| Moore v. Brown appellant’s claim for loss of earning capacity. COURT OF APPEAL FOR BRITISH COLUMBIA |
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COURT OF APPEAL FOR BRITISH COLUMBIA
Date: 20100927 Docket: CA036922 Between: Shane William Moore Appellant (Plaintiff) And Roland Brown Respondent (Defendant)
On appeal from: Supreme Court of British Columbia, February 18, 2009
Reasons for Judgment of the Court: I. Overview [1] This appeal is limited to the issue of whether, in a judgment in a personal injury action, there is palpable and overriding error in the trial judge’s assessment of the loss of profit component of the appellant’s claim for loss of earning capacity. [2] The appellant was seriously injured on September 18, 2005, when his motorcycle came into collision with a left-turning motor vehicle operated by the respondent. Early in the trial the respondent admitted liability for the accident and the trial proceeded as an assessment of damages. The trial judge awarded the appellant $115,000 in non-pecuniary damages, $63,000 for past income loss, $262,000 for loss of earning capacity, $75,000 for future care, and $47,400 in special damages. Only the loss of profits portion of the loss of earning capacity award is in issue. [3] The appellant is a geologist with a geological engineering company in Victoria, B.C. He is also a 25 percent shareholder in the company. His compensation includes a salary and an entitlement to share in a portion of the annual net profits of the company. Both his salary and his share of the net profits of the company are determined by his productivity. [4] The judge’s award for loss of earning capacity had two components: loss of future employment income and loss of profits as a shareholder entitled to share in the net earnings of the company. The judge assessed the employment income component of the award at $192,000 (para. 91) and the loss of profits at $70,000 (para. 92). The appellant does not take issue with the employment income component of the award but argues that there is palpable and overriding error in the judge’s assessment of the appellant’s claim for loss of profits. [5] The appellant’s main argument is that the trial judge, when quantifying the appellant’s loss of profits, was manifestly in error when he failed to have regard for the combined effect of the profitability of the company and the provision in the shareholders’ agreement calling for the distribution of the company’s annual net proceeds to the four shareholders based on their productivity. [6] In opposing the appeal, the respondent points to the limited scope for appellate review on judge-alone damage awards, relying on Joyce v. Dorvault, 2008 BCCA 151, 80 B.C.L.R. (4th) 52. He argues that the appellant has not demonstrated any palpable and overriding error in the judge’s findings of fact or error in principle in the judge’s approach to determining the impugned portion of the future loss award. The respondent contends that the award is grounded in the evidence and flows from an appreciation of the relevant contingencies and, further, that the award is, as the authorities require, an assessment rather than a mathematical calculation. [7] We are all of the view that this is a case in which errors on material facts can be identified and shown to be in error in such a way as to have altered the judge’s assessment of the loss of profits. II. Background [8] At the time of the accident in September 2005, the appellant was 34 years old, fit, and quite athletic. His recreational pursuits included motorcycle riding and track racing. Since the accident, his ongoing pain, particularly in his left foot, has restricted his ability to work, his daily living activities, and the recreational pursuits he had previously enjoyed. [9] The trial judge found that as a result of the accident the appellant suffered multiple orthopaedic and soft tissue injuries, a minor concussion that resulted in some impaired memory over a few months, and associated headaches. Although the headaches had largely abated by the time the appellant returned to work part-time in January 2006, he continued to experience occasional extreme migraine-type headaches that were found to be related to the soft tissue injuries in his neck and shoulder. [10] As of the date of trial in November 2009, the appellant’s recovery had reached a plateau. He continued to experience chronic pain from his upper extremity injuries. The appellant’s most significant injury, however, was to his left foot, which continued to give him considerable pain and caused him to have an irregular walking gait. It also contributed to the ongoing pain in his knee, hip and low back, all of which had a negative impact on his work and lifestyle. [11] The trial judge reviewed in some detail the medical evidence adduced by both parties. Overall, he preferred the evidence of the appellant’s experts. In particular, the trial judge accepted the evidence of the appellant’s orthopaedic surgeon on the treatment options available for the appellant’s foot injury. He recommended a conservative approach to treatment that did not include surgical intervention. [12] The trial judge found the appellant to be a highly motivated, somewhat driven, hard-working individual. [13] Since 2000, the appellant has been employed with the same engineering firm. In September 2007, he became a 20 percent shareholder in the company. The shareholder’s agreement in place at that time did not provide for a distribution of profits. In August 2008 the appellant’s ownership interest increased to 25 percent when he and three others bought out the founding partner’s remaining 20 percent of the shares. A shareholders’ agreement dated August 31, 2008 [Agreement] provided for distribution of the company’s annual net profits among the four shareholders. [14] The trial judge found that the appellant would likely remain in his present employment and partnership, but that he faced an uncertain future and that his prognosis was generally poor. [15] The appellant’s employment income is based on hours worked (billable and non-billable) multiplied by his hourly rate. Non-billable work does not directly increase the company’s net profits. [16] In regard to the appellant’s income loss up to the date of trial, the judge found that before the accident the appellant billed on average about 90 percent of his time and that his annualized employment