“The most significant change of emphasis of the new Rules is to require courts to be more ready to make separate orders which reflect the outcome of different issues. In doing this the new Rules are reflecting a change of practice which has already started. It is now clear that too robust an application of the “follow the event principle” encourages litigants to increase the costs of litigation, since it discourages litigants from being selective as to the points they take. If you recover all your costs as long as you win, you are encouraged to leave no stone unturned in your effort to do so.”
“In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.”
“A more convenient method, while keeping in mind the issue based approach, is to assess all the costs together and then apply a proportion which reflects the fact that a party has won on some issues and lost on the other issues. That is what the Costs Rules require.”
“In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he has won but also the common costs”
“We regard it as permissible, for instance, for a judge whom has found against defendants in an action based on their fraud practised on the Claimants, to take that fraud into account when deciding the basis of taxation. We are however far from saying that a successful fraud action should usually be accompanied by a special order as to costs. These are matters for the judge’s discretion and before he exercises it in such a way as to order a departure from the standard basis of taxation there must be something to take the case out of the usual run of cases.”
“My Lords, it is, I think if I may say so with the utmost respect, fallacious to consider the problem as though a benefit were being conferred upon a wrongdoer by allowing him to abate the damages for which he would otherwise be liable. The problem is rather for what damages is he liable? And if we apply the dominant rule, we should answer: “He is liable for such damages as, by reason of his wrongdoing, the plaintiff has sustained. … I see no reason why in this case we should depart from the dominant rule or why the respondent should not have his damages assessed upon the basis of what he has really lost, and I consider that in determining what he really lost the judge ought to have considered the tax liability of the respondent.” (2) By Lord Goddard at 206, 207 and 208: “The basic principle so far as loss of earnings and out-of-pocket expenses are concerned is that the injured person should be placed in the same financial position, so far as can be done by an award of money, as he would have been had the accident not happened, and I will endeavour to apply this in the first place to the special damage claimed in respect of loss of earnings ... If, therefore, he is disabled by an accident from earning his salary, I cannot see on what principle of justice the defendants should be called upon to pay him more than he would have received if he had remained able to carry out his duties. ... Damages which have to be paid for personal injuries are not punitive, still less are they a reward. They are simply compensation, and this is as true with regard to special damages as it is with general damages.”
“It would, I think, be unfortunate if, as the result of our decision, the fixation of damages in a running-down case were to involve an elaborate assessment of tax liability. It will no doubt become necessary for the tribunal assessing damages to form an estimate of what the tax would have been if the money had been earned, but such an estimate will be none the worse if it is formed on broad lines, even though it may be described as rough and ready. It is impossible to assess with mathematical accuracy what reduction should be made by reason of the tax position, just as it is impossible to assess with mathematical accuracy the amount of damages which should be awarded for the injury itself and for the pain and suffering endured.” (2) Lord Goddard at 208: “But in considering special damage in these cases the rate of tax to be taken must, as it seems to me, be the effective rate of income tax, and, if necessary, surtax which would have been applicable to the sums in question if they had been earned. That rate depends on the combination of a number of factors that may vary with each case - allowances, reduced rates, surtax rates, other income of the claimant or his wife, charges or reliefs. The task of determining it may not always be an easy one, but in complicated cases it is to be hoped that the parties, with the help of accountants, will be able to agree figures. If not, the Court must do its best to arrive at a reasonable figure, even though it cannot be said to be an exact one.” (3) Lord Reid considered this aspect in the context of deciding whether the impact of taxation was too remote. He said at 214 to 215: “Another element to be considered is whether bringing in the matter of liability to tax would seriously increasethe duration and expense of trials; for practical as well as theoretical considerations weigh in determining what is too remote. But I do not think that there would be serious practical effects. … In considering the importance of practical difficulties I would weigh them against the importance of the element of tax liability, with tax at modern levels, in determining the real loss which the plaintiff has suffered. I cannot find any sufficient reason, theoretical or practical, for excluding the element of tax liability, and I am therefore of opinion that this appeal should be allowed.”
“Lord Reid pointed out in Gourley that the assessment of damages is a practical matter, and an element to be considered is whether bringing in the matter of liability to tax would seriously increase the duration and expense of trials. I feel real apprehension that this extension which is proposed would frequently increase the duration and expense of trials, and as far as a contract of service is considered I would ask for what purpose - merely to reduce the obligation which a defendant had expressly undertaken.”
