Expert Examination
April 19, 2022

The fire costed 4.5 billion, an examination on the remains and close attention to the expert: how we conducted the examination of the ‘First Solution’ case

Case No. А41-24226/20 was before the Arbitration Court of the Moscow Region.

It is always difficult to conduct an examination and defend it before the court, especially when hundreds of equipment units have been destroyed, and damages amount to billions of rubles. But the more serious the challenge is, the more valuable is the result. Read the bloody details in our new case.

The core of the matter and the first difficulties in the expert's task

A fire broke out at the metallurgical plant, which spread to an area of about 25,000 m². The walls of the building were burned, the roof collapsed and almost all equipment and utilities were destroyed.

The cause of the fire was established within the criminal case – in the workshop, which was rented by ‘First Solution’ LLC, welding works were carried out. They set fire to the packaging materials.

The owner of the premises ‘DOZAKL’ LLC (the lessor) filed a lawsuit against ‘First Solution’ LLC (the tenant) for the recovery of 4.5 billion rubles in damages and lost profits for the period of forced downtime. The claims were supported by the ‘Ingosstrakh’ insurance company, which insured the lessor's property.

To calculate the damages, the court appointed a forensic examination and entrusted its conduct to Veta expert group. Dmitriy Zharskiy acted as an expert.

Dmitriy Zharskiy,
CEO of Veta expert group

‘Our work was complicated by the fact that the examination was appointed only a year after the fire itself. The rest of the equipment by that time had already been sold for scrap. Instead of the workshop only remains were left.

The task of the expert was further complicated by a large number of the missing equipment and material assets – a combined total of 809 units. In addition, it was a special-purpose equipment of different production years: from 1974 up to 2018. How much would a 1976 lathe machine cost now?
Except for the price of the equipment itself, the delivery and installation costs should also be considered. Since the equipment was a special-purpose one, its installation required the works of a highly qualified personnel, which lead to the rise of its price.

Some of the equipment was customized. For example, an aluminum smelting line was. It was not easy to find analogues for calculations.
The total area of the premises was 37,000 m2. The walls were their only remains.’

ООО «ДОЗАКЛ» обратился в суд к ООО «Первое решение» Пожар стоимостью 4,5 миллиарда, экспертиза на руинах
he fire at the metallurgical plant

The questions raised to the expert were as follows:

  1. To determine the list and condition of the property destroyed as a result of the fire.
  2. To determine the condition of the premises before and after the fire.
  3. To determine the value of the property and premises destroyed by the fire.
  4. To determine the lost profits of the landowner.

 

How can one calculate and evaluate assets destroyed a year ago?

By identification of assets destroyed

To determine the list and condition of the destroyed property, the expert relied on primary and warehouse accounting records:

  • Certificate of the list of fixed assets that were in the premises at the time of the fire;
  • Certificate of the list of property destroyed as a result of the fire;
  • Report on mechanical condition of the equipment;
  • 1C databases uploading;
  • Certificates on fixed asset count completion;
  • Certificates of work in progress and fixed assets write-off;
  • Report on mechanical condition of fixed asset;
  • Reports following the results of inventory audit.

Expert's Opinion: The primary documentation helped to identify that the equipment and material assets were in the premises and were indeed destroyed due to the fire.
Dmitriy Zharskiy,
CEO of Veta expert group

‘We knew that the plant operated as a complex enterprise and was under the supervision of Rostekhnadzor. This meant that the equipment was in good working order, and the building was in proper condition. Otherwise, the company would have been closed by regulatory authorities.’

By determination of lost profits

The difficulty arose in determination of lost profits – income that the plaintiff could have received during the restoration works. There is no universal formula for its determination – the calculation of lost profits is probabilistic in nature and in each case depends on many factors (Plenum of the Supreme Court of the Russian Federation No. 25). The qualification of an expert is manifested in the ability to establish lost profit with a reasonable degree of certainty.

Lost profits in this case consisted of:

  • potential income of the landowner;
  • fixed costs, regardless of the volume of production (for example, payment of salaries to employees, protection of the territory).

Как определили упущенную выгоду

To determine potential income, the expert analyzed the lessor's official accounting records for the last four years and compared them with industry indexes. Gross profit margin turned out to be close to the industry average: the index for the industry was 7.52%, and for the company – 6.2%. The expert concluded that the lessor's business was typical, and used data from the plaintiff's accounting to determine the lost profit.

