England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE FC3 97/6243/C

IN THE COURT OF APPEAL (CIVIL DIVISION) QBENF 96/1094/C

(HIS HONOUR JUDGE FRICKER QC (SITTING AS A DEPUTY HIGH COURT JUDGE) )

Royal Courts of Justice

Strand

London WC2

Thurdsay, 19 February 1998

B e f o r e:

LADY JUSTICE BUTLER-SLOSS

LORD JUSTICE HENRY

LORD JUSTICE POTTER

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BRYAN WARD

Plaintiff/Appellant

- v -

NEWALLS INSULATION COMPANY LIMITED

First Defendant/Respondent

-v-

CAPE CONTRACTS LIMITED

Second Defendants/Respondent

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(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR D BRENNAN QC & MR A SPINK (Instructed by Irwin Mitchell, Sheffield, S1 2EL) appeared on behalf of the Appellant

MR S POWLES QC (Instructed by Messrs Edward Lewis, Verulam Gardens, 70 Gray's Inn Road, London, WC1X 8NF) appeared on behalf of the Respondents

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

LORD JUSTICE HENRY: This is the judgment of the Court. The plaintiff appellant, Mr Ward, is now aged 48. His early working years, between 17 and 27, were spent working for the first and second defendants. In the course of such employment, he was exposed to asbestos. As a result of the admitted negligence of the defendants, that exposure has caused him to suffer a progressive and restrictive lung disease. The symptoms of this disease were first observed at the end of 1988, and diagnosed in 1989. It is a condition that has got, and still is getting, progressively worse. Mr Ward's life expectancy is reduced, and he may yet develop even more serious conditions, such as mesothelioma or lung cancer.

He now appeals against an award of damages and interest of £440,167.10 awarded by His Honour Judge Fricker QC (sitting as a High Court judge) on 9th July 1996, an award made on the assumption that he would not at some later date develop lung cancer and/or mesothelioma as a result of his exposure to asbestos, with liberty to him to apply to the court for further damages if he did.

Thanks to the good sense and realism of counsel, many issues have been resolved by the parties without the intervention of the court. Consequently we are only concerned with two separate issues, one of principle (the partnership issue) and one of detail. We deal first with the partnership issue, and then with the detail.

On leaving the employment of the second defendants when he was 27, Mr Ward, in 1976, formed a partnership with Mr John Eid in the business of insulation contracting, a business that became active in 1978. He proved to be a good, economically prudent, and energetic businessman, and was extremely successful. The business of the partnership prospered and expanded. In all some five limited companies, each being a separate profit centre, were set up. Mr Ward and Mr Eid owned and controlled those companies 50:50. The judge described the situation in these terms:

"The partnership continued as the vehicle for the plaintiff and John Eid to draw their income, on the basis of equality between them. The companies in the group paid profits into the partnership account. The plaintiff's share of the partnership profits was taken by drawings from the partnership account by cheques made out to the plaintiff."

It is clear that the partnership only received such profits as were allocated to the partners by the companies: ie some profits were retained in the companies.

The judge found that Mr Ward had been a healthy, vigorous and successful businessman. He was a workaholic, and the fortunes of all the companies which he owned 50:50 with Mr Eid depended to a large extent on him, his dynamism, his attention to detail, his personal supervision of the business, and his client base developed through all these qualities. The judge concluded that he was:

"A businessman of unusual competence, and his personal skills and commitment were a major factor in the degree of success of the group business."

The judge was satisfied that without Mr Ward's illness, the group's business would have been more profitable than it had been, and in addition to that loss of profit, in certain regards it proved more expensive to carry on the group's business, because of the need to hire additional personnel.

Because of the numerous inter-company transactions, the expert accountants employed by both sides abandoned the idea of producing a consolidated balance sheet for the group as being too difficult, and agreed on a simpler "broad brush" approach for establishing the total turnover figure for all the companies, and then deducting gross profits at 41% (less variable overheads at 3%) and then further deducting tax at 40%. That calculation resulted in the loss of profit figure sustained by the whole Ward/Eid partnership, for each year in question. If it were necessary to consider the pecuniary value of his contribution to the business (as it would be if he was claiming in a personal injury action for his loss of earnings and/or earning capacity), then, on the judge's findings, in the days of his two-man partnership with Mr Eid, his loss would be 50% of the total net profits.

So much is common ground. The issue here arises because Mr Ward and Mr Eid, on their accountant's advice and for tax purposes, made their wives partners. As the judge put it:

"However, on the advice of their accountant the plaintiff and Eid signed partnership accounts which declared that there were four partners, including their wives. The plaintiff, Eid and their wives paid tax on the basis of four separate and approximately equal incomes from the partnership profits.

