Rix v Paramount Shopfitting Co Ltd [2020] EWHC 2398 (QB)
Head v Culver Heating Co Ltd [2021] EWCA Civ 34
These two recent cases illustrate the complexities that can arise in a situation where the injured (or deceased) person has (or had) his or her own business, with income both from a salary and from a shareholding. If the income from the shareholding will endure after the death, what does that mean for a FAA financial dependency claim, or a claim for lost years of earnings? Especially in the light of the Court of Appeal’s judgment in the later case, Head, which cited and approved the approach in Rix, the applicable principles are now somewhat clearer.
Rix
In a judgment of September 2020, Cavanagh J considered the financial dependency aspect of Mrs Rix’s FAA claim. Her late husband had built up a profitable company in construction and joinery. At the time of his death, he owned 40% of the shares in that company, and Mrs Rix owned 40%, with their sons 10% each. Mr Rix also drew a salary, as did Mrs Rix, although that salary did not reflect her contribution to the business, but was a tax-efficient way of taking money out of it. He found that she was, at the point of his death, financially dependent upon him. After his death, his eldest son took over as managing director of the business, and the business became more profitable. As Mrs Rix now had an 80% shareholding, the defendant argued that she had not suffered any financial loss at all as a result of her husband’s death, as in purely financial terms, her income was greater than when he was alive.
The court considered that there was some logic in both parties’ positions, but that the answer lay in three leading Court of Appeal authorities, Wood v Bentall Simplex Ltd [1992] PIQR P332 (CA); Cape Distribution Ltd v O’Loughlin [2001] EWCA Civ 178; and Williams v Welsh Ambulance Services NHS Trust [2008] EWCA Civ 81. The core principles he identified included the following.
First, and critically, there is a difference between an income-producing asset, such as a rental property or an investment, on the one hand, and a business which was benefiting from the labour, work, and skill of the deceased, on the other. Where the value of an income-producing asset is unaffected by the deceased’s death, there is no financial loss or injury as a result of the death, and so there is no claim for loss of financial dependency in relation to it. Where, however, the deceased worked in a business that benefited from his or her hard work, the dependants will have lost the value of that hard work as a result of the deceased’s death and so will have a financial dependency claim.
Second, following O’Loughlin and Williams, a loss of financial dependency is fixed at death, and so the value of the loss, is not assessed by reference to how well the business has been doing since the deceased’s death.
Third, the courts should look at the practical reality in relation to financial dependence, not at the corporate, financial or tax structures that were used in family arrangements. This was a reference to the fact that although she had received a salary, she had not herself worked at all, and it was an arrangement for tax reasons.
As a result, Cavanagh J rejected the defendant’s contentions, that Mr and Mrs Rix’s shareholding in the family business was an income-generating asset, independent of the work and labour of Mr Rix himself. He found that Mrs Rix had suffered a loss of financial dependency, notwithstanding that the business was more profitable after his death than it was before. Finally, he also went behind the ostensible fact of Mrs Rix herself receiving a salary and income, because the practical reality was that such income arose by virtue of Mr Rix’s labour, rather than her own.
Head
This case concerned a mesothelioma claim brought by the injured Mr Head, who subsequently died after trial. The issue which subsequently went to the Court of Appeal was that of the ‘lost years’ claim. On this, the parties had been “very far apart indeed”: the Claimant had contended for an award of over £4 million, whereas the Defendant argued there should be no award at all.
Mr Head had established a profitable business. His wife worked for the business in an administrative role for two days a week, and took a salary, but HHJ Melissa Clarke found that it was essentially Mr Head’s business, and concluded, as a fact, that Mr Head’s future earning capacity was at 90% of his business’ profits, subject to a deduction equal to the value of Mrs Head’s work for the business. However, she then considered whether this notional loss was diminished by the dividend income from his shares in the business which was likely to survive his death, and concluded that it was, to such an extent that there was no residual loss at all. She reached that conclusion on the basis of her reading of an earlier High Court decision in Adsett v West [1983] QB 826, understanding that to mean that where earnings enjoyed in life survive and continue to be earned after death, those earnings have not been lost and cannot form part of a ‘lost years’ claim.
Giving the only judgment of the Court of Appeal, Bean LJ concluded that this conclusion at first instance was wrong in law. He considered all that had been determined in Adsett was that there was a critical distinction between loss of earnings from work, and loss of income from investments. As an example of the latter, he took someone who, after a few years in the insulation industry, won the National Lottery and then lived off investments before being diagnosed: he would have no claim for loss of earnings in the lost years. By contrast, Mr Head was not someone who was not working, and merely passively received an income from his shareholding. Rather, he was the driving force of the company. So his future loss of earnings was not restricted to the “very modest” salary which he took – the level of which was fixed “for reasons of tax efficiency” and did not reflect the value of his work. Rather, the full extent of his earnings included all the income which he and his wife received from the company, save for the small deduction in respect of Mrs Head’s work.
Summary observations
The two decisions in Rix and Head are complementary. Although the former is a FAA claim, and the later was a claim personal to Mr Head (and thereafter his estate), the core principles appear the same. Indeed, in coming to his conclusion, Bean LJ cited Rix, and expressly analogized the position with that case (“As Cavanagh J did in the Rix case…”). A conceptual flaw in the defendants’ position in both cases was assuming a dichotomous treatment of salary as earnings on the one hand, and dividend income as analogous to a passive investment income on the other. These decisions show the courts looking behind the arrangements that might be made cases for tax efficiency, and to the underlying reality of what income each man was generating by his work. Given how far apart the parties were on the law in both cases, the clarification in Rix and Head appears to have been much needed, albeit applying these principles to the facts of any particular case may yet prove difficult.
