Brief Summary

Damages — Loss of earning capacity — Claim for future earnings dismissed — Appellant, as curator ad litem for seriously injured businessman, sought compensation for loss of earnings post-accident — Trial court found no post-accident earning capacity due to past tax evasion, determining that any future income would require unlawful concealment from tax authorities — Appeal court upheld trial court's dismissal, concluding that the appellant could not lawfully claim compensation for future earnings based on a business model reliant on dishonesty.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was an appeal to a full bench of the Western Cape High Court, Cape Town, concerning a claim for damages against the Road Accident Fund arising from a motor vehicle collision. The proceedings before the full bench followed a trial in which the plaintiff’s claim for damages (insofar as it related to loss of earning capacity) had been dismissed.

The appellant was Adv AE Heese N.O., acting in her capacity as curator ad litem to Mr Hans Ulrich Peters, a German businessman who suffered serious injuries, including brain damage, in a collision in Cape Town on 10 June 2000. The respondent was the Road Accident Fund.

The procedural history was material. Summons was issued in October 2004. The merits were referred to arbitration, and in June 2007 the arbitrator determined that the RAF was fully liable for any damages suffered by Peters. The quantification of damages proceeded in the High Court. By February 2010, general damages had been agreed at R500 000 and the RAF had paid past medical expenses of about R1,2 million. By the time the trial commenced before Blignault J on 10 May 2011, future medical expenses had also been resolved. What remained was the claim for diminution of earning capacity.

The parties agreed to a staged approach. The first phase was to determine the claimant’s gross pre-tax income but for the accident; the second phase would deal with tax, discounting to present value, and contingencies. The trial before Blignault J concerned only the first phase, but culminated (on 2 December 2011) in a dismissal of the loss-of-earnings claim on the basis that Peters had no post-accident earning capacity to which a value could be ascribed for purposes of South African law. Leave to appeal was refused by the trial court on 24 February 2012, but the Supreme Court of Appeal granted leave on petition on 24 July 2012 to appeal to a full bench. The appeal was heard on 24 July 2013 and judgment delivered on 23 October 2013.

The general subject-matter of the dispute was whether Peters had proven, on a balance of probabilities, that the accident caused a compensable patrimonial loss arising from an impairment of his earning capacity, given the nature of his business, the evidence of tax evasion, and the likelihood of criminal tax consequences in Germany.

2. Material Facts

Peters, aged 51 at the time of the collision, conducted a magazine subscription-selling business in Germany. The business model involved teams of sales representatives procuring subscriptions, which were then administered through a central organisation, Pressenvertiebszentrale GmbH & Co (PVZ). Peters did not hold accounts directly with PVZ. Instead, he dealt through a large intermediary, Heinz Bitter KG (Bitter). Peters could either retain subscriptions and receive ongoing royalties or transfer subscriptions for a lump sum. The plaintiff’s case relied on an alleged consistent arrangement that subscriptions procured by Peters’ teams were split on a 50/50 basis, with 50% retained and 50% transferred to Bitter for a lump sum.

A substantial feature of the plaintiff’s case—accepted as a defining characteristic of how the claim was presented—was that Peters’ historical financial statements and tax returns were said to be an unreliable measure of true profitability because he had allegedly engaged in dishonest tax evasion in Germany by understating income and overstating expenses, particularly from about 1997 to 2001. A German accountant, Heinzmann, prepared annual financial statements and tax returns from source documents provided by Peters (commission statements and expense vouchers). Payments from Bitter to Peters were historically made in cash, limiting corroboration from bank statements.

Several tax-related events were relied upon by the court as relevant to the probability of future criminal tax consequences. After the accident, the German tax authorities issued audit reports disallowing certain expenses (including, among other things, issues affecting MLP, an entity used in the business arrangements, and later a sales tax audit). A further important factual component concerned fictitious invoicing. Peters and his fiancée, Adriana Holzmann, devised a fraudulent scheme in which Holzmann (through “Adriana Holzmann Pressvertrieb”) issued fictitious invoices to Peters’ business for supposed selling services, totalling DM 1 219 320. Holzmann’s evidence indicated that German tax authorities questioned her about this in 2002 and that she paid a “penalty” of €250 000, although the evidence was sparse and lacked documentary substantiation. Additionally, a sales tax audit report dated 19 June 2002 disallowed input credits connected to invoices purportedly issued by 18 sales representatives who could not be traced or denied involvement, implying expenditure of DM 226 154 was bogus.

