Guidance for Calculating ‘Lost Years’ Claims

Legal Update written by Tom Semple.

Background

Mr Head was the founder and managing director of his own heating and ventilation company, Essex Mechanical Services Ltd (‘EMSL’). His income came from a modest salary and dividends income from his shares in the company. His salary did not reflect the value of his work for the company, but was intentionally low for tax efficiency purposes.

Before he set up EMSL, Mr Head was exposed to asbestos while working for the Defendant in the 1970s and 1980s. He began to develop symptoms of mesothelioma in December 2017 and the diagnosis was confirmed weeks later.

Mr Head brought a claim against the Defendant, including a ‘lost years’ claim for over £4million. This was on the basis that he had lost the pecuniary benefit of his income from both his salary and dividends in the lost years as a result of the mesothelioma. Liability was not contested, but the measure of damages remained in dispute, particularly regarding the lost years claim.

The High Court held that there was a distinction to be drawn between income arising from a claimant’s capacity to work and income derived from investments surviving the claimant’s death, citing Adsett v West [1983] QB 826. The Judge treated Mr Head’s income from dividends and income from an investment, rather than earnings from work. The profitability of EMSL was likely to continue after Mr Head’s death. The dividend income was therefore likely to survive his death and therefore fell to be discounted. In respect of his salary, his personal living expenses (£42,827) exceeded his salary (£27,911) and therefore there was no loss.

Judgment in the Court of Appeal

The Court of Appeal unanimously overturned the High Court decision. Although it was right to say that income from investments is not recoverable in a lost years claim, Mr Head’s dividends income was not income from an investment. The reality of Mr Head’s earnings from his work was not reflected in his salary; this being deliberately modest for tax efficiency purposes. It was not disputed that Mr Head was the driving force behind the company. The dividends income was therefore generated by Mr Head’s work for EMSL. It followed that all of his income, whether it be from his salary or dividends, were the product of Mr Head’s work and fell to be considered in the lost years claim.

Practice Points

Company directors deriving much of their income from dividends, whilst also paying themselves a modest salary for tax efficiency purposes, is not uncommon. The decision in Head provides some clarity in that the court must assess the reality and not simply treat dividends as income from an investment, when in fact it is directly attributable to the individual’s work. This latter aspect is likely to be the most contentious in matters going forward.

The Court of Appeal went on to set out various scenarios which will provide useful guidance in lost years claims to come:

• If a claimant had been working but, prior to any loss of life expectancy, won the National Lottery and thereafter lived off the investments, there would be no claim for loss of earnings in the lost years. Loss of income from investments is not recoverable, as per Adsett.

• If a claimant received a salary and dividends income from the claimant’s company, but decided to retire before any loss of life expectancy and live off the income from shareholdings, there would be no claim for loss of earnings in the lost years, save perhaps for a loss of pension. The income from dividends could no longer be said to be arising from the fruits of the claimant’s labour as they had retired.

• If a claimant received a salary and dividends income, the latter of which did not arise as a result of the fruits of their labour (for example, if the shareholdings were gifted to the claimant), the dividends income would fall to be discounted. The gross figure for any loss of earnings in the lost years would be limited to his salary, as was the case in Adsett.

• If, like Mr Head, the claimant received a salary and income from dividends from the claimant’s company, and the latter can be attributed to the fruits of the claimant’s labour, the dividends income falls to be included as loss of earnings in the lost years claim.

The full judgment from the Court of Appeal can be accessed here.

Stephen Friday and Hylton Armstrong will be hosting a ‘Law with Lunch’ webinar on 23 February 2021 at 12.30 to discuss the case and its implications. For more information, please contact Laura Storr at laura.storr@parklaneplowden.co.uk.

Tom specialises in clinical negligence, inquests, Court of Protection, and general personal injury law. He has a particular interest in healthcare matters and is skilled at getting to grips with complex medico-legal issues in difficult cases. Tom’s full profile can be accessed here.