Slonim v Mizrachi Nominees Pty Ltd [1998] VSC 214

5. In these circumstances, it was contended that the portion of the income earned by the plaintiff which was channelled through the service company and was ultimately paid as profit to his family trust company, Rasheda Nominees Pty. Ltd, should be recognised as forming part of the plaintiff's earnings for the purposes of computing loss of earning capacity.

8. The basic statement of principle in this area is that of Dixon CJ and Kitto and Taylor JJ in Graham v. Baker [1961] HCA 48; (1961) 106, C.L.R. 340 at 347 where the court said this:

"...an injured plaintiff recovers not merely because his earning capacity has been diminished but because the diminution of his earning capacity is or may be productive of financial loss."

12. In Batt v. Wilkinson 1983 2 QdR. 619, that statement was addressed by the Queensland Full Court. The case involved the measure of damages for a plaintiff who was the husband in an equal husband and wife partnership and who had been required, because of his injury, to replace his labour in the partnership business. Derrington J (with whom Mathews J and Neap J agreed), noted that the actual High Court decision related to the effect of sick leave payments and stated at p.623:

"It is not easy to translate this authoritative statement into the present situation because there is an added factor which raises doubt as to the meaning of 'financial loss' and that is that the plaintiff was actually exercising his full earning capacity.

It is going too far to say that this uncomfortable translation results in the need that the only compensible financial loss which the plaintiff suffers should be confined to a result of less money in his pocket. His earning capacity is an asset provided he uses it in such a way that the deprivation of it causes him the loss of something which he otherwise would have had. If he chose that the fruits of his work were to go to another person, that does not reduce or otherwise affect the validity of his claim to the full value of that which he would have had, but has lost."

"The plaintiff here has lost not only his earning capacity, but also the opportunity to put that capacity to work for the benefit of himself and the partner with whom he has chosen to share in the business the fruits of, interalia, his labour. The financial loss which he suffers is the combination of what he was entitled to receive, and as a matter of his choice, to give away."

19. It was put by Mr Galbally that the concept remains valid whether the entity is a partnership or discretionary trust. In this regard he cited Andriolo v. G & G. Construction Pty Ltd and Ors (1989), Australian Torts Reports, 80/235 at 68,478 - a decision of Miles CJ of the ACT Supreme Court. In simplified terms, three bricklayers, including the plaintiff, Mr Andriolo, had established an entity, the Forandic Unit Trust, in which the family trust of each of three bricklayers held units. The Unit Trust employed other employees and sub-contractors. Each of the bricklayers drew wages or salary and each of the family trusts shared equally in the profits made by the Unit Trust. Miles CJ held, p.68,493:

"The whole of the amount distributed by the Forandic Unit Trust to the Andriolo Family Settlement should be regarded as representing part of the plaintiff's earning capacity. The other part of his earning capacity is represented by what he receives as wages or salary."

23. Mr Galbally also referred to Cole v. Ellis (1992) Australian Torts Reports 81-186 at 61,630. In that case, which initially involved a partnership between the plaintiff's husband and wife, the former was an abalone diver who effectively did all the work. After the plaintiff's accident, which was the subject of the litigation, the partnership was converted into a discretionary family trust in which the husband and wife were sole directors and shareholders.

26. The beneficiaries included the couple and their two children. The approach adopted by Mullighan J was the same as that found in Batt's case and Andriolo's case. His Honour determined that the measure of the plaintiff's loss was the cost of employing substitute divers. After reviewing such cases as Batt v. Wilkinson he remarked (p.61,641):

"All of these cases illustrate the need to consider the nature of the partnership arrangements and the extent to which the earning capacity of the injured partner had been committed to the business of the partnership. The plaintiff and his wife entered into the partnership for reasons common to persons in their situation, namely to share income in order to minimise income tax. The plaintiff committed his labour to the partnership which was the sole source of income to the partnership, except in the limited sense which I have mentioned. In thecircumstances the starting point in assessing damages for past loss of earning capacity is, in my view, the total cost of replacing him as the diver less the amount of income tax he would have paid, and not the share of the profits from the partnership which, but for the accident, he would have received."