The accident itself caused serious brain injury. On the evidence, it was common cause (through a joint minute between psychologists) that prior to the accident Peters was above average in intelligence and highly motivated, and that after the accident he suffered significant neurophysical and neuropsychological sequelae, including cognitive abnormalities and personality and behavioural changes, rendering him unfit for gainful employment.

A further set of facts relevant to the outcome concerned Peters’ connection to South Africa and the feasibility of continuing his business. Peters and Holzmann travelled to South Africa in March 2000, decided to return for an indefinite stay, and returned on 9 May 2000. They brought substantial cash (DM 500 000) strapped to their bodies and Peters purchased a sectional title unit in Cape Town for R1,15 million. In May 2000 Peters also sold his house in Germany for DM 1 million in circumstances the court viewed as potentially suggestive of urgency. After the accident, Peters ultimately lived in South Africa permanently from 11 September 2001.

In the period after the accident, Peters’ business continued without his direct management. Giesecke (a business associate) managed the business for about a year post-accident; the last subscriptions acquired for Peters were in about July 2001. Thereafter, Giesecke took over remaining sales representatives and vehicles and ran the business for his own account until the end of 2002, after which it fizzled out. The court treated the evidence as indicating the business depended heavily on Peters’ personal involvement and that it could not feasibly be run remotely for any length of time.

The trial judge had dismissed the loss-of-earnings claim on two principal lines: first, on a public-policy approach tied to an assumed duty to disclose past tax evasion (with resulting “sterilisation” of earning capacity by criminal sanctions); and second, on the view that the German tax authorities were “closing in” and would probably have arrested and imprisoned Peters in any event. On appeal, the full bench accepted that those kinds of considerations could, in principle, affect compensability and causation, but found the factual and evidentiary basis for certain assumptions inadequate, while nonetheless concluding that the plaintiff failed to prove the necessary patrimonial loss on a balance of probabilities for different (though overlapping) reasons.

3. Legal Issues

The central legal questions the court was required to determine were whether Peters had proven a compensable diminution in earning capacity giving rise to patrimonial loss, and whether, on the probabilities, any impairment of his abilities caused loss of income that would otherwise have been earned. This required determination of causation and proof of loss in a delictual damages claim against the RAF, within the framework of the staged approach the parties had adopted (gross pre-tax income in phase one).

A further set of issues concerned the relevance of tax evasion and illegality to future earnings in the assessment of damages. This included whether a South African court should refuse to award damages where future earnings would depend on illegality (such as ongoing non-compliance with tax duties), and whether the likely intervention of criminal tax consequences (including possible imprisonment) would probably have “sterilised” earning capacity to the point that no compensable loss could be found.

The dispute therefore concerned a mixture of legal principle (public policy limits on compensating earning capacity linked to illegality), factual prediction (whether Peters would have returned to Germany, whether he would have been prosecuted and imprisoned, and what effect that would have had on earning capacity), and the application of law to fact (whether, on these probabilities, patrimonial loss from diminished earning capacity was established as required).

4. Court’s Reasoning

The full bench rejected the proposition that the trial judge’s legal approach was wrong in principle. It accepted that if evidence shows that a claimant’s earning capacity would likely have been rendered worthless by a future event, a court may properly conclude that diminution in earning capacity has not been established on a balance of probabilities. The court recognised that lengthy imprisonment could, in an appropriate case, constitute such a future event. It also endorsed the public-policy proposition that a court should not award damages for earnings that could only be generated through illegality or non-compliance with legal duties to tax authorities.

However, the court drew an important distinction. It emphasised that it was not saying a claimant must fail merely because, but for the accident, the claimant would probably have continued committing tax evasion. In the court’s view, the correct approach is generally to assess future earnings on the basis of lawful conduct, including the inevitable incidence of tax on lawful earnings. The policy bar arises more sharply where the evidence shows that honest and lawful post-accident exploitation of the earning capacity would itself have required disclosure of past evasion, making continued lawful earning impossible or practically sterilised by criminal consequences.