Neither Mrs Ward nor Mrs Eid played any part in the partnership business, nor did they put capital into the partnership, nor did they do any work for the partnership. As partners, they were no more than nominees of their husbands.

Mr Ward always operated with cash rich businesses (remarkably, we are told that he never had a business overdraft) and when he drew money from the partnership, whether his or his wife's share, he simply paid it into the all-purpose family joint account. It seems the family was treated as an economic unit, and that no actual apportionment or allowance was being made to Mrs Ward in respect of her notional quarter share of the profits. That point was made, but it was not explored in depth in the evidence. Nonetheless, the defendants successfully submitted to the judge that the legal result of that arrangement with the Inland Revenue is that Mr Ward's loss of earning capacity was reduced from 50% of the partnership's profits to 25% of those profits. The correctness of that conclusion is the principal issue in this appeal.

Mr Powles QC for the defendants put the case as follows. The existence of the partnership of two (Mr Ward and Mr Eid) was plain. While there was no partnership deed for the partnership of four, each year both husbands and both wives had signed the accounts, and the tax assessments for that year showed the wives as entitled to a share of the profits. Mrs Ward had claimed retirement annuity relief against her share in each year, and had had a "company" car. Both husbands and wives had signed the normal return to the Revenue. Against that factual background Mr Powles referred to Section 2 of the Partnership Act, 1890 and in particular Section 2(3), to the effect that receipt of a share of the profits was prima facie evidence of a partnership, and that the law will assume equality of profit share unless the contrary is shown. He submitted that whatever the reality of the situation, this was a four person partnership in law. Before us he further submitted that, as it is always possible to be a dormant or sleeping partner, it makes no difference that a partner does no actual work. That submission seems to be right. In Pooley -v- Driver [1876] 5 Chancery Division 458 at 473, Lord Jessel MR said:

"You can have, undoubtedly, according to English law, a dormant person who puts nothing in - neither capital, nor skill, nor anything else. In fact, those who are familiar with partnership know it is by no means uncommon to give a share to the widow or relative of some form of partner who contributes nothing at all, neither name, nor skill, nor anything else. Therefore it is not quite accurate, as Chancellor Kent puts it, that they must contribute labour or skill or money or some or all of them."

Before the judge, Mr Powles founded himself on the authority of Kent -v- The British Railways Board [1995] PIQR at Q42. There the plaintiff wife suffered serious personal injuries in an accident for which the defendants were responsible. Part of her claim was for loss of the profits of her business in which she and her husband were both working partners. For taxation purposes it had been arranged with the Revenue that the husband and wife should be assessed on the profits of the business as to 60% on the husband and 40% on the wife. The husband had not been injured and had no claim against the defendant. But the Master on the assessment of damages, in dealing with the past and probable future loss to the partnership, awarded the wife 100% of that loss saying:

"I do not propose to make any apportionment as between the husband and wife. It would be entirely inappropriate to make such a distinction. The couple have decided to be assessed separately for income tax. The facts are that this is a small business run entirely as a joint venture and I do not propose to make any distinction as to shares."

The Court found that to be wrong in law, Sir John May saying, at Q45:

"It is in my opinion trite law needing no authority that in the circumstances of the present case the respondent's husband had no claim against the appellants. They owed him no duty of care which they breached.

From this I think it must follow that in law the plaintiff cannot recover the full amount of the loss of takings of the business. To allow her to do so would clearly effectively afford her husband a right of recovery, where as a matter of law he clearly has none. In my opinion, hard though it may seem at first sight, it is necessary carefully to analyse the nature and legal incidence of the relationship between the plaintiff and her husband and the business, to use a neutral phrase. Doing so, I must conclude that the plaintiff and her husband carried on the tea-shop and the bed and breakfast business in partnership."

Sir John May then referred to Section 24 of the Partnership Act, 1890 with its presumption of equality in the division of the profits of the business, and on the basis of that equality reduced the award of 100% of the profits of the business to the wife to 50% - ie increasing to her benefit the share of the profits that she had agreed with the Revenue (40%).

For Mr Ward, Mr Brennan QC distinguished Kent -v- British Railways Board on the basis that there the plaintiff husband had been a working partner. He submitted that neither Mrs Ward nor Mrs Eid were partners because neither were " carrying on a business in common [with their husbands and the other couple] with a view of profit " (Section 1(1) of the Partnership Act, 1890). Neither of those ladies was carrying on a business at all. He then submitted:

1) The Court should assess Mr Ward's actual loss.

