Cunningham v. Wheeler; Cooper v. Miller; Shanks v. McNee, 1994 SCC 120

Cunningham v. Wheeler; Cooper v. Miller; Shanks v. McNee, [1994] 1 S.C.R. 359

John Earl Miller Appellant

v.

Mariea Cooper Respondent

and

Confederation Life Insurance Company,

The Great‑West Life Assurance Company

and London Life Insurance Company Interveners

and between

Samuel H. Shanks Appellant

v.

Thomas Harry McNee and Beverly Ann McNee Respondents

and between

Thomas Harry McNee and Beverly Ann McNee Appellants

v.

Samuel H. Shanks Respondent

and

Confederation Life Insurance Company,

The Great‑West Life Assurance Company

and London Life Insurance Company Interveners

and between

Bradwell Henry Cunningham Appellant

v.

Cherylee Lyn Wheeler and

Edward Kenneth Wheeler Respondents

and

Confederation Life Insurance Company,

The Great‑West Life Assurance Company

and London Life Insurance Company Interveners

Indexed as: Cunningham v. Wheeler; Cooper v. Miller; Shanks v. McNee

File Nos.: 22860, 22863, 22867.

1993: November 4; 1994: March 17.

Present: La Forest, L'Heureux‑Dubé, Sopinka, Cory, McLachlin, Iacobucci and Major JJ.

on appeal from the court of appeal for british columbia

Torts ‑‑ Negligence ‑‑ Compensation ‑‑ Plaintiffs receiving compensation for lost wages under employment plans ‑‑ Whether compensation received should be deducted from amount recovered for loss of wages from tortfeasor ‑‑ Whether amount recovered for lost wages should be reduced by amount of income tax which would have been payable on wages.

In Cunningham v. Wheeler the plaintiff was injured when he was struck by a car. While he was off work he collected disability benefits pursuant to a collective agreement with his employer. No deductions were made from his pay for these benefits, but the hourly wage package was made up of an hourly rate of pay together with collateral benefits. Disability benefits recovered from the defendants did not have to be paid either to the employer or to the insurance company managing the plan. The trial judge held that the payments should not be deducted in calculating the amount payable by the defendants for the wages lost by the plaintiff as a result of his injuries, as the plaintiff had established that the indemnity benefits were paid for by him as part of his wage package. The Court of Appeal reversed the judgment. It determined that since there was no subrogation right in the employer, and the direct funding for the disability benefits came from the employer, the plan was not in the nature of a private insurance policy and the funds received should be deducted from the damage award.

In Cooper v. Miller the plaintiff was injured in a motor vehicle accident. She was unable to return to work and was still totally disabled three years after the accident. Under a collective agreement she received short‑term disability benefits and was entitled to further sums post‑trial if her disability continued. Her share of the cost of the short‑term and long‑term disability plans was 30 percent, paid by means of deductions from her pay. She was not obliged to repay the short‑term disability benefits either to her employer or to the insurance carrier. The trial judge held that her benefits should not be deducted from her recovery for lost wages from the defendant. He was of the view that even though there was no subrogation provision, she came within the category of those who had bought insurance because she paid 30 percent of the premium cost. The Court of Appeal upheld the judgment.

In Shanks v. McNee, the plaintiff was injured in a motor vehicle accident in 1988 and was unable to return to work for approximately two years. Under his collective agreement, he was a member of both a short‑term and a long‑term disability plan. From 1986 to 1988, the long‑term plan was funded 70 percent by the employer and 30 percent by the employee through payroll deductions. In the 1988 through 1991 collective agreement the percentages were changed to 50 percent paid by the employer and 50 percent paid by the employee. There was no payroll deduction for the short‑term disability plan, but under the collective agreement the employee's share of the unemployment insurance premium reduction resulting from the provision of the disability benefits was retained by the employer as payment for the plan. There was a subrogation clause in the long‑term disability plan, but not in the short‑term plan. The plaintiff received benefits under both plans. These were not deducted from the amount the defendants were ordered to pay for lost wages, since the trial judge found that the disability payments were in the nature of insurance the plaintiff had paid for as an employee. He further held that there was to be no deduction for the income tax which would have been paid on the lost wages if the plaintiff had received them while he was working. The Court of Appeal upheld the judgment with respect to the long‑term disability benefits and the taking into account of income tax, but held that the short‑term benefits should be deducted since there was no direct contribution by the employee and there was no subrogation clause pertaining to those benefits.

Held (La Forest, L'Heureux‑Dubé and McLachlin JJ. dissenting): The appeal in Cunningham v. Wheeler should be allowed; the appeal in Cooper v. Miller should be dismissed; the appeal by the plaintiff in Shanks v. McNee with respect to the deductibility of the short‑term benefits should be allowed.

Held: The cross‑appeal by the defendants in Shanks v. McNee with respect to the deductibility of the long‑term benefits and the taking into account of income tax should be dismissed.

Per Sopinka, Cory, Iacobucci and Major JJ.: While the plaintiff in a tort action is not generally entitled to a double recovery for any loss arising from the injury, the disability benefits obtained by the plaintiff in Cunningham v. Wheeler as a result of his collective bargaining agreement are in the nature of a private policy of insurance and so should not be deducted from the claim for lost wages under the private insurance exception introduced in Bradburn. The insurance exception should apply where disability benefits are obtained not privately but pursuant to a collective agreement. Since the benefits at issue here were bargained for and obtained as a result of a reduction in the hourly rate of pay, they were obtained and paid for by the plaintiff just as much as if he had bought and privately paid for a disability insurance policy. In order to show that the benefits are in the nature of insurance, there must be evidence adduced of some type of consideration given up by the employee in return for the benefit. The application of the insurance exception to benefits received under a contract of employment should not be limited to cases where the plaintiff is a member of a union and bargains collectively. Benefits received under the employment contracts of non‑unionized employees will also be non‑deductible if proof is provided of payment in some manner by the employee for the benefits. Evidence that the employer takes the cost of benefits into account in determining wages would adequately establish that the employee contributed by way of a trade‑off against higher wages.

The disability benefits in Cooper v. Miller were also clearly in the nature of an insurance policy and therefore should not be deducted from the lost wages recovered from the defendant. While the plaintiff paid only 30 percent of the cost of the benefits by means of deductions from her pay, whatever sums the employer contributed to fringe benefits such as the disability payments were deducted from the total hourly wage that would otherwise have been paid to the employee, and the entire cost of the benefits was thus in fact paid by the employee.

Both the long‑term and the short‑term disability benefits in Shanks v. McNee were in the nature of an insurance paid for by the employee and should not have been deducted. While no evidence was called as to the collective bargaining process whereby the hourly wage rate was reduced in exchange for the provision of the collateral benefits such as these, it can be inferred from the fact that the contract containing the short‑term disability plan was arrived at after a lengthy strike that there must have been trade‑offs made by the employees in return for the collateral benefits which were received. In any event, there is evidence of a direct contribution by the plaintiff to both the long‑term and the short‑term benefits in this case. There was a payroll deduction made for the employee's contribution to the long‑term disability plan, and the employee agreed to give up to the employer the return of the unemployment insurance premiums for the short‑term disability plan. Generally, subrogation has no relevance in a consideration of the deductibility of the disability benefits if they are found to be in the nature of insurance. If the benefits are not shown to fall within the insurance exception, then they must be deducted from the wage claim that is recovered, unless the third party who paid the benefits has a right of subrogation. Finally, the plaintiff's damages for lost income should not be reduced by the amount of tax which would have been payable had they been earned as income.

Per La Forest, L'Heureux‑Dubé and McLachlin JJ. (dissenting in part): The plaintiff in a tort action is entitled to recover to the full extent of the loss, and no more. Double recovery is not generally permitted. This case does not fall within the private insurance exception introduced in Bradburn, which should not be extended to benefits paid under employment contracts. Contribution by the plaintiff to a benefits plan does not avoid the prohibition against double recovery. As a matter of logic, the fact that a plaintiff may lose the benefit of having made a contribution does not affect the fact that, to the extent a loss is made good by the plan, the plaintiff in fact suffers no parallel loss recoverable against the defendant under tort principles. The law reflects this logic in that it has consistently refused to compensate a plaintiff because he or she took precautions which minimized the loss flowing from the negligent act.

It is far from clear that the difference between the damages payable without deduction of collateral benefits received from employment plans and damages payable with deduction would have any effect on negligent conduct. Moreover, even if some connection between non‑deduction of employment benefits from damage awards and deterring negligent conduct could be established, deterrence alone is not a valid basis upon which to justify increasing damages. Since a plaintiff who has been compensated for lost earnings by an employment benefits plan has suffered no loss to the extent of those benefits, it is not a question of who will bear the loss. Nor is this a case of the tortfeasor unjustly benefiting at the plaintiff's expense. The plaintiff contributes regardless of whether or not the accident occurs, and the tortfeasor does not benefit, in any usual sense of the word, since he or she pays the actual measure of the plaintiff's loss.

Where the employer or insurer who pays the wage benefit recovers the damages allocated to lost wages from the employee by way of subrogation, there is no double recovery. The burden is properly placed on the tortfeasor rather than the employee or insurance company. Since rights of subrogation appear to be exercised rarely, the best approach is a regime of deductibility of employment plan benefits, subject to the plaintiff's right to claim the benefits if it is established that they will be paid over to the subrogated third party. The only exceptions that should be endorsed are charity and cases of non‑indemnity insurance or pensions. Since the benefits under the plans at issue in all three cases were paid in lieu of wages to the plaintiffs, they must be brought into account in calculating damages. The plaintiff's long‑term disability benefits in Shanks v. McNee should not be deducted, however, because the employer was subrogated to them.

Cases Cited

By Cory J.

Considered: Ratych v. Bloomer, 1990 CanLII 97 (SCC), [1990] 1 S.C.R. 940; referred to: Bradburn v. Great Western Rail Co., [1874‑80] All E.R. Rep. 195; Shearman v. Folland, [1950] 1 All E.R. 976; Parry v. Cleaver, [1969] 1 All E.R. 555; Browning v. War Office, [1962] 3 All E.R. 1089; Hussain v. New Taplow Paper Mills Ltd., [1988] 1 All E.R. 541; Tubb v. Lief, 1932 CanLII 229 (SK CA), [1932] 3 W.W.R. 245; Dawson v. Sawatzky, 1945 CanLII 185 (SK CA), [1946] 1 W.W.R. 33; Bourgeois v. Tzrop (1957), 1957 CanLII 339 (NB CA), 9 D.L.R. (2d) 214; Boarelli v. Flannigan, 1973 CanLII 690 (ON CA), [1973] 3 O.R. 69; Chan v. Butcher, 1984 CanLII 536 (BC CA), [1984] 4 W.W.R. 363; Canadian Pacific Ltd. v. Gill, 1973 CanLII 2 (SCC), [1973] S.C.R. 654; Guy v. Trizec Equities Ltd., 1979 CanLII 232 (SCC), [1979] 2 S.C.R. 756; Cirella v. The Queen, 1977 CanLII 3011 (FC), [1978] 2 F.C. 195; The Queen v. Jennings, 1966 CanLII 11 (SCC), [1966] S.C.R. 532; Andrews v. Grand & Toy Alberta Ltd., 1978 CanLII 1 (SCC), [1978] 2 S.C.R. 229; Watkins v. Olafson, 1989 CanLII 36 (SCC), [1989] 2 S.C.R. 750; British Transport Commission v. Gourley, [1956] A.C. 185; National Insurance Co. of New Zealand v. Espagne (1961), 105 C.L.R. 569; O'Brien v. McKean (1968), 118 C.L.R. 540.