On the facts, the court identified difficulties in the evidentiary foundation for the trial judge’s first line of reasoning. The premise that German tax law imposed a duty on Peters to disclose past evasion (or that honest post-accident returns would necessarily require such disclosure) was not supported by evidence. There was no direct evidence on German tax duties requiring disclosure of past evasion, nor on whether the structure of German accounting and tax returns would have compelled restatement of prior-year figures such that past evasion would be exposed. The court considered that Heinzmann might have been able to address these points, but he was not asked. In the absence of such evidence, the court held that the assumption could not simply be made.

In relation to the second line of reasoning, the court was more persuaded at a factual level that the German tax authorities were, at least to some extent, “closing in” on Peters. It regarded the vagueness and evasiveness of Holzmann’s evidence, the unconvincing professed ignorance of Heinzmann regarding the investigation, and the refusal of the lawyer (Hinzpeter) to cooperate as factors heightening suspicion about the severity of Peters’ position. The court reasoned that, at minimum, the fictitious invoicing scheme involving AHP would probably have resulted in criminal proceedings against Peters, because he was the instigator and primary beneficiary of the scheme. The court considered it implausible that the authorities could have been persuaded that Holzmann alone was responsible.

Despite accepting that prosecution was likely, the court held that the trial judge erred in finding that criminal sanctions would necessarily have completely sterilised Peters’ earning capacity for the entire claimed period. The claim covered 2002 to 2023, and the court reasoned that criminal charges would likely have been instituted only later, with some ability to exploit earning capacity pending trial. There was insufficient evidence as to when prosecution would occur, how long proceedings would take, and what sentence would be imposed. The court declined to accept, on the thin evidence, a conclusion that Peters would certainly face lengthy imprisonment sufficient to render earning capacity valueless for the whole period.

The decisive reasoning, however, turned on whether Peters would in fact have returned to Germany to conduct the business and thus whether the impairment of his abilities caused a patrimonial loss. The court accepted that Peters had no meaningful professional or technical qualifications other than in the German subscription business, and that there was no realistic prospect of him starting a similar business in South Africa. It accepted that the German business could not be run remotely for long and that it was heavily dependent on Peters’ personal presence, control, and force of personality in managing volatile sales teams. The post-accident continuation of the business without Peters, followed by its decline and eventual collapse, was treated as consistent with that dependency.

Where the court differed from the trial judge was in evaluating the probability of Peters returning to Germany. The court considered that looming tax investigations and the risk of criminal proceedings would have been a powerful disincentive for Peters to return. It viewed features such as the indefinite relocation to South Africa, the sale of his German home at an apparently low price, the purchase of property in South Africa, and the movement of large quantities of cash as consistent with an inference that Peters might have chosen to remain outside Germany’s jurisdiction. The court also questioned the assumption that Peters needed to return to Germany to maintain a lavish lifestyle, noting evidence suggesting he may have had substantial assets and financial resources, including prior sales of subscription blocks and references to foreign bank accounts.

Drawing these strands together, the court concluded that it was at least as likely as not that Peters would have remained in South Africa indefinitely to avoid German criminal proceedings, with the consequence that his German business would have crumbled (as it did) in his absence. Even if he later returned, the court was not satisfied on the evidence that he would or could have restarted the business successfully after interruption and reputational damage. Accordingly, the plaintiff failed to prove on a balance of probabilities that there was a patrimonial loss associated with the impairment of Peters’ earning capacity, as required by authority.

Because the plaintiff failed at the level of proving loss, the court considered it unnecessary to engage in depth with the actuarial and accounting model used to predict future profits (principally through De Kroon and Tank). It nevertheless observed that, had it been necessary, it would have been hesitant to accept the model because its reliability depended on assumptions that could not be firmly grounded in reliable records and because the model was sensitive to changes in key inputs. The court noted that, in some cases, a fair lump sum may be appropriate where actuarial precision is not achievable, but it did not reach that remedial stage because the threshold proof of patrimonial loss was not met.