income was less than $55,000. After the accident, the appellant received an increase in his hourly rate. The trial judge found that in 2005, but for the accident, the appellant would have earned a salary of $62,000 and that his employment income would likely have increased at about five percent a year to the date of trial. After deducting the actual income the appellant received during that period, the trial judge determined that the appellant’s past loss of employment income was $75,000 (para. 83). [17] The appellant’s claim for an award of damages for loss of future earning capacity had two components, both of which were based on the decrease in the appellant’s productivity resulting from the injuries he suffered in the accident. [18] The trial judge was satisfied that the appellant had suffered an impairment of his future earning capacity. He found that the appellant’s foot injury had limited his ability to continue with the type of on-site field work in which he previously had been engaged. That work typically included hiking over rough terrain and, as well, rappelling down vertical cliff faces to check rock and slope stability. [19] The judge compared the difference in the appellant’s billable and non-billable hours before and after the accident. He found that before the accident, the appellant had spent about two-thirds of his day doing on-site field work, which was the source for his client billings, and the balance of the day in the office writing reports for clients. The judge found that after the accident, the appellant had to modify how he approached his work and the kind of work he undertook, and that his ratio for billable and non-billable work reversed. He found that the appellant now spends about two-thirds of his day on office or administrative duties and one-third of the day on selective field work. His administrative work to the date of trial had focused on computerizing the company’s timekeeping and accounting systems, and taking on a greater role of the company’s management. [20] As to the appellant’s loss of earning capacity based on his employment income at the company, the judge found that the amount of the appellant’s billable hours had decreased markedly after the accident. The judge found that he had consistently failed to achieve the 2004 level of 2,096 hours, that his paid hours in 2007 totaled 1,546 and that at the time of trial in 2008, his projected annual paid hours totaled 1,692. The judge found that the decrease was on average 250 billable hours less per year than the 2,100 billable hours expected for each partner. Based on his findings the judge concluded that the appellant’s “productivity level reflected by client billings will typically be about 12 percent less than his partners.” (para. 100). [21] The judge found that the appellant’s annual future loss of employment income was $10,000 and that through to age 65, discounted for present value, the appellant’s loss should be assessed, after positive and negative contingencies were taken into account, at $192,000. In arriving at that assessment, the judge concluded that the positive and negative contingencies were more or less evenly balanced. In that regard, he said at paras. 88-90: [88] I consider it likely that Mr. Moore’s long-term shortfall will be about 250 paid hours per year. At Mr. Moore’s current pay rate, that converts to about $9,000 per year. Absent further improvement in his medical condition, I anticipate that Mr. Moore will maximize his employment earnings within an additional three to four years after trial. His loss will be greater in the interim. Further, as his hourly rate increases in the future, his annual loss based on paid hours will also increase over time. Taking these additional factors into account, a reasonable and fair assessment of Mr. Moore’s future loss of employment income is $10,000 per year. [89] According to Mr. Wickson, an economist retained by the plaintiff, the present value of $10,000 per year through to Mr. Moore reaching age 65, after taking into account the probability of survival and the discount factor, is $192,810. In cross-examination, counsel for the defendant put additional possible negative contingencies to Mr. Wickson. These included the risk of disability, unemployment, involuntary unemployment, part-time work, and labour force participation. In my view, any reduction to reflect these contingencies would be modest in the present circumstances given Mr. Moore’s talents and level of commitment to his work. [90] In addition, by fixing the ongoing income loss at $10,000 per year, I have conservatively estimated the continuing increase in Mr. Moore’s hourly billing rates. In so doing, I ignore the possibility that his actual increases over time may be greater. [22] The appellant does not take issue with the judge’s assessment of his loss of future earning capacity in relation to his loss of future employment income. The contentious issue is whether the trial judge made a manifest error in his assessment of the appellant’s loss of profits claim. III. The assessment of the appellant’s loss of profits claim [23] With respect to the loss of profits claim, the trial judge began by saying at para. 92: [92] For the reasons that follow, I assess future loss of profits at $70,000. Accordingly, the total award for impairment of earning capacity is $262,000. [24] The judge then set out some background facts relevant to the loss of profit component of the appellant’s claim. Those facts, taken from paras. 93-95 of the judge’s reasons, are summarized below with the names of those who are not parties omitted. [25] Until 2007, the founding member of the firm together with his wife and a Family Trust owned the company. Much earlier, dating back to well before the 2005 accident, the founding member expressed an interest in selling the business to the appellant and other employees. In September 2007, pursuant to a written agreement, the founding member sold 80 percent of the shares of the company to the appellant and three other engineers, all with a level of experience similar to that of the appellant. The founding member retained the final 20 percent interest in the shares but the agreement also granted the four new shareholders an option to purchase the balance of the founding member’s shares. Each of the new shareholders took 20 percent of the total issued shares. The purchase price for all of the shares was $800,000, with 80 percent or $640,000 being paid in September 2007. The new shareholders each paid $160,000 for their 20 percent of the shares. The remaining shares of the founding member were purchased by the new shareholders at the end of August 2008. The appellant paid, in total, slightly over $200,000 for one-quarter of the shares in the company. [26] The three engineers who are the other shareholders in the company testified. Of these witnesses the trial judge said: “All impressed me as bright, hardworking, professionals.” (at para. 96). [27] Financial material and financial statements of the company were in evidence. Annual revenues from the company rose from $1,082,899 in 2002 to $1,981,795 in 2007. The net income for the company in the fiscal year ending February 28, 2006, prior to payment of corporate taxes and management salaries, was $674,564.47. Net income for the fiscal year ending in February 2007, prior to payment of corporate taxes and management salaries, was $694,520.08. For the fiscal year running from the beginning of September 2007 to the end of August 2008, when the Agreement was about to take effect, the net income after payment of corporate taxes, was $686,258.37. [28] In the year prior to the Agreement of August 2008 being made, when the founding member still held the remaining 20 percent of the shares, the shareholders’ agreement in place for that year did not provide for a distribution of net profits. For that year, the net profits were divided equally, as the founding member decreed. [29] The appellant and his three partners testified that the increase in the company’s net profit in 2008 was largely due to an increase in business, which included an increase in new business. The respondent asserted that the increase was due in large part to the founding partner’s retirement in 2007, because he and his wife had commanded significant management salaries which were no longer being paid. However, as noted above, the statements for the net income in the fiscal years ending prior to August 31, 2008 did not include the management salaries. [30] The Agreement, the company’s record of profitability, and the appellant’s impaired work capacity provided the evidentiary foundation for the appellant’s claim for loss of profits. The relevant provision in the Agreement was described by the trial judge as follows: [97] Paragraph 11.04(b) of the current shareholders agreement provides for the distribution of the firm’s net after tax income subject, in part, to “establishing retained earnings for capital expenditures, business growth, reserve or investments funds”. Once the retained earnings are established, any remaining annual profits are to be distributed, according to the following formula: Distribution of annual profits to the Shareholders shall be in proportion to their respective actual contribution to the earnings and operation of the Company. Distribution shall be by one of or a combination of salary, bonuses, Dividends, and fringe benefits. Dividends shall be paid equally on a per-share basis, and additional division of profits and periodic payment on account of profits are to be determined by a formula that takes into consideration billable hours in addition to non-chargeable time relating to corporate administration and management. ... The clause goes on, in effect, to provide that the eligible non-chargeable time may vary from partner to partner as the partners decide. [98] I accept as accurate the interpretation of the formula offered by Mr. Moore and one other partner to the effect that distribution will first, to the extent that all equally share, be by dividend and, second, any unequal distribution by other means. The eligibility of non-chargeable time for consideration may vary from time to time and has not yet, in any event, been decided. [31] Each of the appellant’s partners testified that the intent of para. 11.04(b) of the Agreement was to distribute profits among them proportionate to each of their actual contributions to the company by way of billable and non-billable hours. One of the partners also stated that if a partner was not available to do the on-site inspection, the company might bring in a junior member to do that work. As of the date of trial, the partners had not yet decided the extent to which non-billable time would be taken into account in the distribution of the net profits. That is hardly surprising as the trial began in early November 2008, which was just over a month after the company’s fiscal year end and the founding member’s retirement. [32] The appellant testified that the additional revenue to the company in the fiscal year ending September 2008 permitted him to be more selective in choosing those work projects that had less physically demanding terrain, although he expressed concern that if the volume of work slowed down he would not have the same degree of choice in his work projects and that limitation would, in turn, result in him having fewer billable hours. [33] In assessing the appellant’s loss of profits claim, the trial judge looked to the same evidence he had considered in arriving at an assessment of the appellant’s claim for loss of future employment income in order to determine what effect the appellant’s loss of working capacity might have on the company’s annual net profit. He stated at para.101: [101] I earlier set out my view that 2,100 billable hours is a sustainable goal for a partner in the firm. Two of the remaining partners were on track to achieve that goal at the time of trial. The third was on track to modestly exceed it. Four partners would achieve, on average, a cumulative total of 8,400 hours per year based on 2,100 hours each. Given Mr. Moore’s ongoing limitations, the annual cumulative hours of the firm will be reduced by 250 hours to 8,150. Even accepting that some of the reduction represents lost profits otherwise available for distribution, which is far from a certainty, Mr. Moore’s share of the lost profits is, at best, 25 percent. [Emphasis Added.] [34] In the appellant’s submission, the judge’s error in his assessment of the loss of profits claim may be identified beginning with the emphasized portion of para. 101. [35] In para. 102 of his reasons the trial judge stated that it would be dangerous and unfair to the defendant to assume the company’s growth pattern would continue to be replicated. In that regard, he said: [102] August 2008 is the most recent year-end for the company. A Profit and Loss Statement shows that the company’s net after tax income was about $686,000. While that result is undoubtedly the result of the hard work of all the partners and employees of the firm and consistent with a growth pattern over several years, it would be dangerous, and unfair to the defendant, to assume that the company will replicate the pattern indefinitely into the future. [36] The trial judge then referred to a number of positive and negative contingencies in regard to the future economic performance of the company and to the appellant’s productivity at paras. 103-106: [103] There are a number of positive and negative contingencies to consider in regards to both the future economic performance of the company and the particular circumstances of Mr. Moore as they may impact on his ability to share equally in the distribution of profits. [104] The company has done well during a boom economy. The boom has come to an end; at the very least, the short-term economic future is more uncertain. The business is closely tied to the construction industry and more vulnerable to economic downturns as a result. The senior founding member of the firm recently retired and a senior associate engineer who is not a partner is expected to retire shortly. [105] As to Mr. Moore, there is the possibility of surgery that may, at some point, decrease his pain and perhaps even enhance his mobility. Either event may translate into increased personal productivity. There is also a possibility, however, that surgery will accomplish neither goal and, indeed, may set the plaintiff back in terms of function. Accordingly, with or without surgery, there is a continuing risk that, to the extent that profit sharing is based on third party billings, Mr. Moore’s participation will be less than at present. [106] On the other hand, it is also possible that Mr. Moore will gradually shift his attention primarily to less physically taxing office work that the partners will recognize as equally eligible for the purpose of profit sharing. [Emphasis added.] [37] Next, the trial judge referred to submissions made by both counsel with respect to the two components of the appellant’s future loss of earning capacity claim, all of which he rejected: [107] Counsel for Mr. Moore contends that because Mr. Moore will not be able to generate billings to the same extent as if the accident had not occurred, his share of profits will be correspondingly less. In that regard, he seeks an award of about $578,430 before adjusting for contingencies. In an alternative submission, counsel contends that I should assume that Mr. Moore will work through to age 55 at his current productivity level; that the firm will maintain its current profit level throughout that period; and that, at age 55, Mr. Moore will withdraw from the firm and thereafter earn a similar income doing more sedentary work. Based on that scenario, Mr. Moore claims about $794,000. I do not accept that there is a reasonable chance that Mr. Moore will sustain losses of either magnitude. [108] Nor do I accept that Mr. Moore’s future loss of employment income will approximate $380,500 as his counsel submits. That calculation stems from an assumed finding that Mr. Moore will earn $20,000 per year less through to age 65 than would have been the case had the accident not occurred and is inconsistent with my findings. [109] In the result, the plaintiff advanced total claims for impairment of earning capacity in excess of $1,000,000. According to him, there is a reasonable chance that he will sustain such a loss. I disagree for the reasons already set out. [110] Counsel for the defendant concedes that Mr. Moore is entitled to an award for diminished earning capacity but contends that an award of $150,000 would fairly compensate Mr. Moore for all aspects of his claim. I also disagree with that contention. An award of $150,000 fails to reflect even the anticipated loss of employment income with a present value of $192,000 to which I earlier referred. Nor does it adequately reflect the loss of opportunity to participate in firm profits or, finally, Mr. Moore’s capital loss otherwise as it relates to his ability to earn income in future. IV. Alleged errors in judgment [38] The following errors in judgment are set out in the appellant’s factum: 1. The Trial Judge in quantifying the Appellant’s loss of profits misdirected himself when he had regard for the number of hours that the firm’s total billings would be reduced as a result of the Appellant’s failure to achieve full productivity, rather than by determining the future net annual income for the company, and thereafter arriving at that figure representing 12% of the Appellant’s one quarter interest in that income. 2. The Trial Judge erred when he assumed a future profitability for [the company] that was totally unsupported by the evidence. 3. The Trial Judge erred in failing to have regard for the evidence that if the company’s business slowed, the Appellant’s productivity would probably decrease. V. Discussion [39] The approach to be taken in assessing an award for impaired earning capacity was summarized by Huddart J. in Rosvold v. Dunlop, 2001 BCCA 1, 84 B.C.L.R. (3d) 158: [8] The most basic of those principles is that a plaintiff is entitled to be put into the position he would have been in but for the accident so far as money can do that. An award for loss of earning capacity is based on the recognition that a plaintiff’s capacity to earn income is an asset which has been taken away: Andrews v. Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229 (S.C.C.); Parypa v. Wickware (1999), 65 B.C.L.R. (3d) 155 (B.C.C.A.). Where a plaintiff’s permanent injury limits him in his capacity to perform certain activities and consequently impairs his income earning capacity, he is entitled to compensation. What is being compensated is not lost projected future earnings but the loss or impairment of earning capacity as a capital asset. In some cases, projections from past earnings may be a useful factor to consider in valuing the loss but past earnings are not the only factor to consider. ... [11] The task of the court is to assess damages, not to calculate them according to some mathematical formula: Mulholland (Guardian ad litem of) v. Riley Estate (1995), 12 B.C.L.R. (3d) 248 (B.C.C.A.). Once impairment of a plaintiff’s earning capacity as a capital asset has been established, that impairment must be valued. The valuation may involve a comparison of the likely future of the plaintiff if the accident had not happened with the plaintiff’s likely future after the accident has happened. As a starting point, a trial judge may determine the present value of the difference between the amounts earned under those two scenarios. But if this is done, it is not to be the end of the inquiry: Ryder (Guardian ad litem of) v. Jubbal, [1995] B.C.J. No. 664 (C.A.) (Q.L.)]; Parypa v. Wickware, supra. The overall fairness and reasonableness of the award must be considered taking into account all the evidence. ... [18] The assessment of damages is a matter of judgment, not calculation. ... [40] As was noted in Rosvold at para. 9, the capital asset approach requires an evaluation of hypothetical events that may affect the award based on simple probability, not on a balance of probabilities. In Athey v. Leonati, [1996] 3 S.C.R. 458, Major J. explained the applicable principles, commencing at para. 27: 27 Hypothetical events (such as how the plaintiff’s life would have proceeded without the tortious injury) or future events need not be proven on a balance of probabilities. Instead, they are simply given weight according to their relative likelihood: Mallett v. McMonagle, [1970] A.C. 166 (H.L.); Malec v. J. C. Hutton Proprietary Ltd. (1990), 169 C.L.R. 638 (Aust. H.C.); Janiak v. Ippolito, [1985] 1 S.C.R. 146. For example, if there is a 30 percent chance that the plaintiff’s injuries will worsen, then the damage award may be increased by 30 percent of the anticipated extra damages to reflect that risk. A future or hypothetical possibility will be taken into consideration as long as it is a real and substantial possibility and not mere speculation: Schrump v. Koot (1977), 18 O.R. (2d) 337 (C.A.); Graham v. Rourke (1990), 74 D.L.R. (4th) 1 (Ont. C.A.). *** 29 This point was expressed by Lord Diplock in Mallett v. McMonagle, supra, at p. 176: The role of the court in making an assessment of damages which depends upon its view as to what will be and what would have been is to be contrasted with its ordinary function in civil actions of determining what was. In determining what did happen in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards. [41] At trial, the respondent did not dispute that the appellant was entitled to an award for loss of earning capacity for both loss of employment income and loss of profits as a shareholder. On the appeal, the parties part company on the question of whether there is palpable and overriding error that will justify judicial interference in the loss of profits component of the award. [42] Damages are a question of fact. The scope of appellate review on findings of fact was set out by McLachlin J. in Toneguzzo-Norvell (Guardian ad litem of) v. Burnaby Hospital, [1994] 1 S.C.R. 114 at 121: It is by now well established that a Court of Appeal must not interfere with a trial judge's conclusions on matters of fact unless there is palpable or overriding error. In principle, a Court of Appeal will only intervene if the judge has made a manifest error, has ignored conclusive or relevant evidence, has misunderstood the evidence, or has drawn erroneous conclusions from it .... A Court of Appeal is clearly not entitled to interfere merely because it takes a different view of the evidence. The finding of facts and drawing of evidentiary conclusions from facts is the province of the trial judge, not the Court of Appeal. [Emphasis added.] [43] Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 [Housen], made plain that the same standard of review also applies with respect to inferences drawn from facts. [44] In Van Mol (Guardian ad litem of) v. Ashmore, (1999) BCCA 6, 58 B.C.L.R. (3d) 305 (leave to appeal to the S.C.C. refused [1999] S.C.C.A. No. 117) at paras. 8-12, Lambert J. provided a helpful elucidation of what is meant by “palpable and over-riding error” and “manifest error”. Justice Lambert said, in part: [11] ... Surely what is meant by the descriptive adjectives “palpable” and “manifest” must be that the error can be identified and can be shown to be an error. The importance of identifying the error is stressed in Beaudoin-Daigneault v. Richard, [1984] 1 S.C.R. 2 at p. 9. Surely, also, what is meant by the adjective “over-riding” must be that the error is one which either must have altered the result or which may well have altered the result. [12] I think that the third, fourth and fifth questions [has the judge ignored conclusive or relevant evidence, misunderstood the evidence or drawn erroneous conclusions from the evidence] must represent examples of specific kinds of palpable, manifest and over-riding errors in relation to the treatment of the evidence. So the questions confronting the Court of Appeal in relation to suggestions that the trial judge ignored or misconceived relevant evidence, or drew wrong conclusions from it, must still be whether the error can be identified and can be shown to be an error, and whether the error is one which either must have altered the result or may well have altered the result. [45] The policy reasons behind the standard of review when findings of fact and inferences drawn from facts are challenged on appeal were considered in Housen at paras. 10-25. In that case, the Supreme Court made plain that there is only one standard of review applicable to all factual conclusions made by the trial judge – that of palpable and overriding error: Housen para. 25. A palpable error is an error that is plainly seen: Housen paras. 5-6. [46] If an award is supported by evidence and absent error in principle, only palpable and overriding error will permit judicial interference: K.L.B. v. British Columbia, 2003 SCC 51, [2003] 2 S.C.R. 403 at para. 62. VI. Submissions of the parties [47] The appellant submits that the error in determining the factual foundation for assessment of the appellant’s loss of profits claim is manifest, beginning in para. 101 of the judge’s reasons which I repeat for ease of reference: [101] I earlier set out my view that 2,100 billable hours is a sustainable goal for a partner in the firm. Two of the remaining partners were on track to achieve that goal at the time of trial. The third was on track to modestly exceed it. Four partners would achieve, on average, a cumulative total of 8,400 hours per year based on 2,100 hours each. Given Mr. Moore’s ongoing limitations, the annual cumulative hours of the firm will be reduced by 250 hours to 8,150. Even accepting that some of the reduction represents lost profits otherwise available for distribution, which is far from a certainty, Mr. Moore’s share of the lost profits is, at best, 25 percent. [Emphasis added.] [48] The main plank in the appellant’s argument is that the trial judge either misunderstood relevant evidence or drew erroneous conclusions from the evidence when he failed to distinguish between the effect the appellant’s diminished productivity might have on his future employment income and the effect his diminished productivity might have on his entitlement to benefit from his capital investment in the company. The appellant’s claim for loss of future income was bounded by reference to paid employment income and billable and non-billable hours worked whereas the claim for loss of profits was bounded by reference to the company’s profitability and, under the Agreement, his “productivity”. [49] The respondent submits that the last part of para. 101 of the judge’s reasons reflects the trial judge’s rejection of the appellant’s position that a 12 percent decrease in his productivity, as it relates to his loss of employment income, would necessarily translate to a comparable decrease in his proportionate share of the company’s net profits. He submits that while the appellant’s income from salary is clearly tied to his billings, the Agreement recognizes the potential for other forms of contribution in determining a partner’s proportionate share of the profits. Furthermore, he suggests, a junior member of the firm could fill in to do the appellant’s on-site (billable) work and thus alleviate any potential diminishment of the company’s future profitability arising from the appellant’s inability to do that work. [50] In response to those submissions, the appellant contends that the respondent’s argument simply confirms the appellant’s position that the company’s annual net profit is the result of a number of variables from both the revenue and expense side of its income statement but fails to address the extent to which the appellant’s decreased working capacity may affect his “productivity”. [51] To demonstrate the effect of the error in the judge not appreciating the extent to which the appellant might suffer a loss of profits from his investment in the company, the appellant compared the figures used and results reached in the two parts of the award. The $190,000 sum awarded for loss of employment income was predicated on a $10,000 per year difference in a pre-and-post accident earning capacity. The trial judge found that had it not been for the accident, the appellant’s gross annual employment earnings as of the date of trial would have been about $65,000. By contrast, the sum of $70,000 was awarded for loss of profits. The appellant points out that if $70,000 is reduced to an annual rate, taken over 28 years and discounted for present value, it would amount to about $3500 per year, a figure wholly at odds with the evidence of the company’s profitability and the judge’s findings about the appellant’s reduced working capacity. [52] The appellant submits that, taking a very conservative figure of $500,000 per year as the on-going annual net profit, each of the shareholders would be entitled to $125,000, assuming the annual net profits were divided equally. On the basis of his findings of the impact of the appellant’s injuries on his capacity to achieve the average yearly hours of his fellow professionals, the judge found that “his productivity level reflected by client billings will typically be about 12 percent less than his partners” (at para. 100). In the appellant’s submission, even assuming some accommodation by the other shareholders in recognizing the “productivity” of administrative work, the judge’s award for loss of profits of about $3500 per year is manifestly in error. VII. Analysis [53] The factual basis for the appellant’s claim for loss of profits was his shareholdings in the company and the Agreement made between the shareholders to divide the annual net profits of the company. The four shareholders had purchased 80 percent of the founding member’s shares for $640,000 in September 2007. The remaining 20 percent of the shares were purchased in August 2008. In total, the appellant paid $204,000 for his 25% of the shares in the company. [54] The appellant’s expectation of sharing in the annual net profit of the company came with the share purchase and the agreement between the shareholders, all of whom were engaged in a professional practice. Paragraph 11.04(b) of the Agreement sets out the mechanism or method by which the four shareholders agreed to determine the distribution of the annual net profit. Paragraph 11.04 is set out in full below: 11.04 Profits Distribution The profit earned by the Corporation after payment of income taxes in accordance with applicable tax laws shall be shall be (sic) utilized for the following purposes and schedule as determined by the Board of Directors: a. Establishing retained earnings for capital expenditures, business growth, reserve or investment funds. b. Distribution of annual profits to the Shareholders shall be in proportion to their respective actual contribution to the earnings and operation of the Company. Distribution shall be by one of or a combination of salary, bonuses, Dividends, and fringe benefits. Dividends shall be paid equally on a per-share basis, and additional division of profits and periodic payment on account of profits are to be determined by a formula that takes into consideration billable hours in addition to non?chargeable time relating to corporate administration and management. The eligible non-chargeable time will depend upon corporate and managerial duties, and may vary from Director to Director. The formula and allotments for each fiscal year are to be established by the directors at each Annual General Meeting for the following fiscal year, although such can be revised from time to time by unanimous resolution of the Directors in recognition of changed duties. [Emphasis added.] [55] The factual foundation for the appellant’s loss of profit claim rests, in part, on the profitability of the company and, in part, on the effect his