptions in this manner allows for a better comparison between expert reports and may assist in reducing the number of issues to be addressed during settlement discussions or litigation proceedings.


Whether the case pertains to allegations of beach of contract, personal injury or lost business value, assumptions are an integral component of an expert report. The following case study highlights some of the major areas where assumptions are required, as well as the steps that can be taken to ensure that the assumptions adopted by the financial expert are reasonable, supportable and consistent.

The Case

A U.S. based manufacturer of sporting equipment and athletic attire terminated its contractual relationship with a Canadian distributor prior to the contract's expiration date. The distributor sued alleging a breach of the contract and claiming loss of profits in excess of $2 million. For purposes of quantifying the incremental profits that would have been earned by the distributor "but for" the early termination, the expert must make certain assumptions relating to:

a) the period of the loss (i.e. a "reasonable" notice period);

b) expected net future sales volumes, selling prices and gross margins;

c) incremental costs that would have been incurred by the distributor to earn the lost revenues and margins being claimed; and

d) the net proceeds realized from the distributor's mitigation efforts.

Given the need to make these types of assumptions, what is it that distinguishes an expert report that will stand up to rigorous cross-examination from a report that will be given little consideration by the Court? To further explore this question, we have considered the three categories of assumptions outlined above in relation to the case study.

Period of Loss - Category 1

In order to provide an opinion regarding loss of profits, the expert must make a reasonable assumption(s) as to the period of loss. The period of loss is generally a legal matter that will ultimately be determined by the Court. While this assumption is outside the expertise of the financial expert, in our experience, providing an analysis that considers alternative loss periods is most helpful to Counsel and to the Court. In this case, the Plaintiff claimed losses for a period of 2 years, which the Defendant alleged was excessive. The Defendant suggested that 6 months was more reasonable. The Defendant's expert quantified the loss of profits to the distributor based on three alternative loss periods (6 months, 12 months and 2 years) – the loss periods selected were based on the case facts and Counsel's instructions. The Plaintiff's expert's report considered only one loss period of two years, therefore limiting the usefulness and comparability of that report.

Quantification of Net Incremental Profits – Category 2

The expert must make certain assumption(s) as to the revenues that would have been generated during the loss period, net of incremental costs, in order to quantify loss of profits. The assumptions that are made by the expert that are within his/her areas of expertise are based on a scope of work executed by him/her. Where historical financial records exist, it is important that the expert understand the historical results – what happened and why, in order to project what would have likely happened during the loss period "but for" the triggering event (i.e. the alleged breach of contract). Absent a fundamental change in the operations of the business or industry, historical experience is often the best indicator of future experience. However, the expert must also consider and address potential differences between the historical actual results and the likely results. For example, in this case, the Plaintiff's expert adopted management's revenue forecast of 8% annual growth, based on historical growth rates. However, management had been advised prior to the termination that certain product lines were likely going to be discontinued by the manufacturer (during the period of loss). The Defendant's expert adjusted the expected sales volumes to reflect this likely decline from historic levels. In order to assess the historical results and management's projection of future results, the Defendant's expert relied upon the following sources of information:

  • Historical monthly, quarterly and annual financial statements;
  • Forecasts, budgets, and plans;
  • Correspondence between the manufacturer and the distributor; and
  • Independent market analysis.

Proceeds from Mitigation (Category 2/Category 3)

Litigants are required by law to take reasonable steps to mitigate or reduce their losses. In this case, the distributor sought out and secured an unrelated product line subsequent to the termination. The Plaintiff's expert was asked to assume that the Plaintiff would have secured this product line absent the termination and as a result concluded that there were no net proceeds from mitigation. This assumption was not supported by an analysis of the case facts. The Defendant's expert considered the Plaintiff's previous efforts to secure additional product lines (there were none) as well as the warehouse and personnel capacity of the Plaintiff. Based on his analysis, the Defendant's expert concluded that absent the termination, it would not have been possible for the distributor to service the original contract as well as the new product lines without securing additional warehouse space and hiring additional personnel and as a result concluded that there were net proceeds from mitigation.

Internal Consistency – Category 2/Category 3

The most common mistake that financial experts make when adopting assumptions is that of internal consistency. For example, in this case, management projected an 8% annual increase in sales volumes with no increase in overhead costs or capital expenditures. In order assess management's projection, the following types of questions should be considered by the experts:

a) Do the historical actual growth rates support the projected growth rate? If not, what is the basis for making an assumption of 8% growth?

b) Does the business have sufficient warehouse space and staffing levels to service the projected increase in sales? If there are potential capacity issues, would the business have incurred incremental costs to rent additional space and hire additional staff?

c) Has the risk related to achieving the sales forecast been adequately reflected in the discount rate that was adopted by the expert to calculate the present value of the future losses?


Assumptions are an integral component of a financial expert's report (and opinion). Clearly disclosing the assumptions that were relied upon, including those that were provided by Counsel, and setting out the underlying supporting facts (including those that differ from the assumptions that were adopted), will assist the Court in assessing opposing views and ultimately determining the damages award.

Lastly, remember

"The least questioned assumptions are often the most questionable." Paul Broca

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions