British Transport Commission v Gourley

Compensatory damages for past and prospective loss of earnings must reflect the claimant’s real financial loss. Where the earnings would have attracted income tax and surtax, the tribunal must deduct an appropriate estimate of that liability. The tax burden is an ordinary legal consequence of earning income, not a matter too remote or collateral to the loss.

The result does not depend on whether tax would have been deducted at source or paid after receipt. Actual loss should reflect the effective rate applicable to the claimant. Future tax may be estimated broadly on present conditions; mathematical precision is unnecessary. Damages compensate the claimant and are neither punishment nor reward.

British Transport Commission v Gourley [1956] AC 185 arose from serious injuries suffered by an eminent civil engineer in a railway accident caused by the Commission’s servants. Pearce J awarded £10,000 for pain, suffering, loss of amenities and expenses. He awarded a further £37,720 for past and prospective loss of earnings, while alternatively assessing that loss at £6,695 if income tax and surtax were taken into account.

Pearce J considered himself bound by the Court of Appeal’s decision in Billingham v Hughes [1949] 1 K.B. 643 to use gross earnings. The Court of Appeal followed the same authority. The parties agreed that the damages themselves would not attract income tax or surtax and accepted both alternative calculations. The question before the House was whether the tax that would have been payable on the lost earnings should reduce the damages.

1. Appeal allowed by a majority of six to one. Earl Jowitt, Lord Goddard, Lord Reid, Lord Radcliffe, Lord Tucker and Lord Somervell of Harrow concluded that income tax and surtax had to be taken into account. Lord Keith of Avonholm dissented.

2. Per Earl Jowitt, Lord Goddard, Lord Reid and Lord Tucker, compensatory damages for pecuniary loss are measured by the claimant’s actual financial loss. A claimant deprived of taxable earnings loses the amount that would have remained after satisfying the tax liability, rather than the gross earnings. Lord Radcliffe and Lord Somervell expressly agreed with Lord Goddard.

3. Per Lord Reid, the governing question was whether the reduction in tax liability was legally too remote. Tax was imposed generally by law as a consequence of earning income. The claimant’s personal tax circumstances merely quantified that obligation and were not completely collateral. Practical difficulties in estimating tax did not justify ignoring an element which, at contemporary rates, materially affected the real loss.

4. Per Earl Jowitt and Lord Goddard, no distinction arose between tax under Schedule D, which was paid after income had been received, and tax under Schedule E or PAYE, which was deducted before payment. In either case the liability necessarily reduced the benefit of the earnings. Lord Tucker similarly regarded expenditure imposed by law as a necessary consequence of receiving earnings as relevant to the loss.

5. Per Earl Jowitt, Lord Goddard and Lord Reid, accrued loss should reflect the effective tax liability attributable to the lost earnings. Prospective tax and earnings could be estimated on broad and reasonable lines. Allowances, other income, surtax and relevant reliefs might require consideration, but mathematical exactness was neither possible nor required. The majority displaced Billingham v Hughes [1949] 1 K.B. 643 and approved the approach taken in M'Daid v Clyde Navigation Trustees 1946 S.C. 462.

6. Lord Keith of Avonholm would have retained assessment by gross earnings. He considered that taking account of tax would introduce inequity, complexity and speculation about future fiscal legislation and personal circumstances. The majority substituted £6,695 for £37,720 as the loss-of-earnings award, reducing total damages from £47,720 to £16,695, with credit for £7,000 already paid. Costs were governed by the parties’ agreement.

1. House of Lords: By a majority of six to one, allowed the Commission’s appeal and varied the total damages from £47,720 to £16,695, with credit for £7,000 already paid.

2. Court of Appeal: Followed Billingham v Hughes [1949] 1 K.B. 643 and left undisturbed the assessment based on gross earnings.

3. High Court: Pearce J awarded £47,720, including £37,720 for lost earnings calculated without regard to tax. At the Commission’s request, he alternatively assessed the lost earnings at £6,695 if tax were taken into account.