British Transport Commission v Gourley [1955] UKHL 4 (08 December 1955)

BRITISH TRANSPORT COMMISSION

v.
GOURLEY

Earl
Jowitt

Lord
Goddard

Lord Reid

Lord
Radcliffe

Lord
Tucker

Lord Keith

of Avon-
holm

Lord

Somervell
of Harrow

8th December, 1955.

Earl Jowitt

MY LORDS,

The Respondent, who is an eminent civil engineer, suffered severe injuries
whilst travelling in a railway train owing to the negligence of the Appellants’
servants, and brought his action to recover damages.

The trial Judge awarded him £9,000 for pain and suffering and loss of
amenities, and £1,000 in respect of out of pocket expenses. No question
arose in this appeal as to this part of the award.

The trial Judge further awarded the Respondent the sum of £37,720 in
respect of loss of earnings actual and prospective, and in arriving at this
sum paid no regard to the fact that had the Respondent been able by his
activities in his profession as a civil engineer to achieve the earnings repre-
sented by the sum of £37,720, he would have had to pay a large amount in
respect of income tax and surtax on the amount of such earnings.

The trial Judge, at the request of the Appellants, made an alternative
assessment of £6,695, which represented the sum he would have awarded if
he ought to have taken into account in assessing damages the tax which the
Respondent would have had to pay if he had in fact earned by his pro-
fessional activities the sums lost.

It was agreed by Counsel on both sides—and I think rightly agreed—that
the Respondent would incur no tax liability in respect of the award of
£37,720, or alternatively of £6,695.

The question for determination in this appeal is whether the Judge ought
to have taken the tax position into account in assessing that part of the
damages attributable to loss of earnings actual or prospective.

The broad general principle which should govern the assessment of damages
in cases such as this is that the tribunal should award the injured party such
a sum of money as will put him in the same position as he would have been
in if he had not sustained the injuries (see per Lord Blackburn in Livingstone
v. The Rawyards Coal Company, 5 A.C. 25 at page 39).

The principle is sometimes referred to as the principle of restitutio in
integrum : but it is manifest that no award of money can possibly com-
pensate a man for such grievous injuries as the Respondent in this case has
suffered.

The principle, therefore, affords little guidance in the assessment of damages
for the pain and suffering undergone and for the impairment which results
from the injuries : and in fixing such damages the Judge can do no more than
endeavour to arrive at a fair estimate, taking into account all the relevant
considerations.

The principle can, however, afford some guidance to the tribunal in assess-
ing compensation for the financial loss resulting from an accident, and in
such cases it has been referred to as ” the dominant rule of law ” (see per
Lord Wright in Liesbosch Dredger v. Edison, S.S., [1933] Appeal Cases, 449 at
page 463).

There are, no doubt, instances to be found in the books of exceptional
cases in which this dominant rule does not apply, as, for instance, in cases
of insurance, or cases calling for exemplary or punitive damages, or in
certain cases dealing with the loss of use of a chattel; but, as Lord Sumner
said in Admiralty Commissioners v. 5.5. Chekiang ([1926] A.C. at page 643),

” The measure of damages ought never to be governed by mere rules of
” practice, nor can such rules override the principles of the law on this
” subject”.

It was argued for the Respondent that no consideration of the tax
which would have resulted had he not been prevented from earning the
sums for the loss of which he claims compensation was legitimate, as this
consideration was too remote. It was pointed out that the tax under
Schedule D (which was the relevant schedule in this case) is not payable
until some time after the money has been earned, and in no sense constitutes
a charge on the monies themselves. If the tax fell to be assessed under the
system of P.A.Y.E. or under Schedule E, different considerations would
arise: for in that case the tax would be deducted before the money was paid.

I do not think that we should draw a distinction between cases in which
the money is deducted before the payment of tax is made, and those cases
in which the tax falls to be paid after the money has been received.

It is a strange fact that until 1933 the question whether the tax position
of the injured person should be taken into account in assessing damages
had, so far as I can ascertain, never been raised. No doubt in the old
days tax was so small that it may have been thought not worth while to take
account of it. In the great majority of running-down cases the question
would not have arisen and in those days the amount of damages was assessed
by a jury under appropriate directions from the judge.

However, for many years before 1933 the amount of tax had been assessed
at a figure by no means negligible, and there is no record of the point ever
having been raised.

The first case in which this question arose for decision was the case of
Fairholme v. Firth and Brown (149 L.T. page 332). That was a case in
which a company had wrongfully dismissed their managing director. The
damages were assessed at £18,000, and the issues for determination were

(a) Whether any sum awarded to the plaintiff by way of damages
would be subject to British income tax and/or surtax.

(b) If not, whether this fact and the fact that the plaintiff would have
been liable for income tax and surtax if the money had been paid under
the agreement, should be taken into account in assessing damages.

Point (a) was not in fact argued, it being agreed by Counsel on both
sides that the damages would not be subject to tax: and accordingly du
Parcq, J. assumed, without deciding the point, that no tax would be exigible
on the amount of the damages and pointed out that this was the foundation
for the argument on point (b).

I express no opinion as to what the answer to point (a) would have been
if it had been the subject of a judicial decision. There may well be a
difference between actions for personal injuries and actions for wrongful
dismissal in regard to the obligation of the plaintiff to pay tax on the amount
of damages received: and cases on the one topic may therefore be a dangerous
guide to follow on the other.

du Parcq, J., in the course of his judgment, said: ” I should be reluctant
” to give a decision which would seek to alter an inveterate practice unless
” I were convinced that the practice is inconsistent with principle, and
” unjust, and I am not so convinced in this case. On the contrary, I am of
” opinion that it is right in principle to have no regard, in assessing damages
” as between master and servant, to the servant’s liability to the Crown,
” which is truly res inter alios acta “.

