Atlas Tiles Ltd v Briers [1978] HCA 37;

Atlas Tiles Ltd v Briers [1978] HCA 37; - HCA 1978 case summary — Zoe

[28]

18. But the plaintiff has not in a relevant sense lost the earnings either in the period before verdict or the future thereafter: he has lost the capacity to earn perhaps the equivalent of his current earnings or perhaps more or less according to the reasonable expectations of the employment of his earning capacity. If the award of damages for such an injury destroying or diminishing his earning capacity were merely a matter of replacing those earnings, the amount of the award would be taxable: but it is not, for the reason that the award is for a capital loss, however much the amount of the award is quantified by a consideration of what the use or employment of that capacity might be expected to produce. In other words, the assessment of damages for loss of earning capacity is in truth an exercise in valuation. It is quite true to say that what that capacity may reasonably be expected to produce is a factor, indeed a major factor, in the process of valuation. Indeed, in some uncomplicated situations it may provide a sure guide to the amount of the valuation. So many cases before the courts concern personal injury to industrial workers which destroys or reduces their capacity to earn. The uncomplicated nature of the financial affairs of such a person and the prevalence of a P.A.Y.E. system of tax collection have, in my opinion, worked to obscure the matters of principle which fall to be considered in this case. I cannot think that in the future the problems of assessment of damages will be limited to such simple situations. The areas in which the principle of negligence is relevant are extending: and the courts are ever finding new and more refined examples of the duty of care. Such a duty is finding its place in an ever widening segment of relationships within the community. Further, the endeavour to extend the decision of Gourley's Case to the award of damages in fields other than that of personal injury tortiously caused has by no means ended. Such considerations give added reason for this Court closely to examine the Gourley decision before endorsing it for Australia for the future. (at p210)

[42]

32. I would give a couple of instances which themselves, to my mind, show how superficial and legally irrelevant was this illustration. One could multiply instances of like injuries befalling people in unequal taxation situations. In connexion with these instances it is important to bear in mind that the wages, salary or earnings are not themselves taxed: they simply form part of the assessable income from which the taxable income is derived, i.e. after allowable deductions are made. Whilst it may be possible after due assessment of income tax has been made to calculate how much each pound or dollar of the assessable income has "borne" tax, income tax cannot, in my opinion, be said to be levied at any particular rate on each pound or dollar as the case may be which forms part of the assessable income. Earlier I pointed out the different ways of looking at the effect of Gourley's Case. The difference in the two situations is even more notable where graduated rates of income tax apply. It might possibly then be said that some particular ingredient of the assessable income has taken the taxable income into a higher rate of tax. I remarked earlier also on the obscuring apparent simplicity of the case of an industrial worker with no income except his wages. But even in such a case, there may be complications. Though a stipulated amount is deducted periodically at the source from wages, salary or earnings, the total of the sums deducted does not necessarily represent the amount of income tax payable. Some earners allow such deductions to be made by the employer as if they had no allowable deductions to be taken into account in determining their taxable income with the result that after the close of the tax year refunds are payable because the total deductions by the employer significantly exceed the tax payable. Further, the circumstances of the earner may generate allowable deductions after the date as at which the assessment of damages may have to be made. Lastly, in this connexion it is increasingly likely that so far from taxation remaining at or above its current level, it may indeed fall and even do so dramatically. Therefore any prognostication of the amount of tax payable because of estimated earnings over a lengthy period of time must indeed be susceptible of grievous error. (at p215)

[48]

