Chatwin v Lowther

This is an appeal from the order of Cox J made in the Queen's Bench Division on 18 December 2002 dismissing the defendant's appeal from part of the order made by HHJ Paynter-Reece in the Romford County Court on 24 August 2002. Brooke LJ gave permission to make a second appeal because the case raises an important point of practice, although the parties disagree about how often it will in fact arise.

The issue relates to the meaning of the words 'compensation for earnings lost' in the table in Schedule 2 to the Social Security (Recovery of Benefits) Act 1997. In the case of a self-employed person, does it refer to actual income, that is, net profits lost? Or does it refer to turnover lost?

The scheme of the 1997 Act serves two objectives. The first is to ensure that a defendant who is liable to compensate a claimant for an accident, injury or disease reimburses the state for certain state benefits paid to the claimant in respect of that accident, injury or disease. The second is to ensure that the benefits recouped from the defendant are offset against the sums received by the claimant so that the claimant does not obtain a double recovery. But there are important qualifications to that second principle. Under the previous scheme, first enacted in the Social Security Act 1989, the compensator was entitled to deduct the sums paid to the state from the total award of damages. If those sums were more than the sums awarded in special damages, the victim might lose some of her general damages as well. Under the 1997 Act, the sums paid to the state to recoup certain benefits can only be deducted from the equivalent head of damages awarded. The object is to 'ring fence' the general damages for pain, suffering, loss of amenity, or for loss of congenial employment, or the like, while enabling the state to recoup its expenditure on benefits paid in respect of loss of earnings, the cost of care and loss of mobility. Another important qualification is that the state can only recover benefits paid, and accordingly such benefits can only be deducted from the damages, for the 'relevant period', which is a maximum of five years.

The way the scheme works is as follows. Before a defendant compensator makes a compensation payment, he must obtain a certificate of recoverable benefits from the Compensation Recovery Unit (the 'CRU') of the Department of Work and Pensions. He then has to pay that sum to the CRU when he makes his payment to the claimant. The sum he pays to the claimant will be calculated in accordance with section 8. Section 8 provides:

The principles of the scheme are clear and simple but the practical operation of the Act is by no means so clear and simple. In Williams v Devon County Council [2003] EWCA Civ 365, at para 17, this court recently explained two of the difficulties:

As explained and illustrated in that case at paragraph 18, either party can appeal against the certificate of recoverable benefits on the basis that the benefits paid were not 'in respect of the accident, injury or disease'. Generally speaking, the defendant will wish to do so if the amount of benefit certified is more than the amount awarded by the court in special damages. The claimant may wish to do so if it is the same or less.

It will thus be apparent that there are circumstances in which the operation of the Act means that a claimant will receive, or a defendant will have to pay, more than the court has awarded in damages. First, if there is a finding of contributory negligence, the total of the benefits recouped and the damages paid to the claimant will be more than the judge's order; the defendant has to pay out more than the claimant receives from the court, although not more than the claimant has received overall as a result of the accident. Secondly, benefits paid for longer than five years are neither recouped nor offset, and so the claimant achieves more in total than the court has awarded; the defendant does not have to pay but there is an element of double recovery. Thirdly, and perhaps more relevantly to this case, benefits may be paid as a result of an accident even though there is little or no loss of earnings for which damages may be claimed; once again, the defendant has to pay a total of more than the claimant can achieve in damages, although not more than the claimant has received overall as a result of the accident.

The claimant suffered personal injuries in a car accident on 19 December 1995. Liability was admitted and most heads of damage were agreed. The orthopaedic evidence of both parties was that she was unable to work from that date until August 1996 when she regained her pre-accident state of health, although the judge was not in fact persuaded that she was fit to work by then and he accepted that her medical expert advised against it. It may be, although the evidence is not before us, that this was because of the psychological consequences of the accident.

The dispute was about the effect this had had on the claimant's business. The claimant had been running her own business as an insurance broker from premises leased at a rental of £7000 a year. At the time of the accident the sums payable to the landlord annually were some £8851. The lease ran until May 2008 with a break clause available to the tenant on 14 May 1998. Because she was unable to work, the claimant had to give up her business. The judge held that she was justified in closing it down in early 1996 (there is no appeal against that finding). He also held that she was reasonable in not starting up again in August 1996 (again there is no appeal against that finding). But this left her with liability for rent until May 1998. The landlord obtained judgment against her for the arrears with interest. She eventually settled with him in late 1997 for £13,355 (on which interest continued to run). The judge held that this was a reasonable and proper settlement and the best she could do in the circumstances (again there is no appeal against that finding).

