In Paramount Shopfitting Company Ltd v Rix [2021] EWCA Civ 1172 the Court of Appeal rejected a defendant’s appeal in relation to the assessment of damages awarded to a widow. The widow’s husband had run a successful business.  The fact that it had continued to prosper after his death did not impact upon the award that was made.  The question to be asked is whether the income arose from the deceased person’s involvement in the business, rather than simply from capital.

“in cases like the present, where the inherited asset takes the form of a business in which at the time of his death the husband was himself actively working and thus contributing to the generation of the income of which she enjoyed the benefit, it is in principle necessary to distinguish between the loss of the income derived from those services and the loss of the income derived from the capital asset.”

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THE CASE

Mr Rix died as a result of  asbestos-related mesothelioma. He ran a highly successful business.  His wife was a shareholder in the business. The business continued after his death.  The defendant contended that the widow had suffered no loss of financial dependency as a result of the death.

THE JUDGMENT AT FIRST INSTANCE

The judgment at first instance is considered in detail here. 

The judge found that Mr Rix’s widow had suffered a loss and quantified that at £64,616 a year at the time of trial, adjusted for later years.

THE DEFENDANT’S UNSUCCESSFUL APPEAL TO THE COURT OF APPEAL

The Court of Appeal rejected the defendant’s arguments and upheld the decision at first instance.

THE DEFENDANT’S GROUNDS OF APPEAL

There were three grounds of appeal.

i) The judge erred in treating all of the profits generated by MRER Ltd which had accrued to the claimant and her husband (and would have been expected to do so had he lived) as providing the basis for the calculation of a loss of dependency suffered by the claimant without regard to whether those profits survived his death and continued to accrue to her;

ii) The judge erred in law in treating the claimant’s entitlement to a share of the profits of MRER Ltd based on her own shareholding in the company as if it had belonged to the deceased;

iii) The judge erred in law in confining the credit for surviving income (as required by Coward v Comex Houlder Diving Ltd, 18 July 1988, CA) to rental income from commercial property owned by the claimant and, when received, her state pension and failing to take account of the claimant’s surviving income in the form of a share of profits in MRER Ltd based on her own shareholding in that company and her director’s salary.

THE COURT OF APPEAL’S REJECTION OF ALL THREE GROUNDS OF APPEAL

The Court of Appeal rejected each ground of appeal.

1. The following principles can be identified from the authorities as to the approach of the court to the assessment of the damages to be awarded under section 3 FAA:

i) The question to be addressed is what is the extent of the dependants’ loss based upon a reasonable expectation of pecuniary benefit from the continuance of the life of the deceased;

ii) The assessment is dependent upon the facts of the particular case;

iii) Capital assets which the dependants had the benefit of during the deceased’s lifetime and continued to enjoy following the death are not taken into account either as part of the dependency or as a deduction from it;

iv) The question for the court is how much loss has arisen because the deceased is no longer alive and able to work, and how much of the deceased’s income was derived solely from capital which the dependants have inherited;

v) The dependency is fixed at the moment of death, it is what the dependants would probably have received as benefit from the deceased had the deceased lived. Post death events are irrelevant, save for those which affect the continuance of the dependency and the rise or fall in earnings to reflect the effects of inflation;

vi) The damages awarded under the FAA can be greater than would be justified upon a strict view of the dependants’ loss.

Ground 1

1. Since the 1970s, Martin Rix devoted his time, energy and ability to building up a successful business which encompassed construction/building, joinery and the manufacturing of granite worktops. He established a profitable company, MRER Ltd, and such was its success that in the latter part of 2015 the business moved into premises in Dunstable to enable it to accept larger contracts. Unchallenged were the judge’s findings that much of the success of the business could be attributed to Mr Rix’s skill and acumen. He possessed great business flair, he was highly competent, reliable and charming and was popular in the local area. The company’s success was reflected in its turnover.

1. The business was described as the main focus of Mr Rix’s life. Unsurprisingly, Mr Rix wished to build up a successful and stable business which he could in time pass on to his sons. He had been expected to carry on the business and gradually train his sons in all aspects of its management. Of note is the fact that Mr Rix took out a 15-year business mortgage on the Dunstable property, which was intended to run until he was 74. His death occurred when he was just 60. The judge found that until very shortly before his death, Mr Rix remained the prime mover in the business. He was primarily responsible for its health and prosperity and was the person with the contacts and the know-how.

1. Mrs Rix did not work in the business, her work and support was focused on her roles as a wife and mother. Her shareholding in and salary from the company reflected accountants’ advice, there is no suggestion that there was anything improper in this arrangement.

1. The facts of this case are similar to those in Wood, O’Loughlin and Williams in which the inherited asset takes the form of a business in which the deceased had worked in order to generate or maximise income from the asset which his dependant has inherited. In such a case it is critical to distinguish between the loss of the income derived from the services of the deceased and the loss of income derived from the capital asset. If what was lost was a capital asset inherited by the dependant and it was an asset which was generating income for the dependant prior to the deceased’s death, then no loss has resulted from his death following the inheritance. If, however, what the dependant has lost is not income derived from a capital asset but the contribution of the deceased as the manager of the business and family assets, the flair, skill, expertise and energy in the wealth-creating project upon which the deceased was engaged in his life and which, had he lived, he would be continued to be engaged upon, that is the real loss which can be valued in money’s worth. The loss for the dependant relates to the contribution or services of the deceased in creating wealth.