By McLachlin J. (dissenting in part)

Livingstone v. Rawyards Coal Co. (1880), 5 App. Cas. 25; Hodgson v. Trapp, [1988] 3 W.L.R. 1281; Bradburn v. Great Western Railway Co. (1874), L.R. 10 Ex. 1; Canadian Pacific Ltd. v. Gill, 1973 CanLII 2 (SCC), [1973] S.C.R. 654; Guy v. Trizec Equities Ltd., 1979 CanLII 232 (SCC), [1979] 2 S.C.R. 756; Parry v. Cleaver, [1969] 1 All E.R. 555; Ratych v. Bloomer, 1990 CanLII 97 (SCC), [1990] 1 S.C.R. 940; Hussain v. New Taplow Paper Mills Ltd., [1988] 1 All E.R. 541; Graham v. Baker (1961), 106 C.L.R. 340; The Propeller Monticello v. Mollison, 58 U.S. (17 How.) 152 (1854); Andrews v. Grand & Toy Alberta Ltd., 1978 CanLII 1 (SCC), [1978] 2 S.C.R. 229.

Statutes and Regulations Cited

Civil Code of Québec, S.Q. 1991, c. 64, arts. 1608, 2474.

Insurance Act, R.S.O. 1990, c. I.8, s. 267.

Authors Cited

Brown, Craig, and Julio Menezes. Insurance Law in Canada, 2nd ed. Scarborough, Ont.: Carswell, 1991.

David, Hillel. "Collateral Benefits: Ratych v. Bloomer" (1990), 12 Advocates' Q. 124.

David, Hillel. "An Update on Collateral Benefits: Ratych v. Bloomer" (1992), 14 Advocates' Q. 221.

Dougans, Gillian. "Collateral Benefits: Some Further Thoughts" (1991), 49 Advocate 43.

Flaherty, James M. "A Purposeful Uniform Collateral Benefits Rule" (1991), 3 C.I.L.R. 1.

Fleming, John G. The Law of Torts, 8th ed. Sydney: Law Book Co., 1992.

Krishna, Vern. The Fundamentals of Canadian Income Tax, 4th ed. Scarborough, Ont.: Carswell, 1993.

Ontario. Law Reform Commission. Report on Compensation for Personal Injuries and Death. Toronto: Ministry of the Attorney General, 1987.

Ontario. Report of Inquiry into Motor Vehicle Accident Compensation in Ontario, vol. 1. Toronto: Ministry of the Attorney General, 1988.

Québec. Code civil du Québec: Commentaires du ministre de la Justice. Montréal: DACFO Inc., 1993.

Shuman, Daniel W. "The Psychology of Deterrence in Tort Law" (1993), 42 Kan. L. Rev. 115.

Taylor, Christopher A. "When is a Loss Not a Loss?: The Deductibility of Collateral Benefits After Ratych v. Bloomer" (1990), 12 Advocates' Q. 231.

APPEALS from a judgment of the British Columbia Court of Appeal (1991), 1991 CanLII 1444 (BC CA), 64 B.C.L.R. (2d) 62, [1992] 3 W.W.R. 258, 95 D.L.R. (4th) 655, 6 B.C.A.C. 268, 13 W.A.C. 268, reversing a decision of Anderson J. (1990), 23 A.C.W.S. (3d) 296 in Cunningham v. Wheeler, affirming a decision of Hutchison J. in Cooper v. Miller and reversing in part a decision of Tyrwhitt‑Drake J. in Shanks v. McNee. Appeal in Cunningham v. Wheeler allowed, appeal in Cooper v. Miller dismissed and appeal by plaintiff in Shanks v. McNee with respect to deductibility of short‑term benefits allowed. La Forest, L'Heureux‑Dubé and McLachlin JJ. are dissenting. Cross‑appeal by defendants in Shanks v. McNee with respect to deductibility of long‑term benefits and taking into account of income tax dismissed.

Mark M. Skorah, Guy Brown and Cheryl Talbot, for the appellant John Earl Miller, the appellants/respondents Thomas Harry McNee and Beverly Ann McNee and the respondents Cherylee Lyn Wheeler and Edward Kenneth Wheeler.

Kenneth W. Thompson, for the respondent Mariea Cooper.

John F. Carten, for the appellant/respondent Samuel H. Shanks.

Richard Sugden and Robin N. McFee, for the appellant Bradwell Henry Cunningham.

P. G. Foy and C. A. Arthurs, for the interveners.

The reasons of La Forest, L'Heureux-Dubé and McLachlin JJ. were delivered by

McLachlin J. (dissenting in part) --

Introduction

Shanks, Cunningham and Cooper were injured in separate accidents. As a result of those injuries, they each missed periods of work. Each received compensation for wages lost under a plan established pursuant to the collective agreement between their employer and their union. Shanks made no contribution to one of the plans under which his lost earnings were paid, but contributed 50 percent of the cost to a second plan. Cunningham made no contributions; his benefit was entirely underwritten by his employer, although it was administered by Aetna Insurance. Cooper contributed to both plans through deductions from her pay cheque.

Shanks, Cunningham and Cooper each brought an action in tort against the person who had caused the accident that injured them. In those actions, each of them made a claim for the full amount of wages that would have been paid to them in the time they were unable to work. They each take the position that they are entitled to recover from the tortfeasor the full amount of their lost wages without any deduction for the fact that they had already received compensation under their employment plan for at least a portion of those wages.

The defendant tortfeasors object. They take the position that the plaintiffs are entitled to recover only what they have actually lost. They say the plaintiffs should not be allowed to recover their lost wages twice and end up in a better financial position than would have been the case had the accident never occurred.

These appeals require this Court to consider the question of whether benefits received as indemnity for lost wages under wage schemes should be taken into account in calculating damages in a subsequent tort action. My colleague, Justice Cory, concludes that plaintiffs who have been indemnified for a loss should nevertheless be able to recover for the same loss from the defendant, provided there is evidence of "some type of consideration given up by the employee in return for the benefit" (p. 407). With respect, I cannot agree. In my view, a plaintiff who has been indemnified for a loss cannot claim it over again from the tortfeasor. Principle, precedent and policy all point to this conclusion, as I see it.

A. The Fundamental Principle

Full and Fair Compensation Without Double Recovery

The fundamental principle is that the plaintiff in an action for negligence is entitled to a sum of damages which will return the plaintiff to the position the plaintiff would have been in had the accident not occurred, in so far as money is capable of doing this. This goal was expressed in the early cases by the maxim restitutio in integrum. The plaintiff is entitled to full compensation and is not to be denied recovery of losses which he has sustained: Livingstone v. Rawyards Coal Co. (1880), 5 App. Cas. 25 (H.L.), at p. 39, per Lord Blackburn. It has been affirmed repeatedly by Canadian courts and once again in more recent times by the House of Lords: ". . . the basic rule is that it is the net consequential loss and expense which the court must measure": Hodgson v. Trapp, [1988] 3 W.L.R. 1281, at p. 1286. At the same time, the compensation must be fair to both the plaintiff and the defendant. In short, the ideal of the law in negligence cases is fully restorative but non-punitive damages. The ideal of compensation which is at the same time full and fair is met by awarding damages for all the plaintiff's actual losses, and no more. The watchword is restoration; what is required to restore the plaintiff to his or her pre-accident position. Double recovery is not permitted.

Cory J. and I agree on the basic principle of recovery in a tort action. As he states, it is simply to compensate the plaintiff as fully as money may do for the loss suffered as a result of the tortfeasor's negligence. The plaintiff is not, we both agree, generally entitled to double recovery (Cory J., at p. 396). However, Cory J. suggests that the case is governed by an exception to the general principles called the private insurance exception.

My colleague and I part company on the issue of whether the present case falls within the private insurance exception. Cory J. seems to assume that the benefits in question fall within the private insurance exception; the issue as he sees it is rather whether the private insurance exception should be maintained (at p. 400). I, on the other hand, do not question that the insurance exception (if indeed it is an exception) should be maintained. The questions which arise, as I see the matter, are the scope of the so-called insurance exception to the rule against double recovery, and whether employment plans such as those here at issue fall within that exception.

B. The Precedents

The fundamental principle, to repeat, is that a plaintiff is entitled to recover to the full extent of the loss, and no more. However, the law, in limited circumstances, has permitted exceptions to the rule against double recovery.

The first exception to the rule against double recovery is the case of charitable gifts. If a plaintiff is injured and his neighbour brings him a basket of groceries or donates to him a sum of money, the law will not deduct the value of the basket from the damages which the negligent defendant must pay nor require that the monetary gift be called into account. This exception reflects the concern of the courts who initiated it that people should not be discouraged from aiding those in misfortune. Arguably, it also reflects the reality that in most cases it would be more trouble than it is worth to require the courts to hear evidence and rule on the value of charitable assistance.

A second apparent exception to the rule against double recovery was introduced in 1874 by the English decision of Bradburn v. Great Western Railway Co. (1874), L.R. 10 Ex. 1. Mr. Bradburn had purchased a private accident insurance policy. He was injured in an accident. The insurance company paid him £31. Bradburn sued the railway company which had negligently caused the accident. The railway company argued that the £31 that Bradburn had received from the insurance company should be deducted from the damages payable by the railway. The court disagreed. It reasoned (per Pigott B., at p. 3) that the plaintiff

does not receive that sum of money because of the accident, but because he has made a contract providing for the contingency; an accident must occur to entitle him to it, but it is not the accident, but his contract, which is the cause of his receiving it.

This language suggests an exception of narrow scope. At very least, the case does not seem to stand for more than the fact that an insurance policy triggered by a specific event, in this case a railroad accident, need not be brought into account in assessing damages for negligence causing the accident. What Bradburn had lost seems to play no role in what he is entitled to recover; it is not his loss which entitles him to payment under the policy, but the event of the accident. While it is impossible to be sure more than one hundred years later, the words used suggest that the contract of insurance was not viewed as an indemnity contract, indemnifying the policy holder for a stipulated loss, but rather as a contract for a payment of a certain sum upon the happening of a certain event.