The landowner did not have documents confirming income and expenses, so the expert decided to use the factographic method and proceeded from accounting data that are transferred to the tax office. Averages data were taken and extrapolated to the future.

Due to lack of information, the expert calculated fixed costs on the basis of state statistics on the metallurgical industry. The percentage of fixed costs was calculated from the cost price.

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It is worth separately mentioning about the period for which the amount of lost profits should be calculated. It is not a trivial task to calculate the time required to restore the plant. The expert relied on SNiP 1.04.03-85 (Construction Norms & Regulations) and other documents. The expert determined the recovery period at 18 months.


Expert's opinion: According to the expert's opinion, the value of the destroyed equipment and material assets of the plaintiff amounted to 2 billion rubles, the market value of the destroyed part of the premises was evaluated at 440 million rubles, and the lost profit was specified as 389 million rubles.

Four summons to court, tough interrogation and personal attacks: how the trial was run

The loss of profit, according to the expert's calculations, was almost two times lower than that initially demanded by the plaintiff, so it was logical to expect the expert to be called to court to give explanations on the opinion.

Dmitriy Zharskiy,
CEO of Veta expert group

‘In total, the expert was summoned to court 4 times. The court hearings themselves lasted about two hours. That is not the highest record in our practice, but nevertheless it is physically challenging to withstand a two-hour tough interrogation by both sides.’

By the beginning of the trials, the defendant's company also experienced a corporate dispute – the head of the company was replaced, personnel reshuffle began. Because of this confusion, both old and new lawyers came to the court. And the more representatives were, the more questions to the expert arose.

Most of all, the expert was interrogated about the definition of lost profit, because it is probabilistic in nature, and there is no clear algorithm for its calculation. Moreover, the parties argued about the cost of equipment: 10 main production lines for aluminum smelting accounted for more than 90% of the cost. Such equipment is customized, so it is difficult to find analogues to make calculations.

The defendant's lawyers were well prepared for the trial. In order to challenge the findings of the examination, they studied the identity of the expert and his publications in various publication mediae. So they tried to prove non-existent contradictions between the classical formula for calculating of lost profits and an adapted version for this situation. They focused attention to the fact that the calculation could not be evaluated in such a manner if in the expert’s article it was said that such a calculation method is unacceptable. But the lawyers’ strategy did not work as they misinterpreted the conclusions from that publication.

On his part the expert prepared four blocks of explanations for the trial, which were the same size as the expert opinion itself. But that was not the most striking thing. The expert had less than a day to prepare explanations, although such work usually takes several days at least.

Dmitriy Zharskiy,
CEO of Veta expert group

‘Clarifying questions from one of the parties were received on Sunday evening, and explanations were required by Monday morning at the court hearing. I had to work on the train on the way home and all the next night. If I wasn’t on time, I would have to answer the questions orally, and that is more challenging. It is unreal to remember hundreds of pieces of equipment and thousands of formulas, and imprudent answers would serve as another reason to challenge the opinion.’

Court Quotes

‘In view of the fact that the findings of the expert on the issues raised by the court are unambiguous and motivated, there are no ambiguities and contradictions in the expert’s opinion, there are no grounds for appointing a repeated or supplementary expert examination in the case. During the examination the court have not established any violations of the norms of procedural law and legislation on examination. There are no grounds for mistrusting the expert's findings.

The expert opinion does not contain contradictions, is sufficiently clear and complete, and is accepted as a proper evidence in the case.’

What is the result?

The defendant tried with all his might to challenge the expert's opinion, which was not surprising as the amount of claims was huge. He tried to prove that he could not be blamed for the fire. Its representatives stated that the expert's calculations were unreliable and the amount of lost profits was overestimated. Almost every figure in the opinion was disputed.

The court found the expert's opinion as an appropriate evidence, despite the objections of the defendant and the lack of information for determination of the damages.

The tenant ‘First Solution’ LLC was obliged to pay the lessor ‘DOZAKL’ LLC 1.3 billion rubles of losses and 200 thousand expenses for the state duty.

According to the expert's opinion, the total amount of damage amounted to 2.926 billion rubles.

The rest of the claim was dismissed by the court.

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