1. The authorities of Wood, O’Loughlin and Williams do not establish a principle that a business such as MRER should be treated as a capital asset, which will continue to produce a flow of income regardless of the death of its prime mover and driving force. In Williams the builders’ merchants business was not dissimilar in size to MRER and Mr Williams was also considered to be the driving force in the company. No aspect of the profitability of the company in Williams was treated by the court to be income attributable to capital assets. In Williams the family support prior to death was held to be derived partly from the capital Mr Williams had amassed and partly from his work as manager of the business. There was an identified separation. No such distinction was found by the judge on the facts of this case.

1. Income is only derived from capital if it is identifiable as having been received without the labour and services of the deceased. In short, it is passive. On the facts of this case, there was no identifiable element of the profits which was not touched by the management of Mr Rix. The judge concluded that MRER was not a “money generating beast” which would generate money regardless of who was in charge of it. It follows that the loss of Mrs Rix, for the purpose of the FAA, is the loss of the income generated by Mr Rix’s services to the business, irrespective of the fact that the business employs or owns the capital assets. That being so, there can be no sound objection to Basis 1 which seeks to establish the income derived from the deceased’s services. There are other cases where Basis 2 will be an acceptable proxy. Each case has to turn on its own facts and there is nothing in Williams to suggest that an assessment on Basis 2 is wrong in principle or to be preferred to Basis 1.

1. Given such a finding, I accept the submission of the respondent at [50] above that it is logical to treat the whole of the profit available to Mr and Mrs Rix as earned income and therefore part of the financial dependency. The profit available for distribution is a direct product of Mr Rix’s management of the company. The decision to retain profits within the company as opposed to taking it out by way of dividends was a personal decision by Mr and Mrs Rix.

1. The value of the dependency is to be assessed at the date of death: Williams [50]. The fact that the company has thrived since Mr Rix’s death is irrelevant for the purpose of the calculation of Mrs Rix’s dependency. As was observed in Wood and Arnup, there will be cases in which the valuation of the loss of dependency is greater than any financial loss sustained, that is what Parliament decided.

1. For the reasons given, and subject to the views of my Lords, I would dismiss this ground of appeal.

Ground 2

1. This ground was succinctly rejected by the judge at [71] when he stated that:

“The authorities have made clear that courts should look at the practical reality in relation to financial dependence, not at the corporate, financial or tax structures that are used in family arrangements. If one looks at the practical realities, it is clear that the income that Mrs Rix received as director and shareholder was entirely the result of her husband’s work for the business.”

1. In identifying the importance of looking at the practical reality the judge relied on the authority of Malyon above, an FAA case in which the plaintiff widow and her husband, the deceased, were the only directors and shareholders of a private business. The husband did the vast majority of the work and was the driving force in the business, owning all but one of the shares. His widow owned the remaining share and received a significant salary, albeit she did part-time work for the business on a casual basis. In addressing the issue of whether the widow’s salary qualified as part of the dependency for which damages could be recovered, Sellers LJ stated that the court should address the true loss which the wife has suffered. The husband’s business had been destroyed by his death and the revenue was, in substance, derived from him. The assessment of a dependency requires a finding of fact which reflects “the true financial position as distinct from an artificial or fictitious one”. The court allowed the widow’s salary to be treated as part of the loss of dependency apart from a sum which reflected the true value of her work for the company.

1. At [77] the judge identified the reality in the present case as being that the salary and dividends which Mrs Rix received were the result of her husband’s work in the company, none of it represented her own earnings for work done. In those circumstances he correctly found that the salary and dividends should be included in the loss of dependency.

1. The appellant also relies upon the authority of Ward in which two partners ran a business together and the profits were paid into a partnership account. They were subsequently advised to make their wives equal partners. One of the partners fell ill and brought a personal injury claim. The trial judge assessed the partner’s loss of earning capacity at 25{c9b670b3c77d807bdd7060c9fc0a99121cc6b184676c9335f3481a95c383dd4c} on the basis that his wife’s income should be disregarded. The Court of Appeal overturned the finding and stated that in reality the wife was a sleeping partner whose contribution to the profitability of the partnership had been nil and accordingly the plaintiff’s real loss of earnings was 50{c9b670b3c77d807bdd7060c9fc0a99121cc6b184676c9335f3481a95c383dd4c} of the partnership profits. The partnership arrangement had been an informal arrangement terminable at will, there was no public policy reason why the plaintiff’s loss should be limited to 25{c9b670b3c77d807bdd7060c9fc0a99121cc6b184676c9335f3481a95c383dd4c} of the profits as it did not reflect the reality of the situation.

1. In my judgment, the approach of the judge is consistent with the authorities and reflects the reality of this case. There is nothing in this ground of appeal.

