This post was written by Samuel Cuthbert. It concerns the decision of the Court of Appeal in Head v The Culver Heating Co Ltd, which was handed down on Monday afternoon. The Court of Appeal overturned the decision of the High Court that the Deceased, a successful businessman, could not recover any loss of earnings because the profitability of his business would likely continue after his death and so any divided income from his shares in that business would survive his death. Mr Head was alive at trial but had sadly died by the time the case came before the Court of Appeal.

The judgment of the Court of Appeal can be read here.

Background

This was an appeal against the judgment of Her Honour Judge Melissa Clarke on the principal issue of what damages should be awarded for the Deceased’s ‘lost years’ claim, where the Deceased was the founder and managing director of his own heating and ventilation company, Essex Mechanical Services Ltd (“EMSL”). The Deceased was both paid a salary and received divided income on his shares in ESML.

At first instance

The Defendant relied upon Adsett v West [1983] QB 826in which McCullough J distinguished between earned income arising from a claimant’s capacity to work as recoverable in a ‘lost years’ claim, and income derived from capital surviving a claimant’s death which is not recoverable in a ‘lost years’ claim.

The Judge accepted the Defendant’s argument that the Deceased’s income was derived from his successful business and would not be lost. Accordingly, the judge valued this aspect of the claim at zero, in contrast to the £4 million which the Claimant sought. The Judge asked whether it was relevant for the purposes of a ‘lost years’ calculation that the Deceased’s dividend income from his EMSL shares would survive his death. The judge summarised her reasoning at [11]:

1. the principles of Adsett v West applied;
2. on the balance of probabilities, the profitability of EMSL was likely to continue after Mr Head’s death, therefore the dividend income from the shares that he and his wife held in EMSL was likely to survive his death;
3. this dividend income was greater than the ‘surplus’ income he enjoyed;
4. per Adsett v West, there was no loss in the ‘lost years’.

The Judge concluded at [70] that “the real distinction being drawn by McCullough J in Adsett v West is not between earned income and income from capital but from income which is lost on death and income which survives death”.

The Judge refused permission to appeal, as did Simler LJ on the papers. Following an application under CPR 52.30, which codified the principle set out in Taylor v Lawrence [2003] QB 528, the order refusing permission was revoked and the question was referred for determination by the Court of Appeal. Bean LJ, giving the lead and unanimous judgment, stated that:

“The overwhelming majority of Taylor v Lawrence applications are entirely unfounded but this one was a rare exception, perhaps the most striking one I have seen during six years’ service in this court.”

It was deemed necessary to reopen the determination of appeal in order to avoid “real injustice”.

On appeal

There were seven grounds of appeal. The first alleged that the decision was based on a misunderstanding of the expert accountancy evidence and a mistaken assumption that those experts had agreed that the profits of EMSL would continue undiminished after the Claimant’s death. Bean LJ found it unnecessary to resolve this ground in light of his judgment on the subsequent six grounds which are dealt with in concert.

Bean LJ accepted the position as set out in Adsett that the correct line to draw was between loss of earnings from work and loss of income from investments. Significantly, it was held, Adsett involved a claimant whose shareholdings and their respective dividend income had been gifted to him. Analogously, it was stated that had the Deceased retired prior to the onset of mesothelioma symptoms, the loss of earnings claim would be zero. However, it was accepted by HHJ Clarke that the Deceased was integral to the running of EMSL and that would have continued to be the case but for the mesothelioma.

The Deceased was paid a very modest salary which was fixed for tax efficiency and, as at [33], in light of the Deceased being the driving force behind EMSL “it made no sense at all […] to say that this was the full extent of his earnings from work.” As a matter of logic, all of the Deceased’s income from EMSL represented the fruit of his labours and not a return on an investment. The corollary to that is set out at [35] whereby Bean LJ recognises two points. First, at the point at which the Deceased would have stopped working full time, if he retained his shares in the company, his dividend income would be pro rata income on investments and not earnings from his work. Second, upon the Deceased stopping work altogether, any surviving dividend income would entirely constitute income on investments.

At [34], Bean LJ agreed with the Appellant’s submission that the nature of a ‘lost years’ claim was to compensate the earning capacity which had been personally lost by a claimant:

“Mr Head was free to dispose of that income in whatever way he chose. By contrast, as Mr Steinberg rightly observed, he could not make a testamentary disposition of his own future earning capacity. It was not necessary for him to be able to plead and prove what the cost of a replacement would be to EMSL: that would be to mischaracterise the nature of a lost years claim, which requires assessment of the value of the earnings or earning capacity which the claimant personally has lost.”

The Court of Appeal therefore set aside the Judge’s assessment of  the ‘lost years’ claim, and remitted the case for an assessment of damages before the Senior Master.

Comment

This judgment is hugely significant in directing the manner in which courts address quantification of the ‘lost years’ claims. There is now clear authority that a lost years claim should reflect the annihilation of the claimant’s future earning capacity by their illness.The earnings which the Deceased lost were not a return on any kind of investment in EMSL, but a reflection of his acumen, experience, skill and hard work. The value of that work was extinguished upon the Deceased’s death, and so falls to be recovered. The fact that EMSL may continue to make a profit in the future is immaterial to the personal financial loss which the Deceased suffered by reason of the mesothelioma.

It further represents a recognition of the fact that, for the purposes of ‘lost years’ claims, any quantification of income must fully embrace the economic reality of a claimant’s business structure. Distinguishing between salary and dividend income for such purposes does not appreciate that such lines are drawn for the purposes of tax-efficiency. Separating the two artificially and unfairly hives off income which was nonetheless the fruits of the Deceased’s labours.

The language used by Bean LJ at [6] is striking: “I consider that it was indeed necessary to reopen the determination of this appeal in order to avoid real injustice”. Such bold statements of fundamental principle are rare and speak to the significance of this judgment for both the Deceased’s widow and claimants more broadly.This judgment affirms that properly compensating a claimant for their loss of earnings in the ‘lost years’ requires close scrutiny and appreciation of which earnings are the fruits of their labours, and which are a return on an investment. Bean LJ highlights at [35] that Mr Head’s evidence regarding the involvement he would have continued to have in EMSL as he aged was accepted by the judge at first instance. Logically it must follow that the assessment of damages maps that evidence in compensating the Deceased’s estate.

Harry Steinberg QC and Kate Boakes – instructed by Peter Williams of Fieldfisher LLP – acted for the Appellant.