LOSS OF EARNINGS AND THE SELF-EMPLOYED: SOME KEY ISSUES

There are now a record number of self-employed people working in the UK and the numbers are increasing. There are 4.6 million people working for themselves, that is 15% of the total workforce.  Here I want to look at some of the issues that face the self-employed claimant when claiming loss of earnings.  We also look at some of the key cases in relation to “loss of chance” in relation to the self-employed.

PROOF AND EVIDENCE

The first problem that often arises in a claim for loss of earnings is the absence of clear evidence.   There are no wage slips and it is not uncommon for the self-employed claimant not to know precisely what their net earnings are.  Here a claimant lawyer has to be tough and robust (because sooner or later a defendant lawyer will be).  Damages are awarded on the basis of evidence and not speculation.

  • Tax returns are the key in many cases (where they actually exist).
  • It can be a struggle to persuade a claimant that the court is only interested in their net losses rather than their gross turnover.
  • Evidence is needed from the claimant to show the work they did and how they earned their income.

This stage of the case is difficult. However it cannot be avoided. Because it is difficult it is often left until late in the action. There is much (indeed everything) to be said for doing this first.  An early, and realistic, assessment of the actual net losses is an essential aid to assessing a Part 36 offer and making an offer.

 Proving the loss

The need to prove the loss is emphasised in the case of Bonham Carter v Hyde Park Hotel Ltd [1948] WN 89, 92 Sol Jo 154, KBD:

Plaintiffs must understand that if they bring actions for damages it is for them to prove their damage, it is not enough to write down the particulars, and, so to speak, throw themselves at the head of the court saying “This is what I have lost. I ask you to give me these damages”. They have to prove it.’

This requirement to prove that a loss has occurred will present the self-employed claimant with the most problems. The onus is on the claimant to prove every item of loss claimed that is not agreed. Proving loss of profits, or potential profits, is extremely difficult in a lot of businesses. If an extra employee has been taken on to cover the absent claimant then the calculation is relatively simple; the losses caused because of absence from work, inability to supervise staff, meet business contacts etc is more problematic.  Further, and this is a point that often needs reiterating, the court is only concerned with the net loss of income to the claimant.

Pleading the loss 

Although there is no case on the subject after the Civil Procedure Rules 1998, SI 1998/3132 it is prudent to ensure that special circumstances of the claimant’s case is set out in the particulars of claim. Failure to mention circumstances such as loss of profits or loss of a business opportunity will lead to the loss not being allowed at trial: Domsella v Barr (trading as AB Construction) [1969] 3 All ER 487, [1969] 1WLR 630, CA; see also Perestrello e Companhia Ltda v United Paint Co Ltd [1969] 3 All ER 479, [1969] 1 WLR 570, CA.

What the claimant has to show

The claimant has to show:

(1)      the profitability of the business did decrease, or failed to increase; and

(2)      such decrease or failure to increase was due to the claimant’s impaired efficiency.

Incomplete accounts

1In the case of Ashcroft v Curtin [1971] 3 All ER 1208 at 1213, [1971] 1 WLR 1731 at 1737, the Court of Appeal considered the case of a limited company whose potential profitability had decreased because of the injury of its ‘proprietor’. The court was sympathetic to the plaintiff’s plight, and Edmund Davies LJ said:

‘In a one-man company of this kind, with an actively working managing director of undoubted efficiency, there is a high probability that injuries such as he sustained would not only drastically interfere with the quality of his life but would also have a damaging effect on the business which he created and still controlled.’

Unfortunately the plaintiff in Ashcroft v Curtin [1971] 3 All ER 1208, [1971] 1 WLR 1731, CA had not been diligent in keeping his accounts prior to the accident. Whilst there was no allegation of any wrongdoing, because of the vagueness of the accounts it was impossible for any accountant to calculate the loss suffered. As a result, even though the court conceded some loss must have occurred, no award was made for loss of profit.

