Brief Summary

Damages — Loss of earnings — Calculation of past and future loss of earnings — Respondent involved in cycling accident sustaining severe injuries affecting earning capacity — Respondent claimed loss of earnings based on business performance of co-owned company, BPW — Appellant contended that respondent failed to prove loss of income as required by law and that payments received during absence were not gratuitous — Court held that the respondent's loss of earnings could be quantified based on BPW's income, distinguishing the case from precedent, and awarded damages for past and future loss of earnings.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an appeal to the High Court of South Africa (Western Cape Division, Cape Town) against part of an award of damages made by Van Staden AJ in a delictual claim arising from a motor vehicle collision. The appeal was brought with leave of the court a quo and was expressly confined to the amounts awarded for the respondent’s past loss of earnings and future loss of earnings.

The appellant was The Road Accident Fund and the respondent was Glenn Marc Bee, a 56-year-old businessman and member of Bee Painters and Waterproofers CC (BPW). The respondent had pursued damages following injuries sustained while cycling in an accident on 25 November 2007.

The general subject-matter of the dispute on appeal concerned the proper method of quantifying loss of earnings / earning capacity where an injured claimant conducts business through a close corporation and continues to receive drawings/salary during absence and thereafter, and whether the claimant may quantify personal loss by reference to the alleged post-accident decline in the close corporation’s performance.

2. Material Facts

It was not seriously disputed that the respondent sustained severe injuries in the cycling accident on 25 November 2007, including a base skull fracture, diffuse axonal brain injury, sub-dural haematoma, skull lacerations, chest and pelvis injuries, and multiple vertebral fractures, together with other lacerations and bruising. His treatment included neurosurgical intervention (craniotomy and monitoring), other procedures, and hospitalisation until 21 December 2007.

Before the accident, the respondent was a member of BPW, with his brother, Russ Bee, as the other member. The evidence accepted by the appeal court was that the brothers conducted BPW as though it were a 50:50 partnership, with an agreement to share profits equally. BPW operated as a service business in painting, waterproofing, roofing, epoxy flooring, and post-construction redecoration. BPW typically secured contracts and outsourced performance to subcontractors.

The respondent’s pre-accident responsibilities included managing larger industrial and commercial contracts, preparing quotations and tenders, outsourcing work components, overseeing projects, liaising with stakeholders, and overall day-to-day responsibility for the Cape Town office. After the accident he was absent from work for a period just over one year and returned in January 2009 initially on an ad hoc basis. On return he could not immediately drive and later had to rely on navigational aids even for familiar routes.

The court treated as undisputed that after returning to work the respondent functioned in a reduced capacity, including being unable to manage large projects and being restricted to smaller painting and limited waterproofing work, and that BPW hired assistance to support him. Expert reports (industrial psychologists and occupational therapists) confirmed that his working ability and employability were compromised and that his post-accident employment was characterised as protected or sheltered.

A central factual feature relied upon by the appeal court was that during the respondent’s absence from work he nonetheless received payments equivalent to those received by Russ Bee, and after his return he continued to receive equivalent payments despite his reduced functional contribution. The evidence of Russ Bee was that their earnings were not determined by the work performed but by what BPW could afford and by their needs, and that salaries were equal.

In quantifying damages, the respondent did not rely on his own salary/drawings to prove and quantify loss. Instead, he quantified past and future loss of earnings with reference to the alleged loss of income suffered by BPW, supported by forensic accounting analysis. He also contended that payments received during absence, and a portion of payments received after return, were gratuitous (ex gratia) and should be disregarded in calculating his loss. He additionally advanced a claim premised on early retirement due to his injuries.

The appellant’s case on appeal focused on two principal contentions: first, that the respondent had not shown that this was an appropriate case to quantify personal loss by reference to BPW’s alleged loss (given the separate estate of the close corporation and the warning in authority against equating corporate loss with personal loss); and second, that the court a quo should have taken into account the payments the respondent received, as these were not gratuitous but flowed from his legal entitlement as a 50% member.