2) His actual loss should be determined by his half-share of the partnership profits, however this may have been treated for tax purposes.

3) The only deduction from Mr Ward's 50% should be in respect of any sum which could properly be attributed to his wife's actual services to the partnership; as she did nothing for the partnership, nothing should be deducted;

4) Mr Ward and Mr Eid followed the accountant's advice as to how to treat the partnership income for tax purposes, but did not follow his advice about drawing up a partnership deed and did not intend to create a legal relationship of partnership with their wives.

This submission failed. The trial judge was clearly impressed by Kent -v- British Railways Board . He quoted Sir John May at Q45:

"... hard though it may seem at first sight, it is necessary carefully to analyse the nature and legal incidence of the relationship between the plaintiff, and her husband and the business, to use a neutral phrase."

He then continued:

"Mr Powles argued that a legal relationship of partnership has to exist before you can claim the tax benefit. By signing the partnership accounts and their separate tax returns, the plaintiff and his wife were declaring that they were partners. The plaintiff's wife had a partnership car.

´At first sight this seems very unfair but it is a consequence of a conscious decision taken on advice to secure a positive benefit' (Closing submissions paragraph 49)

The plaintiff, Eid and their wives made a deliberate decision to divide between themselves the profits of the business on the basis that they were legally entitled and obliged to do so. This cannot be treated as a mere accounting advice which affects their rights and duties only when they choose.

I adopt Mr Powles' argument and conclude that there was and is a partnership of four, including the wives, and Mr Ward is entitled to be compensated only for his quarter share.

I also conclude that the plaintiff, Eid and their wives will prefer to retain the tax advantages of continuing to treat themselves as four partners."

The source of the reasoning in Kent was the case of Lee -v- Sheard [1956] 1 QB 192. There, the plaintiff was injured in a motor car accident, and succeeded in negligence against the driver of the other car. He was one of the two working directors of a private limited company, the shares in which were divided between the two directors in the proportions 51:49. As a result of his injuries, the plaintiff was unable to work, and in consequence thereof the profits of the company were much lower than they would otherwise have been, and consequently the distribution of the proceeds to the two directors were less than they would otherwise have been. The defence was that the loss was the company's and the company had no claim. This defence failed. Lord Denning MR said:

"In these circumstances I think that Mr Lee is entitled to recover his real loss (the £1,500 which the judge found the company would have paid him but for the accident) so, too, a partner in a partnership would be entitled his real loss and no more."

The issue before us can be encapsulated in the question: "what was Mr Ward's real loss of earnings and/or earnings capacity?"

For a point which has now assumed so central a prominence, there seems to have been very little evidence as to the setting up of the four-person partnership. On 19th March Mr Ward was being cross-examined by Mr Powles QC for the defendants. There was the following exchange (p 18H and following):

"Q: Yes, Mr Ward, the last topic I wanted to ask you about was the financial arrangements of the partnership. As I understand the position, as you say in your proof at paragraph 52, I am sure you agree the restructuring you put in hand was to try and guarantee the future?

A: That's right.

Q: And you also say, at paragraph 21 that the purpose of the partnership is that it exists for investment only?

A: Well it is a management - we derive our earnings through the partnership charged out to limited companies.

Q: The way your accountant puts it - Volume 2 at page 44 - is that the partnership levies management charges to meet the needs of the partners?

A: That is correct.

...

Q: At the time of setting up of the partnership I understand your case to be that you were advised by your accountant to arrange for a share of the profits to go to your wives?

A: To be allocated to the wives, yes, for taxation.

Q: Yes, I am quite sure that you would not want to be involved in any way in anything dishonest, would you, it goes without saying. And so you were concerned to ensure that the information which you must have returned to the Inland Revenue would have been true?

A: Yes.

Q: You would want to be sure about that. And so I take that the partnership was set up as a proper partnership?

A: Yes."

Mr Powles, perhaps with pride in a cross-examiner's art, attached importance to the answers to the last two questions. We do not share his view as to their importance, for the simple reason that anyone, whether honest taxpaying man or dishonest tax evader, would give the same answer to the questions.

However, as a result of those questions, the plaintiff clearly thought that the propriety of making the wives partners when they took no part in the business had been called into question and was upset by that suggestion. Thus, Mr Hunt, the accountant expert witness for the plaintiff, was asked about the partnership and the Revenue's attitude to it in his evidence in chief (20th December, pp 26 and 27). He pointed out that an accountant with a married client would seek to take advantage of his or her spouse's tax allowances if that could be done within the confines of tax legislation. The judge intervened at that stage to ask him about the Inland Revenue's attitude to such arrangements. In dealing with the Inland Revenue's stance to such arrangements the accountant said:

"It certainly allows the reality that in this particular instance Mrs Ward has no involvement whatsoever and yet the Revenue are prepared to accept for taxation purposes she is assessed at a quarter share of the profits of the business. The reality is that the Revenue wouldn't really care."