Ground 3

1. Given the findings of the court, namely that the income of Mr and Mrs Rix, in the form of salary, dividends and profits generated by MRER, is wholly attributable to Mr Rix’s endeavours and earning capacity, no portion or percentage of Mrs Rix’s post death income can be independent of the deceased and unaffected by his death. It follows that there can be no deduction of monies received from MRER by Mrs Rix post death. Further, such deduction would contravene the principle that dependency is fixed at the date of death and nothing done by a dependant post death can affect the level of dependency from that source, save in limited circumstances which do not apply in this case.

1. For the reasons given, and subject to the views of my Lords, I would dismiss this appeal.

Lord Justice Baker:

1. I agree.

Lord Justice Underhill:

1. I agree that this appeal should be dismissed for the reasons given by Nicola Davies LJ, but in deference to the arguments before us I will add a short judgment on ground 1. I will for convenience refer to the dependant in a case of the kind we are concerned with as “the wife” and the deceased as “the husband”, since this remains the most typical scenario (though no doubt decreasingly so).

1. Although Mr Kent floated an argument to the effect that the claimant was receiving damages for a loss which she had not in fact suffered, that point is squarely addressed by Smith LJ in the passage from her judgment in Williams quoted by Nicola Davies LJ at [32] above (see also Arnup, quoted at [39]), and it is clear how the law now stands. In truth, the real issue before us was not about whether she had suffered a loss but about whether in assessing that loss Cavanagh J should have adopted “Basis 2” rather than “Basis 1”.

1. The starting-point must be that in a case where a wife has inherited from her deceased husband an asset which generates income without the need for any substantial work on his part she cannot claim to have lost the income of which she previously enjoyed the benefit: as Staughton LJ said in Wood you cannot claim for loss of the eggs if you have inherited the goose.

1. That means that in cases like the present, where the inherited asset takes the form of a business in which at the time of his death the husband was himself actively working and thus contributing to the generation of the income of which she enjoyed the benefit, it is in principle necessary to distinguish between the loss of the income derived from those services and the loss of the income derived from the capital asset. That is clearly recognised in Williams. At [65] of his impressive judgment at first instance HHJ Hickinbottom emphasised that the widow’s loss was not of “income derived from a capital asset” but was “the contribution of [the deceased]”. At [44] of her judgment in this court Smith LJ approved that passage, and at [51] she expressed the distinction as being between “income which was derived from capital” and “[income] that was derived from labour”. That is the same distinction as Bean LJ makes at [33] of his judgment in Head (albeit that that is not a FAA case), where he refers to the lost income being “the product of [the husband’s] hard work and flair, not a return on a passive investment”. (I would add that although in some of the cases the court places emphasis on the husband’s special flair, that feature cannot be essential to establishing a loss, although it may be important in quantifying it: “special” or not, his services to the business have been lost.)

1. The real question is how that distinction works in the case of a small or medium-sized business with substantial assets, where the deceased (typically, but not necessarily, the founder) is not only the owner but the main person whose work and decisions generate the profits and thus the income which he takes out of the business and which the wife enjoys. Should some part of that income be treated as deriving from the assets – buildings, plant, goodwill, workforce – rather than from the services, however important, of the husband? On this the judgment of Staughton LJ in Wood is helpful. He says that in a case where a capital asset generates income by being used for the purposes of an “active” business, like a boarding-house or a farm, and where the deceased provided services for the purpose of that business,

“the court has to ascertain how much loss has arisen because the deceased is no longer alive and able to work, and how much of the deceased’s income was derived solely [my emphasis] from capital which the dependants have inherited”.

In the last paragraph of his judgment he says (in effect) that if the husband’s income was no more than might be expected from doing the work without having any capital interest he would not regard it as incorporating an element of return on capital. I take that to mean that it is irrelevant that the capital has in one sense made the earning of the income possible. The income is only “derived from capital” if it is identifiable as having been received without the husband’s services – in short, if it is passive.

1. It follows from that approach that Basis 1 is unobjectionable in principle. It simply seeks to establish what the income derived from the husband’s services would have been. That will obviously sometimes be a very difficult exercise, depending on the circumstances of the case, and it is in such cases that Basis 2 will be a good proxy. A leitmotiv of the authorities is that the correct approach to the assessment of damages in this kind of case must depend on the particular facts (and, I would add, on what evidence is available). Basis 2 was obviously appropriate in Cape because the claim was that the husband’s flair and entrepreneurial skills would have increased the income from the existing property portfolio (see the opening lines of [15] of the judgment of Latham LJ): estimating the extent of any such increase would have been highly speculative. I am less clear why it was adopted in Williams (at [100] of his judgment in the present case Cavanagh J suggests a prima facie plausible explanation, but I am not entirely sure that it is reconcilable with the findings in that case): it may simply that it is the basis which the claimant advanced. However, all that matters is that nothing in Williams suggests that Basis 2 must in principle be preferred to Basis 1: Smith LJ’s observations at [51] are directed to showing that Basis 2 was legitimate, and indeed right for the particular case, but not that its use is mandatory in all cases of this kind. Once that point is reached, I agree with Nicola Davies LJ that the judge in this case was perfectly entitled to adopt Basis 1.