The only ground, apart from the reference to inveterate practice upon
which du Parcq, J. based his judgment, rests upon the maxim res inter alios
acta. I confess to some difficulty in defining the limits of this principle
in cases concerning the assessment of damages in personal injury cases,

The contract which the injured person has made, which gives him the
right to the salary for the loss of which he claims to recover damages, may

surely also be said to be res inter alios acta from the point of view of the
wrong-doer; and yet this contract obviously forms the basis upon which
damages for loss of earnings are to be assessed.

In all such cases the real issue seems to be whether the facts relied upon
as affecting the measure of damages are too remote to be taken into con-
sideration.

The next case in which the point arose for decision was M’Daid v. Clyde
Navigation Trustees (1946 S.C. page 462). In that case a workman was
injured in unloading a vessel. He was in receipt of a weekly wage from which
tax was deducted under the P.A.Y.E. scheme.

The question for determination was whether, in awarding damages for
loss of earnings, the Judge should have regard to the gross sum which the
workman earned or to the net sum which was paid to him after payment of
tax.

Lord Sorn decided that the lower sum should be the factor to be taken
into account in assessing damages. He said that in his opinion, to ignore
the tax position at the present day would be to act in a manner which was
out of touch with reality. He put the following case:

” Suppose the case of a pursuer whose potential earnings have been
” proved at about £2,000 a year. Suppose, further, that he has already
” lost one year’s work, and that the medical evidence establishes that
” he may be expected to lose another before becoming fit to resume.
” Is the pursuer’s counsel entitled to ask the presiding Judge for a
” direction to the jury that, in making good this loss of income to the
” pursuer, they must not take into account the fact that he would have
” had to pay tax upon it? With income tax at 10s. in the £ (to say
” nothing of surtax) such a direction would seem to a jury just like
” telling them to give the pursuer twice the amount of his loss, and it
” is difficult to suppose that such a direction, apparently ignoring
” realities, could be received or given with any sense of satisfaction.
” It seems to me that, when you get a liability to which all earnings are
” subject and which depends not upon any circumstances peculiar to
” the individual but upon a general law of the land universal in its
” application, it would be wrong to ignore the existence of that liability “.
(1946 S.C. at page 464.)

The attention of Lord Sorn was not called to Fairholme’s case.

In 1946 a similar question arose before Mr. Justice Atkinson in Jordan v.
The Limmer and Trinidad Lake Asphalt Company Limited ([1946] 1 K.B.
356). That learned Judge followed the decision in Fairholme’s case. It does
not appear that M’Daid’s case was brought to his attention.

The cases of Fairholme and Jordon were followed and applied in a case
arising in South Australia (Davies v. Adelaide Chemical and Fertilizer Com-
pany Limited: 1947 S.A.R. page 67).

Shortly afterwards Lord Keith in Blackwood v. Andre (1947 S.C.
333) decided that no deduction should be made from the amount awarded in
respect of loss of earnings on the ground that these earnings would have
been liable to income tax. Lord Keith expressed his disagreement with the
reasoning of Lord Sorn in M’Daid’s case. He gave his reasons for disagree-
ing in the following terms:

” The basis upon which the argument proceeds is that a pursuer
” is entitled to restitution as far as possible of the loss which he has
” sustained as the result of the injury for which the defender is liable.
” The suggestion is that what he has lost is only the net sum which he
” would receive after the deduction of income tax. That argument has
” a certain speciousness, particularly if tax is regarded as tax deducted
” at the source. It must be remembered that not all tax is deducted at
” the source and that the same argument would apply to a person who
” received certain income for which he had himself to account to the
” Revenue, but, apart altogether from that, the consideration appears
” to me to be quite an illegitimate one. It would apply on the same

” grounds where a person had come under obligation to pay a proportion
” of his income away to somebody else. The fact that he would then
” be left with a net sum does not appear to me to be any reason for
” basing the assessment of damages upon the net sum which he would
” receive or retain and not upon the gross sum which should be paid
” to him and from which he would make the conventional deduction
” to which he had become bound. Further, the argument seems to
” ignore the fact that the only person who is going to benefit is the
” person who is liable in damages. There is no suggestion that he will
” account to the Revenue for the capitalised income tax which ex
” hypothesi has been taken into account in assessing damages. The
” Court, in my opinion, has no concern with the incidence of taxation
” in assessing the damages of an injured taxpayer. The argument rests
” upon a consideration of facts that really are res inter alios acta, and
” for these reasons the argument must, in my opinion, be rejected “.
(1947 S.C. at page 333.)

There being this difference of opinion between the Judges of first instance,
the matter came before the Court of Appeal in Billingham v. Hughes ([1949]
1 K.B. page 643). That was a case in which a doctor had been knocked
down and seriously injured by an army vehicle and was thus prevented from
continuing his activities as a general practitioner.

The Court decided that the fact that the plaintiff would have been liable
to pay tax in respect of the income which he would have earned but for the
accident ought to be disregarded in assessing damages. The question
whether a similar result should follow if the tax was payable under the
P.A.Y.E. scheme as in M’Daid’s case was left open.