The judge confirmed that:

"Legally the partner is entitled to divide up the ownership of the partnership as they think fit"

to which the witness agreed. Then after another four questions the judge asked:

"Would you accept that even if the Revenue knew that the wife's function was not actually active directly in the business they would nevertheless accept the division of the partnership profits into four, the wives declaring their quarters as separate income?"

It seems that the witness got confused by the complexity of that question because he answered that he " wouldn't accept it ", when it was clear from his full answer that he would. What he said thereafter was:

"I would say it is quite common.

Q: You are saying there is nothing peculiar about what actually happened in this case?

A: There is nothing either peculiar ... [and then the judge intervened to ask a clarifying question and the witness after that continued]

A: Nothing unusual, nothing uncommon and nothing wrong or illegal about it. The Revenue in my experience aren't particularly interested as long as they are able to assess the total earnings of the partnership, the way in which those profits are allocated are not of any real concern to them as long as the number on which the assessable profits is based is accurate at that point of time. They tend to rather lose interest."

There that topic was left, and it was not explored in cross-examination. Nor was it suggested to Mr or Mrs Ward in their evidence that they had done anything wrong, nor anything other than act in sensible reliance on their accountant's advice.

But we were told by Mr Brennan for Mr Ward that, in his submissions before the judge, Mr Powles continued to question the propriety of the arrangement. Certainly by the time that the matter came on appeal before us he was doing so, and taking an illegality point (ex turpi causa non oritur actio). The respondent's skeleton argument before us pulled no punches:

"By this appeal P seeks (in effect) to establish that the four partners have been engaged in tax evasion and hence that the partnership was illegal. [Even giving poetic licence to the words " in effect ", that was not correct. As Mr Powles eventually conceded, the plaintiff's stance has always been that there was nothing illegal or improper in the payment of 25% of the four-man partnership profit to Mrs Ward when she made no contribution to the partnership business.] Not only is this wholly contrary to the evidence but would result in P relying on his own illegality to establish a different partnership agreement which offends the principles of Tinsley -v- Milligan [1994] 1 AC 340."

He identified the kernel of what he relied on in Tinsley -v- Milligan in Lord Jauncey's speech at p 336D

"Second, it is well established that a party is not entitled to rely on his own fraud or illegality in order to assist a claim or rebut a presumption. Thus when money or property has been transferred by a man to his wife or children for the purpose of defrauding creditors and the transferee resists his claim for recovery, he cannot be heard to rely on his illegal purpose in order to rebut the presumption of advancement: Gascoine -v- Gascoine [1918] 1 KB 223, 226; Paleniappa Chettiar -v- Arunasalam Chettiar [1962] AC 294 at 302; Tinker -v- Tinker [1970] Probate 136, 143 per Salmon LJ."

Again, before this Court, it was clear that Mr and Mrs Ward were very upset by the suggestion that they had been doing anything improper when they entered into this scheme at the suggestion of their accountants. Ultimately, Mr Powles recognised that the point he was seeking to make was a bad one. He withdrew it on the basis that it was quite clear that the reality was that Mr Ward was never asserting that his agreement with the Revenue was illegal or a sham or improper in any way. He was right to make that concession.

But he still asserted that in calculation of Mr Ward's loss, he was tied to the 25% figure agreed with the Inland Revenue.

Mr Brennan's first submission on behalf of Mr Ward was that Mrs Ward was not a partner because she did not, within the meaning of Section 1(1) carry on a business in common with her husband and the Eids with a view of profit. She had nothing to bring to the business, and brought nothing to the business. But, given the fact that the law still accepts sleeping partners (as to which see Pooley -v- Driver (supra, Lindley 17th Edition 2-003, and Halsbury Laws 4th Edition Reissue, Volume 35, paragraph 2)) it seems to us that the only realistic finding is that Mrs Ward was a partner, albeit a sleeping partner.

We have considered, but rejected, the argument that, partnership being a matter of contract, there was no intention to create legal relations between Mr and Mrs Ward. Both parties must have recognised that their arrangement with the Revenue would have legal consequences.