Loss of profits

The loss of profits of a business are generally recoverable as damages by the injured entrepreneur. The legal basis of the way in which the loss is assessed is, in theory, relatively straightforward and is summarised by Forbes J in Bellingham v Dhillon [1973] QB 304, [1973] 1 All ER 20, QBD:

‘Where a plaintiff’s claim for damages was based on loss of profits of his business the damages were to be calculated in the same way whether the claim was in contract or in tort, i.e. by taking the profits which the business would have earned but for the wrong the plaintiff had suffered at the hands of the defendant and subtracting from that figure the profits which had in fact been earned after the wrong had been suffered.

When the injured person is part of a partnership

These losses are recoverable even if the claimant is a member of a partnership. In such a situation the claim should normally be for the diminution in the claimant’s share of the partnerships profits: see Vaughan v Greater Glasgow Passenger Transport Executive 1984 SC 32, 1984 SLT 44, Ct of Sess.

Limited companies

If the claimant carries on business through the medium of a limited company it is still possible to recover any loss of profits of the company even though, technically, the loss is the company’s and not his own. In Lee v Sheard [1956] 1 QB 192, [1955] 3 All ER 777, CA the Court of Appeal gave short shrift to the argument that the separate legal personality of the company means that the injured businessman should not recover personally. The court said that in those cases where a director is effectively the proprietor of a small company the loss is not too remote and is recoverable. This is an interesting example of a case in which the courts are willing to ‘lift the veil’ in company law and provides an exception to the general rule in Saloman v A Saloman & Co Ltd [1897] AC 22, 66 LJ Ch 35, HL. However, this exception has only been held to apply to small companies where the proprietor is virtually a ‘one-man band’. There are no clear principles in the cases as to the size a company will need to be before the courts refuse to consider a claim for loss of profit, but it is unlikely that the courts will consider such claims for anything more than one-man companies. Indeed the effect on insurance premiums could be dramatic if defendants had to underwrite the losses of large PLCs, and the losses in these cases would probably be held to be too remote. In any event the problem of proving that the injury was the cause of the loss would be enormous.

Working outside the tax system

If any work is being carried out ‘on the side’ and neither VAT nor tax is being paid the profits from this are still recoverable if the work is lost as a result of the accident. In these circumstances the court will deduct the tax and VAT that should have been paid in assessing the loss: Duller v South East Lincs Engineers [1981] CLY 585. In this case, the source of the earnings was legal and only the failure to declare them was illegal. This approach was followed in Newman v Folkes [2002] EWCA Civ 591, [2002] All ER (D) 47 (May): what Garland J referred to as ‘collateral illegality’ does not bar a claimant who has failed to pay income tax and National Insurance contributions from recovering loss of earnings.

Mitigation of loss

In Bellingham v Dhillon [1973] QB 304, [1973] 1 All ER 20, QBD Forbes J  said that in making the calculation for loss of profits ‘… the court has to take into account any steps which the plaintiff, as a reasonable and prudent man of business, had taken to mitigate his loss’. These issues have been considered in detail at para 4.5 ff above but particular care must be taken in relation to self-employed claimants where allegations of failure to mitigate loss can be difficult to counter. The claimant should take care to ensure that the financial losses suffered as a result of the accident are minimised so far as reasonably possible. Could a locum be called in to run the business? Or could any work be done from home?

Loss of future earning capacity in a self-employed person

In Ashcroft v Curtin [1971] 3 All ER 1208, [1971] 1 WLR 1731, CA the court, after deciding it could not award damages for loss of profit, did award damages for the plaintiff’s ‘increased vulnerability in the labour market’. The Smith v Manchester1 award can be of great significance in those cases where loss of profit or loss of chance of a business opportunity cannot be proven to the satisfaction of the court. The self-employed are particularly vulnerable in the labour market and the possibility of the Smith v Manchester award should be thoroughly considered since in some cases, as we have seen, this could be the only amount a claimant will receive for their economic loss.