The distinction between indemnity and non-indemnity insurance is well-recognized in the insurance industry. The following definitions, which I adopt here, were used by the 1988 Report of Inquiry into Motor Vehicle Accident Compensation in Ontario (the Osborne Commission), at p. 429:

An indemnity payment is one which is intended to compensate the insured in whole or in part for a pecuniary loss. . . . A non-indemnity payment is a payment of a previously determined amount upon proof of a specified event, whether or not there has been pecuniary loss.

Perhaps the best example of non-indemnity insurance is that of life insurance. The beneficiary under a life-insurance policy collects a set amount upon the death of the policy holder without reference to any pecuniary loss. Pensions are also considered to be non-indemnity payments: Canadian Pacific Ltd. v. Gill, 1973 CanLII 2 (SCC), [1973] S.C.R. 654 (Canada Pension Plan benefits); Guy v. Trizec Equities Ltd., [1979] 2 S.C.R. 756 (company pension plan benefits). Subject to these exceptions and the specific wording of the policy, there is a virtual presumption in the insurance industry that indemnity is the essence of all contracts of insurance: C. Brown and J. Menezes, Insurance Law in Canada (2nd ed. 1991), at para. 1:1:7.

This distinction is critical to a discussion of collateral benefits. If the insurance money is not paid to indemnify the plaintiff for a pecuniary loss, but simply as a matter of contract on a contingency, then the plaintiff has not been compensated for any loss. He may claim his entire loss from the negligent defendant without violating the rule against double recovery. Viewed thus, Bradburn may not even represent a true exception to the compensatory principle of compensation.

This much appears uncontroversial. Controversy arises, however, when attempts are made to apply Bradburn to indemnity policies or plans which compensate the plaintiff for the very loss claimed against the tortfeasor. This is because application of Bradburn to such plans raises starkly the problem of double recovery in a context that is more significant and questionable than the exception for charitable gifts. Courts are far from unanimous on the question of whether Bradburn applies to indemnity policies and plans. Some, particularly the earlier cases, held that it does. The trend in recent years, however, has been to hold that Bradburn does not extend so far. Let us turn then to the cases.

The House of Lords leaned in favour of non-deduction in Parry v. Cleaver, [1969] 1 All E.R. 555. It held that an employment pension for disability should be treated like a private insurance policy for purposes of deduction. It reasoned that the employee must be regarded as having paid for the benefit through his labour or as having purchased it with his wages, and that it would be "unjust and unreasonable to hold that the money which he prudently spent on premiums and the benefit from it should enure to the benefit of the tortfeasor" (per Lord Reid at p. 558). It may be noted that the pension, payable on the event of disability regardless of the loss sustained, was not a benefit designed to indemnify the plaintiff against the loss which he later claimed against the tortfeasor. Like Bradburn, it was a benefit payable on a stipulated contingency, in this case, disability.

More recent decisions in England unanimously favour deductibility*. As Cory J. put it in Ratych v. Bloomer, 1990 CanLII 97 (SCC), [1990] 1 S.C.R. 940, at p. 950:

While courts in Canada and England have consistently applied the Bradburn principle with respect to private insurance proceeds, they have encountered difficulties in developing a uniform approach for dealing with collateral benefits provided by an employer to an employee.

As I stated of the British position in the same case, at p. 967:

While some benefits, like private insurance, remain non-deductible, wages or sick benefits paid during the period the plaintiff is unable to work have always been required to be brought into account in calculating the plaintiff's damages. This was affirmed by Lord Reid in obiter dicta in Parry v. Cleaver and applied by the House of Lords in Hussain v. New Taplow Paper Mills Ltd.

Hussain v. New Taplow Paper Mills Ltd., [1988] 1 All E.R. 541 (H.L.), like the appeals at bar, raised the issue of the deductibility of wage benefits paid pursuant to an employment contract. The plan was designed to indemnify the plaintiff against wage loss. It provided that during the first 13 weeks after injury, the plaintiff would receive full pay. Thereafter, he would receive 50 percent of his pre-accident earnings by way of long-term sickness benefits payable under an insurance scheme run by the defendant, which had taken out a permanent health insurance policy to insure itself against contractual liability for long-term sickness benefits to its employees. The only issue on appeal was whether the long-term benefits should be deducted; it was accepted that the trial judge correctly deducted the wage benefits for the first 13 weeks. It was argued that because of its insurance-like nature, the benefits paid under the long-term disability plan fell into the Bradburn principle as extended by Parry v. Cleaver and should not be deducted. The House of Lords accepted that the employment plan could be viewed as "a partial substitute for earnings" (p. 546). Even so, it ruled that the benefits paid under the plan must be deducted from the amount claimed for lost earnings from the tortfeasor. Lord Bridge stated at pp. 546-47:

Counsel for the plaintiff seeks to apply by analogy a principle said to be established by Parry v Cleaver in support of the argument that all payments to an employee enjoying the benefit of the defendants' permanent health insurance scheme are effectively in the nature of the fruits of insurance accruing to the benefit of the employee in consideration of the contributions he has made by his work for the defendants prior to incapacity. Much emphasis was laid on the long-term nature of the scheme payments to which the plaintiff has become entitled and it was submitted that they are strictly comparable to a disability pension. Both these arguments fall to the ground, as it seems to me, in the light of the concession rightly made at an early stage that the nature of payments under the scheme is unaffected by the duration of the incapacity which determines the period for which payments will continue to be made. The question whether the scheme payments are or are not deductible in assessing damages for loss of earnings must be answered in the same way whether, after the first 13 weeks of incapacity, the payments fall to be made for a few weeks or for the rest of an employee's working life. Looking at the payments made under the scheme by the defendants in the first weeks after the expiry of the period of 13 weeks of continuous incapacity, they seem to me indistinguishable in character from the sick pay which the employee receives during the first 13 weeks. They are payable under a term of the employee's contract by the defendants to the employee qua employee as a partial substitute for earnings and are the very antithesis of a pension, which is payable only after employment ceases. The fact that the defendants happen to have insured their liability to meet these contractual commitments as they arise cannot affect the issue in any way. [Emphasis added.]

So in England, any payments under an employment scheme which are a substitute for wages must be deducted from the plaintiff's claim for wages against the defendant. Only if the benefit is not in the nature of an indemnity for wages, but rather a true non-indemnity insurance benefit or pension, does it fall within the Bradburn principle.

Almost a year later, in Hodgson v. Trapp, supra, the House of Lords reaffirmed the fundamental and axiomatic nature of the rule requiring deduction of collateral benefits. The House of Lords further held that all state benefits, such as unemployment benefits, statutory sick pay, attendance and mobility benefits and others not specifically exempted by statute, would be deductible from an award of damages. The court emphasized that, given the compensatory nature of damages, the Bradburn exception must be narrowly applied and that any exceptions to the rule against double recovery must be clearly and demonstrably justified. Lord Bridge stated at pp. 1285-86:

. . . it cannot be emphasised too often when considering the assessment of damages for negligence that they are intended to be purely compensatory. Where the damages claimed are essentially financial in character . . . the basic rule is that it is the net consequential loss and expense which the court must measure. If, in consequence of the injuries sustained, the plaintiff has enjoyed receipts to which he would not otherwise have been entitled, prima facie, those receipts are to be set against the aggregate of the plaintiff's losses and expenses in arriving at the measure of his damages. All this is elementary and has been said over and over again. To this basic rule there are, of course, certain well established, though not always precisely defined and delineated exceptions. But the courts are, I think, sometimes in danger, in seeking to explore the rationale of the exceptions, of forgetting that they are exceptions. It is the rule which is fundamental and axiomatic and the exceptions to it which are only to be admitted on grounds which clearly justify their treatment as such. [Emphasis added.]

The position in Australia echoes that in England. The leading case of Graham v. Baker (1961), 106 C.L.R. 340 (Austl. H.C.) remains authority for the position that sick pay received by a plaintiff from his employer following a car accident will be deducted from the damages assessed against the tortfeasor. That case also decided, as did Parry v. Cleaver, that pension benefits received by the plaintiff would not be deducted.

In the United States, the original rule was that a defendant must bear the full cost of the injury he caused the plaintiff, regardless of any compensation the plaintiff receives from an independent or collateral source: The Propeller Monticello v. Mollison, 58 U.S. (17 How.) 152 (1854). However, many states have overturned this rule by statute and the majority have implemented exceptions to it.

In sum, it can be stated with confidence that, subject to the exceptions of charity and non-indemnifying personal insurance or pensions, the rule in other common law jurisdictions remains one of deductibility. Where plaintiffs have received collateral benefits with respect to wages and "wage-alikes", such as sick leave entitlement and unemployment benefits, these will be deducted from the calculation of loss. J. G. Fleming, The Law of Torts (8th ed. 1992), summarizes the position as follows (at p. 246):

In other words, they [collateral benefits] are treated not as gains which might or might not be set off against an actual loss, but (like free medical services in Britain) as preventing a loss from ever arising.

This Court joined the general trend in the common law world to deduction of collateral benefits with its decision in Ratych v. Bloomer, supra. The Court held that, "[a]s a general rule", and subject to cases where a third party was subrogated to the wage benefit, "wage benefits paid while a plaintiff is unable to work must be brought into account and deducted from the claim for lost earnings" (p. 982). It affirmed the rule against double recovery and stressed that before a claim for damages can be made, the plaintiff must demonstrate an actual loss. Accordingly, it held that a plaintiff who had received payment of wages while he was unable to work due to an accident could not claim damages for loss of earnings against the tortfeasor.

Ratych v. Bloomer might be left at this were it not for the interpretation placed on it by my colleague, which requires some response. Cory J. cites (at p. 403) the following passage (omitting the last sentence) for the proposition that Ratych holds that collateral wage benefits paid for by the plaintiff need not be deducted from a damage claim for wage loss against the tortfeasor (at p. 983):

These comments should not be taken as extending to types of collateral benefits other than lost earnings, such as insurance paid for by the plaintiff and gratuitous payments made by third parties. Those issues are not before the Court and must be left for another day. [Emphasis added.]

With the greatest respect, I cannot draw as much from this passage as does Cory J. The passage cited asserts no principle of law, but merely reserves certain cases for another day. Moreover, it excludes lost earnings from its ambit.

My colleague couples his construction of this passage with an argument that Ratych was only a case about evidence; if better proof had been adduced that the plaintiff paid for the wage benefit, it would not have been deducted. He draws this inference from the following passage of the majority reasons in Ratych (at p. 972):

I accept that if an employee can establish that he or she has suffered a loss in exchange for obtaining wages during the time he or she could not work, the employee should be compensated for that loss. Thus in Lavigne v. Doucet the New Brunswick Court of Appeal quite rightly allowed damages for loss of accumulated sick benefits. I also accept that if an employee can establish that he or she directly paid for a policy in the nature of insurance against unemployment, equivalent to a private insurance, he or she may be able to recover the benefits of that policy, although I would leave resolution of this question for another case. [Emphasis added.]