38. Perhaps, as in the case of Earl Jowitt, the notion that damages involved a restitutio in integrum coloured his Lordship's speech. Concern was expressed that the plaintiff should not be better off or, on the other hand, be no worse off by reason of the verdict. Lord Reid did not accept that a restitutio in integrum is involved in the assessment of damages. His Lordship insisted that compensation was that which was to be awarded. I respectfully agree. But, again, that for which compensation was to be awarded is identified, in my opinion, in his Lordship's speech as the loss of wages. Again, the wages unpaid down to the date of verdict are treated as certain and recoverable: but the wages which might thereafter have been earned are treated as a prospective loss. His Lordship expresses the question to be decided as being "whether the plaintiff's liability to pay taxes is something which the law must regard as too remote when determining or estimating what he has lost as a result of the accident" (1956) AC, at p 212 . I would respectfully agree that the question is one of relevance or remoteness though his Lordship's expression "what he has lost" I find ambiguous and likely to turn the mind away from rather than towards the identification of the subject matter of the compensation. His Lordship, it seems to me, answers the question he posed by treating the liability to tax as a cost of earning the income. He realizes that tax is not directly levied on the earnings but only on the taxable income to the total of which the earnings contribute. Yet the impression, and I must concede it is only that, because the reasons expressed in the speech are, if I may respectfully say so, anything but express on the point, is that his Lordship treated the payment of tax as a cost of earning the wages for the loss of which his Lordship thought the plaintiff was to be compensated. Thus, in the long run, his Lordship, faced with the difficulties of introducing tax estimation into common law trials, said (1956) AC, at p 215 : "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 . . ." With unfeigned respect for his Lordship's views, it seems to me that by treating the problem as one of replacing the wages which will not be received and treating tax as a cost of earning wages, his Lordship has been led to deciding that the plaintiff's loss in this respect must be ascertained after setting against those wages the liability to pay tax on the taxable income to which those wages, if received, would have contributed. (at p218)

[51]

41. So far, I have considered the case of damages for lost earning capacity as a result of injury tortiously caused. But my reasons for my conclusion would be equally valid if Gourley's Case were sought to be applied to a case of wrongful dismissal. In the case of wrongful dismissal, the salary or wages to be paid are rendered certain by the agreement between the parties whether oral or in writing. Further, the time during which they are payable is both fixed or capable of being fixed. There is thus at first sight some attraction in the proposition that the only "real loss" occasioned by the wrongful dismissal is the non-receipt of the agreed wages. But, so to regard the matter is, in my opinion, to make a false analysis. The liability to pay tax on taxable income cannot properly be classified as a cost of earning the emoluments of the employment. So to say is not to deny that in economic terms the level of income tax in a community does not result in an increase in the price of goods and services. But that economic fact is, in my opinion, quite irrelevant when determining the damages for breach of a contract to pay salary or wages. Suppose, for example, an employer is to pay salary or wages which, according to the terms of the employment, were an underpayment. Could the employer in an action to recover the shortage successfully say that the employee had in truth not lost the salary or wages but that he had lost only the net amount he would have beneficially retained after payment of income tax referable directly or indirectly to the receipt of wages? Of course not - and why not? True, the action would be for debt and not damages. But, in any case, the liability to tax would be irrelevant. If instead of short payment of salary or wages the employer wrongfully dismissed the employee, or by persistent refusal to pay the agreed wages repudiated the employment, in an action for damages could the employer say that the employee had only lost so much of the agreed salary or wages as would remain in his hands after payment of income tax? I cannot bring myself to believe that, in point of law, he could. The dismissed employee had lost the benefit of the employment: that means, in my opinion, the amount the employer had agreed to pay him. Again, the fate of the wages received, whether already pledged to be paid away under some obligation or bound to be applied to or towards the payment of income tax, would, in my opinion, be quite irrelevant. The employer would, in my opinion, be bound to pay what he had agreed to pay undiminished by any consideration of the obligation to pay income tax. It is, in my opinion, quite fallacious in relation to damages for wrongful dismissal to ask the question what has the employee really lost, meaning thereby how much of what he would have been paid could he have kept for himself. As I have indicated, it was by asking a comparable question in Gourley's Case: what really in that sense had the plaintiff lost by the deprivation of his earning capacity?, that the House of Lords reached its conclusion in that case. (at p219)

[58]