Our attention was also called to the case of Comyn v. The Attorney-
General (1950 Irish Reports page 142). This was a case in which the
question arose as to the compensation for compulsory acquisition of property.
It was therefore necessary for the Court to determine the fair valuation of a
capital asset. In such a case I should have thought it questionable whether
a reduction of the amount to be paid as compensation for that capital asset
based on the prospective tax liability of its owner was in accordance with the
true principle of valuation.

In W. Rought Limited v. West Suffolk County Council ([1955] 2 W.L.R.
page 1080) the Court of Appeal had to consider whether or not, in claiming
compensation for loss of profit in respect of specific orders during the inter-
ruption of manufacturing operations, regard should be had to the tax which
the company in question would have had to pay, had they been enabled to
complete these orders. It was assumed that the company would have been
liable to pay tax in respect of the profit earned on these contracts, and it
was further assumed that the compensation awarded would not be liable to
tax. It was held that it was not legitimate to make any deduction from
the compensation awarded for loss of profits by any consideration of the
company’s possible tax liability. The facts in Rought’s case were widely
different from those in the present case and it is not necessary for the present
purpose to express any final opinion on either Rought’s case or Comyn’s
case.

I have now referred to all the relevant authorities bearing on the point and
the question remains whether the Billingham case, which the trial Judge
and the Court of Appeal in this case followed, was rightly decided.

My Lords, it is, I think, if I may say so with the utmost respect, fallacious
to consider the problem as though a benefit were being conferred upon a
wrongdoer by allowing him to abate the damages for which he would
otherwise be liable.

The problem is rather for what damages is he liable: and if we apply the
dominant rule, we should answer, ” He is liable for such damages as, by
” reason of his wrongdoing, the plaintiff has sustained “.

I cannot think that the risk of confusion arising if the tax position be
taken into consideration should make us hesitate to apply the rule of law

if we can ascertain what that rule is. Nor should we be deterred from
applying that rule by the consistent or inveterate practice of the courts in
not taking the tax position into consideration in those cases in which the
courts were never invited to do so.

My Lords, I agree with Lord Sorn in thinking that to ignore the tax
element at the present day would be to act in a manner which is out of
touch with reality.

Nor can I regard the tax element as so remote that it should be dis-
regarded in assessing damages. The obligation to pay tax—save for those
in possession of exiguous incomes—is almost universal in its application.
That obligation is ever present in the minds of those who are called upon
to pay taxes, and no sensible person any longer regards the net earnings
from his trade or profession as the equivalent of his available income.

Indeed, save for the fact that in many cases—though by no means in all
cases—the tax only becomes payable after the money has been received,
there is, I think, no element of remoteness or uncertainty about its incidence.

Counsel for the Appellants in the course of his argument put the case of
two men each enjoying a salary of £2,500 a year, the one as a servant of an
international body being exempted from all tax on his salary, the other having
to pay income tax and surtax in the ordinary way. He pointed out that if
each of these men met with an accident and each was deprived of a year’s
salary, for which he succeeded in recovering damages, it would be quite
unreal to treat them as though they were in receipt of the same salary;
for, in the absence of special and unusual circumstances, the one whose
income was tax free would enjoy an income almost double the income of his
fellow who had to pay taxes.

My Lords, I agree with this contention. I see no reason why in this case
we should depart from the dominant rule or why the Respondent should
not have his damages assessed upon the basis of what he has really lost;
and I consider that in determining what he has really lost the Judge ought to
have considered the tax liability of the Respondent.

It would, I think, be unfortunate if, as the result of our decision, the
fixation of damages in a running-down case were to involve an elaborate
assessment of tax liability. It will no doubt become necessary for the
tribunal assessing damages to form an estimate of what the tax would have
been if the money had been earned, but such an estimate will be none the
worse if it is is formed on broad lines, even though it may be described as
rough and ready. It is impossible to assess with mathematical accuracy
what reduction should be made by reason of the tax position, just as it is
impossible to assess with mathematical accuracy the amount of damages
which should be awarded for the injury itself and for the pain and suffering
endured.

In the present case the Judge has made an elaborate and detailed survey
of the position and has fixed two sums ; and it was agreed between the parties
that we should award as damages one or other of these sums. We were,
therefore, in no way concerned to consider the precise method which the trial
Judge employed in arriving at these figures.

In my opinion, under these circumstances we should substitute the sum
of £6,695 for the sum of £37,720.

For the reasons I have given I would allow this appeal and reduce the
amount of damages to be recovered by the Respondent from £47,720 to
£16,695. Allowance must, of course, be made for the sum of £7,000 which
has already been paid.

It has been agreed that the Appellants should pay the costs of this
appeal.

