In this blog John-Paul Swoboda and his pupil Cressida Mawdesley-Thomas discuss the recent High Court decision of Mr Justice Cavanagh in Rix v Paramount Shopfitting Company Limited  EWHC 2398 (QB).
Rix is the latest case to consider the width and breadth of section 3(1) of the Fatal Accidents Act 1976 (“FAA”), following in the judicial footsteps of Witham v Steve Hill Ltd  P.I.Q.R. Q4 and AB v KL  P.I.Q.R Q1. The issues determined in this judgment were twofold: did Mrs Rix have a valid claim for a financial dependency and if so, how should that dependency be valued. Mr Rix was a businessman with acumen, flair and drive but after his death, his son had stepped into his shoes and the business was even more profitable.
The judgment provides a useful reminder of important principles to be borne in mind when dealing with section 3 FAA claims: one looks at the practical reality when determining whether there is a dependency irrespective of tax arrangements which may be used in family businesses; income derived from capital is not a valid dependency as opposed to income derived from labour; the dependency is fixed at the moment of death which makes nearly all events after death irrelevant to the calculation of the dependency; the question of whether there is a financial dependency is a question of fact meaning there is no one single prescriptive rule to determine the amount of any dependency.
The Claim was brought by the widow of Mr Rix who died of mesothelioma aged 60 having been exposed to asbestos whilst working for the Defendant as an apprentice carpenter / shopfitter in the 1970s.
After his apprenticeship, the Deceased went on to establish what would become a highly successful limited company, combining a joinery, worktops, and kitchen and bathroom fitting business. The business was still expanding in 2015, shortly before Mr Rix fell ill.
The Deceased’s Business
At the time of his death, Mr Rix owned 40% of the shares in the company. Mrs Rix owned 40%, and their sons owned 10% each. Mrs Rix’s shareholding produced dividends, and she drew a salary, although this was not to reflect her contribution to the business but was done on accountants’ advice as it was a tax-efficient way of taking money out of the business. After Mr Rix died, Mrs Rix inherited her husband’s shareholding, to own 80% of the shares. In addition to his income from the business, Mr Rix had two small pensions.
Section 3 of the FAA reads:
“Assessment of damages:
In the action such damages, other than damages for bereavement, may be awarded as are proportional to the injury resulting from the death to the dependants respectively.”
The well-established meaning of this arcane language is that a dependant can recover damages if s/he has suffered pecuniary loss resulting from the death, and the pecuniary loss arises from a relationship contemplated under the Act (e.g. husband and wife).
Mr Justice Cavanagh considered the Court of Appeal authorities of Wood v Bentall  PIQR 332 (CA); Cape v O’Loughlin  EWCA Civ 178; and Welsh Ambulance Services v Williams  EWCA Civ 81 and distilled the following principles (emphasis added):
- The question whether there has been a loss of financial dependency, and, if so, how much, is a question of fact;
- The courts will take a realistic and common-sense approach to these questions;
- There is no hard-and-fast or prescriptive approach to the determination, or quantification, of loss of financial dependency;
- 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 under section 3. 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;
- The question whether a dependant has suffered a loss of financial dependency, for the purposes of the FAA, section 3, is fixed and determined at the date of death;
- It follows from the fact that the loss of financial dependency is fixed at death that, in a “work/skill” case, the existence of the right to claim loss of dependency, and the value of the loss, is not assessed by reference to how well the business has been doing since the deceased’s death;
- Moreover, a dependant cannot by his or her own conduct after the death affect the value of the dependency at the time of the death; and
Applying the above principles, it was held that Mrs Rix suffered a loss of financial dependency, notwithstanding that the business is more profitable than it was at the time of her husband’s death. As in Williams, her husband’s business produced an income for the family which was the result of her husband’s skill, energy, hard work, and business flair. Although she was a director and shareholder, the reality was that it was her husband, not her, who was responsible for the success of the business. At the time of her husband’s death, she had a “reasonable expectation of pecuniary advantage from the continuance of the life of the deceased” (Pym), because if he had lived his management of the business would have continued to produce an income for her. O’Loughlin and Williams make clear that, as the value of the dependency is fixed at death, the health of the business after the deceased’s death is irrelevant. In particular, Williams demonstrated that the existence of, and value of, a dependant’s financial dependency is not affected by any increase in profitability in the business.
