What you need to know about Rix v Paramount when calculating future losses in a fatal personal injury claim

The decision in Rix v Paramount is an important one for those dealing with fatal personal injury claims. It confirmed once more that dependency is assessed at the time of death and reiterated that the finding of a loss of dependency and the quantification of it in these cases is particularly fact-specific.

Implications

Practitioners advising claimants in the specialist area of fatal claims will now be much more likely to advance claims based on the total profits of a company rather than the actual drawings or the theoretical cost of replacing a deceased’s services.

Claimant solicitors will similarly resist arguments to give credit against the financial dependency claims for the surviving spouse’s notional salary in cases where the co has been structured to distribute profits in a tax efficient way, and defendants can expect to face more claims for post-retirement income from a family company.

The background to the case

This case arose out of the death of a very successful businessman, Mr Rix, aged just 60. Mr Rix was the prime mover behind the family’s joinery, kitchen fitting and granite worktop firm, MRER Ltd, which he had established in 1977 when he was aged just 21.

Mr Rix’s company was successful, with a turnover of just under £1.5 million p.a. and gross profit averaging £357,000. The company had recently purchased new premises with a 15 year business mortgage. The long-term plan was for the sons to step into their fathers shoes, but by virtue of his illness and death they had had to do this before they were ready. Even so, the company continued to thrive, and turnover increased. Although they lost some local authority contracts after the father’s death, new clients were won.

The issues

The court was asked to decide whether Mrs Rix had actually suffered a loss of dependency with the death of her husband. It was relevant – the defendants argued – that she had inherited her husband’s share in the company and that it was doing better than ever. Also relevant they said was the fact it was a limited company, and the defendants argued that it was akin to an income producing capital asset and that no loss of financial dependency had been sustained.

If there was a financial dependency the court was asked to decide how it should be assessed, and whether Mr Rix would have continued to draw income from the company after his retirement.

The decision

In a detailed judgment Mt Justice Cavanagh found in the claimant’s favour in every regard.

Firstly, there was a loss of dependency for Mrs Rix because, at Mr Rix’s death, she had a reasonable expectation of continued financial benefit. The company’s continued success was at least in part as a result of Mr Rix’s efforts.

The measure of the dependency was the widow’s share of the annual income that she and her husband would have generated from the business if he had lived. Unlike previous cases of Cape Distribution v O’Loughlin [2001] EWCA Civ 178 and Welsh Ambulance Services v Williams [2008] EWCA Civ 81, it wasn’t the cost of replacing the deceased’s services within the business.

The success or failure of a deceased claimant’s business post-death is irrelevant – as to find otherwise would provide a “perverse incentive to fail, because the damages recovered if the business fails would be greater than if the business succeeds”

To take into account post-death profits would also be contrary to S4 of the Fatal Accidents Act, which confirms benefits flowing from the death are disregarded.

The fact the business was long established and being run as a limited company did not mean that Mrs Rix had simply inherited an income generating asset that would continue to generate profits regardless of who was in charge.

The courts should also look at the practical reality of financial dependency, not the corporate, financial or tax structures that are used in family arrangements.

The calculation

Prior to his death Mr and Mrs Rix each held 40% of the shares in MRER Ltd and their two sons had 10% each. The average gross annual profit in the two years prior to death was £358,000 but only modest dividends and benefits were taken out of the business by Mr and Mrs Rix. The financial dependency however was assessed on the basis of 70% of the likely continuing profits of the co, plus the deceased’s modest pension provision – totalling over £100,000. Rent from commercial premises owned by Mrs Rix was deducted in full.

The customary 2/3 1/3 approach to assessing loss of dependency was adopted, even though the court found that Mr Rix’s frugal lifestyle meant a deduction of only 17.5% for his own living expenses would have been appropriate.

This meant that, in fact, Mrs Rix was in a better position financially than she would have been had her husband survived, as a result of receiving both the damages for the dependency element of her claim and the continued profits from MRER Ltd. However this is has always been the almost inevitable consequence of S4 of the Fatal Accidents Act and must have been what Parliament had in mind when it was drafted.

The parties will now go on to negotiate what losses flow from this judgment, and the final outcome is awaited with interest.