One of those legal consequences would be that under the Income and Corporation Taxes Act, 1988 Section 111 as originally enacted, trades carried on by two or more persons jointly were assessed on income tax by a joint assessment in the partnership name. So, in the event that the other partners failed to pay the tax, Mrs Ward would have been liable for it. So far from this arrangement putting a part of the family's assets out of the reach of creditors, it brought all the wife's property into the reach of all creditors of the partnership, including the Inland Revenue, or at any rate those creditors who had dealt with the partnership in reliance on the fact that the wife was a partner. In these circumstances, to portray the arrangements as a fraud on the Revenue ignores both the fact that the Revenue accepts sleeping partnerships, and the advantages to the Revenue in the arrangement made.

In the light of those matters, we have no difficulty in accept the unchallenged evidence of Mr Hunt, the accountant called by Mr Ward that the Revenue was not concerned whether the division of the partnership assets agreed by them accurately reflected what was put into the partnership by way of partnership and labour. If at any time or for whatever reason the Revenue became dissatisfied with the arrangement they had made, they could discontinue it. We regard it as fanciful to assume, as at one point Mr Powles was asking us to assume, that the Revenue agreed the arrangement on the basis that Mrs Ward was providing property and labour equal to that provided by her husband. Part 3 of the Act makes clear that the apportionment of profits is an internal matter for the partners, and the presumption of entitlement to share equally in the capital and profits of the business and contribute equally toward the losses would arise only where there is no agreement between the partners as to the division of profits and liability for losses.

Though Mr Ward and Mr Eid made their wives sleeping partners, there was no formal partnership deed entered into between them. Given the informality of the arrangements, this is not surprising. But given that informality, it is quite clear that the arrangements between the husbands and wives existed from year to year, and were terminable at will. Mr Ward and Mr Eid together controlled all of the five companies that were passing on the management fees, the partnership depended on them totally and consequently they could at any time have terminated any arrangements. In practice they could have apportioned to themselves whatever percentage of the profits they thought fit, and obviously the arrangements made with the Revenue would not affect that in any way. The husbands would simply declare the change when it happened.

Against that background we can see no basis whatsoever for measuring the Mr Ward's loss of earning capacity by an arrangement reached with the Revenue and terminable at will, rather than on the realistic basis of the 50:50 split as between the two earning members.

First, we see no reason for assuming that, given the acceptance of sleeping partnerships, the four-way division of income was either put forward to the Revenue as, or understood by the Revenue as, an agreement accurately representing the comparative value of each partner's contribution to the partnership. There certainly was no evidence to that effect.

Second, there is no public policy reason for holding the parties to that division of profits. The apportionment of profits is an internal matter for the partners which does not affect anyone but them and the Revenue. It can at best be some evidence of each partners' contribution if the position is otherwise unclear.

Third, the apportionment of profits between the partners is terminable by them at will, year on year. There is no reason to look on it as an "advancement" for all time of half the profits of the partnership.

Fourth, we simply do not accept Mr Powles' submission that it is simply the rub of the green, so that while the figures worked against Mr Ward and to the advantage of the defendants in this case, the defendants would have been equally bound to pay Mr Ward's 25% partnership share, if all he had contributed was 10%, of the property, time and skill which made the partnership profitable.

It follows that, unless constrained by authority to do otherwise, we would accede to propositions 1, 2 and 3 put forward by Mr Brennan, namely that Mr Ward's actual or "real" loss (whether of earnings or earning capacity - we do not think it matters) is 50% of the reduced partnership profits, and the only deduction required to be made is one which reflects his wife's contribution to the profitability of the partnership. That, in the circumstances, is nil.

Not only have we been referred to no authority inconsistent with our conclusion, but we have been referred to Australian authority supporting it.

We have had the benefit, which the trial judge did not, of being referred to Taroporewalla -v- Berkery a decision of the Supreme Court of New South Wales presided over by Hutley JA reported at [1983] 3 NSWLR at 28. On its facts that case was very similar to this. The plaintiff's claim was for economic loss suffered as a result of personal injuries which arose partly from his loss of capacity to continue a profitable second source of employment, a partnership business in which his wife assisted him. She did some work, writing up the books, taking orders, and making some deliveries. However, the greatest part of the work and in particular the physical work of the silk-screen printing process was done by the plaintiff. Under the partnership he and his wife were treated as equal partners. Each received 50% of the partnership profits. Mahoney JA in the lead judgment found at 34G:

"The partnership was, I infer, formed to minimise income tax payable on the business income. The plaintiff's wife did some work in the business but the substantial income was and would have been derived because of the plaintiff's activities. Notwithstanding this, the profits were divided equally between them. The partnership was, as it was assumed in argument, terminable at will.