4. The decision in Gourley's Case has been widely criticized. The Supreme Court of Canada has declined to follow it (The Queen (in right of Ontario) v. Jennings (1966) 57 DLR (2d) 644 ). Learned writers have exposed what they regard as its weaknesses. The main criticisms are stated in the dissent of Lord Keith, in the judgment of Judson J. in the Canadian case and in Street on Damages (1962), pp. 98-104, although the topic has been discussed in many articles, some of which are mentioned in Luntz: Assessment of Damages for Personal Injury and Death (1974), p. 162. I shall refer briefly to the most cogent of these criticisms, and in doing so would return to consider what I have described as the foundations of the decision in Gourley's Case. In most cases of personal injuries a plaintiff would be compensated too generously if his damages were assessed on the basis of his gross earnings. He would be better off financially by reason of the wrong done to him. Judson J. in The Queen (in right of Ontario) v. Jennings did not agree that this would be so. He said (1966) 57 DLR (2d), at p 656 : "There must be very few plaintiffs who are compelled to take a lump sum who would not be better off with their earning capacity unimpaired or a periodic reassessment of the effect of its impairment. There is, as things are at present, no possibility of such a reassessment. But mathematical precision is impossible in assessing the lump sum, and where large amounts and serious permanent disability are involved, I think that the award is usually a guess to the detriment of the plaintiff." With great respect I remain unconvinced by these assertions. Take first the case - probably, in Australia, the most common case - of the plaintiff who receives earnings after tax has been deducted from them. A person cannot be said to have lost something that he would never have received and a plaintiff in that situation would never have received more than what remained after tax had been deducted, with perhaps a small taxation refund as well - in all, no more than his net earnings. To assess the damages of such a plaintiff on the basis that he has lost his gross earnings seems manifestly unreal, and unduly advantageous to the plaintiff. However, the critics say, the principle in Gourley's Case will work unfairly where the plaintiff would have earned a large income, particularly if tax was not deducted at the source. Such a plaintiff may have lost the ability to deal freely with his gross earnings and to take steps to reduce the burden of the tax. However, there is nothing in Gourley's Case that requires the court to proceed so mechanically as to fail to take these possibilities into account. Further it is said that it is impossible to foresee future changes in the level of tax, or in the tax laws, or in the situation of the plaintiff himself which may affect the extent to which the lost earnings would have borne tax. There is an element of truth in this criticism, but in the assessment of damages the court is constantly required to endeavour to predict the course of events in the future, and it does not abdicate a necessary function for fear that its predictions may be falsified. To ignore tax altogether would be to assess damages on a basis that would be unreal and theoretical. It is asked what will be done with foreign taxes; the answer is that there, too, an estimation may be made, but in any case that question does not cause practical difficulties in many cases in Australia. I consider that on the whole the tendency of the principle in Gourley's Case is to ensure that damages do not exceed the amount required to compensate the plaintiff for his loss, rather than to reduce awards below a proper level of compensation. (at p222)

[73]

16. The provisions of the Finance Act (U.K.) present difficulties in the assessment of damages for wrongful dismissal, particularly when the total award is just below or just above 5,000 pounds. The same difficulty does not arise under s. 26 (d) of the Income Tax Assessment Act. Whatever may be the correct position in the United Kingdom, it seems to me that the principle in Gourley's Case should be applied in assessing damages for wrongful dismissal in Australia, notwithstanding that five per cent of the award will be taxable. As I have already said, I consider that, in general, the principle applies only where the damages are not taxable, and this would be so even if the tax payable on the award were considerably less than the notional tax on the lost earnings. But where only a small fixed proportion of the award is subject to tax, it would be manifest that a plaintiff would receive more than was necessary to compensate him for the loss caused by his wrongful dismissal if his damages were assessed on the footing of his gross earnings, when all of those earnings would have been subject to tax. The reasons underlying Gourley's Case in my opinion require that in such a case the court should assess damages on the basis of the net earnings which represented the plaintiff's real loss, but should adjust the result by taking account of the fact that a proportion of the award will bear tax. The proper approach is, I consider, along the lines suggested in Stewart v. Glentaggart Ltd. (1963) SLT 119 , but it is not necessary, as a matter of law, to say more than that in making the assessment the court must take into account both the fact that if the contract had not been broken the respondent would have had to pay tax on his earnings, and that he will now have to pay tax on five per cent only of the damages awarded. A theoretical difficulty will be occasioned by the fact that once the amount provisionally assessed on the basis of net earnings is increased to take account of the fact that five per cent of the damages will bear tax, the increase in the amount to be awarded will increase the tax payable. However an elaborate assessment, aiming to produce mathematical accuracy, is not required - "an estimate will be none the worse if it is formed on broad lines, even though it may be described as rough and ready": Gourley's Case (1956) AC, at p 203 . I am not convinced that an assessment made in the manner suggested will cause undue difficulty or inconvenience. And I consider that it is necessary to take tax into account in order to determine, in the fairest way possible, the compensation that the respondent should receive for the wrong done to him. (at p227)