3. Legal Issues

The central legal questions concerned the application of law to fact: whether, on these facts, the respondent was entitled to prove and quantify his personal past and future loss of earnings by using BPW’s reduced turnover/profits as a proxy for his loss, or whether doing so impermissibly treated the close corporation’s loss as automatically equivalent to the member’s loss.

A further issue was whether the respondent’s continued receipt of payments during his incapacity and thereafter could properly be treated as ex gratia (and excluded from the calculation), or whether they were in law attributable to his membership interest and profit-sharing entitlement, such that excluding them would mischaracterise his position as if he were an ordinary employee.

A related question was whether an award for loss premised on the respondent’s early retirement was legally sustainable in circumstances where he remained a 50% member entitled to share in BPW’s profits.

4. Court’s Reasoning

The appeal court approached the dispute through the lens of the lex Aquilia and the established principle that damages for loss of earnings are directed at determining whether there has been a diminution of the value of the injured party’s estate. The court accepted that an individual’s capacity to earn money forms part of that person’s patrimony, but emphasised that diminished earning capacity does not in every case translate into compensable pecuniary loss; there must be proof that the reduced capacity in fact yields patrimonial diminution.

A key component of the reasoning was the recognition that a close corporation (and similarly a company or trust) has a separate and distinct estate from that of its members. Accordingly, the mere fact that the close corporation’s income declines does not, without more, establish that a particular member has suffered personal patrimonial loss. The appeal court treated this as the central caution articulated in Rudman v The Road Accident Fund 2003 (2) SA 234 (SCA), namely that one must avoid the trap of treating the enterprise’s loss as automatically and necessarily the injured claimant’s own loss.

The court accepted that there are cases in which a plaintiff may prove and quantify personal loss with reference to the loss of income suffered by a company/close corporation, but stressed that this is fact-dependent and requires a plaintiff to demonstrate, on a balance of probabilities, that it is inappropriate to rely on salary/drawings as the indicator of patrimonial loss, thereby justifying deviation from the ordinary approach. The court placed the onus on the injured party to persuade the court that reliance on salary would be inappropriate before the Rudman principles can be departed from.

Against that legal background, the appeal court analysed the court a quo’s reliance on Miles v Road Accident Fund (7410/2009) [2013] ZAKZPHC 41 (14 June 2013) and its attempt to distinguish Rudman. The appeal court held that the evidentiary basis for applying the Miles reasoning was lacking on the record. It rejected as unsupported the propositions that the respondent’s salary mechanism was a tax-minimisation device of the type described in Miles, and that BPW’s fortunes were “clearly inextricably bound up” with the respondent’s wellbeing and the time and effort he expended. On the contrary, the evidence showed that BPW continued functioning for a year without him and was able to pay him amounts equivalent to his brother’s remuneration during that period.

The appeal court further emphasised that BPW’s operational model involved outsourcing work to subcontractors, and that the respondent’s remuneration was not determined by specific measurable productivity or direct sales performance. Unlike the evidential picture in Miles (where reduced appointments and activity levels were linked to reduced income), the appeal court found that the evidence did not establish what the respondent did, in concrete terms, that would explain and justify attributing BPW’s reduced income to his diminished capacity, rather than to other business variables.

The appeal court also addressed and rejected the court a quo’s distinction between Rudman and the present matter based on the presence in Rudman of valuable underlying assets (a game farm) versus a service-based close corporation. It found no demonstrated relevance in that distinction to the correct legal approach to quantification, and noted that in any event there was no evidence regarding BPW’s assets.

The respondent’s reliance on other authorities was considered but found not to assist on the facts. The appeal court distinguished Road Accident Fund v Oberholzer [2006] 3 All SA 593 (E) on the basis that in that matter the evidence established that Oberholzer’s personal skill and endeavours were the main driver of the business’s growth and contract acquisition, whereas such evidence was not established in relation to the respondent and BPW. It distinguished Road Accident Fund v Ronaasen N.O. [2007] ZAECHC 153 (22 June 2007) because that case involved a one-man close corporation where the evidence about the business’s profit levels was used to establish the plaintiff’s pre-accident earning ability, rather than to ascribe the close corporation’s loss to the individual as personal loss. The appeal court held that, in contrast, the respondent’s approach used BPW’s reduced profits to establish BPW’s loss and then ascribe it to him, thereby falling into the very trap warned of in Rudman. The appeal court also held that Sandler v Wholesale Coal Suppliers Limited 1941 AD 194 at 198 did not assist because the kind of evidential demonstration present there (showing business disorganisation and a direct link between absence and reduced sales/profit) was not present on these facts.