31678 A 3

Lord Goddard

MY LORDS,

On the 21st September, 1951, the Respondent to this appeal was gravely
and permanently injured in a railway accident for which it is conceded the
Appellants must accept liability. The Respondent was a partner in a firm
of civil engineers: he was and is eminent in his profession and was earning
a large professional income. Until some time in the year following the
accident he was unable to take any effective part in the business of the firm.
On his return to work, on account of his physical condition a reduction was
made in the apportionment of the profits he was entitled to receive, and the
learned trial Judge also found that the earnings of the partnership were
likely to be reduced in the future owing to his inability to take a full part
in the business. It is unnecessary to set out the provisions of the original
partnership deed and the subsequent alterations agreed upon owing to the
Respondent’s disability, because the sums awarded by the learned Judge
under the various heads of damage are accepted by the parties, and the sole
question raised in this appeal is whether in assessing the loss of income up
to the date of trial and the prospective future loss the tax paid on his income
or which would have had to be paid had it been earned is to be taken into
account. For pain and suffering, loss of amenities and actual out of pocket
expenses incurred or to be incurred the Respondent was awarded £10,.000,
and no question arises as to this amount, which would not in any case be
subject to tax. On the basis that income tax and surtax are to be ignored,
Mr. Justice Pearce awarded the Respondent £37,720 in respect of the loss of
earnings to the date of the trial and his prospective future loss. He then
in the course of a full and careful judgment set out the sums he would award
if he had to take the tax position into account. He found that in that event
the sum would be £6,695. Holding that he was bound by the decision of the
Court of Appeal in Billingham v. Hughes [1949] I K.B. 643 to ignore all
questions relating to tax. he entered judgment for a total of £47.720 less
£7,000 already paid by the Appellants on account. The alternative sum
found by the learned Judge was accepted by the parties, and it is conceded
by the Appellants that this case is indistinguishable from Billingham v.
Hughes, so the question for your Lordships is whether or not that case was
rightly decided The parties agreed that under the present law no part of
the sum awarded as damages was subject to income tax or surtax, and the
appeal proceeded on this footing.

It is remarkable how little authority there is on this subject. It has
never been before this House, nor does there seem to be any decision in the
Appellate Courts of the other Commonwealth countries or of the United
States of America on the matter. The first reported case in which it appears
to have been raised is Fairholme v. Firth and Brown Ltd. (1933) 149 L.T. 332 ;
49 T.L.R. 470, where du Parcq, J., as he then was, decided that no
deduction of tax on earnings was to be made ; and this was followed by
Atkinson, J. in Jordan v. The Limmer and Trinidad Lake Asphalt Company
Limited [1946] 1 K.B. 356. In assessing in the latter case the amount
of wages lost by an injured plaintiff, the learned Judge refused to take
into account the weekly amount deducted for tax commonly referred to as
P.A.Y.E. Both these cases were considered and approved by the Court of
Appeal in Billingham v. Hughes (supra). There have been two cases in the
Court of Session on this subject. In the first, M’Daid v. Clyde Navigation
Trustees, 1946 S.C. 462, the Lord Ordinary decided that the incidence of tax
should be taken into account, while in Blackwood v. Andre, 1947 S.C. 333,
Lord Keith, as Lord Ordinary, came to the same conclusion as had du Parcq
and Atkinson, JJ. That the contention now put forward by the Appellants was
never raised before 1933 despite the heavy taxation that had obtained since
the first war is no doubt a point in favour of the Respondent. ” Communis
” opinio “, said Lord Ellenborough in Isherwood v.Oldknow, 3 M.& S. p. 382
at 396, is evidence of what the law is, and it would certainly appear as if the
opinion of the profession and of those specially affected by these matters, like
insurance companies, was that tax should be left out of account in the assess-
ment of damages. At the same time it must be remembered that in very many,

I think it may be said in most, accident cases the plaintiffs are persons whose
tax liability would make but little difference to the amounts awarded, and
taxation is now far higher than it was before the last war. Moreover, the
sums awarded in these cases are generally on a considerably higher scale than
formerly. This is no doubt partly due to the fall in the value of money, but
at least in road accident cases fast moving motor cars are apt to inflict much
greater damage than did horse drawn vehicles. Probably the highest sum
ever awarded in an accident case in the last century was £16,000 which Dr.
Philips was awarded against the London & South Western Railway in 1879.
The case is reported in 5 C.P.D. 280. In those happy days the income tax
was 3d. in the £ and there was no surtax. With income tax and surtax at
present rates and with damages on the high scale that so often has to be
applied nowadays, the question of principle raised in the present case is one
of the greatest importance.

In an action for personal injuries the damages are always divided into two
main parts. First, there is what is referred to as special damage which has
to be specially pleaded and proved. This consists of out-of-pocket expenses
and loss of earnings incurred down to the date of trial, and is generally capable
of substantially exact calculation. Secondly, there is general damage which
the law implies and is not specially pleaded. This includes compensation
for pain and suffering and the like, and if the injuries suffered are such as
to lead to continuing or permanent disability compensation for loss of earning
power in the future. The basic principle so far as loss of earnings and out-of-
pocket expenses are concerned is that the injured person should be placed in
the same financial position so far as can be done by an award of money as
he would have been had the accident not happened, and I will endeavour to
apply this in the first place to the special damage claimed in respect of the
loss of earnings. Hitherto the decisions, other than that of Lord Sorn in
M’Daid v. Clyde Navigation Trustees, have treated the incidence of tax on a
man’s earnings as res inter alios acta. This expression in this context is, I
think. misleading. A plaintiff may seek to increase or a defendant to
diminish damages by items which are held to be too remote. The mere
fact that the item arises as between plaintiff and a third party would not
seem to be the test. In a wrongful dismissal or personal injuries action the
fact that a plaintiff has obtained remunerative employment with a third
party is normally relevant though it would fall within the words res inter
alios acta. The question is whether taxation is or is not too remote to be
taken into account. A plaintiff claims loss of earnings because he has been
prevented from fulfilling a contract of service or earning wages or, if a
professional man, earning fees from clients or, if a trader, from dealing with
customers. Tax is imposed by law ; the State exacts a certain proportion
of income which varies with the amount of the taxable income. There is a
standard rate of income tax, but there are allowances, and no one pays the
standard rate on each pound of his income. Surtax is graded according
to the amount of income. The taxpayer must pay and, in my opinion, it
cannot make any difference whether he receives the gross income and pays
his tax later, as he does if assessed under Schedule D, or whether it is deducted
before he receives it, as is the case with tax under Schedule E or P.A.Y.E.
In either case to say that a taxpayer has the benefit of his full income is, in
my opinion, to be ” out of touch with reality “, to use the words of Lord Sorn
in M’Daid’s case. As he said, when income tax was 10s. in the £ to award
him damages without regard to tax would give him, subject to statutory
allowances, just double the amount of his loss. The simplest case to take,
no doubt, is that of a person assessed under Schedule E. A certain salary
is attached to the office, but that which he will receive is, at the present rate
of taxation, the salary less a very substantial percentage which is deducted
for tax before payment. If, therefore, he is disabled by an accident from
earning his salary, I cannot see on what principle of justice the defendants
should be called upon to pay him more than he would have received if he
had remained able to carry out his duties. A taxpayer assessed under
Schedule D can no doubt make provision for payment as he pleases. It
may be from time to time he has to sell capital to enable him to pay his
tax if he has spent his income before the tax becomes due, but I cannot see