[91]

15. If this be so, how should it affect the assessment of damages in the present case? The plaintiff here sued in contract for damages for wrongful dismissal. In the United Kingdom it is clear that damages for wrongful dismissal, like damages for lost earning capacity in the case of personal injuries claims in tort, to the extent to which they do not exceed 5,000 pounds and are therefore, under the Finance Act 1960, free of tax, are subject to the principle in Gourley's Case. In Gourley itself, at a time when all such damages were free of tax, Lord Goddard expressly said as much (1956) AC, at p 210 ; with his opinion Lord Radcliffe and Lord Somervell agreed, and the speech of Lord Tucker seems to be expressive of the same view (1956) AC, at p 215 . Only Earl Jowitt expressly reserved the point. Subsequent cases in England and Scotland after the enactment of the "golden handshake" provisions of the Finance Act 1960 have, despite some notable dissents such as that of Sellers L.J. in Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB 95, at p 106 , applied the principle to such damages: Stewart v. Glentaggart Ltd. 1963 S.L.T. 119. ; Parsons v. B.N.M. Laboratories (1964) 1 QB 95 (and the additional cases there cited by Pearson L.J. (1964) 1 QB, at pp 134-135 , Bold v. Brough, Nicholson and Hall Ltd. (1964) 1 WLR 201; (1963) 3 All ER 849 and Lyndale Fashion Manufacturers v. Rich (1973) 1 WLR 73; (1973) 1 All ER 33 ). Any impression that, because liability depends upon the defendant's breach of his contract to employ the plaintiff for reward rather than upon a tortious breach of his duty of care, the burden of tax thereby becomes a merely collateral matter, properly to be disregarded, is dispelled by recalling that in both cases the dominant rule of law is compensation of the plaintiff; or, as Earl Jowitt said in Gourley's Case (1956) AC, at p 197 the awarding to the injured party of "such a sum of money as will put him in the same position as he would have been in" but for the wrongful act. (at p234)

[108]

6. However, since Espagne [1961] HCA 15; (1961) 105 CLR 569 has been decided by this Court and since in conceptual principle it is not distinguishable from Gourley, it is necessary first to examine the matter on this conceptual level. It has now been sufficiently demonstrated (by Dixon C.J. and Windeyer J. in Espagne and by most of their Lordships in Gourley and in Parry v. Cleaver that very broad statements, referring to "collateral matters", "remoteness", "causa sine qua non", "causa causans", "res inter alios acta" and more, do not provide sound ground for the elucidation of a principle but tend rather to express a conclusion. Prior to Gourley it was generally accepted that in the assessment of damages for financial or economic loss arising from an incapacity to earn the measure of damages was the loss of earnings less the cost of earning and that apart from this latter cost no account was to be taken of what the injured man would have expended out of his earnings, by statutory compulsion as tax or by statutory or other compulsion for maintenance of dependants or by contractual obligation or otherwise; nor was account to be taken of a benefit which the injured man received or became entitled to receive after his injury which he would not have received or been entitled to receive if he had not been injured, whether the benefit came from benevolence or statutory right or contractual right or otherwise. This rule could be accommodated with the primary notion that damages in such cases are compensatory by treating this notion as an elaboration of the principle that there is no punitive element in such damages. What Gourley did was to frame the notion that such damages are compensatory only as a principle whereunder it is generally necessary to regard the whole financial or economic situation of a plaintiff before and after his injury, and to balance all credits and debits one against the other. In order to escape the application of this general rule a plaintiff would need to establish an exception to a dominant rule that damages should be assessed on the basis of what a plaintiff had really lost overall. See in Gourley, per Earl Jowitt (1956) AC, at pp 198, 203 ; per Lord Goddard (1956) AC, at p 206 and Lord Reid (1956) AC, at pp 212, 214 who both apply a test of remoteness to determine whether an exception does or does not exist; per Lord Tucker (1956) AC, at p 215 who applied the test whether the expenditure out of earnings was imposed by law as a necessary consequence of receipt. (at p240)

[114]

