A recent judgment sheds light on the court’s attitude to the assessment of loss of earnings in circumstances in which the claimant was on the verge of setting up a business before the incident occurred that gave rise to the claim.

One periodically comes across claimants who, at the time of an accident that ended their working lives, had been about to embark on or had just started a new business venture.

In those circumstances the writer has typically expressed caution as to the extent to which credible claims can be made be loss of earnings based on the future profit potential of the fledgling enterprise.  Often these cases are simply pleaded on the basis of a “Loss of Chance”, especially if there are no contemporaneous financial records or business plans.

“Very substantial damages”

The recent case of XYZ and Portsmouth Hospitals NHS Trust ([2011] EWHC 243 (QB)) demonstrates that it is possible to win very substantial damages in relation to a business which, at the time the claim arose, had not even begun to trade.  However the case highlights the importance of having robust and reliable evidence not only from expert accountancy witnesses but also from lay witnesses who are able to testify to the claimant’s personal business acumen and the trading dynamics of businesses similar to that which the claimant claims he would have run had it not been for the accident.

The case concerned a claim by a claimant who had donated a kidney to his father. The defendant admitted that the operation was performed negligently, and to a degree recklessly.

The consequences of the defendant’s negligence were described in the judgment as “catastrophic for the claimant and his family: physically, psychologically, emotionally and financially.”

The claimant’s case was that when he suffered his injuries he was on the threshold of a new stage in his career in the highly specialised area of market research in the pharmaceutical industry. For some 13 years he had worked in the industry and had reached the top of his profession in the employed sector. For at least two years he had been actively planning to set up his own agency,

His case was that, but for the defendant’s negligence, after 2 years, the turnover would have been £2 million, after 5 years the turnover would have been £5 million and after 10 years the turnover would have been £10 million. He contended that would have continued running the agency until retirement, at which point he would have sold the business for a very substantial sum.

The claimant relied not only on expert accountancy evidence but also from evidence from former colleagues who had, themselves, successfully established pharmaceutical market research practices comparable with that which the claimant claimed he would have created.

Such evidence was clearly very influential, notwithstanding the judge’s comment that the he did not “regard the exercise of analysing the turnover of the comparator businesses as anything more than the roughest guide to the level of success the claimant could have expected to achieve” because “none of the comparator businesses was a direct match for the business the claimant proposed.”

“Unimpressive”

Prior to the kidney donation operation the claimant had prepared a business plan on which he was extensively cross-examined.  The defendant argued that it was “so unimpressive… as to call into question the ability of the claimant to set up and maintain an agency at the financial level contended for.”  It was submitted on behalf of the defendant that it was “all the more significant because it is the only contemporaneous document in which the claimant’s financial aims and objectives were set out.”

The claimant acknowledged the shortcomings of the document but said it was a work-in-progress.  He said he had “no previous experience of drafting a business plan, and used two books called ‘Business Plans for Dummies’ and ‘Starting a Business for
Dummies’.”

The court noted that there was a “stark difference” between the financial forecast in the Business Plan and the figures underpinning the claim for damages.  Nevertheless the judge concluded that the projections in the business plan were not intended to be a properly researched and considered set of figures and that the creation of a detailed financial forecast was one of the tasks the claimant had set himself to complete but had been prevented from doing by virtue of the circumstances underlying the claim.

Accordingly, the court concluded that find that “it was a virtual certainty that the claimant would have achieved a turnover of £2 million within 2 years” and that there was therefore “no need to apply a percentage discount to reflect the chance that he would not have done so.”  It further concluded that “there was a 50% chance that the claimant would achieve an annual turnover of £5 million within 5 years” and “a 20% chance that the claimant would have achieved a turnover of £10 million” within 10 years.

The judge applied an overall net profit percentage of 22% to the turnover figures and a discount of 15% to reflect the further contingencies and uncertainties that the proposed business venture would have faced.  He also assessed that the claimant would have sold the business upon his retirement for a sum based on six times its net profit at that time.  Overall the claimant was awarded £4.5million in relation to his claim for future loss of earnings and a further £1.2million for his capital loss on the eventual sale of the claimant’s business.

The case gives valuable guidance as to the approach taken by the court in relation to prospective businesses and the importance of good quality accountancy evidence.

Roger Isaacs

risaacs@milsted-langdon.co.uk
Milsted Langdon LLP
One Redcliff Street Bristol BS1 6NP
Tel +44(0)117 945 2500
www.milsted-langdon.co.uk