diminished working capacity may have under para. 11.04(b) of the Agreement to share equally in the distribution of annual net profits. [56] There is no dispute that the legal principle to be applied in respect of both components of the award for loss of earning capacity is that the appellant, to the extent it may be done by a money award, is entitled to be put into the same position he would have been in but for the accident. The award for loss of profits should therefore reflect the difference between the proportion of the net annual profit to which he would have been entitled had he not been injured and the proportion to which he would be entitled in his injured state. [57] In para. 101 of his reasons, the trial judge began his analysis of the appellant’s loss of profit claim by asking how the reduction in the number of hours the appellant is able to work would affect the profitability of the firm. He found that “[g]iven Mr. Moore’s ongoing limitations, the annual cumulative hours of the firm will be reduced by 250 hours to 8,150”. The reduction in the annual billings of the four shareholders as a result of the appellant’s reduced working capacity was of little, if any, relevance in assessing the appellant’s loss of profits claim because the company’s gross income was not confined to the revenue that could be generated by the billing hours of the four shareholders. In looking to the reduction in the cumulative hours of work of the four shareholders, the judge overlooked or ignored the evidence that other employees in the company also did field work, thereby generating revenue. [58] The judge went on to reason, in para. 101, that “[e]ven accepting that some of the reduction represents lost profits otherwise available for distribution, which is far from a certainty, Mr. Moore’s share of the lost profits is, at best, 25 percent.” As noted above, the appellant’s “share of the lost profits” was not limited to the reduction in the company’s income resulting from his lower billings. The firm’s four shareholders were not the only professionals in the firm able to do geological work. In other words, there was no factual foundation from which to infer a direct correlation between the reduction in the appellant’s hours and the firm’s profitability. [59] Furthermore, in focusing on the appellant’s “share of the lost profits”, the trial judge misapprehended or misconstrued the material term in the Agreement. The four professionals who had agreed to take over the business from the founding member had each put in a substantial sum to buy shares. Paragraph 11.04(b) reflected their expectation that there would be a distribution to them of the annual net profit of the company. Their agreement was that the distribution would be in proportion to their respective actual contribution to the earnings and operation of the company. [60] To demonstrate that the result the trial judge reached in assessing the appellant’s claim for loss of profits was plainly wrong, appellant’s counsel pointed out that in order to arrive at an award of $70,000, the trial judge would have had to conclude that the appellant’s shortfall in profit sharing to age 65, discounted, would amount to only about $3500 per year. [61] The trial judge concluded in para. 88 of his reasons, quoted above, that a fair assessment of the appellant’s future loss of employment income was $10,000 per year. That figure took into account the appellant’s pay rate at the date of trial, and anticipated increases which “will maximize his employment earnings within an additional three or four years after trial”. Implicit in that assessment is the assumption that the company will continue to do well financially. [62] While the appellant’s pay rate was a material fact in assessing the appellant’s loss of employment income, it was of little, if any, relevance to his loss of profits claim. Instead, the evidence material to the loss of profits claim were the financial statements from which the future profitability of the company could be gauged and para. 11.04(b) of the Agreement which determines the proportion to which the appellant is entitled to share in the annual net profits. [63] While there was some uncertainty at the time of trial about the extent to which the shareholders might recognize actual contributions to the operation of the company other than though earnings, we see nothing in the Agreement or in the evidence to suggest that time spent in office management alone would be accepted by the other professionals as the full annual contribution “to the earnings and operation of the company” over the span of 28 years. Among other things, it would be unreasonable for a geological engineer to permanently assume office management duties when others could almost certainly be hired to perform those tasks. [64] The evidence showed that the annual gross revenues of the company had almost doubled between 2002 to 2007 and that the company’s net income for three fiscal years ending February 28, 2006, February 28, 2007, and August 31, 2008, (the latter being after the share purchase agreement had taken effect) showed the levels of profit all exceeded $674,000. However, in para. 102 of his reasons, the trial judge said: [102] August 2008 is the most recent year-end for the company. A Profit and Loss Statement shows that the company’s net after tax income was about $686,000. While that result is undoubtedly the result of the hard work of all the partners and employees of the firm and consistent with a growth pattern over several years, it would be dangerous, and unfair to the defendant, to assume that the company will replicate the pattern indefinitely into the future. [Emphasis added.] [65] It is unclear what the judge intended by this observation because the appellant’s loss of profit claim was not dependent on an assumption of “a growth pattern” in the company’s profitability. [66] In para. 104 of his reasons, the judge referred to some negative contingencies, specifically, that the company had “done well during a boom economy” but that “[t]he boom has come to an end” and that “at the very least, the short-term economic future is more uncertain.” The judge also noted that the business “is closely tied to the construction industry and more vulnerable to economic downturns as a result” and further, that the senior founding member of the firm had recently retired and that a senior associate engineer