The business had not been generating any profits up until then. The accounts for 94 - 95 showed that the turnover less other costs had been enough to cover all but around £2000 of the annual sums payable to the landlord. The claimant believed that the turnover would have improved enough to cover the whole of these sums for the period up to September 1997 but the judge did not feel able to conclude that she would have done so. He held that she would have continued to cover 5/7ths of rent.

The claimant's original schedule of special damages included two claims resulting from her inability to work. One was for loss of earnings, represented by what she might have been earning as a bank clerk had she not set up in business. This was resisted on the basis that there was no actual loss of earnings because the accounts showed that she was working for nothing. Not surprisingly, therefore, this claim was abandoned in her re-amended schedule of special damages. The other claim was for the liability to her landlord:

The claimant did pursue this claim (for the amount of the settlement) on the basis that had it not been for the destruction of her business she would have been able to continue to meet it. The defendant resisted it initially on the basis that the business was failing in any event, but that failed because the business was mainly covering the rent. It was then resisted on the basis that it was due to her own impecuniosity, under the principle adumbrated in the Liesbosch Dredger[1933] AC 448. The judge held that it was not - this was a productive asset and part of the business, which was destroyed because of the accident.

Accordingly he awarded her 5/7ths of £13,355 = £9,539; plus 5/7ths of the interest of £718.06 = £511.47. He also awarded interest on the former from 5 November 1997 at the normal special damage rate. There has been no appeal against the recoverability of this head of damages, only against its characterisation for the purpose of the 1997 Act.

The Certificate of Recoverable Benefits, dated 27 June 2002, showed a total liability of £30,645.33, made up of £10,837.00 in respect of the care component of disability living allowance, £7559.25 in respect of the mobility component, and £12249.08 in respect of severe disablement allowance. There was no head of damages equivalent to the first two of these benefits. The judge also refused to specify the head of damages in respect of the rent settlement, under section 15(2) of 1997 Act, as an amount of compensation attributable to the loss of earnings head of compensation in column 1 of the table:

On appeal, Cox J also acknowledged that the arguments were finely balanced and there was merit on each side. Like the judge she referred to the 'like for like' principle, although she linked that to double recovery rather than the ring-fencing for which it was undoubtedly designed. She too accepted the distinction between the liability to the landlord as result of ending the business and compensation for loss of earnings.

The appellant defendant argues that this could not be an award for rent. That was a pre-existing liability and did not arise out of accident. It had to be an award for loss of the turnover used to pay the rent. That is why the Judge reduced it to reflect the proportion of the rent would in fact have been paid. An award for loss of turnover is an award for loss of earnings. It should make no difference whether the award is in respect of a reduction in net profits or whether it is in respect of an increase in net losses or of a change from profit to loss. The defendant also argues that the question should not be answered by reference to fairness and the 'like for like' principle. The Act is unfair to defendants in other respects (as we have already seen in paragraph 7 above).

The respondent claimant argues that this problem rarely arises. Normally claimants cannot claim for business losses (as opposed to loss of profit) because of the duty to mitigate. It is rarely reasonable for a claimant to continue to operate at a loss and then claim this from the defendant. It only arises where a claimant has continuing liabilities although she has ceased trading, as here. The judge held that the claimant had acted reasonably. More importantly, this was not a loss of earnings claim. The natural and ordinary meaning of 'earnings' is something of net benefit to the individual. Self employed claimants can usually only claim their net loss. This claimant could not claim loss of earnings because she was working for nothing.

The key question in this appeal is the construction of the words 'compensation for earnings lost' in column 1 of the Schedule. Does 'earnings lost' mean receipts or turnover lost or does it mean net profit or income lost?

There are, as both judges acknowledged, arguments on each side. 'Earnings' may mean either. Expressions used in an Act of Parliament have to be construed in their context. What must Parliament have been thinking of when these words were used? There are three relevant contexts here.