My colleague goes on to argue that this passage creates "two exceptions" (p. 404). The first, compensation for lost sick days, he agrees, creates no double recovery problem. The second exception, he says, "is an application of the insurance exception" (pp. 404-5).

Again, with respect, the words of the sentence said to create this exception amount only to reservation of the issue for another case, as the passage plainly states. No legal principle is advanced, no exception created. As for the obiter passage relied on by my colleague (at p. 405), it is confined to the situation "where a person has prudently obtained and paid for personal insurance", the classic Bradburn situation, and is expressly distinguished from cases where benefits are paid under an employment plan.

The Court of Appeal on these appeals, (1991), 1991 CanLII 1444 (BC CA), 64 B.C.L.R. (2d) 62, interpreted Ratych v. Bloomer as holding that as a general rule, and leaving aside certain insurance-like situations which were not before the Court, wage benefits paid under an employment scheme must be brought into account (per Southin J.A. at pp. 79-80). I agree with this interpretation. Ratych v. Bloomer is not merely a ruling on evidentiary sufficiency. Rather, following on the lead in other common law jurisdictions, it pronounces on the general requirement for deduction of employment wage benefits from claims for loss of wages against a tortfeasor.

We are not asked to overrule our decision in Ratych v. Bloomer. Therefore, the appellants can succeed only by establishing, first, that they fall within a situation which Ratych left for future decision and, second, that the rule in that undecided category should be in favour of non-deductibility.

On the first point, it is argued that the fact that the appellants have contributed to, or should be deemed to have contributed to, the employment plans under which the wage benefits were paid brings this appeal within the class of cases which Ratych left for future decision. The classes of case excluded from the purview of Ratych were types of collateral benefits other than lost earnings, such as non-indemnity insurance paid for by the plaintiff and "gratuitous payments made by third parties" (p. 983). This is a restatement of the exception for charitable contributions and the Bradburn rule. Later, the private insurance exception is again left for another case (at p. 972) and (at pp. 973-74) the majority affirms the distinction "between cases where a person has prudently obtained and paid for personal insurance and cases where the benefits flow from the employer/employee relationship". In the former case there may be reasons for asserting an exception, in the latter, by contrast, "there is little to be weighed in the balance against the general policy of the law against double compensation" (p. 974). In short, what Ratych left for consideration for another day were simply the long-standing exceptions of charitable contributions and private insurance in the nature of Bradburn.

It is here that we come to the heart of the difference between the parties. The appellants contend that the private insurance exception of Bradburn should be extended to employment plans to which employees have contributed, notwithstanding the language in Ratych to the contrary. They urge that we confine Ratych to its facts -- a voluntary wage continuance by the employer -- and hold that benefits to which the employee has contributed fall within Bradburn. The respondents, on the other hand, argue that the Bradburn exception applies only to personal contracts of insurance taken out by and paid for by the plaintiff, and does not extend to benefits paid under employment contracts.

Viewing the matter from the point of view of precedent, it is my considered view that the respondents' submission is the better of the two. The courts of England, the jurisdiction which has most closely considered the question of the scope of the Bradburn exception, after extending the exception to non-indemnity pensions in Parry v. Cleaver, have concluded that the better course is to confine Bradburn to true insurance or pension situations and to exclude benefits designed to indemnify the plaintiff against wage loss. In Australia and the United States, the trend has been in the same direction. In Canada, this Court has affirmed the general rule against double recovery in Ratych v. Bloomer. Simply put, all the recent cases point to deduction*. Even Parry v. Cleaver does not assist; it was a case of non-indemnity benefits, and the courts in England have themselves declined to extend it to wage benefits. In my view, the courts of Canada should not go against the weight of current authority and rule in favour of non-deduction of wage benefits unless the departure is clearly required on grounds of common sense or policy.

C. Policy

1.The Substitute Loss Argument

My colleague concludes that if the plaintiff has given consideration, or "paid for" the employment plan, he or she can recover the amount claimed twice: once from the plan and again from the tortfeasor. He argues that "[i]t would be unjust to deprive employees of the benefits which, through prudence and thrift, they have provided for themselves" (p. 404). It is suggested that the fact the plaintiff has paid something avoids the prohibition against double recovery.

In fact, contribution by the plaintiff to the plan does not have that effect. Two arguments support this; one based on logic, the other on the reality of how such plans operate.

As a matter of logic, the fact that a plaintiff may lose the benefit of having made a contribution does not affect the fact that, to the extent a loss is made good by the plan, the plaintiff in fact suffers no parallel loss recoverable against the defendant under tort principles. Tort law says the plaintiff who is prevented from working by an injury caused by the defendant's negligence may claim any lost earnings from the defendant. If the earnings have not been lost because they continued under an employment plan, then the plaintiff has suffered no loss of earnings. So logic dictates the plaintiff can recover nothing on account of lost earnings. The fact that the plaintiff has contributed to the plan does not enter into the chain of reasoning which tort principles require. And even if this contribution could somehow be considered, the amount credited to the plaintiff would at best be the cost to the plaintiff of the contribution, in many cases a sum much smaller than the claim for loss of wages. So the fact that the plaintiff has made a contribution to the plan does not avoid the problem of double recovery.

The law reflects this logic. The law has consistently refused to compensate a plaintiff because he or she took precautions which minimized the loss flowing from the negligent act. The defendant takes the plaintiff as the defendant finds the plaintiff. Sometimes this increases the damages a defendant must pay, as in the case of what the law calls the "thin skulled" plaintiff. Sometimes it decreases the damages the defendant must pay. The point is simply this: the fact that the plaintiff is more or less vulnerable and hence suffers greater or lesser damages as a consequence of the defendant's negligence will not be reflected in the actual award of damages. The plaintiff will be compensated to the full extent of the loss, and no more, regardless of the measure of the plaintiff's personal vulnerability.

Turning to the argument based on the nature of employment plans, it appears wrong as a matter of fact to suggest that contribution to a plan can be traded off against indemnification for accident-caused loss to avoid double recovery. Deduction of benefits paid by employment plans does not deprive the plaintiff of the value of his contribution to the plan. The contribution covers, after all, a wide range of circumstances which may result in an inability to work, including sickness or injury, while ensuring that income is continued. In many cases, the claim does not involve injury caused by another's negligence and there is no defendant to sue for the loss. In those cases where there is a defendant, recovery is not assured. The tortfeasor may be unknown, unavailable or judgment-proof. Where these particular problems do not arise, recovery may nevertheless be long-delayed. Each of these difficulties is attenuated by an employee benefits plan. The plaintiff enjoys the benefits provided by the plan regardless of whether deduction of plan benefits from tort claims is required or not.

Taken together, these arguments demonstrate that the "substitute loss" argument based on contribution to a plan by the plaintiff does not support the unacceptable result of double recovery by the plaintiff.

2.The Deterrence Argument

It is suggested that wage benefits paid under employment plans should not be deducted from damages for lost earnings claimed from tortfeasors because requiring the tortfeasor to pay more will increase the deterrent effect of tort actions and reduce the incidence of negligent conduct. The general deterrent effect of tort actions is not the issue here, although recent research casts doubt on its validity: see D. W. Shuman, "The Psychology of Deterrence in Tort Law" (1993), 42 Kans. L. Rev. 115. What is at issue is the additional deterrent effect, if any, gained by requiring the defendant to pay more than what the plaintiff has truly lost; by paying again for benefits already received.

This argument suggests two answers. First, it is far from clear that the difference between the damages payable without deduction of collateral benefits received from employment plans and damages payable with deduction would have any effect on negligent conduct. Large and well-publicized awards of punitive damages such as those permitted in some countries might arguably have such an effect. But it strains credulity to imagine that the prospect of paying wage benefits in a negligence action, as opposed to not paying them, will play an important role in people's decisions about the care they take in the way they drive their automobiles or carry out their work.

Second, even if some connection between non-deduction of employment benefits from damage awards and deterring negligent conduct could be established, our law has not generally gone so far as to suggest that deterrence alone is a valid basis upon which to justify increasing damages. If that were so, one might expect heavily punitive damages in many more cases. In fact, we have not chosen to follow that path.

3.The Argument that the Tortfeasor Should Bear the Loss

It is argued that, as between the prudent employee and the negligent tortfeasor, the tortfeasor should bear the loss. Or in the words of Cory J., "[i]t makes little sense for a wrongdoer to benefit from the private act of forethought and sacrifice of the plaintiff" (p. 401).

This argument rests on the assumption that there is a loss which someone must pay. A plaintiff who has been compensated for lost earnings by an employment benefits plan has suffered no loss to the extent of those benefits. It is not a question of who will bear the loss, but rather of whether there is any loss to be borne.

Nor is this a case of the tortfeasor unjustly benefiting at the plaintiff's expense. The plaintiff contributes regardless of whether the accident occurs or not. And the tortfeasor does not benefit, in any usual sense of the word; he or she pays the actual measure of the plaintiff's loss. If the fact that a plaintiff was wearing a seat belt lessens the injury which might have otherwise occurred from a defendant's negligence, we do not say that the defendant has benefited from the prudence of the plaintiff, nor do we suggest there is any unfairness in this. The measure of tort damages is what the plaintiff has lost, not what the defendant should be compelled to pay as the price of his negligence.

The fallacy behind the argument that the tortfeasor should bear the loss is the notion that the tortfeasor should be punished. That is an approach which our law has eschewed except for those special situations in which punitive damages may be awarded. Rather, the law of damages for negligence insists that damages must be fair to both the plaintiff and the defendant: Livingstone v. Rawyards Coal Co., supra; Andrews v. Grand & Toy Alberta Ltd., 1978 CanLII 1 (SCC), [1978] 2 S.C.R. 229.

4.The Social Inequity Argument

Cory J. argues (at pp. 403-4) that deduction of wage benefits from damages

. . . would create barriers that are unfair and artificial. It would mean that top management and professionals who could well afford to purchase their own insurance would have the benefit of the insurance exception, while those who made the same provision and made relatively greater financial sacrifices to provide for the disability payments through their collective bargaining agreement would be denied the benefits of the insurance exception. This would be manifestly unfair.

Cory J. calls such a distinction "socially regressive".

This point was not argued before us and the record does not appear to support the assumptions upon which it rests. The first assumption is that privately purchased wage-loss protection always falls within the Bradburn exception, and hence will not be deductible from wage claims against a tortfeasor. But if the Bradburn exception is confined, as it has been in other jurisdictions, to non-indemnity insurance or true pensions, this assumption cannot be made. As the reasoning of the House of Lords in Hussain demonstrates, who paid for the benefit is not the test; the test, rather, is whether the benefit is a replacement, or indemnity, for lost wages. If so, it amounts to an indemnification benefit and must be brought into account.

