Economic Experts (EE) provides economic consulting and litigation support in complex legal cases. One of EEs current clients, USClient, had a contract with ForeignCO to design and build a plant for ForeignCO. Before the plant was completed (and before ForeignCO made any payments to USClient), ForeignCO notified USClient that it was canceling the contract. USClient filed a lawsuit claiming that ForeignCO breached the contract and as a result of this contract breach USClient was claiming damages of $220 million. These damages consist of $170 million of out-of-pocket expenses that USClient spent designing and building the ForeignCO plant and $50 million of fixed overhead that USClient allocated to the ForeignCO project.

At the time it was building the ForeignCO plant, USClient had several other construction projects. As part of USClients normal accounting practice, it allocates all overhead costs not incurred directly on particular projects to all projects, using total direct costs as the allocation base. Using this allocation methodology, the total overhead costs allocated to the ForeignCO project totaled $50 million.

ForeignCO hired an expert who wrote a report rejecting the $50 million of overhead as damages. Specifically, the expert for ForeignCO argued:

1. Costs included as damages must be incremental to the contract in order to be damages. As such, those costs must be directly related and necessary to the activities caused by the breach and reflect expenditures that would not have been made but for the breach. Based on my review of USClients overhead, it is my opinion that the $50 million of overhead claimed as damages by USClient are either unrelated to the ForeignCo project or are fixed in nature and needed for the general operations of USClient. The $50 million of overhead costs would have been incurred by USClient and are not incremental to the ForeignCO project. Therefore, the damages claimed by USClient of $50 million of fixed overhead should not be included as damages.

EE has been engaged by USClient to provide an expert witness to comment on ForeignCOs expert report cited above. You have been hired by EE as the expert witness to rebut ForeignCOs opinion. The legal definition of damages resulting from a breach of contract by a defendant are usually calculated under the principle that compensation awarded to the plaintiff as damages should place the plaintiff in the economical position equivalent to the plaintiffs position had the harmful event never occurred.

Required:

Write a rebuttal report that critiques the ForeignCO expert witness. In other words, do you agree with ForeignCOs expert that the $50 million of fixed overhead should be excluded as damages claimed by USClient? If you disagree, explain why the ForeignCO experts opinion is wrong. Note: For the purposes of your report, you should assume that the $50 million of overhead consists of allocated fixed indirect charges such as the salaries of the senior executives (CEO, CFO, etc.), the human resource department, accounting, information technology, depreciation on the corporate office, and so forth.