any principle upon which the amount he is to receive as damages should
depend upon whether he is assessed under one Schedule or another. Though
the tax is not payable till a year after the income is earned, the liability,
which is common to all except those who by reason of the smallness of their
income are exempt altogether, always remains and must be discharged.
Damages which have to be paid for personal injuries are not punitive, still
less are they a reward. They are simply compensation, and this is as true
with regard to special damage as it is with general damage.

As a result of allowing this appeal the damage claimed for loss of earn-
ings must be the sum of £4,945, and for future earnings £1,750, this being the
sum which the trial Judge awarded on the basis of the figures agreed by the
parties if tax had to be taken into account. We were not informed what the
calculations were which had resulted in this figure. But in considering special
damage in these cases the rate of tax to be taken must, as it seems to me, be
the effective rate of income tax and. if necessary, surtax which would have
been applicable to the sums in question if they had been earned. That rate
depends on the combination of a number of factors that may vary with each
case—allowances, reduced rates, surtax rates, other income of the claimant
or his wife, charges or reliefs. The task of determining it may not always
be an easy one. but in complicated cases it is to be hoped that the parties,
with the help of accountants, will be able to agree figures. If not, the Court
must do its best to arrive at a reasonable figure, even though it cannot be said
to be an exact one.

The assessment of general damages in these cases is always a matter of
difficulty. I do not think that restitutio in integrum has any application
to general damages. The plaintiff receives compensation and not restitu-
tion. If he has lost an eye or a limb he can be compensated by money,
but that will not restore what he has lost. So, too, if his earning capacity is
lessened or destroyed, the loss cannot be measured so as to ensure that he is
no worse off in the future than he was in the past, and. indeed, if it turned
out that the amount of his disability was less than was anticipated at the
trial he might even be over-compensated. On this matter I would quote
Lord Dunedin in Admiralty Commissioners v. 5. S. Susquehanna [1926] A.C.
655 at page 661 : ” If the damage be general. … the quantification of such
” damage is a jury question. For a jury question no rigid rules, or rules that
” apply to all cases, can be laid down, but in each set of circumstances certain
” relevant considerations will arise which … it would be the duty of the judge
” in the case to bring before the jury “. A Judge sitting without a jury
must act on the same principles and bear in mind the same considerations
as he would direct a jury to do as to the fair amount to award both for pain
and suffering and for loss of earning capacity, and I think it would be well
to remember that it has always been laid down that damages cannot be a
perfect compensation. Lord Wensleydale, when one of the Judges of the
King’s Bench, as he was for six years, so charged the jury in Armsworth v.
South Eastern Railway, 11 Jur. 758, and his direction was approved by the
Exchequer Chamber in Rowley v. London and North Western Railway Com-
pany, L.R. 8 Exch. 221. In cases where surtax is payable and the rate has
been affected by private income the nature of that private income will be
relevant. If it is a life annuity under a will or settlement it may well be expected
to continue. If it is disposable investments which might be sold at any time
or transferred to a child, less, perhaps little, regard should be had to it.
Apart from this surtax complication, I think I should direct a jury somewhat
in this way: ” You know what the plaintiff was earning before the accident
” and what he had left to support himself and his family after tax was paid.
” You know his age. It is for you to consider for how long he would be
” likely to earn at the present rate. If he is a member of a partnership
” take into consideration his position in the firm at the lime of the accident.
” If a junior partner you may well think that his earnings would have in-
” creased as time goes on, while if a senior partner they might well decrease
” as he ceases to give the same amount of time to the business of the firm.
” Remember that whatever he earned would be subject to tax, and that you
” will already have in mind when assessing his pre-accident income. No one
“can foresee whether tax will go up or down, and I advise you not to

