W Nagel (A Firm) v Pluczenik Diamond Company NV

[2017] EWHC 2104 (Comm)

Cited by 1 later case1 neutralCites 1 authority

Summary

Damages for breach of a continuing commission arrangement should generally be assessed by applying a multiplier to pre-tax profits, leaving the judgment sum to be taxed when received. A post-tax multiplier cannot be applied directly to pre-tax profits where the multiplier already reflects tax assumptions. The multiplier must instead be adjusted to preserve the contingencies and valuation methodology underlying the original assessment. A pragmatic approach is appropriate where the precise difference between the tax treatment of lost trading income and damages cannot reliably be established.

Factual background

Following the trial judgment, the court had found that the claimant was entitled to remain the defendant’s broker while the defendant held a Sight at De Beers, and that termination of the brokerage breached that agreement. The court had left the tax treatment of the damages for further argument. The parties agreed a pre-tax annual profit stream of US$842,165. The issue was whether the previously selected multiplier of 5, calculated by reference to post-tax profits, should be grossed up or adjusted when applied to pre-tax profits.

Held

  1. The damages were to be calculated by reference to pre-tax profits, with the judgment sum left to be taxed in the claimant’s hands on receipt.
  2. The court adopted the pragmatic approach described in Parsons v BNM Laboratories Ltd [1964] 1 QB 95, recognising that the tax treatment of damages received in 2017 might differ from the treatment that would have applied to commission income over the relevant period.
  3. The multiplier of 5 had been selected as a post-tax multiplier. It reflected a P/E valuation starting point and adjustments for contingencies including termination risk, uncertainty about continuing purchases and accelerated payment.
  4. If applied to pre-tax profits, the multiplier had to be adjusted to reflect the same tax difference. Applying the agreed 21 per cent rate, the appropriate pre-tax multiplier was 3.95, calculated as 5 × 0.79. Applying that multiplier to US$842,165 produced damages of US$3,326,551 before interest.

The court’s approach to earlier authorities

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Appellate history

Not stated in the judgment.

Key cases cited

1 authority cited.

  • Parsons v BNM Laboratories Ltd [1964] 1 QB 95

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Cases citing this case

1 later case · 1 neutral

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