30. Mr Brookes, in submitting that loss of earning capacity must be directly related to financial loss, relied upon the High Court decision of Graham v. Baker, to which I have referred, which was submitted to be in accordance with the view expressed by Denning L.J, in Lee v. Sheard (1956) 1 Q.B, 192, at 196, namely;

"...a partner in a partnership would be entitledto recover his own real loss and no more."

This proposition was, it seems, approved by the Victorian Supreme Court in a judgment of Hudson J, in Plover v. Giampolo [1965] VicRp 40; (1965) V.R. 275.

35. The case law in this area, most of which is conveniently gathered in Junghenn v. Lowndes (a decision of His Honour Judge Nixon of the County Court of Victoria), reveals a division as to whether loss of earning capacity of an injured partner should be limited to the actual loss calculated as his proportion of the partnership loss. On one side of the argument, are such cases as Szittner v. Harriott (1967) 1 N.S.W.R, 233, Schick v. Abbott (1976) W.A.R. 54, Dahm v. Harmer (1955) S.A.S.R. 83, and the cases referred to by Mr Galbally.

38. On the other side of the argument the authorities include Carlon v. Allison (1964) N.S.W.R. 946, Jacklin v. O'Hara (1973) QdR 438, and Dal Zotto v. Bonnani [1980] FCA 97; (1980) 47 F.L.R 239.

41. In Junghenn's case, His Honour Judge Nixon preferred the latter authorities in limiting the plaintiff's loss of earnings to his proportion as a partner of the cost of the additional labour required to be employed by the partnership.

44. This case, it was submitted by Mr Brookes, was in accord with the principles enunciated in Graham v. Baker. It was further submitted that the authorities cited by Mr Galbally were not a correct application of that High Court principle.

47. In any event it was argued that such cases can be distinguished from the present case as representing a situation where the plaintiff was the primary creator of income derived by the partnership or trust. They involved family partnerships or trusts of the type that might be set up by a single tradesman, be he carpenter or plumber.

50. It was put that, unlike these factual situations, WCS was an independent business entity paying its own staff, and providing services required by the radiology partnership. It did not employ the plaintiff and the plaintiff had, in fact, received no money from it. The right to income was vested in unit holders who, on the evidence, do not necessarily have to be members of the partnership to hold the units.

53. There can be no doubt that the partners in EMR had an intimate involvement in WCS. According to the business manager of both organisations, Mr Anthony Hampson, the partners were its directors whom individually guaranteed loans for the leasing of equipment and the fees actually charged by WCS were set by the partners in consultationwith their tax consultants.

56. Of course the partnership itself could have employed staff and leased equipment. It chose not to do so and instead it set up the separate legal entity, WCS. It was then necessary in order to earn income in the practice of radiology, to pay this business entity for the provision of staff and equipment.

59. The partners chose to pay a fee for these business services which not only covered the operating expenses of WCS, but was inflated to ensure that WCS made a large profit. That profit was distributed to other entities, namely the family trusts created by the partners who were the unit holders in WCS.

62. A simple description of how the partnership and the service company interacted demonstrates that what existed here was a sophisticated commercial arrangement, havingnothing in common with the case of the family partnerships or trusts upon which Mr Galbally sought to rely, assuming that such cases correctly represent the law.

65. On the face of it, the financial loss to the plaintiff is the loss of income from the partnership after the payment by the partnership to WCS of the costs of earning that income. The only other financial loss is that of a unit trust from the service entity, WCS. It is not for this Court to recharacterise what is ostensibly money expended in the earning of income as income itself. Accordingly, on my view of the current law, the sums distributed by WCS as profits cannot be taken into account by this jury as constituting a loss of earning capacity by the plaintiff.