The Respondent, who is an eminent civil engineer, suffered severe injuries whilst travelling in arailway train owing to the negligence of the Appellants' servants, and brought his action to recover damages.
The trial Judge awarded him Â£9,000 for pain and suffering and loss of amenities, and Â£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 Â£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 represented by the sum of Â£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 Â£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 professional 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 Â£37,720, or alternatively of Â£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, 5A.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 compensate 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 assessing 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.,  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( 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 Â£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, maysurely 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 consideration.
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 Â£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 Â£ (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 Jordanv. The Limmer and Trinidad Lake Asphalt Company Limited ( 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 Company 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 disagreeing 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, theconsideration appears to me to be quite an illegitimate one. It would apply on the samegrounds 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 ( 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 ( 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 interruption 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 lawif 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 disregarded 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 Â£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 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 Â£6,695 for the sum of Â£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 Â£47,720 to Â£16,695. Allowance must, of course, be made for the sum of Â£7,000 which has already been paid.
It has been agreed that the Appellants should pay the costs of this appeal.
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 Â£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 Â£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 Â£6,695. Holding that he was bound by the decision of the Court of Appeal in Billingham v. Hughes  I K.B. 643 to ignore all questions relating to tax. he entered judgment for a total of Â£47.720 less Â£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  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.and 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 assessment 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 Â£16,000 which Dr. Philips was awarded against the London and 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 Â£ 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 Â£ 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 seeany 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 earnings must be the sum of Â£4,945, and for future earnings Â£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 restitution. 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  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. Londonand North Western Railway Company, 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 increased 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 tospeculate 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 compulsory 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  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 Â£16,695 for that of Â£47,720, directing that credit be given for the sum of Â£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.
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 remarkable 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 Â£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 Appellants, 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 Â£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 Â£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 Â£10,275 more in income lax and surtax: he therefore awarded Â£4,945 if those taxes have to be taken into account.
In respect of estimated future loss of earnings he awarded Â£22,500 if tax is not to be taken into account but only Â£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 Â£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 Â£10,000 which is not challenged the question before your Lordships is whether the Appellants must pay Â£37,720 based on neglecting the incidence of tax or Â£6,695 based on taking that into account. As regards loss of earnings suffered before the end of 1953, it is an ascertained fact that if the Respondent had earned the additional sum of Â£15,220 he would only have benefited from that to the extent of Â£4.945 because he would have had to pay the rest in tax. Â£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 Â£22.500 is a fair estimate of the present value of the Respondent's future loss of gross earnings and that Â£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 Â£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 Â£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 restitution 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 estimating 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 wrongapproach. 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 have continued to incur.
In Billingham v. Hughes  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 restitution 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 argument 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 Â£1,000 per annum, and suppose that he has an unearned income of Â£2,000 or that his wife has an income of Â£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 Â£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 generaldescription 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, examination 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.
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.
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 expenditure 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 approvalto 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
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 Â£2,000 a year are injured in the same accident and are totally disabled for life. A has income from investments of Â£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 Â£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 realintentions 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 singularly 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.
I would dismiss the appeal.
Lord Somervell of Harrow
I agree with the Opinion which has just been delivered by my noble and learned friend. Lord Goddard. and there is nothing which I wish to add to it.
I agree that the appeal succeeds.