” speculate on the subject but to deal with it as matters are at present
” You cannot tell what his health would have been had he not been injured
” nor what fortune, good or bad, he might have met with. You know he
” had when he was injured a spendable income of so much ” (adding if the
plaintiff was in partnership ” you have heard the provisions of his partner-
” ship deed providing for alteration in the shares and you may consider
” whether his injury may affect the earnings of the partnership “). ” Taking
” all these matters into consideration, you will consider what is fair that a
” man of this age should receive in respect of the amount of disability which
” you find this accident has imposed upon him, remembering also that what
” you give is given once and for all”. My Lords, I do not pretend that
such direction is scientific, and there may well be other considerations in
particular cases of which to remind oneself or a jury, but generally damages
must be decided by the application of reasonable common sense. The
principles set out above would be applicable in wrongful dismissal actions in
which the Court has to calculate damages for loss of earnings which would
have been subject to tax had they been earned. It was suggested that the
principles might apply in certain computations of compensation under com-
pulsory purchase orders. We were referred to an Irish case, Comyn v.
The Attorney-General, 1950 I.R. 142. and W. Rought Ltd. v. West Suffolk
County Council [1955] 2 W.L.R. 1080. In this opinion I am dealing solely
with damages in personal injury and wrongful dismissal cases. In the present
case all we are concerned with is whether in calculating the damage the
incidence of tax should be taken into account and whether it is an element
to be considered in assessing general damage. In my opinion, it is. and I
would therefore allow the appeal and vary the judgment of Mr. Justice
Pearce by substituting the sum of £16,695 for that of £47,720, directing
that credit be given for the sum of £7,000 already paid by the Appellants.
The costs are the subject of agreement between the parties and no order
need be made concerning them.

Lord Reid

my lords.

The Respondent was very seriously injured in a railway accident on 21st
September, 1951, for which the Appellants admit liability. He was senior
partner in a firm of civil engineers and before the accident he was earning
a very large income. Although he was 65 years of age he made a remark-
able recovery. He is still very much handicapped, but he is able to carry
on his professional work, though on a reduced scale. His earnings have been
much reduced, but he still earns a large income, and damages have been
assessed on the basis that he will probably be able to continue to do that
for a number of years.

The action was tried in March, 1954, and Pearce. J.. awarded a sum of
£47,720 as damages. Authorities binding on him and on the Court of Appeal
required him to assess damages on the diminution of gross income suffered
and to be suffered by the Respondent as a result of the accident, and to
leave out of account the incidence of income tax and surtax. The Appel-
lants, wishing to bring this matter before this House, requested Pearce. J..
to analyse his award and to make alternative findings of the sums which
he would have awarded if the incidence of income tax and surtax were
taken into account. The learned Judge did this and all his assessments are
accepted as correct. In respect of out-of-pocket expenses, pain and suffering
and loss of amenities (including the fact that the Respondent now requires
the assistance of a manservant) he awarded £10,000; and there is no appeal
against that part of his award. In respect of actual loss of earnings before
the end of 1953 he awarded £15,220 if the incidence of tax is not taken
into account, and found that in respect of those additional earnings the
Respondent would have had to pay £10,275 more in income lax and surtax:
he therefore awarded £4,945 if those taxes have to be taken into account.

In respect of estimated future loss of earnings he awarded £22,500 if tax
is not to be taken into account but only £1,750 if tax is to be taken into
account. That great disparity is accounted for by the fact that in spite of
his serious handicap the Respondent will still receive a large share of the
profits of his firm, so that he will probably still pay surtax at the highest
rate. The result is that if this appeal succeeds the Respondent’s damages
will be £16,695. It is not disputed that whatever sum is awarded as damages
it will not be subject to income tax or surtax.

Leaving aside the award of £10,000 which is not challenged the question
before your Lordships is whether the Appellants must pay £37,720 based
on neglecting the incidence of tax or £6,695 based on taking that into account.
As regards loss of earnings suffered before the end of 1953, it is an ascer-
tained fact that if the Respondent had earned the additional sum of £15,220
he would only have benefited from that to the extent of £4.945 because
he would have had to pay the rest in tax. £4,.945 represents his real loss
for that period. Prospective loss in respect of future earnings can never
be a matter of exact calculation whether one takes gross earnings or the
net benefit to the plaintiff remaining after allowing for additional tax liability.
But it is accepted in this case that £22.500 is a fair estimate of the present
value of the Respondent’s future loss of gross earnings and that £1,750 is
a fair estimate of the present value of the net benefit which he would have
retained after paying tax. So, although the Respondent has been awarded
£37,720 in respect of loss of earnings caused by the accident, in fact if the
accident had not happened he would only have been better off in this respect
to an extent represented by an award of £6,695.

It is true that there are several authorities and a long course of practice
against taking tax liability into account in assessing damages, but this is not
the type of case in which vested interests may have accrued or in which
people may have ordered their affairs relying on the validity of existing
practice. In my opinion, this is a case in which it is proper for your Lord-
ships to consider the question on its merits as one of principle.

The general principle on which damages are assessed is not in doubt. A
successful Plaintiff is entitled to have awarded to him such a sum as will,
so far as possible, make good to him the financial loss which he has suffered
and will probably suffer as a result of the wrong done to him for which the
defendant is responsible. It is sometimes said that he is entitled to restitutio
in intrgrum. but I do not think that that is a very accurate or helpful way of
stating his right. He cannot in any real sense be restored, even financially, to
his position before the accident. If he had not been injured he would have
had the prospect of earning a continuing income it may be for many years,
but there can be no certainty as to what would have happened. In many
cases the amount of that income may be doubtful even if he had remained
in good health, and there is always the possibility that he might have died or
suffered from some incapacity at any time. The loss which he has suffered
between the date of the accident and the date of the trial may be certain
but his prospective loss is not. Yet damages must be assessed as a lump
sum once and for all not only in respect of loss accrued before the trial but
also in respect of prospective loss. Such damages can only be an estimate,
often a very rough estimate, of the present value of his prospective loss.