The first, and most immediate, context is an award of damages in personal injury litigation. It is axiomatic that an award of damages for loss of earnings in personal injury litigation is calculated by reference to the actual net income lost. If an employed person is unable to work, a calculation is made of what her net income would have been over the relevant period. Since the House of Lords' decision in British Transport Commission v Gourlay[1956] AC 185, income tax and other deductions have been taken into account in assessing both past and future loss of earnings. Similarly, if a self employed person is unable to work, a calculation is made of what her net income would have been over the relevant period. She will not claim for, still less be awarded, her gross receipts. Hence in Kemp and Kemp, The Quantum of Damages, at para 5A-030, it is commented:

A second context in which the words have to be constructed is that of state benefits for those who for some reason or other are unable to achieve the income which might otherwise be expected. The benefits listed in column 2 are benefits designed to give the person something to live on. That is why they are generally known as income replacement benefits. Some are means tested and some are not. All may be payable to a person injured as result of an accident who stops working but was earning less or nothing beforehand. 'Like for like' would suggest that they should only be offset against damages which replace net income.

Thirdly, if one considers the words in the context of the scheme of the Act as a whole, benefits may be recouped even though there is no entitlement to an equivalent award of damages. If this claimant had simply stopped work as a result of the accident, she would have been entitled to claim benefits but would not have been entitled to claim any loss of earnings against the defendant. The defendant would still have had to reimburse the state for the benefits paid as a result of the accident. It may very well be the case that the claimant is better off on state benefits than she was before. But, as we have already seen, it is inherent in the scheme that the defendant may have to pay more in total than the claimant can recover in damages under this head.

Construed in those three contexts, therefore, in my view the words 'loss of earnings' do not refer to an award such as this. There is every reason to think that Parliament had in mind loss of net income rather than loss of gross turnover. This was, as has already been made clear, an unusual head of damages which would not normally arise. It was a one-off financial liability which arose as a result of the claimant having to give up her business. Normally, she would have been expected to mitigate her loss, either by disposing of the lease or by finding other uses for the premises. It so happens that the judge found that she could not do this and that the sum awarded was recoverable. He calculated it by reference to what she had actually lost, but he did not calculate it by reference to the period over which she had been unable to work. There has been no appeal against his decision to make this award.

This is an additional liability which the defendant has had to bear as a result of his wrongdoing. There is, however, no reason to think that his liability to the claimant and the state in respect of conventional loss of earnings will be any greater than it would have been without this additional award. The defendant can appeal against the certificate and stands a very good chance of having it reduced to the severe disability allowance paid from December 1995 until August 1996 and possibly for a little while longer until the claimant became fit for work. As already seen, there is nothing unusual in a defendant having to reimburse benefits event though there is no loss of earnings claim. Equally, of course, the claimant could appeal against the certificate. But as this court made clear in Williams v Devon County Council[2003] EWCA Civ 365, it is important to place the burden of appealing the certificate in the right place. The defendant can readily argue that he should not be responsible for income replacement beyond the date upon which the claimant became fit to resume work. The claimant will have much more difficulty in doing so. The same applies to the care component in all these benefits.

For all those reasons, I consider that both judges reached the right conclusion on the facts of this somewhat unusual case and I would dismiss the appeal.

Notwithstanding my profound respect for Hale L.J. (and for each of the judges in the courts below), my vote is that this appeal should be allowed.

The accounts for the claimant’s business for the last completed year prior to the accident show in round terms “commissions receivable” of £20,000, professional expenses of £22,000 and thus a net loss of £2,000. Within the list of professional expenses is an item for rent and rates of £9,000, apparently comprising £7,000 in respect of rent and £2,000 in respect of rates. It seems to me that the rates may well have been payable directly to the local authority rather than to the landlord; but the point is of no consequence.

The accident rendered the claimant unable to work. The commissions dried up and almost immediately the claimant closed the business. But, when a business is closed and the commissions or other fees cease to be received, it does not follow that all the professional expenses at once cease to be incurred. Further payments may fall to be made to the staff who are laid off. In this case the problem was the claimant’s office lease. Unable to assign or surrender it, she was liable to continue to pay the rent for a further two years.

