Re-assessment of damages in Head v Culver Heating Co Ltd: from nothing to £2.4M

This blog post was written by Samuel Cuthbert.

Harry Steinberg QC and Kate Boakes – instructed by Peter Williams of Fieldfisher LLP – acted for the Claimant in Deborah Head (Executrix of the Estate of Michael Head, Deceased) v The Culver Heating Company Limited [2021] EWHC 1235 (QB). Johnson J re-assessed the lost years claim, following the Claimant’s successful appeal in the Court of Appeal earlier this year.

The judgment can be read here. Our blog post on the Court of Appeal’s judgment can be read here.

Background

In January 2021, the Court of Appeal overturned the decision of HHJ Melissa Clarke by which she held that Mr Head, a successful businessman who founded and ran a company called EMSL, could not recover any loss of earnings in the lost years because the profitability of his business would likely continue after his death and so too any divided income from his shares. The Court of Appeal set aside that element of her decision and ordered that the case should be remitted for a re-assessment of the lost years claim.

The re-assessment of damages was heard by Johnson J. By a judgment handed down on 11 May 2021, the Judge assessed damages for the lost years claim in the sum of £2.44 million. Accounting for the other heads of loss that were assessed by HHJ Clarke, the total judgment sum was £2.62M.

The decision

Johnson J was required to assess the lost years claim in accordance with the guidance of Bean LJ in the Court of Appeal.

The gulf between the parties remained enormous: the Claimant contended for a figure of £3.7M and the Defendant contended for a figure of £238,000. This difference was attributable to four key issues which the Judge had to determine.

(1) What fell to be included in the lost years claim? Was it limited to salary and dividend income? Or did it extend to retained profits insofar as these were generated by Mr Head’s work?

At paragraph 33 of the Court of Appeal’s judgment, Lord Justice Bean held that “at the time of Mr Head’s death all the income which he and his wife received from the company (save for the small deduction in respect of Mrs Head’s work) was the product of his hard work and flair, not a return on a passive investment.

There was a dispute as to the meaning of this sentence. The Claimant argued that it was intended to mean that all of the income the Claimant was able to derive from EMSL, including those profits he chose to retain within the business, was recoverable as part of the lost years claim and there was no “investment income” element. The Defendant argued that the use of the word “received” meant that the recoverable element was limited to that which was actually extracted from the business and that the profits Mr Head retained within the business should be categorised “investment income” and offset against the loss.

Johnson J found for the Claimant on this point. He held that the effect of the Court of Appeal’s judgment was clear:

First, artificial distinctions should not be drawn between salary, dividends and undistributed profit. Bean LJ’s use of the term “loss of earnings” was not an exclusion of earning capacity that was reflected in the accumulation of funds otherwise than by payment of salary. Mr Head’s dividend income was not to be treated differently to his salary. Similarly, the term “dividend” was used in Bean LJ’s judgment to cover both dividend income and undistributed company profits. Mr Head’s earning capacity was not defined solely in terms of his salary or by reference to dividend payments, because he was the individual responsible for 90% of the profitability of the business. Had he been self-employed, his earning capacity would be assessed be reference to his net profit and the fact he chose to incorporate EMSL did not, as a matter of principle, make any difference to his level of earning capacity.

Second, Mr Head’s earning capacity, at the time he contracted mesothelioma, was best reflected by a combination of his salary and 90% of EMSL’s profits, less a deduction in respect of the work done by Mrs Head. This was an assessment made by HHJ Clarke at first instance and the Court of Appeal had not suggested that this element of her decision was in any way flawed.  

Third, once Mr Head no longer worked full-time, his earning capacity could properly be reduced pro rata.

(2) If Mr Head had not contracted mesothelioma, to what extent would he have worked less and/or handed over ownership of the company as he approached old age?

HHJ Clarke held that Mr Head would have worked at 80% rate from the age of 65 to 70 and at 50% rate thereafter. These findings were not disturbed on appeal. Johnson J held, following the guidance from Bean LJ, that Mr Head would have further reduced his input to 25% at the age of 75. Despite Mr Head’s evidence that he did not envisage ever fully giving up work, Johnson J found as a fact that he probably would have retired completely at the age of 80.

Johnson J accepted the evidence of Mr Head’s widow and son that he would not have drawn more money from EMSL than that which reflected the work he put in. He found that it was likely, as the years progressed, that Mr Head would have reallocated his shareholding to reflect his proportionately reduced involvement. This meant that there was no element of “investment income” to be taken into account – all of Mr Head’s income from EMSL would have been a reflection of his contribution to the business and was therefore earned income.

