Damage Calculation: Ex-Post vs. Ex-Ante Theories

Two theories of calculating damages are the ex-post and the ex-ante. You may have heard of these two, but probably not. And these two they work totally different, and it's very interesting how you would consider these when you're doing a damage calculation. Basically, ex-post looks back at damages and ex-ante looks forward.

Now, let me give you an example because when I first started, that didn't make any sense to me either.

Let's assume that you hire someone to build a house for you, and they build the house. By accident they build it 12 inches on your neighbor's property. So obviously there's going to be a legal dispute here, and how would you calculate damages?

Well, in the ex-post what they would say is, "Well, you've used 12 inches of your neighbor's property. Obviously, you have to figure out what the fair market value is and they'll compensate you and we're all done and let's go."

That's the way to look back at what happened and theoretically, the neighbors should be happy, and the people who just bought the house should be happy.

But, take a step back what does this mean? Because let's say I build a house, and I know of this case and I want to build my house on my neighbor's property, in fact, I want to take like two feet of this property, and he won't sell it to me. You know what, I'll do it by accident, I'll build a house and I'll take two feet of his property, and then he'll have to give me the fair market value.

And so, what ex-ante says is that you can't look back you have to look forward. Because if everybody who wants to build on your neighbor's property doesn't know, and they're just going to have to pay for the fair market value, there's no incentive not to do it.

So what ex-ante says is no, the damages have to be substantially more so that people don't go around building on their neighbor's property.

So for that case where I built on my neighbor's property instead of fair market value maybe it would be triple, or seven times fair market value. Because that would stop people from doing it.

So these two theories of damages are very important, in most cases, we look at both and depending on the facts and circumstances we usually end up using one or the other. If you have any questions on ex-post or ex-ante, feel free to send me an email.