In the proceedings the claimant included a claim referable to her liability for the rent, which by then, pursuant to a reasonable compromise with her landlord, had become fixed at £13,355. She pleaded it as follows:

It emerged that the claimant was contending that, had she been able to continue in business, she would have generated slightly increased fees which, although not yielding her a profit, would have eliminated her loss, i.e. would have covered the entirety of her professional expenses, including of her rent. In his reserved judgment on the substantive claim, written before he was asked to consider the characterisation of his award for the purposes of the Act of 1997, the trial judge summarised her claim as follows:

In the event the judge rejected the claimant’s contention that she would have generated increased fees. He found that, but for the accident, the result of her business activities would have remained as before, namely that her annual commissions would have covered her annual expenditure with one exception, namely that they would have covered only £5,000 of the £7,000 payable annually in respect of rent. So the award of 5/7ths of £13,355 (plus interest) was directly related to the amount of fees which, as the judge found, the claimant would have generated.

I believe that the judge’s award was compensation “for earnings lost” within the meaning of column 1 of Schedule 2 to the Act of 1997.

I think that the judge was right to represent the claimant’s contention as being that the rent would have been met out of the “earnings” of the business. Such was the natural, proper word for him to have chosen. I think that there is a danger of becoming mired in semantics by referring to the “turnover” in contra-distinction to the “earnings” of the business. And it is not without interest that the trial judge expressly denied that the basis of his award was loss of turnover. Rather he adopted a description, not (as I understand it) now favoured, that the basis of the award was “destruction of the business”. Nor do I find that it clarifies matters in my own mind to import a notion of “actual income”.

Instead I favour the following, very simple analysis.

First take an employee with a salary of say £25,000 p.a. That figure represents his earnings. But if, by reason of a defendant’s negligence, he is unable to continue to work, his loss is less than the full amount of his earnings: for, had he continued to work, his earnings would have generated a liability to income tax of say £4,000 p.a. So, although his earnings would have been £25,000 p.a., his “loss of earnings” is £21,000 p.a.

Turn next to the self-employed man or woman. Take the example closest to home. “BARRISTERS’ EARNINGS TOP A MILLION”. Unwelcome and unrepresentative though such headlines are, the sub editors are correct to describe a barrister’s entire annual fees as earnings: he has “earned” those fees. If he becomes unable to continue to work, his saving of tax is the second of two types of saving which will render his loss of earnings less than their full amount. The first type is of course his saving in respect of professional expenditure: items such as clerks’ fees will certainly be saved but, in common with the present claimant, he may not enjoy a saving of rent.

One may describe the gross fees of a self-employed person as “turnover”; but to do so does not alter their colour as earnings. The word may be a convenient description of all the earnings received before some (or occasionally all) of them are turned round (or turned over) and paid out in respect of professional expenditure. Any resultant surplus may conveniently be called profit: but, again, it is a surplus of earnings. In the words of Lord Herschell in Russell v Town and County Bank(1888) 13 App Cas. 418 at 424:

In the usual case the element of a claimant’s earnings which has been lost is the after-tax profit which he would have generated. But from that proposition it is dangerous to extrapolate that there can be no other loss of earnings. The successful barrister who reasonably continues to pay rent to keep his room in chambers available for when he resumes practice will have a loss of earnings greater than his loss of profit.

It is hardly unknown to find a loss-making business. But such a business is usually maintained in expectation of early move into profit. The situation in this case, where the claimant not only has a history of business loss but does not even seek to establish that, but for the accident, she would have moved into profit, must be rare. In the absence of some additional factor, there can clearly be no award in such circumstances for loss of earnings. That conclusion is not in my view born of the duty to mitigate: it is born of the proposition that he who deprives you of the opportunity to make a loss does not cause you loss.

The additional factor in this case is loss of the earnings which would have covered 5/7ths of the rent for which the claimant reasonably remained liable notwithstanding closure of her business.

Upon the basis of the conclusion of Mrs Justice Cox that the judge’s award in respect of rent “afforded her no net benefit", the claimant argues that the word “earnings” means something that amounts to a net benefit. With respect I do not accept the judge’s conclusion. At all material times the claimant was liable to pay rent of £7,000 p.a. Prior to the accident she was able to pay £5,000 p.a. towards the rent out of her fees. Only £2,000 p.a. had to be met out of her capital or by borrowing. As a result of the accident the amount which she had to meet out of capital or by borrowing rose to £7,000 p.a. But the award put her back into her previous position: thus in my view it was of substantial net benefit to her.

