Fatal accident claims and death of business owners

Rix v Paramount Shopfitting [2021] EWCA Civ 1172 (28^th July 2021)

This recent decision from the Court of Appeal once again illustrates difficulties associated with fatal dependency calculations under the Fatal Accidents Act 1976 (FAA).

Mr Rix died of mesothelioma in 2016, aged 60. He established a family business in 1977, which had flourished. The trial judge (Cavanagh J) found it was his skill and acumen which accounted for that success.

Mr and Mrs Rix both held 40% shares in the family company, with the remainder divided equally between the two sons. For tax reasons Mrs Rix also received a salary from the business, but had never worked in it. The couple also enjoyed rental income from commercial properties in Mrs Rix’s name.

Following the death one son assumed the position of MD, but he encountered difficulties and managers were appointed.

The trial judge valued financial dependency by reference to Mrs Rix’s share of the income she and her husband would have received from the work carried out by him. There were two bases upon which he could have made an award:

Calculated by reference to Mrs Rix’s share of the income they would both have received
Calculated by reference to the cost of replacing the deceased’s services

Most of the authorities had used Base 2, whereas in this case the judge opted for Base 1. The reason was that the rental income had been deducted from the calculation by Mrs Rix, and what was left was purely income from the business, all of which had been generated by Mr Rix.

The judge allowed Mrs Rix to recover two thirds of the assessed profit of the business, after having deducted the rental income. In other words, she recovered the full extent of her financial dependency, despite the fact she continued to receive income from the family business. In effect, her 40% shareholding was ignored.

There was an appeal on three main grounds, asserting that the judge had erred in:

Treating all of the profits as the basis for the calculation regardless of the fact these profits continued to accrue to Mrs Rix
Treating Mrs Rix’s entitlement to a profit share based on her shareholding as it if had belonged to the deceased
Confining credit for surviving income to rental income alone, and ignoring her profit share / salary, which she still received

Authorities were reviewed back to 1992, and from these a number of principles had been established:

Assets enjoyed by dependents both before and after death were to be disregarded
The loss of the ‘driving force’ behind a family company can be measured in money terms by looking at the cost of replacing their services, irrespective of whether those services had in fact been replaced
The courts will distinguish between income from capital assets, and income from labour, since it is the deceased’s contribution as the manager of the business which has been lost; he is regarded as the ‘wealth generator’
The fortunes of the business post-death are irrelevant, since dependency is fixed at the moment of death
The object of the exercise is not to look at income from the family business before and after death, and then award any shortfall
The courts accept a dependent may recover more than they have in fact lost

The Court of Appeal followed the previous line of authorities, and refused the appeal.

The real loss was said to be the loss of business skill, which was the driving force behind its success; the business was not a capital asset which would have produced income regardless of Mr Rix’s death.

Income is only derived from capital if it is passive, and received without labour; such income is irrelevant for these purposes. All profits in this case were ‘touched by the management of Mr Rix’ and therefore relevant to be included in the dependency calculation. Base 1 was correct, since it was founded upon income derived from the deceased’s services.

The fact the family business had thrived post-death is irrelevant, and the court acknowledged there are cases where the dependency calculation exceeds the loss sustained (this being a case in point).

As for the income enjoyed by Mrs Rix, this was entirely the result of her husband’s work, and therefore relevant to be included in the dependency calculation. Her post-death income was disregarded, since dependency is fixed at the date of death.

Points to Note

Loss of entrepreneurial skill is an intangible but created a dependency that sounded in damages.
The court’s quantification of this is imperfect. The result often benefits claimants at the expense of defendants.
These cases are decided by reference to Sections 3 & 4 of the FAA. Section 3 governs how damages are assessed, and Section 4 indicates any benefits flowing from the death must be disregarded. Section 4 often results in claimants being left financially better off than they would have been had the death not occurred.
Cases surrounding family companies are especially complex. The court’s answer ignores the successful continuance of any family business, not due to the operation of Section 4, but because the essential question governs the loss of expectation of future pecuniary benefit, and that crystallises at the moment of death. What happens thereafter is entirely irrelevant to the computation of dependency. This leaves such claimants free to recover damages by way of dependency, while at the same time enjoying the benefits of a family business, which has continued to thrive, despite the loss of its driving force, and creator. That perhaps appears unjust to the defendant, but logically the Court’s focus is on the time line that ends at the date of death and requires a forensic analysis of the lost contribution of the deceased to the “dependency unit”.
A final point to note is that a ‘special flair’ for business is not required for a claimant to be successful in cases such as these; the important point is the fact that services given to a business have been lost, and they can be compensated in money terms. Unfortunately, the court’s method for doing so constitutes a rather blunt instrument.

Mike Pope, Partner