A second major component of the reasoning concerned the characterization of the payments made to the respondent during his absence and after his return. The appeal court held that the court a quo had treated these as ex gratia and also treated part of his ongoing payments as ex gratia to the extent they exceeded his contribution post-accident. The appeal court found this to be a misdirection because the evidence established that the respondent’s entitlement to payments flowed from his 50% member’s interest. In excluding such payments, the court a quo was said to have treated the respondent as if he were an ordinary employee rather than a co-proprietor/member, and the appeal court stated that it could find no legal basis for excluding these payments from the analysis.

Finally, the appeal court considered the award for early retirement. It held that the court a quo’s approach was inconsistent with the respondent’s status as a 50% member of BPW. The appeal court accepted the appellant’s submission that early retirement did not, on the reasoning it adopted, detract from the respondent’s entitlement to share in BPW’s profits, and it found no legal basis for treating early retirement as depriving him of that entitlement in a way that justified the awarded amounts.

On these combined grounds, the appeal court concluded that the court a quo had misdirected itself in awarding the challenged amounts for past and future loss of earnings.

5. Outcome and Relief

The appeal was upheld.

The awards of R4 049 614.00 for past loss of earnings and R7 532 400.00 for future loss of earnings were set aside.

The respondent was ordered to pay the appellant’s costs, the appeal court finding no reason to depart from the principle that costs follow the result.

Cases Cited

Miles v Road Accident Fund (7410/2009) [2013] ZAKZPHC 41 (14 June 2013)

Raath v Nel 2015 (5) SA 273 (SCA)

Dippenaar v Shield Insurance Co Ltd 1979 (2) SA 904 (A) at 917B–D

Rudman v The Road Accident Fund 2003 (2) SA 234 (SCA)

Road Accident Fund v Oberholzer [2006] 3 All SA 593 (E)

Road Accident Fund v Ronaasen N.O. [2007] ZAECHC 153 (22 June 2007)

Sandler v Wholesale Coal Suppliers Limited 1941 AD 194 at 198

Legislation Cited

No legislation was cited in the judgment.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the respondent had not established that this was an appropriate case to quantify his personal loss of earnings by reference to the alleged loss of income suffered by BPW, and that his approach impermissibly attributed BPW’s loss to him in the manner cautioned against in Rudman v The Road Accident Fund 2003 (2) SA 234 (SCA).

The court further held that the court a quo erred in treating payments made to the respondent during his incapacity, and portions of payments after his return, as ex gratia, because the evidence established that his entitlement to those payments derived from his 50% membership interest in BPW.

The court also held that the court a quo’s award premised on the respondent’s early retirement was unsustainable on the approach adopted, because early retirement did not provide a basis to deprive the respondent of his entitlement to share in BPW’s profits as a 50% member.

LEGAL PRINCIPLES

A close corporation has a separate and distinct estate from that of its members, and loss suffered by the close corporation does not automatically constitute loss suffered by a member in delict.

Under the lex Aquilia, a defendant must compensate a plaintiff for the difference between the value of the plaintiff’s estate after the delict and what it would have been absent the delict; earning capacity forms part of the plaintiff’s patrimony, but diminished capacity does not necessarily equate to compensable pecuniary loss without proof of patrimonial diminution.

In an appropriate case, a plaintiff may prove and quantify personal loss by reference to the loss of income suffered by a company or close corporation, but the plaintiff must avoid treating the entity’s loss as automatically equivalent to personal loss, and bears the onus of showing that reliance on salary/drawings is inappropriate on the facts.

Where an injured person is a member with an established entitlement to share in profits or drawings by virtue of a membership interest, payments received in that capacity cannot, without a proper legal basis, be excluded as gratuitous for purposes of quantifying loss.

Road Accident Fund v Bee (A07/16) [2016] ZAWCHC 122 (20 September 2016)