The Defendant argued that Mrs Rix’s interest in the business is, and was at the time of her husband’s death, akin to an income-generating capital asset because it continued to thrive after Mr Rix’s death. This argument was rejected.
“It is clear 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, as a result of his flair, energy and hard work. The business was still expanding, having just moved into new premises. He was the person with the contacts and the know-how. Jonathan was being groomed to take over, but this plan was still at a very early stage. As Mr Phillips put it in his submissions, MRER was not a “money-generating beast” that would generate money regardless of who was in charge of it.”
The Defendant also sought to distinguish Wood, O’Loughlin, and Williams on the grounds that Mrs Rix was both a director and shareholder in the business and therefore her dividends and salary should be treated as her own, not something she received as a result of their financial dependency on the deceased. This submission was also rejected.
“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.”
Mr Justice Cavanagh found that the role of the court is not to compare the income of the dependant from the family business before and then after the deceased’s death, and to award the shortfall, if any. That would be illegitimate because dependency is fixed at death, cf. Williams.
The Judge therefore went on to consider the two methods of calculating dependency advanced by the Claimant. As dependency is a question of fact which should not be determined prescriptively, the judge had to determine which methodology was most appropriate. The Claimant’s primary case was that the dependency should be calculated by reference to Mrs Rix’s share of the annual income that Mr and Mrs Rix would have received from the business if he had lived (“Basis 1”). The secondary case was that her financial dependency should be quantified by reference to the annual value of Mr Rix’s services to the business as managing director, calculated by reference to the cost of employing a replacement (“Basis 2”).
In Wood, Williams and O’Loughlin the Court had adopted Basis 2 to calculate the dependant’s financial dependency. However, it was held that the present case could be contrasted to those cases as the financial dependency claim in this case was concerned “only with income produced by Mr Rix’s labour, skill, energy and flair, not with income produced by his capital assets, or with income produced by a mixture of capital assets and labour.” On that basis Mr Justice Cavanagh made findings as to the joint income, having had the benefit of forensic accountancy evidence, before deducting 1/3 from the joint income to determine the dependency.
Successive cases have now shown that the Courts will look at the practical reality of a family situation prior to a deceased’s death. What ‘the practical reality’ is in any given case is likely to be determined by evidence and, as a question of fact, by the judge’s disposition. This is most striking in one aspect of this judgment which, in the authors’ opinion, could easily be determined in a diametrically opposite manner and still conform with the principles to be applied to FAA claims. The finding in question is that the income of the deceased from the business was entirely based on his labour and not on the intangible asset of the business. Whilst this was consistent with the deceased’s own evidence it does not appear to be consistent with the fact that the business has been more profitable since being run by the son, who by all accounts was ill-prepared at the time of death. Whilst the deceased’s labour was no doubt needed to grow and maintain the business (to some extent) the fact that someone, not as experienced as the deceased, could step into his shoes suggests that the deceased had, at least to some extent, created a “money generating beast”, aka a capital asset. This is not to say that Mr Justice Cavanagh was wrong in his finding but simply to emphasis the point that finding in fatal accident claims are intensely fact specific.
Results such as this will cause disquiet among some as the Claimant has been left with more than she had lost and which runs contrary to the 100% principle which is so deeply ingrained in our (PI litigators) psyche. However, this is at least in part by design of section 4 the FAA (benefits following death are disregarded).
The most controversial, or perhaps unclear, aspect of this judgment is the actual calculation of the dependency. Firstly, the learned judge used 70% of the profit from the company as the joint income (relying on expert accounting evidence) in preference to the much more familiar cost of replacement services. This approach was justified by the finding of fact the business generated profits because of the deceased’s labour, not accumulated capital, and in this way Williams, Wood and O’Loughlin were distinguished. This might be said to add an inadmissible element of guesswork to the determination of loss (though without reference to the accounting evidence this is not easy to determine). Secondly there was no deduction from the joint income to reflect the amount paid to Mrs Rix from the company (save for rental income which was agreed to be income from a capital asset). This appears incongruous with the fact she was actually paid a salary and received dividends from the company, though does perhaps reflect the reality, as found, that she was no more than a straw partner in the business. Finally, a 1/3 deduction was made (by agreement), presumably to reflect living expenses (though this is not clear), even though the judge had found that a 17.5% deduction would be appropriate for living expenses if the alternative basis were used to calculate the dependency.