In Bellingham v Dhillon [1973] QB 304, [1973] 1 All ER 20, QBD, the plaintiff was the owner and manager of a driving school (in fact the school was a limited company in which he owned 500 out of 501 shares). He was negotiating the purchase of a driving simulator but the contract fell through because of his injuries. The price of the simulator in 1967 was to be £7,000 but the plaintiff purchased a second-hand simulator in 1971 for £2,160. He attempted to claim for loss of profit to the company of £4,816 – the loss of profit which he would have earned if the simulator had been purchased in 1967. The court held that in fact he had suffered no loss on this particular venture and the alleged ‘loss of profit’ could not be recovered.

Loss of a prospective business venture

If the claimant has lost the chance of participating in a business venture, the loss of this chance can be compensated. Any award under this head will undoubtedly be speculative. In Mulvaine v Joseph (1968) 112 Sol Jo 927 a golfer who was injured and lost the chance of completing a tournament was awarded damages as a percentage of his chances of winning the contest. The loss of opportunity, however, must not be too remote and must be proven by evidence: Domsella v Barr (trading as AB Construction) [1969] 3 All ER 487, [1969] 1 WLR 630, CA.

LOSS OF CHANCE

Issues relating to loss of chance can play a major part in claims for future loss of earnings of a self-employed person, particularly an entrepreneur, sportsman or woman and and anyone involved in show business.

Langford v Hebran – sporting career

In Langford v Hebran [2001] PIQR Q160, the claimant was a trainee bricklayer who had also just begun a promising career as a professional kickboxer. He suffered whiplash injuries and an injury to his shoulder in a road accident, which were sufficient to put an end to his professional kickboxing career.

Collett -v- Smith & Middlesbrough (first instance decision) Appeal decision here [2009] EWCA Civ 583 

The Court of Appeal upheld an award of £3,854,328 for a professional footballer. The judge had taken his chances of playing at Championship League level as a certainty and discounted matters by 15% to take into account the risks that he may not.  The judge was also entitled to make an award in relation to increases in earnings over the claimant’s career.

In his claim for loss of earnings the claimant claimed loss of earnings and also presented four alternative scenarios reflecting various degrees of success in the fighting career, each more successful than the last.

The trial judge accepted the claimant’s argument that he should receive the basic claim, plus a percentage of each of the four scenarios reflecting the loss of chance of pursuing his kickboxing career to these levels. The Court of Appeal1 rejected the defendant’s argument for the defendant appellant that a Doyle-type2 approach was inappropriate where there were a number of different options to choose from. The claimant was entitled to a percentage of the increased earnings he could have expected in each of the predicted scenarios, had he had the chance to progress as a professional kickboxer, with a discount to take account of the possibility that his success may have been short-lived, and that he may not have realised any of the hypothetical scenarios suggested.

Appleton v Medhat Mohammed El Safty

In Appleton v Medhat Mohammed El Safty [2007] EWHC 631 (QB) the court considered the loss of chance of a professional footballer on the basis that he had a 75% chance of playing at championship level and a 25% chance of playing in division one.

Clarke v Maltby – loss of chance of advancement as a solicitor

In Clarke v Malty [2010] EWHC 1201 (QB) the claimant was a solicitor in private practice whose injuries meant she had a reduced earning capacity. She had lost the chance of partnership in large practices. Damages were assessed on the basis that she had a 100% chance of a fixed share equity in a regional law firm; an 85% chance that she would be a partner in a middle-sized City firm and a 30% chance of joining a city or central London firm as a partner.

XYZ v Portsmouth Hospitals NHS Trust – loss of chance  of running a developing a lucrative business.

In XYZ v Portsmouth Hospitals NHS Trust [2011] EWHC 243 (QB) damages were awarded on the basis that the claimant would have set up and run a substantial business: there was a 50% chance that the business would reach £5 million and a 20% chance that his business would achieve a turnover of more than £10 million. (The total award in that case was £6,740.646, nearly £5 million of this was loss of earnings).

Tait -v- Gloucestershire Hospitals NHS Foundation Trust [2015] EWHC 484 (QB)

The judge awarded damages for future loss of earnings based, in part on the Langford -v- Heilbron principles. See the case in an earlier post Loss of earnings of a self-employed female photographer: a High Court Case considered.

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