Even were that not the case, the argument further assumes that employees either cannot afford to purchase private insurance or that they make relatively greater financial sacrifices to obtain their employment plans than would those able to purchase insurance privately. It might well be, however, that employees pay relatively less than self-employed persons for their benefits. Again, many employees who benefit from plans in government or corporations earn relatively high salaries, higher than the salaries of many self-employed persons. It is not just "top management and professionals" who purchase insurance privately, and it is not true that all employees are in inferior financial positions. Is the self-employed carpenter with private insurance in a better position than a deputy minister with employment sickness and disability plans? Clearly not. In the absence of further proof, the case that deduction of wage benefits is socially regressive is not made out.

5.Subrogation

The argument that it makes sense for the tortfeasor to pay damages for wage losses already indemnified by others succeeds only if the employer or insurer who pays the wage benefit recovers the damages allocated to lost wages from the employee by way of subrogation. In this case there is no double recovery. The burden is properly placed on the tortfeasor rather than the employee or insurance company. The latter result, unlike the result of double payment to the plaintiff, is defensible economically and in justice. For this reason, Ratych v. Bloomer suggested that where subrogation is exercised, no deduction for double recovery need be made.

If subrogation were effected in each case of payment of employment benefits, it would favour a regime of non-deduction of the benefits from damage awards in tort. The plaintiff would end up with compensation for his or her net loss, and no more. However, this is not what happens in the majority of cases. Rights of subrogation appear to be exercised rarely. The Report of Inquiry into Motor Vehicle Accident Compensation in Ontario, supra, at p. 430, concluded that the collateral benefits rule in Ontario resulted in persons with collateral sources of indemnity recovering an average of 136 percent of their gross wage loss. Similarly, the Ontario Law Reform Commission, in Report on Compensation for Personal Injuries and Death (1987), stated at pp. 189-90:

. . . we are advised that disability insurers and employers generally do not exercise their rights of subrogation. Most disability and accident insurers apparently regard the cost of establishing a system of subrogation to be unwarranted in light of the benefit that would be derived and, accordingly, prefer to absorb and spread the amounts paid to the insured through their own funding structure. Employers also regard the exercise of subrogation rights to be impractical and costly, particularly where recovery would be attempted months or years after providing the benefit. They often have no effective means of monitoring the progress of the injured person's claim, or of identifying what parts of a settlement represent lost wages. Furthermore, there is a reluctance on the part of employers to exercise such a right of recovery because of its possibly detrimental impact on employee relations.

The rare exercise of the right of subrogation suggests that the best approach is a regime of deductibility of employment plan benefits, subject to the plaintiff's right to claim the benefits if it is established that they will be paid over to the subrogated third party. In that case, the plaintiff would hold the recovered monies in trust on behalf of the subrogated insurer or employer: Ratych, supra, at p. 978.

6.The Need for Certainty

What is required is a coherent, consistent rule which can be applied with certainty (J. M. Flaherty, "A Purposeful Uniform Collateral Benefits Rule" (1991), 3 C.I.L.R. 1). Each year, thousands of cases similar to those at bar arise. Failing a negotiated settlement, they fall to be decided in our courts. Lack of certainty as to when a deduction for a benefit should be made adds to the complexity of settlement negotiations and increases the number of cases which must be litigated. This in turn adds to the burden on the courts, delays resolution of the plaintiff's suit, and increases the cost to the general public. The desirability of a coherent, consistent rule which can be applied with certainty favours adhering as closely as possible to the fundamental principle of restorative, compensatory damages for actual loss suffered.

Consider the problems posed by the rule based on contribution of the employee proposed by my colleague. Cases at either end of the spectrum are clear enough. At one extreme, the proceeds of a non-indemnity insurance policy purchased by the plaintiff, such as that at issue in Bradburn, would not be deducted. At the other extreme, benefits under a scheme whereby an employer simply continues to pay the employee's wages during the time he or she is off work are fully deductible: Ratych v. Bloomer. Between these extremes, however, lie a multiplicity of different situations susceptible of categorization as deductible or non-deductible depending upon whether the judge finds, on the facts, sufficient evidence of contribution by the plaintiff to bring the benefit into the category of something which the plaintiff has paid for or "earned". This is a question on which different people may hold different views. In fact, it is often possible to see the same benefit as having been paid for by either the employee or the employer, depending on how one looks at the benefit scheme and its integration into the compensation package.

Cory J. enumerates a number of evidentiary considerations which he states may be sufficient to bring a plan within the "insurance exception". However helpful these may be, the very number of the considerations and the vagueness of their parameters underscores the difficulty of determining whether there has been a sufficient contribution to bring the case within the insurance exception. The difficulties of applying an expanded Bradburn exception are reflected even in my colleague's reasons. In applying the rule, Cory J. seems to assume that all employer contributions are to the employee's account. But in another case, evidence might well demonstrate the contrary. Courts would then be in the position of trying to determine whether the employee's contribution was sufficient to bring it within the expanded insurance exception. Moreover, the reasoning by which Cory J. arrives at the conclusion that the employee paid for the benefit in the case of Mr. Shanks, who on the evidence contributed nothing to his wage benefit plan, demonstrates the large area left to inference by the test he proposes. The "open texture" of the process is caught by phrases such as "it must be inferred from this evidence that . . ."; "[t]here must have been trade-offs made by the employees . . ."; [i]t is hard to imagine that Mr. Shanks' employer was in any different position . . ."; and finally, "[i]t would . . . be cruelly insensitive and unrealistic to think that this was not the case after such a long strike" (p. 414). Where so much must be left to inference and supposition, can litigation be far behind?

One solution to this uncertainty might be to introduce a deeming provision or a presumption that all employment benefit plans are paid for by the employee. But this poses problems of its own. How is Ratych v. Bloomer, which arguably involved a type of employment benefit scheme, to be distinguished? More fundamentally, what power has a court of review to replace the fact-finding task of the judge with presumptions or deeming provisions? The essential question -- whether the employee has contributed to the premium bringing the benefit within the Bradburn principle -- is one which would seem to lie squarely within the domain of the trial judge to decide on the evidence. But so long as this is so, the problem of uncertainty remains. The history of judicial attempts to deal with collateral benefits belies the suggestion that it is easy to decide when they should or should not be brought into account in a negligence action.

The better approach, in my view, is that adopted in England and other jurisdictions: to confine the Bradburn exception to the facts upon which it was enunciated. The proceeds of non-indemnity insurance would not be brought into account in assessing damages for negligence. Employment benefit plans, on the other hand, designed to indemnify the plaintiff for the inability to work, would be deductible from claims for lost earning capacity unless the plaintiff establishes that he or she is bringing the claim on behalf of a subrogated third party.

7.Recommendations of Those Who Have Studied the Problem

Often when courts are presented with policy arguments, they face the problem of insufficient study and expert comment on the ramifications of the choices before them. That is not the case here. There exists a wealth of research and comment on the question of whether wage benefits and the like should be deducted from damage awards for the same losses. Virtually all of it favours deduction.

In Ontario, the Report of the Osborne Commission, supra, discussed the issue of collateral benefits at some length and concluded at p. 438 that a rule premised upon non-deductibility is "wasteful in practice and cannot be justified in principle. It ought to be changed." The Commission recommended that the collateral source rule be abolished, by statute if necessary, and that collateral benefits in the nature of indemnity payments be deducted from the relevant components of an award of damages in tort.

Similarly, the Ontario Law Reform Commission in its Report on Compensation for Personal Injuries and Death, supra, also recommended that collateral benefits be taken into account with respect to a damage award for a pecuniary loss. The Ontario Law Reform Commission, in fact, went farther than the Osborne Commission and recommended, inter alia, that all indemnity payments received by the plaintiff, including ex gratia payments, be assessed. The amount of those payments would then be set aside from the damage award and held in trust for the collateral source.

It is argued that art. 1608 of the 1994 Civil Code of Québec supports non-deduction of collateral benefits (at pp. 402-3). It should, however, be noted that art. 1608 is expressly stated not to apply to subrogated claims. Since art. 2474 provides for statutory subrogation of the insurer in all cases of damage insurance, it follows that art. 1608 will apply only to damage claims where the payment is not made by way of insurance. Article 1608 is therefore of very limited application.

Academic commentators also favour a rule of deductibility. Flaherty, supra, at p. 3, has suggested a rule in the following terms:

All benefits in the nature of indemnity payments, regardless of source, are to be taken into account and deducted in the assessment of compensation to the plaintiff for pecuniary loss in tort.

He further suggests a corollary rule which ensures that the collateral source with an existing right to repayment will be able to recover from the defendant when choosing to exercise that right. Finally, for certainty, Flaherty states a third rule holding that where there is no right of repayment, the collateral benefits are still to be deducted from an award of damages for pecuniary loss.

Flaherty's position is echoed, albeit with minor variations, in articles published in the wake of the decision in Ratych by a number of other commentators: H. David, "Collateral Benefits: Ratych v. Bloomer" (1990), 12 Advocates' Q. 124; C. A. Taylor, "When is a Loss Not a Loss?: The Deductibility of Collateral Benefits after Ratych v. Bloomer" (1990), 12 Advocates' Q. 231; G. Dougans, "Collateral Benefits: Some Further Thoughts" (1991), 49 Advocate 43; H. David, "An Update on Collateral Benefits: Ratych v. Bloomer" (1992), 14 Advocates' Q. 221.

8.Summary on Policy

Considerations of policy and the views of those who have studied the problem support the deduction of wage benefits paid pursuant to employment plans from claims for lost earnings made against tortfeasors.

D. Conclusion on the Law

I conclude that principle, precedent and policy all favour the conclusion that wage benefits paid pursuant to employment plans should be deducted from damages for loss of earnings claimed against the tortfeasor, except where it is established that a right of subrogation will be exercised, thereby avoiding double recovery. The only exceptions that should be endorsed are charity and cases of non-indemnity insurance or pensions. Any benefits which indemnify the plaintiff against wage loss must be brought into account in a damage claim for that loss against a tortfeasor because, to the extent the plaintiff has been indemnified, no loss arises. On the other hand, benefits which are not in the nature of indemnification for the loss claimed against the tortfeasor need not be brought into account.

E. Application to the Facts of this Case

The benefits under the plans at issue on these appeals were paid in lieu of wages to the plaintiffs. Having been compensated for these lost wages, neither Shanks, Miller nor Cunningham can claim that they suffered a loss for those amounts. For the reasons I have suggested, the benefits should not be held to fall under any of the exceptions to the principle of compensatory damages. It follows that they must be brought into account in calculating damages.

