Claimants working on the ‘black’ economy and fraudulently obtaining benefits - the defence of illegality

Those advising claimants in cases where there is a potential claim in damages for loss of earnings but, prior to the accident date, the claimant had been securing undisclosed earnings whilst fraudulently obtaining benefits, need to consider quite carefully whether it is worth bringing a claim for loss of earnings at all. The reason for this is that such claims are likely to be defended on the grounds of illegality and may result in the court referring the matter to the DPP and the claimant being prosecuted for fraud.

Defendants will contend that the claim for loss of earnings is ex turpi causa (i.e. void for illegality) and that, as a matter of public policy, the court should not permit a claimant to ground a claim on the illegality. The argument can be used in settlement negotiations to weaken the claimant’s bargaining position on the basis that there is a risk that the claimant will not be entitled to any compensation for loss of earnings because of the illegality.

The courts, however, tend to lean in favour of awarding compensation for loss of earnings in cases where claimants have failed to disclose pre-accident earnings to the Inland Revenue. The rationale behind allowing such claims is that the illegality does not of necessity form part of the claimant’s case where the earnings are lawfully obtained. The mere fact that such earnings have not been declared for tax and National Insurance purposes does not mean that the court is bound to reject the claim. Claimants can rely on the following authorities in support of a claim for loss of earnings in these circumstances: Duller v South East Lincs Engineers [1] and Newman v Marshall & Dunlop Tyres Ltd [2].

In Duller it was conceded in a personal injuries claim that the claimant had not disclosed his earnings from a part-time job as a barman for income tax purposes. Damages were allowed for past and future loss of earnings from his former part-time work. It was held that the claimant was entitled to be compensated for the loss of these earnings as they did not have a criminal origin, but came lawfully into his hands. It was his subsequent conduct which was unlawful in his dealings with the Inland Revenue, not his dealings with the earnings. His claim was not defeated by being tainted with illegality as he did not base his claim on any unlawful act of his. Deductions were made in respect of the tax which would have been chargeable on his part-time earnings.

Similarly, in Newman a claimant’s failure to pay tax or national insurance contributions on earnings derived from a lawful source was not a bar to advancing a claim for past and future loss of earnings in a personal injury action. Mr Justice Garland endorsed the reasoning in Duller and commented that: “In a non-dependency case if the Claimant derives income from a lawful source even though there may be a collateral illegality in the performance of the contract…he is entitled to rely on the loss of that source of income to found a claim although it may be necessary to make some financial adjustment…If the source of the Claimant’s income is itself unlawful, for example, the proceeds of crime, then the same considerations would apply as in Hunter v Butler…”[3].

It would appear, however, that a more draconian approach is taken by the courts where there is a pre-accident failure to pay tax coupled with benefits fraud. This was the case in Hunter v Butler[4] where the Court of Appeal found against the claimant, a widow, claiming for loss of dependency in a claim brought under the Fatal Accidents Act 1976. The deceased was unemployed at the time of his death but shortly before the accident date he had managed to obtain part-time work. He did not disclose his earnings from the part-time work, and continued to draw benefits at the full rate. The deceased’s widow claimed a loss of dependency in respect of his undisclosed earnings and the supplementary benefit drawn. It was agreed that, had the deceased’s earnings from part-time work been disclosed, he would only have been entitled to a reduced amount of benefit to reflect those earnings. The District Judge at first instance refused to include in the sum awarded any amount for loss of dependency and the widow appealed that decision. The Court of Appeal considered whether the deceased’s widow could claim damages in respect of the loss of a combination of undeclared part-time earnings and fraudulently obtained benefits and found against the widow on this issue.

Waite L.J. considered that, in respect of the supplementary benefit, the widow was in no sense dependent on the deceased but rather she was dependent on the State. He also rejected the argument that the lost undeclared earnings should be treated as a head of lost dependency for the following reasons: “It offends public policy in two respects. First, it assumes that someone who had committed fraud in the past would continue to do so in the future; ignoring the possibilities of repentance or detection. Secondly, it treats the proceeds of illegally concealed earnings as providing a valid head of recovery by way of damages for loss of injury.”

Hobhouse L.J. agreed with Waite L.J. and commented as follows in rejecting the widow’s entitlement to damages: “If a Plaintiff comes to Court and asserts as part of her case that she would have committed criminal acts and bases her claim upon such an assertion, she cannot recover in a court of law on that basis. Here she has claimed a loss of dependency on the basis that the deceased would have paid sums to her which he had to her knowledge obtained fraudulently from the benefits office.”

Arguably, however, in a non-dependency case, damages for loss of earnings could still be awarded in circumstances where there has been both a pre-accident failure to pay tax coupled with benefits fraud, and Hunter could be distinguished on the facts. The writer awaits with interest any further developments in this area.

ALEJANDRA HORMAECHE

Tanfield Chambers