(3) Should the calculation of the lost years claim take into account rental income that Mr Head would have received from a property he had jointly owned with his widow?

This issue was not explored at the original trial and so there was no evidence on the point. It was possible that if the Defendant had relied on the rental income, then the Claimant may have sought to argue that a part of the rental income should be included in Mr Head’s earning capacity, thereby increasing the extent of the claim (e.g. if Mr Head had spent time and effort in the maintenance of the property). Johnson J held that it was not open to the Defendant to introduce an additional factor to the calculation of the lost years claim which had not been explored in the evidence.

(4) What deduction should be made for living expenses?

It was common ground that that Mr Head’s notional living expenses during the lost years should be deducted from his earning capacity, but not the extent of that deduction. There was a typing error in HHJ Clarke’s judgment which meant that the percentage deduction was too high. The Defendant contended that it was too late to change it. But Johnson J held that, rather than deducting a proportion of the income, it was appropriate to deduct the actual sum that reflected Mr Head’s living expenses. This was £3,584 per month. This deduction was to be made once overall – rather than year on year with any surplus crystalising as a loss – because the award was a single sum representing the whole of Mr Head’s earning capacity in the lost years less his total living expenses for the same period.

Consequential issues

Johnson J decided various consequential issues at a second hearing.

After determining some minor calculation issues, he assessed the lost years claim at £2.44 million. The overall judgment sum – including other heads of loss and interest – was £2.62 million.

There were two consequential issues which may be of wider interest.

  • What rate of interest should be applied, and in respect of which components of the award?

The effect of the judgment was that Mrs Head ought to have been awarded £2.44 million in May 2019, when HHJ Clarke handed down her judgment. The Claimant contended that interest should be awarded on that whole sum at a rate of 8% (by analogy with the judgment debt rate) or alternatively 4%. The Defendant argued that interest should only be awarded on the past loss element of the award, at half the special account rate.

Johnson J held that he should apply the conventional approach, as set out in Jefford v Gee [1970] 2 QB 130, of awarding interest at half the special account rate. That rate was held to apply to past losses only, i.e. that part of the lost years claim that related to the period before judgment in the re-assessment of damages.

(2) What, if any, orders should be made under CPR 36.17(4)?

The Claimant made a Part 36 offer on 13 November 2020, before the Court of Appeal hearing, of just under £2.25 million in respect of all heads of loss, which she subsequently bettered. The Claimant sought an order under CPR 36.17(4) which should be refused only where the court considers it “unjust” to make such orders. CPR 36.17(5) sets out a non-exhaustive list of matters to be considered.

Johnson J considered each of the factors at CPR 36.17(5)(a)-(e) and held that none of those factors suggested that it would be unjust to order Part 36 consequences. However, he declined to make the orders on the basis that the Claimant introduced new evidence between the Court of Appeal’s judgment and the re-assessment of damages hearing. That evidence comprised a witness statement from Mr Head’s widow, son, and personal assistant, which resulted in a finding that Mr Head would have reduced his shareholding in the business to reflect the gradual reduction in his involvement. This benefitted the Claimant as it meant that the value of the claim was assessed on the basis that Mr Head would not have received income from the business beyond that which derived from his contribution. The Judge found that the earlier evidence before the court would not, in itself, have resulted in that finding, and therefore it would have been natural for the Defendant to question whether the offer was supported by the evidence as it stood at the time.

Comment

The decision on the lost years claim is bound up in the findings of fact. Johnson J, having considered the evidence in the light of the decision in Adsett v West, held that Mr Head’s income would have reflected his work and was not investment income. But the judgment serves as a useful worked example of how to quantify a lost years claim for a successful businessperson who is still working at the time of contracting a fatal illness.

In his judgment in the Court of Appeal, Bean LJ stated at [6]: “I consider that it was indeed necessary to reopen the determination of this appeal in order to avoid real injustice”. Before HHJ Melissa Clarke, the Claimant was awarded damages of c.£175,000 and nothing in respect of the lost years. The re-assessed damages now stand at £2.62 million. This serves to quantify the extent to which a real injustice has been avoided.

The Part 36 decision is also of interest. It could be argued that the Defendant was fortunate to escape the consequences set out in CPR 36.17(4). The determinative factor identified by the Judge appears to be one of the vagaries of litigation, where the Claimant produced supplementary evidence in response to the guidance from the Court of Appeal.

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