I consider that the law applies the same principle when it compensates for an increase in business loss from £2,000 p.a. to £7,000 p.a. as when it compensates for a reduction in business profit from £5,000 p.a. to nil. Yet, were the claimant’s contentions valid, the amount of severe disablement allowance (and other state benefits) received in respect of the accident would fall to be deducted from the amount payable to the claimant by the defendant only in the latter case; and in the former case the conjunction of state benefits and an unreduced payment to her by the defendant would put the claimant in a better position than she would have enjoyed in the absence of the accident.

Mr Wilkinson on behalf of the defendant has exposed a further anomaly in the analysis for which the claimant contends. His example is a business which, but for the accident, would have generated an after-tax profit of £30,000 p.a. but which, as a result of it, generates a loss of £10,000 p.a. The award will be at the rate of £40,000 p.a. but, on the claimant’s analysis, only £30,000 p.a. should be specified by the court as compensation for earnings lost and be subject to deduction in respect of benefits received.

In that I personally find no great difficulty in construing the words “compensation for earnings lost” as apt to describe the judge’s award, it follows that I am less motivated than is my lady to reach out to extraneous considerations as an aid to construction. For example I would not wish to import into my analysis speculation about the prospects of an appeal by the defendant against the size of the sums presently included in the certificate of recoverable benefits. Nor, with respect, would I be keen to subscribe to the argument that the severe disablement allowance was paid to the claimant to give her “something to live on” and thus that an award for loss of the ability to contribute to the rent of an unused office is not analogous to it. The allowance is a flat-rate benefit paid without means-testing to those incapable of work and not less than 80% disabled. Those whose living expenses are already being provided by spouses or parents or from other of their own resources will nevertheless receive it. Moreover every recipient of the allowance who applies part of it to making a mortgage repayment or reducing a credit card debt is using it to meet a liability previously incurred for, no doubt, any one of countless different reasons.

I agree with Wilson J.

In the period before her accident Mrs Lowther was earning at an annual rate of £20,000 by way of commissions derived from her occupation as an insurance broker. She incurred so many business expenses, however, that she derived no net profit from her business at all. In the ordinary course of events she would have had no claim against the defendant for pecuniary loss because her expenses exceeded her earnings. As Lord Scarman said in Lim Poh Choo v Camden Health Authority[1980] AC 174, 191C when identifying deductions that fell to be made from the damages to be awarded:

Once she ceased to work it would ordinarily have been expected that her business expenses would have disappeared, too.

In the event one of her expenses remained in being. The judge did not allow her to recover all her pre-accident earnings, however, because most of them would have been extinguished by the expenses she no longer had to bear. But he did allow her to recover that part of her earnings which he considered would have been available to go towards the rent. By this route she was entitled to recover the annual sums she would have earned which would have covered five-sevenths of her rent liability.

I am therefore of the opinion that the sum she was held to be entitled to recover from the defendant would ordinarily be regarded as compensation for earnings lost within the meaning of that expression as found in the table in Schedule 2 to the Social Security (Recovery of Benefits) Act 1997.

I have had the opportunity of considering the reasons why Hale LJ is of the opinion that although this sum could be described as “earnings”, there are features of the particular statutory context in which the words appear which tend the other way.

I do not find her first reason persuasive. As I have observed, it is a commonplace feature of personal injury litigation that expenses are set against earnings when calculating the value of the pecuniary loss sustained by a self-employed claimant. It would be odd if when earnings just exceed expenses a claimant is treated as receiving compensation for lost earnings but when expenses just exceed earnings, and part of the expenses remain payable (so that they can to an appropriate extent be paid for from the lost earnings recovered), the sum recovered bears a quite different description.

So far as her second reason is concerned, she accepts that the benefit in question may be paid to someone who was earning nothing beforehand. I do not therefore see how the expression “like for like” is necessarily apposite.

As to her third reason, the fact that benefits may be recouped under this statutory scheme where there is no equivalent award of damages does not, in my view, take the matter any further. The underlying principle there is that the state is entitled to recover from a wrongdoer money it would not have had to pay an injured person but for the wrong-doing. What I find very much more persuasive is that if Hale LJ’s interpretation is correct, Mrs Lowther would be left better off monetarily as a consequence of having suffered her accident, while the defendant would have to pay her the appropriate part of her lost earnings and also to pay the state the so-called income replacement benefit as well. I do not consider that this can have been Parliament’s intention.

For these reasons I, too, would allow this appeal.