The Master assessed the plaintiff's damages on the basis that in calculating the loss suffered by him in this regard, there should be attributed to the plaintiff 80% of the business income. The defendants submitted that this was wrong and that the plaintiff's loss should be calculated by reference to only 50% of that income."

In this case too, we conclude that the respective arrangements between husband and wife existed from year to year, and were terminable at will. The husbands controlled the companies that were passing on their management fees to the partnership, and they could simply have turned off the tap at any time.

The learned judge (Mahoney JA) correctly identified the two principles:

"1) The plaintiff is to be compensated only for the loss which he has actually suffered, in the past or prospectively; and

2) that that for which the plaintiff is to be compensated, in this regard, is his loss of capacity to derive reward from his efforts."

The first principle is pure Lee -v- Sheard , and is non-controversial. The second is right in principle, but its application is the subject of controversy. Mahoney JA found that first the court had to be satisfied that the plaintiff would have used his earning capacity in his wholehearted commitment to the partnership had he not been injured. In both that case and this there is no doubt on that score. Then the real question for the court to consider was whether the plaintiff's loss of earning capacity should be judged by the measure of what he put into the profitability of the business, or whether, however dominant his contribution to the success of the partnership was, his loss of earning capacity should be limited to only 50% of the potential partnership profits. The court made the following findings in relation to that partnership which would apply equally to Mr Ward's. Those finding were that:

I. the partnership had been formed for his convenience as a reduction in the tax payable in respect of the business income;

II. he could have rearranged the terms of the partnership.

III. In practice he could have appropriated to himself such portion of the partnership profits as he saw fit.

In those circumstances the court concluded that:

"The plaintiff's relationship to the partnership, and, as I infer, his capacity and practice to take whatever profits it earned, warranted the conclusion that his loss should be calculated by reference to the whole or substantially the whole of the profits which the partnership would have derived. Approaching the matter in this way I do not think that the amount of past economic loss attributable to the partnership profits was excessive."

So the court upheld a finding that the plaintiff was entitled to 80% of the profits of the business, even though the Partnership Act's presumption of equality, in a case where the partners had not made an individual agreement, would have afforded his wife 50%.

Comparison can profitably be made with the case of Jason -v- Batten [1930] Limited [1969] 1 Lloyds Law Reports 281, one of the too few reported cases decided by Mr Justice Fisher. There the plaintiff was a market trader, the one man in a one-man business, a limited company. But he did not have the beneficial ownership of all the shares in that company. Fifty percent of those shares were held in trust for his children.

"The form in which he took the profits was by way of director's fees which were voted to him annually, but the amount so voted was decided by him, in consultation with his accountant, and was quite properly influenced by tax considerations"

In that situation the judge found that the true measure of his loss was the reduction in the net profit of the company caused by his injuries, and was not restricted to 50% of those profits. It does not seem that the contrary was argued.

In each of those two cases the court took into account the fact that for all practical purposes the plaintiff controlled the company that provided the remuneration for him. In the Australian case, as in our case, the agreement between Mr and Mrs Ward was not formal, in that there was no formal partnership agreement entered into, and nothing in the arrangement alleged committed the partnership to paying 25% of the profits to Mrs Ward for any period of time. Even accepting that this informal agreement between husband and wife was intended to create a legal contractual relationship between them, there could not conceivably be an implied term of that agreement that notice was required for termination of that arrangement. The reality was that it was Mr Ward's earning capacity that would have produced the lost profits, and on the evidence the money received as a result of Mr Ward's efforts ended up in the couple's joint account anyway. It was immaterial whether that money was credited to husband or wife: it would have ended in the joint account anyway.

We have re-read Kent -v- British Railways Board carefully, and do not find it in conflict with the conclusion we have reached. There John May LJ was dealing with a partnership to the success of which both husband and wife contributed. The judge declined to accept the apportionment agreed by the Revenue. And in adopting the presumption of equality in default of agreement under Section 24 of the Act, he expressed himself as looking at the reality. We are sure that if the reality (of the plaintiff's loss measured by her contribution) had been 70%, he would have found for that figure. There is no reason (and no power) for the judge to trump reality in a personal injury claim by any internal allocation of the division of profits in a partnership which does not reflect the true value of the partner's contribution.