The Court of Appeal held that notwithstanding the fact that generally the benefits must be deducted from the damages, this should not happen in the case of Shanks' long-term disability benefits because the employer was subrogated to them. It did the same in the case of Miller, even though there appears to have been no subrogation in that case. The latter conclusion appears to have been in error. I would dismiss the appeals except in the Miller action, where the appeal should be allowed.

Like Cory J., I would make no deduction of the amount of income tax which would have been owing on wages, and dismiss the cross-appeal.

The judgment of Sopinka, Cory, Iacobucci and Major JJ. was delivered by

Cory J. -- These three appeals were heard together. They raise the following questions. First, should payments received by a plaintiff pursuant to a private policy of insurance be deducted from the amount recovered for loss of wages? Second, if private policies of insurance are to be exempt from deduction, then should disability benefits negotiated under a collective agreement also be exempted from deduction? Third, if disability benefits provided by a collective agreement are to be exempt from deduction, what proof is required of the payment for the benefits by the plaintiff employee? Fourth, should there be a reduction in the amount paid for loss of wages equivalent to the amount of income tax which would have been payable on those wages?

I. Cunningham v. Wheeler

Factual Background

Some confusion may arise from the designation of the parties as appellants or respondents. I will therefore refer to those seeking to recover lost wages without deduction of their insurance or disability benefits as the plaintiffs, and those arguing for deduction as the defendants.

On November 14, 1988, the plaintiff Bradwell Cunningham was injured when he was struck by a car while he was walking across a road. At the time he was 46 years old and had been employed by B.C. Rail, for about 25 years. He was in hospital for 9 days and off work for almost 20 weeks. During this period, pursuant to the provisions of a collective bargaining agreement, he collected disability benefits which amounted to $5,327.15.

No deductions were made from his pay for the disability benefits. However, there was evidence accepted by the trial judge which demonstrated that collateral benefits formed an important aspect of the negotiations between the company and its various unions. A union representative and the company vice-president of human resources explained that if the indemnity coverage was increased, there would be a proportionate decrease in either the hourly wages or the other collateral benefits paid to the employees. Put another way, it was said that under the collective bargaining agreement the employees were entitled to receive an hourly wage package. That package was made up of an hourly rate of pay together with the collateral benefits. If the disability benefits were to be abandoned, then the hourly wage rate would be proportionately higher. The company held the funds for the disability payments and turned them over to the Aetna Group Canada for management. Mr. Cunningham was not required to repay the weekly disability benefits he recovered from the defendants either to B.C. Rail or to Aetna Group Canada.

Decision at Trial

The trial judge found that the evidence established the disability benefits paid to Cunningham were directly paid for by him. He noted that any increase in the disability benefits would result in a proportionate decrease in the hourly wage rate or other benefits.

He considered the decision of this Court in Ratych v. Bloomer, 1990 CanLII 97 (SCC), [1990] 1 S.C.R. 940. He concluded that the plaintiff Cunningham had established that the indemnity benefits were paid for by him as part of his wage package. He therefore determined that the weekly disability payments should not be deducted in calculating the amount payable by the defendants for the wages lost by the plaintiff as a result of his injuries.

The Court of Appeal

The Court of Appeal ((1991), 1991 CanLII 1444 (BC CA), 64 B.C.L.R. (2d) 62) determined that since there was no subrogation right in the employer, and the direct funding for the disability benefits came from the employer, the plan was not in the nature of a private insurance policy. As a result the court held that the funds received should be deducted from the damage award. The position was put this way (at p. 81):

It is quite true, as was pointed out, by Mr. Justice Anderson in his judgment in Cunningham v. Wheeler, that there are trade-offs in wage negotiations and, in the case of B.C. Rail, it might well be willing to raise the wages of its employees if the disability plan was abandoned.

But I have no reason to think that the Peel Regional Board of Commissioners of Police did not look at the costs of paying the salaries of injured policemen as part of the wage cost to the Board. The right of Constable Ratych against the Board was of no different order than the right of Mr. Cunningham against B.C. Rail.

The Private Insurance Policy -- Its History of Exemption From Deduction and Its Present Status

For over 119 years, the courts of England and Canada have held that payments received for loss of wages pursuant to a private policy of insurance should not be deducted from the lost wages claim of a plaintiff. The first question to be considered is whether the rationale for this exemption persists. In my view there are convincing reasons both for the existence of the policy and for its continuation.

At the outset, it may be well to state once again the principle of recovery in an action for tort. Simply, it is to compensate the injured party as completely as possible for the loss suffered as a result of the negligent action or inaction of the defendant. However, the plaintiff is not entitled to a double recovery for any loss arising from the injury. How then has the insurance exception arisen? It was first formally recognized in Bradburn v. Great Western Rail Co., [1874-80] All E.R. Rep. 195 (Ex. Div.). In that case the plaintiff had been injured as a result of the negligence of the defendant railway company. The plaintiff had received a sum of money from a private insurer to compensate him for lost income as a result of the accident. It was held that the plaintiff was entitled to full damages from the defendant as well as the payment from the insurer. That is to say, there was to be no deduction of the insurance proceeds received from his recovery from the defendant. This result was explained by stating that there would be no justice in setting off an amount to which the plaintiff had entitled himself under a contract of insurance such as any prudent man would make. The justification for the rule is explained in these words at p. 197 in the reasons of Pigott B.:

. . . I think that there would be no justice or principle in setting off an amount which the plaintiff has entitled himself to under a contract of insurance, such as any prudent man would make on the principle of, as the expression is, "laying by for a rainy day." He pays the premiums upon a contract which, if he meets with an accident, entitles him to receive a sum of money. It is not because he meets with the accident, but because he made a contract with, and paid premiums to, the insurance company, for that express purpose, that he gets the money from them. It is true that there must be the element of accident in order to entitle him to the money; but it is under and by reason of his contract with the insurance company, that he gets the amount; and I think that it ought not, upon any principle of justice, to be deducted from the amount of the damages proved to have been sustained by him through the negligence of the defendants.

The decision of the court in that case was founded on the ground that the accident was not the causa causans of the receipt of the insurance benefits, but merely a causa sine qua non.

Later the basis for the exemption was shifted from the causal reason set out in Bradburn to one based on the fact that the plaintiff had paid for the insurance benefit and that benefit thus paid for should not enure to the benefit of the defendant. This was the approach adopted by Asquith L.J. for the Court of Appeal in Shearman v. Folland, [1950] 1 All E.R. 976, at p. 978:

What in a given case is, and what is not, "collateral"? Insurance affords the classic example of something which is treated in law as collateral. Where X is insured by Y against injury which comes to be wrongly inflicted on him by Z, Z cannot set up in mitigation or extinction of his own liability X's right to be recouped by Y or the fact that X has been recouped by Y: Bradburn v. Great Western Ry. Co. [supra] and Simpson v. Thomson [(1877), 3 App. Cas. 279; 38 L.T. 1; 29 Digest 290, 2355]. There are special reasons for this. If the wrongdoer were entitled to set-off what the plaintiff was entitled to recoup or had recouped under his policy, he would, in effect, be depriving the plaintiff of all benefit from the premiums paid by the latter and appropriating that benefit to himself.

This reasoning was adopted by the House of Lords in Parry v. Cleaver, infra.

The English courts have in some cases narrowly interpreted the non-deductibility rule, but the application of the Bradburn rule to private insurance has never been questioned. In Browning v. War Office, [1962] 3 All E.R. 1089 (C.A.), the majority of the Court of Appeal held that the plaintiff's disability pension should be deducted in assessing his damages for lost earnings. However, both Lord Denning, M.R. and Diplock L.J. cited the Bradburn rule as an exception to the principle that a plaintiff should be compensated for his or her full loss, but no more.

In Parry v. Cleaver, [1969] 1 All E.R. 555, the majority of the House of Lords reversed Browning and held that a police officer's disability pension should not be taken into account in assessing his damages for loss of income. Their reasons affirmed the importance of the Bradburn rule, and justified it in terms of fairness. Lord Reid stated at p. 558:

As regards moneys coming to the plaintiff under a contract of insurance, I think that the real and substantial reason for disregarding them is that the plaintiff has bought them and that it would be unjust and unreasonable to hold that the money which he prudently spent on premiums and the benefit from it should enure to the benefit of the tortfeasor. Here again I think that the explanation that this is too remote is artificial and unreal. Why should the plaintiff be left worse off than if he had never insured?

Lord Pearce stated at pp. 575-76:

One must, I think, start with the firm basis that Bradburn v. Great Western Ry. Co. was rightly decided and that the benefits from a private insurance by the plaintiff are not to be taken in account.

The Australian cases have accepted Bradburn's case as correct. So, too, the Canadian cases. It has never been criticised in our courts. It accords with the view of the American Restatement. And counsel for the respondent has not assailed it here.

One may put the justification of Bradburn's case on various grounds. Pigott, B., in deciding it said:

". . . there would be no justice or principle in setting off an amount which the plaintiff has entitled himself to under a contract of insurance, such as any prudent man would make on the principle of, as the expression is `laying by for a rainy day' ... It is true that there must be the element of accident in order to entitle him to the money; but it is under and by reason of his contract with the insurance company, that he gets the amount; and I think it ought not, upon any principle of justice, to be deducted from the amount of the damages proved to have been sustained by him through the negligence of the defendants."

In Shearman v. Folland the court in a judgment given by Asquith, L.J., in discussing what benefits were merely "collateral" said of Bradburn's case:

"If the wrongdoer were entitled to set-off what the plaintiff was entitled to recoup or had recouped under his policy, he would, in effect, be depriving the plaintiff of all benefit from the premiums paid by the latter and appropriating that benefit to himself."

In Hussain v. New Taplow Paper Mills Ltd., [1988] 1 All E.R. 541, the House of Lords once again affirmed the importance of the Bradburn rule. At pages 544-45 Lord Bridge stated:

. . . where a plaintiff recovers under an insurance policy for which he has paid the premiums, the insurance moneys are not deductible from damages payable by the tortfeasor. . . .

The Bradburn rule has been consistently applied by Canadian courts. It has been affirmed by appellate courts in Saskatchewan (Tubb v. Lief, 1932 CanLII 229 (SK CA), [1932] 3 W.W.R. 245 (Sask. C.A.), Dawson v. Sawatzky, 1945 CanLII 185 (SK CA), [1946] 1 W.W.R. 33 (Sask. C.A.)), New Brunswick (Bourgeois v. Tzrop (1957), 1957 CanLII 339 (NB CA), 9 D.L.R. (2d) 214 (N.B.S.C.A.D.)), Ontario (Boarelli v. Flannigan, 1973 CanLII 690 (ON CA), [1973] 3 O.R. 69 (C.A.)), and British Columbia (Chan v. Butcher, 1984 CanLII 536 (BC CA), [1984] 4 W.W.R. 363 (B.C.C.A.)). In Canadian Pacific Ltd. v. Gill, 1973 CanLII 2 (SCC), [1973] S.C.R. 654, at pp. 667-68, and in Guy v. Trizec Equities Ltd., 1979 CanLII 232 (SCC), [1979] 2 S.C.R. 756, at pp. 762-63, this Court affirmed the principle first set out in Bradburn's case and adopted in Parry v. Cleaver that the proceeds of insurance should not be deducted from a plaintiff's damages.