I would agree that where damages have been fixed in a lump sum fair to both parties without any particular regard to the present sum necessary to produce a predicated periodical sum for loss of earning capacity, then it would be inappropriate to take account of tax on the income of that sum. However, that is not the way in which damages for loss of earning capacity are most commonly arrived at. Moreover, the assumption underlying the Gourley rule is that a first step in calculation is to decide upon an average periodical loss over the estimated length of time of the incapacity; for it is that loss which Gourley decided to be the net loss after payment of tax. It appears to me that it should in fairness follow from Gourley that the tax payable on the income produced by the lump sum in damages attributable to loss of earning capacity must be taken into account so that the plaintiff will not be worse off. The longer the period in respect of which the present value of the loss must be computed the more important this income factor will be; for there will be a greater income component in the earlier years. It is hardly practicable to draw a line between what is a short term loss of future earning capacity where the computation of both factors is less important and what is a long term loss of such earning capacity where the computation of tax on the income of the lump sum would go a long way to offset the computation of what the tax would have been on lost earnings. I have come to the conclusion that in relation to loss of future earnings the complexities introduced by the Gourley rule outweigh any real advantage achieved by its application. Most of the uncertainties which Menzies J. described in the passage which I have quoted apply as much to an estimate of the tax for which the plaintiff would have been liable on his earnings if they had not been lost to him as to the prediction of the tax which income from investment of the damages would incur; and therefore to essay both tasks - the calculation of probable tax on what would have been earned and the calculation of probable tax on the income from compensation - would, in the words of Menzies J. which I have quoted, make the assessment of such damages a computer programme rather than an exercise of judgment. And in very many cases it would achieve little. Having concluded that Gourley is not strongly based on a conceptual approach I see no advantage in its adoption as a realistic approach to the assessment of damages for loss of future earning capacity. (at p242)

[145]

B.J. Shaw Q.C. The Court has made a decision within s. 3 of the Privy Council (Limitation of Appeals) Act 1968-1973. The word "decision" in s. 3 has the same meaning as in s. 74 of the Constitution which was interpreted by the Privy Council in The Commonwealth v. Bank of New South Wales [1949] HCA 47; (1949) 79 C.L.R. 497, at p. 625; (1950) A.C. 235, at pp. 294-295. . Section 3 appears to have been drafted with the Privy Council's observations in view. The question here is whether the decision is one which either involved or might have involved the application or interpretation of a law made by the Commonwealth, or whether the appeal could be allowed without a decision involving the application or interpretation of such a law. (He referred to Nelungaloo Pty. Ltd. v. The Commonwealth [1952] HCA 11; (1950) 85 C.L.R. 545, at pp. 571-572, 596. .) The appeal could be dismissed by the Privy Council by upholding the views of Barwick C.J. and Jacobs and Murphy JJ. which did not involve the interpretation of the Income Tax Assessment Act 1936 (Cth), but it could not be allowed without considering the effect of s. 25 and s. 26 (d) and (j). The trial judge and Gibbs and Stephen JJ. considered the interpretation and application of s. 26 (d). The critical word in s. 3 is "involve". It has been held for the purposes of s. 74 of the Constitution that a decision may involve an inter se question, though the question may not have been considered by the High Court. The legislative policy of s. 3 is similar to that of s. 74, i.e. that the decision of matters involving the interpretation of laws made by the Parliament should be confined to the High Court because of its position and experience. Section 3 not only limits Her Majesty's prerogative but prohibits a subject from seeking leave to appeal. An injunction should be granted. The Court of Chancery restrained the institution or continuance of proceedings in foreign courts and courts in Ireland and Scotland before the Judicature Act. (He referred to Dicey, Conflict of Laws, 8th ed. (1967), Rule 183, pp. 1081 et seq.) The High Court acted to affirm its position as the ultimate court of appeal in Australia in Ebert v. Union Trustee Co. of Australia Ltd. [1961] HCA 29; (1961) 105 C.L.R. 327, at p. 331. and Tait v. The Queen [1962] HCA 57; (1962) 108 C.L.R. 620. .

At a glance

Court

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Judgment (164 paragraphs)

Atlas Tiles Ltd v Briers [1978] HCA 37; (1978) 144 CLR 202 (14 December 1978)

Parties

Legislation Cited (7)

Cases Cited (16)