The expansion of the two-man partnership to a four-person partnership occurred in 1988. In 1989 Mr Ward first learned that he had sustained harm from his exposure to asbestos, and of the potential serious consequences to his health and enjoyment of life. If the defendants were right in their contention that paying 25% of the profits to his wife, a sleeping partner at most in the business, it would effectively halve the damages he would recover, then it is clear that that arrangement would have been terminated by agreement between him and his wife. As the marriage subsisted, there would have been no question of his wife opposing that course. But even if the marriage were troubled at the time (which it was not) Mr Ward could have dissolved the format of the partnership under Section 32(c) of the Act:

"Subject to any agreement between the partners, a partnership is dissolved: ...

(c) if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership."

The reality is that Mr Ward could and would have re-organised his affairs if it had been suggested to him that the legal effect of this arrangement was to halve the damages to which he was otherwise entitled. Thankfully, that is not the law.

Accordingly, we would allow the appeal on the partnership issue. There was, however, one further point taken (although never fully argued) which should be dealt with for completeness. In considering the incidence of future loss, the judge asked himself the conventional question in prospective loss of earnings cases, namely what would have happened to the partnership agreement between the parties had Mr Ward not been injured. He did not set out the question, but resolved it tersely:

"I also conclude that the Plaintiff, Eid and their wives will prefer to retain the tax advantages of continuing to treat themselves as four partners."

That conclusion was challenged (by way of an alternative ground) in the Notice of Appeal:

"a. The Learned Judge's finding that the Plaintiff, Mr Eid, Mrs Ward and Mrs Eid would after the date of his judgment prefer to retain the tax advantages of continuing to treat themselves as four partners was not founded on any evidence and/or was wrong.

b. The Learned Judge should instead have inferred that the likely reaction of the Plaintiff, Mr Eid, Mrs Ward and Mrs Eid to finding by the Court that, contrary to their understanding of the situation, Bardon Insulation Partnership was a partnership of four, would be to resolve to dissolve such partnerships and reconstitute Bardon Partnership as a partnership of two, namely the plaintiff and Mr Eid.

c. The Learned Judge should in consequence have found that, at least so far as the Plaintiff's future loss of earnings were concerned, his loss of earnings from Bardon Partnership should be assessed on the basis of a one half share of lost Bardon Partnership profits."

As a result of an observation from the Court Mr Brennan did not pursue that ground. So consequently it was never argued.

But, though the point taken did not initially appeal to us, it may be a good one.

Where a plaintiff was, for whatever reason, not earning at full pitch at the time of the accident, in looking to the future, it may be too simplistic simply to ignore the accident - it may be necessary to look at its consequences.

Take by way of illustration the Australian case of Forsberg -v- Maslin [1968] SASR 432. There the plaintiff only worked six months in the year, because for the rest of the year he chose to race speedway - but though a star, he made no profit from the racing. The accident made him unfit for both, and the general damage award reflected loss of earnings on a twelve month per year basis. If the accident were ignored, the answer to the question "Would the plaintiff have continued to work just six months a year" would have been likely to have been "Yes". But if the extra ingredient were added to the question - would he have continued only to work six months if he could not race speedway, the answer would have been quite different, and he would recover (as he did) on a twelve month basis.

By parity of reasoning, it seems to us that if in Mr Ward's case the judge had asked himself the question "On injury, if the law was that the plaintiff's loss was limited to his 25% share, and if he was so informed, what would he have done?", then the answer would be clear. He would have determined the arrangement, and reverted to the 50% his contribution entitled him to.

In assessing his damage, that would be the realistic answer to the alternative ground of appeal.

We have considered whether to suggest that the Court should hear argument on this ground. But as it is merely an alternative ground, we have concluded that it is not necessary.

Having allowed this appeal on the partnership point, the consequence is that wherever, in calculating the total sum of the appellant's award in the course of his judgment, the judge calculated a constituent figure on the basis of Mr Ward's entitlement to a 25% partnership share only, such figure requires to be re-worked on the basis of a 50% share. Counsel have informed us that they are content to effect such calculation.

So far as the constituent figures of the award are concerned, thanks to the narrowing of the issues in the course of argument and a number of concessions made by Mr Brennan in respect of calculations challenged in the original Notice of Appeal, there are but three points which remain in issue. We deal with them in isolation and without setting out such consequential adjustments to the award as will be required: again, counsel have informed us that they are content to finalise the figures on the basis of our findings.