I think the exemption for the private policy of insurance should be maintained. It has a long history. It is understood and accepted. There has never been any confusion as to when it should be applied. More importantly it is based on fairness. All who insure themselves for disability benefits are displaying wisdom and forethought in making provision for the continuation of some income in case of disabling injury or illness. The acquisition of the policy has social benefits for those insured, their dependants and indeed their community. It represents forbearance and self-denial on the part of the purchaser of the policy to provide for contingencies. The individual may never make a claim on the policy and the premiums paid may be a total loss. Yet the policy provides security.

Recovery in tort is dependent on the plaintiff establishing injury and loss resulting from an act of misfeasance or nonfeasance on the part of the defendant, the tortfeasor. I can see no reason why a tortfeasor should benefit from the sacrifices made by a plaintiff in obtaining an insurance policy to provide for lost wages. Tort recovery is based on some wrongdoing. It makes little sense for a wrongdoer to benefit from the private act of forethought and sacrifice of the plaintiff.

There is a good reason why the courts should be slow to change a carefully considered long-standing policy that no deductions should be made for insurance monies paid for lost wages. If any action is to be taken, it should be by legislatures. It is significant that in general no such action has been taken.

Although in Ontario the non-deductibility principle was abandoned in relation to motor vehicle accidents when a no-fault motor vehicle insurance regime was enacted, the general rule in other tort litigation of non-deductibility has not been altered: s. 267 of the Insurance Act, R.S.O. 1990, c. I.8. It is significant that this was done in the context of creating a new system for compensating victims of motor vehicle accidents, largely outside traditional tort law. The non-deductibility rule in respect to tort damages has not been altered in any of the other provinces. Even more significantly, the Quebec legislators, after careful consideration of the advantages and disadvantages, specifically provided that there was to be no deductibility. The provision of the Civil Code of Québec and the Attorney General's commentaries are instructive. They are as follows:

Article 1608

The obligation of the debtor to pay damages to the creditor is neither reduced nor altered by the fact that the creditor receives a prestation from a third person, as a result of the injury he has sustained, except so far as the third person is subrogated to the rights of the creditor.

Commentary on Article 1608

[translation] This article adopts, with a few changes and making its application more general, the rule regarding insurance contracts stated in art. 2494 C.C.L.C.

It is intended to resolve the question of whether the obligation on a debtor to compensate can be reduced or altered by payments made to the creditor by a third party, whether those payments are gratuitous or for consideration. This would be the case if, for example, without being required to do so, the creditor's employer continued to pay him his salary while he was unable to work; it would also be the case if the creditor's insurer paid him, in his capacity as an insured, the proceeds of an insurance policy he had taken out.

Giving a negative answer to this question may sometimes result in giving the creditor double compensation ‑‑ what he receives from the third party and what he is paid by the debtor ‑‑ and so conferring an enrichment on him; such an answer may also seem contrary to the principle of compensation for injury, since in some cases the injury may no longer exist as the third party may have already given compensation for it.

On the other hand, an affirmative answer seems contrary to the preventive function of the obligation to compensate, and may also lead to the somewhat disturbing result of relieving the debtor of any obligation to compensate solely as the result of the good will of a third party or the creditor's foresight in protecting himself at his own expense against the possibility of the injury.

The article comes down in favour of a negative answer to this question of whether the debtor's obligation to compensate may be reduced or altered by payments the creditor receives from a third party; but so as to avoid the principal cases in which double compensation would result, it expressly excludes situations where the third party is legally or by agreement subrogated to the creditor's rights.

This is the solution which seems fairest in the circumstances, especially as most of the payments made by third parties ‑‑ social security indemnities, insurance payments or payments resulting from collective labour agreements ‑‑ are not really in the nature of an indemnity and in any case are not meant to compensate for the injury sustained by the creditor.

Should the Insurance Exception Apply in the Situation Where Disability Benefits Are Obtained Not Privately But Pursuant to a Collective Bargaining Agreement?

The Court of Appeal refused to exempt the disability payments received by the plaintiff because they were obtained as a result of a collective bargaining agreement, rather than by way of a direct deduction from his pay. That, I think, is too narrow an exception. They were bargained for and obtained as a result of a reduction in the hourly rate of pay. These benefits were therefore obtained and paid for by the plaintiff just as much as if he had bought and privately paid for a policy of disability insurance.

The scheme in this case can qualify as an insurance exception on the basis of the reasons of the majority in Ratych v. Bloomer, supra. In that case, McLachlin J. writing for the majority specifically limited her comments to benefits which were not in the nature of insurance or gratuitous payments in these words (at p. 983):

These comments should not be taken as extending to types of collateral benefits other than lost earnings, such as insurance paid for by the plaintiff and gratuitous payments made by third parties.

To say that the exception applies only to private insurance, where actual premiums are paid to the insurance company, would create barriers that are unfair and artificial. It would mean that top management and professionals who could well afford to purchase their own insurance would have the benefit of the insurance exception, while those who made the same provision and made relatively greater financial sacrifices to provide for the disability payments through their collective bargaining agreement would be denied the benefits of the insurance exception. This would be manifestly unfair. There is no basis for such a socially regressive distinction.

Union representation and collective bargaining are recognized as a means for working people to protect their interests. The benefits for which employees have bargained in good faith should not be sacrificed simply because the mode of payment for the disability benefit is different from that in private insurance contracts. Where evidence is adduced that an employee-plaintiff has paid in some manner for his or her benefits under a collective agreement or contract of employment, the insurance exception should apply. It would be unjust to deprive employees of the benefits which, through prudence and thrift, they have provided for themselves.

On the facts of Ratych v. Bloomer McLachlin J. found that it could not be established that the plaintiff in that case had paid for the benefits at issue, thus making them in the nature of private insurance. However, she held that if there were evidence that the plaintiff had paid for the benefits, they might not be deductible. At page 972, she stated:

I accept that if an employee can establish that he or she has suffered a loss in exchange for obtaining wages during the time he or she could not work, the employee should be compensated for that loss. Thus in Lavigne v. Doucet the New Brunswick Court of Appeal quite rightly allowed damages for loss of accumulated sick benefits. I also accept that if an employee can establish that he or she directly paid for a policy in the nature of insurance against unemployment, equivalent to a private insurance, he or she may be able to recover the benefits of that policy, although I would leave resolution of this question for another case.

These are two different exceptions. The first has nothing to do with the insurance exception, but covers a situation where although the employee continues to receive a salary while off work, he or she has to give up something else to receive it. An example of such a loss, provided by McLachlin J., is sick leave. The employee continues to receive wages, but gives up sick days, which he or she could have used at some other time. In such a situation the insurance exception does not arise, because there is in fact no double compensation problem. The employee who uses up his sick leave to get wages while he or she is off work loses the sick benefits, and so should be compensated for them. Or alternatively, the employee could decide not to use his or her sick days, and not get paid. There is also a loss in such a case.

The second exception McLachlin describes is an application of the insurance exception. However, she held that proof was required that the employee had paid for the benefit in some way to make it akin to private insurance.

McLachlin J., although recognizing the rule for personal insurance, questioned whether, aside from the evidentiary requirement, there was some substantive reason for there to be deductibility in cases where the benefits arise out of a contract of employment. At pages 973-74 she wrote:

The foregoing comments rest primarily on evidentiary considerations. Approaching the problem from a substantive point of view, it may be that there is a valid distinction between cases where a person has prudently obtained and paid for personal insurance and cases where the benefits flow from the employer/employee relationship. The law has long recognized that in the first situation an exception should be made to the usual rule against double recovery. The existence of such an exception does not mean it should be extended to situations where personal prudence and deprivation are not demonstrated. In the latter case there is little to be weighed in the balance against the general policy of the law against double compensation.

The substantive concern is, I think, inextricably linked with the evidentiary requirement. Once the evidentiary requirement is met, the substantive concern for personal prudence and deprivation will also be satisfied. If the plaintiff can show that he or she has paid for the benefits in the nature of insurance against unemployment akin to private insurance, that same proof will also demonstrate personal prudence and deprivation. Indeed such a deprivation for an employee will often be proportionately very much higher than that of the executive or professional person acquiring personal insurance.

In my view Ratych v. Bloomer, supra, simply placed an evidentiary burden upon plaintiffs to establish that they had paid for the provision of disability benefits. I think the manner of payment may be found, for example, in evidence pertaining to the provisions of a collective bargaining agreement just as clearly as in a direct payroll deduction.

Further, the presence or absence of a third party carrier for the insurance will not affect the non-deductibility of the benefits from the wage claim. A requirement of a third-party carrier as a necessary condition for non-deductibility was considered, and in my view properly rejected, by the House of Lords in Parry v. Cleaver. At page 558, Lord Reid asks and answers this question:

Then I ask ‑- why should it make any difference that he insured by arrangement with his employer rather than with an insurance company? In the course of the argument the distinction came down to be as narrow as this: if the employer says nothing or merely advises the man to insure and he does so, then the insurance money will not be deductible; but if the employer makes it a term of the contract of employment that he shall insure himself and he does so, then the insurance money will be deductible. There must be something wrong with an argument which drives us to so unreasonable a conclusion.

It is often more economical for large corporations to self-insure than to purchase insurance from a third party carrier. Risk can be spread among the employees, who are the policy-holders of the self-insurance. The law should not discourage the efficiencies of self‑insurance within large corporations or government agencies.

What Proof is Required to Establish Payment for the Disability Benefits by the Plaintiff? In Other Words, What Proof is Necessary to Establish the Insurance Policy Nature of the Disability Benefits?

In Ratych v. Bloomer, there was no evidence put forward that the plaintiff had paid for the disability benefits. What type of proof will be required to show that the benefits are in the nature of insurance? It is my opinion that what is required by the Ratych decision is that there be evidence adduced of some type of consideration given up by the employee in return for the benefit. The method or means of payment of the consideration is not determinative. Evidence of a contribution to the plan by the employee, whether paid for directly or by a reduced hourly wage reflected in a collective bargaining agreement, will be sufficient.

Generally speaking, any of the following examples, by no means an exhaustive list, provide the sort of evidence that could well be sufficient to establish that the employee paid for the benefit:

(1) Evidence that there were trade-offs in the collective bargaining process, which demonstrate that the employee has forgone higher wages or other benefits in return for the disability benefits. In such a case, the employee has paid for the benefits through wages foregone.

