The Court of Appeal recently gave judgment in the case of Paramount Shopfitting Company Ltd v Rix  EWCA Civ 1172. This case looked at the issue of income dependency in fatal claims and confirmed that, in the context of the deceased owning and running a business, the financial dependency was fixed on the basis of the situation as at death. This applied even if, in reality, the business continued to do well after death and the dependant(s) received the same or higher level of income as before.
The claim was brought by the widow of the late Mr Rix on behalf of his estate and dependants against Mr Rix’s former employers in relation to asbestos exposure. The issue to be determined by the Court of Appeal was one of financial dependency on the deceased.
Mr Rix had died of mesothelioma aged 60 and, at the time of his illness and subsequent death, he was a 40% shareholder in MRER Limited, a company that installed and repaired kitchens and bathrooms, undertaking joinery work and manufacturing granite worktops.
Mr Rix had been the original founder of the business but, by the time of his death, MRER was operating as a limited company in which he and his wife, the claimant, each held a 40% shareholding and each of their two sons held a 10% shareholding.
Both of the sons were involved in the business and, following the death of Mr Rix, the company continued to operate and both turnover and profit increased. The 40% shareholding owned by Mr Rix passed to his wife on his death giving her a total shareholding of 80%. However, his wife had not been and did not become active in the business. Mrs Rix had effectively been a shareholder for tax purposes and Mr Rix had, in reality, been the director and main force in the business up until his death.
Mr Justice Cavanagh heard the case at first instance and assessed his award of financial dependency to the claimant (widow) on the basis of the claimant’s share of the annual income that it was suggested she and Mr Rix would have taken from the business if he had lived. The calculation was based on expert evidence from an accountant instructed on the claimant’s behalf.
It was emphasised that these figures were arrived at by taking income that was derived from labour as opposed to from capital. No discount was made to reflect the fact that the claimant had continued to receive an income from the business and the company's improving financial performance since the deceased's death.
The defendant’s case was that the widow was only entitled to the difference between her actual income since the deceased’s death and the income she would have received if he had survived. On this basis, it argued that there was no loss of financial dependency as her income had been higher due to the ongoing profitability of the company and her 80% shareholding.
The court held that the loss of dependency was a factual issue and the assessment was based on the situation at the time of death. The widow had a financial dependency on the income generated by the deceased’s work in the business and the fruit of those labours was lost through his untimely death. This situation was contrasted with the income-generating investments passing to the dependent and continuing to generate the same income. No loss was sustained for these assets.
At face value, therefore, in money terms the claimant had ended up better off financially than she individually would have done had Mr Rix survived but still recovered for a financial loss. This seems somewhat at odds with the general principle of damages in tort that: “It is the aim of an award of damages in the law of tort, so far as possible, to place the person who has been harmed by the wrongful acts of another in the position in which he or she would have been had the harm not been done: full compensation, no more but certainly no less.”
The defendant appealed this judgment on three grounds.
- The judge erred in treating all of the profits generated by MRER as providing the basis for the calculation of a loss of dependency without regard to whether the profits survived Mr Rix’s death and continued to accrue to Mrs Rix. In effect, the defendant argued that, while the business may have been totally dependent on Mr Rix, the facts indicated that the business was able to continue and be profitable without him and was a capital asset producing income rather than income that was attributable to him.In this respect, the Court of Appeal held that in cases of this nature 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” and the “loss for the dependent relates to the contribution or services of the deceased in creating wealth.”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 High Court had described MRER as not being a “money generating beast” which would generate money whoever was in charge. That is, it was not a capital asset generating income but a business that was generating income due to the input of Mr Rix. Therefore, the loss “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.”The court held that it was therefore “logical to treat the whole of the profit available to Mr and Mrs Rix as earned income and therefore part of the financial dependency” and that the fact that the company had thrived since Mr Rix died is “irrelevant for the purpose of the calculation of Mrs Rix’s dependency.”
- The judge erred in law by treating Mrs Rix’s entitlement to a share of the profits of MRER based on her own shareholding in the company as if it had belonged to the deceased when her shareholding and salary were designed to minimise tax and should not have been treated as Mr Rix’s income because she took no part in the business.The Court of Appeal upheld the finding at first instance and agreed that the practical reality in relation to financial dependence should be looked at rather than the corporate, financial or tax structures that are often used in family business arrangements. They held that the income Mrs Rix received as director and shareholder was “entirely” the result of Mr Rix’s work.
- The judge erred in law in only including rental income and state pension as surviving income and failed to take account of surviving income in the form of a share of profits in MRER and Mrs Rix’s director’s salary. Mrs Rix’s surviving income after tax should have been deducted when assessing the net annual loss.As the court had found the salary, dividends and profits generated by MRER “wholly attributable to Mr Rix’s endeavours and earning capacity” no portion of Mrs Rix’s post-death income could be independent of Mr Rix and unaffected by his death. Therefore, there could be no deduction of monies received from MRER by Mrs Rix post-death.
The appeal therefore failed and Mrs Rix retained the financial dependency claim as assessed at first instance. It seems likely that this issue will be revisited at some stage because of the number of fatal accident claims in personal injury and clinical negligence where there is a family business that survives the death of the main breadwinner.
The court did stress that each case will turn on its own facts but it does appear that, where there is an established financial dependency at death in the context of a family business such as MRER, the subsequent increase in profitability of the business will be disregarded and that a salary paid to a silent family shareholder who is a dependant may not have to be allowed for when assessing that dependency.