“There is no doubt that all that Gourley decided was that where the damages in the plaintiff’s hands would not attract tax, then the principle applied. The House of Lords did not consider cases where such profits were taxable and expressed no opinion on the point and there is no decision except those at first instance to which I have alluded which deals with the point”
“Lord Hunter goes on to conclude that it would be right to carry the principle to what he calls (and I agree) its logical conclusion and to provide for tax on both sides, that is to say, to make a deduction from the damages on the Gourley lines and then to add to them such a sum as would provide for the tax exigible on them.”
“On the whole I incline to the view that this conclusion of his Lordship, though logical, is impracticable, and that it is better, where the Crown has taken a hand and actually taxed the damages in the recipient’s hands, to leave the two taxes to set themselves off one against the other. There may be some roughness in this justice but it does at least make an end of the matter. The law, as Lord Wright said in Liesbosch Dredger v Edison SS, cannot take account of everything. ... On the whole, therefore, I would incline to the view that, as seems to be the practice in commercial loss of profit cases, no account should be taken of tax at either end. This may be a matter largely dictated by expediency but it strikes me as preferable in an imperfect world to an over-assiduous search after perfection. To make the punishment fit the crime is no doubt a sublime object but it may land the searcher at the end in the ridiculous.”
“(a) Taxation should be taken into account on both sides, that is to say both the notional taxation on the lost earnings or profits and the expected taxation on the damages should be ascertained, and the sum of damages awarded should be such sum as will after deduction of tax leave a net sum equal to the plaintiff’s net financial loss; (b)Taxation should be taken into account on one side only, that is to say the notional taxation on the lost earnings or profits should be taken into account so as to arrive at the amount of the plaintiff’s net financial loss, and that should be the amount of the damages awarded, no regard being had to any expected taxation of the damages.”
“In my judgment these objections are sufficient to show that, as a general rule at any rate, in a case where both the lost earnings or profits and the damages are taxable, no account should be taken of taxation in assessing the damages. The present practice of ignoring the taxation in such a case is sound and should not be disturbed. That is my conclusion, subject to a proviso that there may be exceptional cases in which a departure from the practice may be required for the doing of justice in special circumstances. The present case is not exceptional.”
“The award of interest in these cases is a discretionary matter and, in approaching the task of deciding upon such an award, I think judges are entitled to and do adopt a very broad approach. Attempting to do so I would look at this matter in this way. The plaintiffs’ accounting year runs from October 1 to September 30. For tax purposes, therefore, in order to arrive at an average, it must be assumed that all the invoices were paid halfway through the accounting year, i.e on March 1. But the plaintiffs’ corporation tax liability did not have to be paid until January 1, not of the next year but of the year after. As an example, the invoices for the year ending September 1967 would have been notionally paid in March 1, 1967, and those expenses would have been set against the gross income on which the corporation tax would have to be paid on January 1, 1969. There was thus a period of 21 months relating successively to each year’s invoices. The plaintiffs have thus been kept out of the whole sum of damages for only part of the time (the precise period I shall have to look at later). For the remaining period they have been kept out of£550,000 less£239,000 . It seems to me that one cannot ignore this on the principle that one does not look at the particular borrowing position of a plaintiff; and the fact the plaintiffs may have to pay more in corporation tax (because it is at a higher rate) when they are paid the damages than they saved by charging the dredging costs as an expense is unfortunate but, as Lord Denning M.R. said in Jefford v Gee[1970] 2 QB 130 at 149: “.. that cannot be helped. The tax man must collect all he can.”
“...it does not follow that the plaintiff should receive an award of interest which compensates not only for his loss of use of money but in addition for the loss of use of the share which should have been received by the Inland Revenue.”
“If the Court proceeds on the artificial premise that the plaintiff has been deprived of the use of the whole of the damages notwithstanding the effect of taxation the interest awarded will provide the plaintiff with a substantial unjustified windfall at the expense of the defendant. In my judgment the Court should approach each claim to interest on its own merits, placing a sensible pragmatic restraint on attempts to conduct a detailed investigation of a plaintiff’s tax position but, at the same time refraining from awarding interest for loss of use of money if it appears that the plaintiff is unlikely to have suffered the loss of use in question.”