But the general principle is subject to one qualification. A loss which
the plaintiff has suffered or will suffer or a compensatory gain which has come
or will come to him following on the accident may be of a kind which the
law regards as too remote to be taken into account. In my judgment, the real
question in this case is whether the plaintiff’s liability to pay taxes is some-
thing which the law must regard as too remote when determining or estimat-
ing what he has lost as a result of the accident. The defendant is only
bound to pay damages based on an assessment of the plaintiff’s actual and
prospective loss taking into account all those factors which are not in law
too remote.

It has sometimes been said that tax liability should not be taken into
account because it is res inter alios. That appears to me to be a wrong

approach. Let me take the case of a professional man who is injured so
that he can no longer earn an income. Before his accident he earned fees
and he paid rent and rates for his office, the salaries of clerks, the expenses
of running a car and other outgoings, and he would have continued to do so
if he had not been injured. Apart from one matter, to which I shall refer
later, I cannot see why these expenses are any less res inter alios than his
payments of income tax in respect of his net earnings. Indeed he could not
avoid liability to pay tax, but he might have been able to diminish his out-
goings if he had chosen to spend more time and effort himself on his work
or in travelling in the course of his work. Yet no one would suggest that
it is improper to take into account expenditure genuinely and reasonably
incurred or that the plaintiff’s damages should be assessed on the fees which
he would have continued to receive without regard to the outgoings which
he would havo continued to incur.

In Billingham v. Hughes [1949] 1 K.B. 642, the leading authority on which
the Respondent relies, I think that this fact was not fully appreciated. For
example, it was said that the doctor in that case was entitled to restitutio
vis-a-vis his patients, i.e., to receive his fees in full, but it cannot have been
intended that his outgoings should be disregarded in assessing damages. And
it was also said that a man’s income is his own to do what he likes with it
and that the defendant has no concern with what happens to his income.
But that argument goes much too far. The gross fees which the doctor
receives are his own to do what he likes with them. He is not bound to
spend them in paying his rent or rates or other outgoings any more than
he is bound to spend them in paying his taxes. But if he does not meet any
of these obligations either out of his fees or from some other source he will
ultimately be made bankrupt. The defendant has no more concern with
whether or how he pays his rent than with whether or how he pays his taxes.
What the defendant is concerned with is how much the plaintiff has lost.

In a case where the wrongdoer is the plaintiff’s employer it has sometimes
been said that he would have had to continue to pay the plaintiff’s full wages
or salary if there had been no accident or wrongful dismissal, so why should
he take advantage of his own wrong to diminish his liability? That argu-
ment has lost some of its force since the introduction of the system of
P.A.Y.E.. but it would be strange if the introduction of a new method of
collecting tax altered the legal position, and in any event the argument would
remain for surtax. The real answer is. I think, that before the wrong the
employer was paying for the plaintiff’s services, whereas now he is paying
the plaintiff’s loss and he will have to pay someone else to perform the
services. And this argument also would go too far if valid, for it would seem
to involve the proposition that, if a dismissed employee gets other work, the
employer ought not to be able to take advantage of that.

I return to the question whether the fact that the plaintiff now has to pay
less tax than he would have done is a factor too remote to be taken into
consideration. Taxation is not something purely personal to the plaintiff.
The obligation arises from Acts of Parliament and applies to all, and if those
Acts directly related the amount of tax to the amount of income I should
have no doubt about the matter at all. My only difficulty arises from the fact
that the exact amount by which the plaintiff’s liability for tax has diminished
may depend, and sometimes largely depend, on other matters besides the
amount of the diminution of his earned income. Let me take, for example, a
man with an earned income of £1,000 per annum, and suppose that he has
an unearned income of £2,000 or that his wife has an income of £2,000 per
annum. If by reason of an accident he can no longer earn an income his
future tax liability is diminished by a much greater amount than it would
have been if his only income had been the £1,000, and therefore his real loss
is less than it would have been in that case. Other instances could be taken,
but the difficulties are similar to those in the case which I have supposed.

I do not think that it is possible to formulate any principle by which it can
be determined what is and what is not too remote. Mayne on Damages, 11th
edition, page 151, refers to ” Matter completely collateral “, and for a general

description of what is too remote I cannot find better words, but I do not
think that every case can be solved merely by applying those words to it.
Taking this description, however, and applying it to the present case, I do not
think that the plaintiff’s personal position is completely collateral. It is not
something brought in as a separate factor, but only something which helps
to quantify an obligation which is imposed by an Act of Parliament as a
consequence of earning income, and I cannot regard that obligation as in
itself collateral—certainly not completely collateral.

Another element to be considered is whether bringing in the matter of
liability to tax would seriously increase the duration and expense of trials;
for practical as well as theoretical considerations weigh in determining what
is too remote. But I do not think that there would be serious practical effects.
In the great majority of cases the matter would be simple and even in more
complicated cases it would not cause very much difficulty. It has caused
little difficulty in the present case. No doubt some detailed examination is
or may he necessary as regards actual loss suffered between the date of the
accident and the date of the trial, but, as regards prospective loss, examina-
tion in full detail would be of little assistance, and indeed would generally
not be possible, because, as I have said, there can only be an estimate of loss
of future earnings, and there can only be an estimate of the plaintiff’s other
future income, and therefore there can only be an estimate, and probably
only a rough estimate, of what the future tax position of the plaintiff would
have been and will be. In considering the importance of practical difficulties
I would weigh them against the importance of the element of tax liability,
with tax at modern levels, in determining the real loss which the plaintiff
has suffered. I cannot find any sufficient reason, theoretical or practical, for
excluding the element of tax liability, and I am therefore of opinion that this
appeal should be allowed.

Lord Radcliffe

my lords.