who is not a partner was expected to retire shortly. [67] It was obviously within the province of the trial judge to consider and apply negative contingencies in assessing the loss of profit claim and the appellant does not suggest otherwise. What the appellant does argue is that an award predicated on an annual loss of profit of $3500 projected over 28 years and discounted for present value would have to be based on either or both a very substantial drop in the company’s net profits taken over an extended period of time or the appellant’s having only a very minor impairment in his working capacity over that time period. However, neither of those possibilities can account for the judge’s award because to do so would conflict with the findings he made in his assessment of the appellant’s future loss of employment income award. Implicit in the judge’s assessment of the appellant’s future loss of employment income award is a finding that the company would continue to be a successful geological engineering firm. Likewise, the judge’s explicit finding was that the appellant, as a result of his injuries, no longer has the capacity to work the hours he had previously worked. [68] For the reasons set out above, it is our respectful view that judicial interference is warranted in this case on the ground of palpable and overriding error in the judge’s loss of profits assessment. VIII. Substitution of a loss of profits award for the award made by the trial judge [69] If the appeal is allowed, the appellant asks that this Court make its own assessment based on the evidence before the trial judge. Alternatively, the appellant asks that the case be remitted to the trial court for determination of the appellant’s loss of profit claim. [70] In our view, the findings the trial judge made on the loss of employment income award along with the evidence that is not in issue are sufficient to permit this Court to make an assessment of the appellant’s claim for loss of profits without returning the case to the trial court, thus avoiding the delay and expense that would entail. [71] Appellant’s counsel has submitted that if the annual net profit figure is taken at $500,000, which would allow more than ample room for negative contingency discounts, each of the four shareholders would be entitled to a distribution of $125,000, assuming that “their respective actual contribution to the earnings and operation of the Company” were equal. [72] Given the appellant’s profession and nature of the firm’s work, and in view of the judge’s finding about the reversal of the appellant’s work pattern from billable to non-billable hours, and his finding that the appellant’s prognosis was generally poor, it is impossible to conclude that the difference in the appellant’s diminished capacity to make a contribution to the company in his professional field would be offset indefinitely through his performance of office management work. [73] The trial judge made findings about the effect of the injuries on the appellant’s capacity to carry out work as a geological engineer and found that the appellant had an annual decrease in productivity, based on the hours he and the others could reasonably be expected to achieve annually in billable work, of 12 percent. [74] The appellant submits that recognizing that percentage as a measure of the appellant’s reduced capacity to contribute to the earnings of the firm would permit an assessment to be made of the appellant’s loss based on the difference between the amount to which the appellant would have been entitled under the Agreement had it not been for the accident and the amount to which he would be entitled in his injured state. The appellant submits that using the 12 percent figure as a guide would result in a net annual reduction in anticipated distribution of net profits of $15,000, which over 28 years would have a present value of about $280,000. The appellant’s counsel has proposed a more conservative figure and asks that the court substitute an award for loss of profits of $250,000 rather than the $70,000 awarded by the trial judge. [75] The respondent argues that an assessment along the lines the appellant proposes ignores the reasonable possibility, based on the partners’ evidence, that they would recognize at least for a period of time the appellant’s non-monetary contributions to the company and thereby share the decrease in the appellant’s productivity equally amongst the partners. We agree that on the evidence, such a possibility may exist in the short term but the possibility of such an accommodation being made over a 28-year span does not accord with the provision in the Agreement which established the method by which the shareholders agreed to distribute the fruits of the professional practice in which they had made a capital investment. At trial, the partners acknowledged the value of the appellant’s non-billable work in setting up a new computer system but they were unwilling to commit to how that sort of accommodation might unfold in the future. [76] Based on the evidence of the company’s past profitability, we agree with the appellant’s submission that an assumed annual net profit of $500,000 would be very fair to the respondent. Use of that conservative figure amply provides for negative contingencies, such as declines in the economy and other negative fluctuations in business, while ignoring the positive contingencies such as an increase in the company’s profitability. [77] We also agree with the appellant’s submission that the use of the judge’s 12 percent reduction in the appellant’s working capacity would result in a net annual reduction in anticipated distribution of net profits of $15,000, which over 28 years would have a present value of about $280,000. Use of that approach appears to be a reasonable way of going about assessing the appellant’s loss. Any need for further discounting for contingencies appears to be questionable but we will accept the appellant’s submission that an award, if made, of $250,000 would be fair to both the appellant and the respondent. [78] For the reasons given we would allow the appeal, set aside the award for loss of future earning capacity of $262,000 ($192,000 plus $70,000) and replace it with an award of $442,000 ($192,000 plus $250,000). “The Honourable Madam Justice Rowles” “The Honourable Madam Justice Saunders” “The Honourable Madam Justice D. Smith” |