5. Outcome and Relief

The appeal was dismissed, subject to a qualification regarding the form of the trial court’s order and costs. The full bench confirmed, in substance, the dismissal of the claim for loss of earning capacity, though it stated that its reasons differed somewhat from those of the trial judge.

The court made an order dismissing the appeal with costs, but the confirmation of the trial court’s order dismissing the action with costs was made provisional to a limited extent. The appellant was given leave to file written submissions within two weeks as to whether the precise form of the order (including costs) should be varied to account for the fact that, after summons, the respondent had paid or tendered amounts in respect of general damages and medical expenses. The respondent was permitted to reply within one week of receipt. If no such submissions were filed, the dismissal with costs would become final.

Cases Cited

Dhlamini v Protea Assurance Co Ltd 1974 (4) SA 913 (A)

Burger v Union National South British Insurance Company Limited 1975 (4) SA 72 (W)

Southern Insurance Association Ltd v Bailey NO 1984 (1) SA 98 (A)

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

Sil and Others v Road Accident Fund 2013 (3) SA 402 (GSJ)

Miller v Road Accident Fund [2013] ZAWCHC 131

Newman v Folkes and Another [2001] All ER (D) 340 (QB)

Duller v South East Lincs Engineers [1985] CLY 585

Newman v Folkes and Another [2002] EWCA Civ 591

Hewison v Meridian Shipping Pte and Others [2002] EWCA Civ 1821

Legislation Cited

Road Accident Fund Act 56 of 1996 (including reference to section 17(4))

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the plaintiff failed to prove, on a balance of probabilities, that Peters suffered a compensable patrimonial loss arising from diminished earning capacity. Although Peters’ abilities to work were impaired by the accident to the point that he was unfit for gainful employment, the court found that this did not, in itself, establish pecuniary loss in the circumstances.

The court held further that while public-policy considerations can limit compensability where future earnings depend on illegality, and while likely prosecution and imprisonment could in principle affect the value of earning capacity, the evidentiary basis was insufficient to justify a conclusion that Peters’ earning capacity would necessarily have been entirely sterilised throughout the claimed period by criminal sanctions. The decisive factual finding was that it was at least as likely as not that Peters would have remained in South Africa to avoid German criminal proceedings, with the consequence that his German business would have failed in his absence, meaning the required patrimonial loss from diminished earning capacity was not proven.

The appeal was dismissed with costs, subject to a provisional mechanism allowing written submissions on whether the trial court’s form of order and costs should be varied to reflect amounts paid or tendered for general damages and medical expenses.

LEGAL PRINCIPLES

A claimant alleging diminished earning capacity must prove not only an impairment of the abilities relevant to earning, but also that the impairment gives rise to patrimonial loss on a balance of probabilities. The court applied the principle that diminished earning capacity does not automatically translate into loss of earnings; the link between impairment and patrimonial loss must be established in the claimant’s factual context.

Where evidence indicates that an earning capacity would likely have been rendered worthless or substantially diminished by an intervening future event (including, in principle, imprisonment), a court may conclude that a claim for diminution in earning capacity has not been established. The existence, timing, and impact of such future events are factual matters, and the probabilities must be supported by evidence rather than assumption.

Public policy precludes an award of damages for future earnings where the claimant’s ability to generate those earnings would depend on illegality or non-compliance with legal duties, including fiscal obligations. In assessing future earnings, the court distinguished between merely predicting that a claimant might have continued to evade tax (which does not, without more, make the earnings “unlawful” for this purpose) and a situation where lawful earning would require disclosure of past wrongdoing such that earning capacity would be sterilised by lawful compliance. The latter may justify limiting or refusing an award, but must be grounded in evidence as to the relevant legal duties and consequences.

In cases where actuarial modelling depends on uncertain assumptions and the evidence does not support reliable quantification, a court may consider a fair lump sum approach as an alternative to an actuarial calculation, though that remedial question only arises after the claimant has proven the fact of patrimonial loss.

Heese NO v Road Accident Fund (A 586/2012) [2013] ZAWCHC 157; 2014 (1) SA 357 (WCC) (23 October 2013)