1) The cost of employing Simon Ward

It was the appellant's case that, as a result of his illness, additional costs had been incurred by the need to employ his son, Simon Ward, as a contract manager. It was further his case (and this was not disputed) that Mr Eid had not been prepared to have such costs treated as costs of the partnership. In the course of his judgment which dealt quite shortly with the figures, the judge accepted that the cost to the appellant of employing Simon Ward was an additional cost arising as a result of the appellant's illness but, in the succeeding section of his judgment headed "Assessment of Loss To Trial", his calculations were based entirely on the appellant's loss of income from the partnership, omitting the Simon Ward costs. This appears to have happened by simple oversight. Following a minor concession as to the quantum of those costs recoverable (£24,125.00 was claimed at trial) the figure claimed by Mr Ward is £18,125.00 and we are satisfied that the award should be increased accordingly.

2) Loss of Share of International Profits.

In 1987 the partnership, which had previously simply traded as Bardon Insulation Company, started to run its main business through a limited company, Bardon Insulation Company Limited, of which Mr Ward and Mr Eid were the only directors and shareholders. In 1987 they also set up Bardon International Limited in order to do sub-contracting work in Holland. The appellant managed the Dutch contracts from January 1988 and for two years or so the business of International thrived. However the company began to wind down and ceased to work altogether in Holland as the appellant's health deteriorated. The judge concluded in terms that:

"... the Dutch arm of the group and its profits have been lost .... the Holland operation began to wind down in 1990 and ended in 1992."

"The Plaintiffs illnesses and absences from work meant that ... the Dutch activities of International could not continue without him".

Again, it is plain from the evidence and the figures that, under the heading "Assessment of Loss to Trial" the judge failed to award any sum in respect of the loss of profits from International; nor did he award any for continuing loss from that source. He stated in his judgment that the figures from which he worked were figures in a table contained in the report of the defendant's accountant, Miss Hassel, which in turn were taken from a table in Mr Ward's accountant's report. Unfortunately, the judge appears to have overlooked the fact that those figures did not include figures in respect of International's business. Given the judges findings of fact and both sides' accountants' evidence, it is clear there was in effect an undisputed loss to the date of trial (on the basis of a 50% share of profits) of £21,152.00, which fell to be included in the award to the appellant.

3) Adjustment for Inflation

The table which the judge himself drew up and set out in his judgment under the heading "Assessment of Loss to Trial" showed a calculated annual loss for 1995 as "£9,000.00 (continuing)". Beneath the table appeared the judge's observation that in the judge's view the figures related reasonably to the average profits stated in the report of the defendants' accountant for 1988 to 1991 compared with the average for 1992 to 1995. Mr Brennan has made a number of criticisms of the judge's calculation, based largely on speculation as to the precise meaning of that last observation; in particular the complaint is made that he did not make clear what his thought processes were in arriving at that figure. It is suggested that the quantum of the figure is such that no, or no sufficient, allowance appears to have been made over the years of calculation for the effect of inflation upon the amount of Mr Ward's loss.

It is unfortunate that the judge did not express his reasoning more clearly. However, in the light of what he did say, and in the light of the pattern of the evidence before him, it is reasonably plain to us what exercise he performed in order to reach that figure. He had stated at page 17 of his judgment:

"I accept Miss Hassel's argument that fully adjusting the historical figures by RPI to 1995 prices is not appropriate, as it fails to take account of the recession. However, I cannot accept that there would not have been some increase of monetary turnover and profit following trends in inflation.

Miss Hassel's schedule 2 prepared on 25 March 1996 provides what I accept is a reasonable guide for the historical difference in actual sales turnover compared to the average for the years 1987-1990".

It is clear therefore that the judge (a) accepted Miss Hassel's figures as to the historical difference in actual sales turnover as between 1987-1990 (the years before the time at which the judge considered that the effects of the appellant's illness started to operate) and 1991-1995 (the affected years), (b) rejected the idea that there should be a straight (i.e. full) RPI increase, because that would leave out of account the effects of the recession, but (c) indicated that, nonetheless, some uplift for inflation should be applied. In that connection he had before him the table of Miss Hassel to which we have referred, which showed an annual loss on the basis of a 25% partnership share of £4,488.00, and a further table containing similar figures adjusted up to 1995 by application of a full RPI adjustment. That table showed an annual loss for 1995 based on a 25% partnership share of £14,556.00. It seems clear to us, on the basis of the judge's earlier reasoning, that he took the median of £9,000.00 (in round figures) as the appropriate adjusted figure for the annual loss in 1995 and continuing. Thus Mr Brennan's point based on inflation is a bad one although the figure of £9,000.00 (continuing) will require upward revision to take account of the appellant's successful arguments.

The consequent adjustments and necessary increases in the various heads of the award should be made in the light of our findings and, once agreed between counsel, we will give judgment in an appropriate sum.

Order: Application for leave to amend granted; appeal allowed; draft minute of order submitted; leave to appeal to the House of Lords refused.