I have had an opportunity of considering in advance the Speech of my
noble and learned friend. Lord Goddard. I agree with it, as I agree with the
Motion that is to be proposed.

Lord Tucker

MY LORDS,

Having now heard this point argued three limes—twice in your Lordships’
House and once in the Court of Appeal—I am persuaded that the decision
in Billingham v. Hughes, to which I was a party in the Court of Appeal,
was erroneous.

I agree that the phrase res inter alios acta does not assist in the solution
of the problem, but the difficulty is, I feel, in deciding what items of expendi-
ture which follow the earning of profits are to be taken into consideration
and which are to be ignored. Such items are clearly distinguishable from
those which are incurred in the process of earning the profits and which have
to be deducted in the computation thereof.

I think the true answer is that expenditure which—although not actually
a charge on earnings—is imposed by law as a necessary consequence of their
receipt is relevant to the ascertainment of the loss suffered by the party
injured.

In the present case the figures have been agreed and have been set out by
the trial Judge in detail in a manner which has been most helpful, but it
should not, I think, be assumed that your Lordships are giving tacit approval

to the sums awarded under the different heads or to the method of arriving at
them. Nor should it be thought that it is always incumbent upon Judges
who have to apply your Lordships’ decision in the present case to itemise
the damages they award in such detail. I agree that the appeal succeeds.

Lord Keith of Avonholm

my lords.

After listening to the full and able arguments for both sides in this case,
I have considered afresh the opinion I expressed in Blackwood v. Andre,
1947, S.C. 333. With some regret, knowing the views of your Lordships,
I have found myself unable to change my opinion. I propose to explain my
reasons very briefly.

I feel great difficulty in the view that the incidence of taxation on an
injured taxpayer should be any concern of the wrongdoer and should be
used to minimise an award of damages in his favour. To many it may
seem somewhat hard that the more tax a man has paid before he meets
with an accident the less damages relatively will he recover from the
person who has injured him. Two men each earning £2,000 a year are
injured in the same accident and are totally disabled for life. A has income
from investments of £5,000 a year, or a wife with income of that amount.
B is a single man with no independent income. It would be no answer
for the wrongdoer to say, A has got a wealthy wife, or a large independent
income, and therefore he does not need, and ought not to recover, any
damages except for pain and suffering, loss of amenities and out-of-pocket
expenses. The law would say the wealthy wife and the independent income
are not his concern. But by taking net income after payment of tax as
the measure of damages the wrongdoer achieves by a back door precisely
what is refused to him by the direct entrance. In such an event B will
receive full compensation for loss of his earning capacity of £2,000 a
year so far as Judge or jury with the limitations of human foresight and
possibilities of human error can assess it. A will receive insignificant and
some may think derisive damages for loss of exactly the same income.
I do not ignore the fact that B may need the damages more than A and
the difference may seem to introduce a measure of equity as between A
and B, to the advantage of the wrongdoer, but the law has not yet reached
the stage of assessing damages for a legal wrong on the basis of need.

The whole issue in this case boils down to the question whether a man
is to be compensated for loss of wage-earning capacity on the basis of gross
earnings, or net earnings after deduction of tax. The first alternative
provides a simple rule which has been adopted for generations and creates
the minimum of trouble. The second alternative must, I think, give rise
to serious difficulties and complications. Nor is the matter confined to
British income tax. It was conceded in argument and is, I think, inevitable
that under the second alternative, if a foreigner is injured in this country the
Courts will have to pay regard to the incidence of his foreign income tax, if
any. It is a strange turn of fortune’s wheel that the intricacies and accidents
of fiscal legislation should have its repercussions in the assessment of damages
in the civil courts.

Nor does the matter end there. A man may be content to earn a large
income with a high rate of tax, with a view to prospective benefits or
advantages. He may propose to make payments under covenants to relatives
and others, with consequent taxation reliefs, or to maintain and possibly
increase insurance premiums on life and endowment policies, or be content
to enjoy the minimal benefits of earning a large salary under a system
of high taxation with a view to enjoying in retirement a better pension.
To take account of his existing tax position at the date of the accident
will make no allowance for these contingencies. They may be very real

intentions the opportunity of realising which may depend on a man’s
maintaining his earning capacity. It may be said they can be taken account
of by Judge or jury. If so, new and difficult factors will be introduced into
the computation of damages which would be unnecessary if damages were
assessed on the basis of gross earnings.

There is, I think, a deceptive simplicity in looking at the matter from
the point of view of loss of earnings down to the date of trial. It is, of
course, obvious that if the injured man had been able to work he would
have paid tax on his earnings, and it is attractive to say that his damages
for ascertained loss of earnings should be calculated on net earnings after
deduction of tax. But if an award of damages for loss of earnings is not
subject to tax, to deduct tax before assessing damages seems to me singu-
larly like exercising taxing powers in an indirect way. It must be remembered
also that income tax is an annual tax imposed by the will of Parliament. To
fix damages on an estimate of future taxation is impossible and to assess
them de futuro on the basis of existing taxation savours of legislation by the
judiciary. Further, to fix them on the basis of existing taxation without any
knowledge of what the future commitments and obligations and personal
status of the injured person will be, or would have been, seems to me to be
unreal. On all counts the safe and simple rule, in my opinion, is to exclude
the element of taxation from the assessment of damages. If there
is a case for thinking that assessing damages on a basis of gross
earnings in actions for personal injuries, or for wrongful dismissal, enables
the individual to escape his fair contribution to the national revenue, the
position, in my opinion, should be rectified by legislation.