(2) Evidence of some money foregone by the employee in return for the benefits. For example if the employees gave up the return of a percentage of their Unemployment Insurance Plan premiums in return for the benefits.

(3) Evidence of a direct contribution by the employee, in a form such as payroll deductions, in return for the benefits. Such a contribution need not be 100 percent of the premium.

(4) Evidence of payments by the employer for the benefits made on behalf of the employee which shows that those payments were part of the employee's wages, and thus the employee provided work for the employer in order to have the premium paid. For example, if the employer's contribution is listed on the employee's pay slip or statement of benefits, it can reasonably be inferred that the contribution is part of the employee's wage package.

The application of the insurance exception to benefits received under a contract of employment should not be limited to cases where the plaintiff is a member of a union and bargains collectively. Benefits received under the employment contracts of non-unionized employees will also be non-deductible if proof is provided of payment in some manner by the employee for the benefits. Although there may not be evidence of negotiations for the wage/benefits package which makes up the employee's remuneration, evidence that the employer takes the cost of benefits into account in determining wages would adequately establish that the employee contributed by way of a trade-off against higher wages. Clearly, if the non-union employee contributed to the plan by means of payroll deductions, that would prove the employee's contribution. Again, these suggested methods of proof are not an exhaustive list.

In this appeal, there is evidence that the plaintiff paid for the benefits pursuant to his collective agreements through the trade-off of a reduced hourly wage rate. For this reason, this case is distinguishable from Ratych v. Bloomer, since there is evidence to bring him within the insurance exception.

Disposition of the Cunningham Appeal

In the result, the collateral benefits obtained by Cunningham as a result of his collective bargaining agreement are in the nature of a private policy of insurance. The benefits obtained under the collective agreement, like those obtained under a private policy of insurance, should not be deducted from the claim for lost wages. The order of the Court of Appeal should be amended accordingly. The plaintiff should have his costs throughout.

II. Miller v. Cooper

Factual Background

On September 4, 1987 Mariea Cooper was injured in a motor vehicle accident. At that time she had been employed for nine years by MacMillan Bloedel in its Port Alberni Pulp Mill. After the accident she attempted unsuccessfully to return to work. At the time of the trial, three years after the accident, she was still totally disabled. The trial judge found that she would continue to be so for a further one and one-half years.

Mrs. Cooper as a member of a union was a party to a collective bargaining agreement. That agreement provided both long‑term and short‑term disability plans. Her share of the cost of each of these plans was 30 percent, paid by means of deductions from her pay, set out in her pay slips. The employer paid the balance.

Before trial, Mrs. Cooper received $26,102.86 in short-term disability benefits, and was entitled to further sums post-trial if her disability continued. The plaintiff was not obligated to repay the short‑term disability benefits, either to MacMillan Bloedel or the insurance carrier Crown Life Insurance Company.

Judgment at Trial and on Appeal

The trial judge considered Ratych v. Bloomer and decided that the disability provisions were paid for in part by the employee and in part by the employer pursuant to the collective bargaining agreement. He determined that the company deducted its costs of the disability benefits from the hourly wage paid to the employees. It was his opinion that even though there was no subrogation provision, as a result of the payment by the plaintiff of 30 percent of the premium cost of the insurance she came within the category of those who had bought insurance. As a result, he concluded that her benefits should not be deducted from her recovery for lost wages.

The Court of Appeal as well concluded that in light of the payments made by the plaintiff, the disability benefit provisions were in the nature of a private contract of insurance and should not be deducted from her recovery for loss of wages.

Analysis

It is clear that the disability benefits were in the nature of an insurance policy. As such they should not be deducted from the lost wages recovered from the defendant.

The evidence put forward in this case demonstrates, in my view, the wisdom of the policy of non-deductibility of disability payments such as these. The plaintiff paid 30 percent of the costs of the benefits, while the employer paid 70 percent. Yet the evidence given by a union representative and a negotiator for the pulp and paper companies established that the employer negotiated the entire contract on the basis of the cost per hour per employee. Whatever sums the employer contributed to fringe benefits such as the disability payments were deducted from the total hourly wage that would otherwise have been paid to the employee. Thus the entire cost of the benefits was in fact paid by the employee. It is interesting to consider the amounts paid by the employee during the course of her 11 years of employment up to the time of trial. With regard to the long-term benefits, the collective agreement provided that the employer would retain the employee's 5/12th share of the reduction in premiums which resulted from the provision of the long-term disability benefits. Thus the employee paid for the long‑term disability benefits by way of foregoing the return of the unemployment insurance premium as well as the 30 percent payroll deduction.

All of the employer's share of payments for the plan was in essence deducted from the hourly wages that would otherwise have been paid to the plaintiff. Specifically the employer paid $840 per year towards the short-term benefits. That, coupled with the annual deductions of $360 from the employee for the short‑term benefits, amounted to the sum of $1,200 per year. For the long-term payments, the employer paid approximately $727 per year which, coupled with the employee's payment of $311, amounted to a total of $1,038 per year. The total cost of the short‑ and long‑term disability insurance to Mrs. Cooper was over $2,200 per year. Clearly, there was a considerable amount paid by her for this insurance. The disability benefits represented a significant portion of her annual wages and represented a very real self-denial. The cost to her of this form of insurance would be considerably higher proportionally than would the cost of premiums for private insurance paid by a company executive or professional person. Her sacrifice was correspondingly greater.

Socially, these disability payments represented a significant safeguard for her. They meant that she could live and remain independent without resort to social assistance. Nor should it be forgotten that the insurance itself represents a gamble for the insured person. It might well be that Mrs. Cooper could have worked her entire career without any disabling injury and retired without ever having resorted to disability payments. It follows that for the reasons expressed in the Cunningham appeal there should not be any deduction from any recovery for lost wages. If it could be said to be double recovery, it constitutes a very small reward for the self-denial which the heavy cost of premiums represents for the individual assured. There is a benefit received by society resulting from the purchase of these disability benefits by the plaintiff. The long history of the non-deductibility of the proceeds of private insurance should be maintained for all disability insurance paid for by the plaintiff.

III. Shanks v. McNee

Factual Background

As a result of injuries received in a motor vehicle accident on February 13, 1988, Samuel Shanks was unable to return to work for a period of approximately two years.

At the time of the accident, Mr. Shanks had been employed as a first aid attendant by Canadian Pacific Forest Products for some two years. He was a member of a bargaining unit represented by the International Woodworkers of America. By the terms of his collective agreement, Mr. Shanks was a member of both a short‑term and a long‑term disability plan. From 1986 to 1988, the long‑term plan was funded 70 percent by the employer and 30 percent by the employee through payroll deductions. In the 1988 through 1991 collective agreement the percentages were changed to 50 percent paid by the employer and 50 percent paid by the employee. The disability plans were underwritten by an outside carrier.

There was no payroll deduction for the short‑term disability plan. However the collective agreement provided that if the short‑term disability plan met "the standard requirements for full premium reduction for `wage loss replacement plan under the Unemployment Insurance Act'" the employee's 5/12th share of the Unemployment Insurance Plan premium reduction was to be retained by the employer as payment for the short‑term indemnity plan. The evidence indicated that the short‑term indemnity plan did meet those requirements and that the employer kept the premiums which would otherwise have been returned to the employee.

There was a subrogation clause in the long-term disability plan, and Mr. Shanks testified that it was his understanding that he was required to repay any of the sums he had received under the long‑term disability plan if they were recovered from the defendants. There was no subrogation clause in the short-term disability plan, and Mr. Shanks testified that he was not required to repay any sums he received under the short‑term disability plan. Mr. Shanks received $24,408 under the short-term disability plan and $9,317.56 under the long‑term plan. At trial he was awarded a total of $73,459 for lost wages. No deduction was made for his disability benefits.

Trial Judgment

The trial judge found that the disability payments were in the nature of insurance paid for by the employee. As a result of this finding, he did not deduct the benefits received from the wages lost which were to be recovered from the defendants. He further held that there was to be no deduction from the lost wages for the income tax which would have been paid on the lost wages if the plaintiff had received them while he was working. He concluded that the case law was clear that such deduction should not be made.

The Court of Appeal

In the Court of Appeal, it was decided that since the employees contributed 30 percent of the cost of the premiums of the long‑term disability plan, those benefits were in the nature of insurance paid for by the employee and should not be deducted. However, the court concluded that since there was no direct contribution made by the employee to the short‑term disability plan, and there was no subrogation clause pertaining to these benefits, they were not in the nature of insurance and should be deducted.

On the issue of a deduction for the income tax, it was held that although such a deduction was logical, in light of the decisions of this Court, it should not be made.

Analysis

The Nature of the Benefits

There can be no question that the long‑term disability benefits were in the nature of an insurance paid for by the employee and should not have been deducted. Contrary to the decision of the Court of Appeal, I am of the view that the short-term benefits were also in the nature of insurance and should not have been deducted.

It is true that in the Shanks case, no evidence was called as to the collective bargaining process whereby the hourly wage rate was reduced in exchange for the provision of the collateral benefits such as these. However, Mr. Cy Pederson, the president of the union local, testified that the 1986 contract containing the short‑term disability plan was arrived at after a four and one-half month strike. These benefits were confirmed in the 1988 agreement. In my view it must be inferred from this evidence that the collective bargaining agreement could only have been reached after a lengthy and difficult bargaining process. There must have been trade-offs made by the employees in return for the collateral benefits which were received. It is hard to imagine that Mr. Shanks' employer was in any different position from B.C. Rail, the employer of the plaintiff Cunningham. That is to say, the collective agreement must have been based upon a total wage package for the employees. That wage package could either reflect higher hourly wages or lower hourly wages and increased collateral benefits. It would, I think, be cruelly insensitive and unrealistic to think that this was not the case after such a long strike.

In any event, there is evidence of a direct contribution by the plaintiff to both the long‑term and the short‑term benefits in this case. There was a payroll deduction made for the employee's contribution to the long‑term disability plan. The employee agreed to give up to the employer the return of the Unemployment Insurance premiums for the short‑term disability plan. There is thus evidence of an employee contribution to both plans which is sufficient to bring them into the insurance exception. The evidence in this case establishes that both disability plans meet the evidentiary requirements of Ratych v. Bloomer, supra. As an aside, it is interesting to note that the plaintiff testified that he had thought about purchasing private disability insurance, but felt that there was no need to do so, since he was covered under the collective agreement.

In my view, when employees choose to negotiate through their union representatives for benefits in the nature of insurance, and it is proven that they paid for those benefits in some manner, then they have demonstrated the same personal choice as to the expenditure of their funds, the same forbearance, sacrifice, prudence and thrift which is the mark of the purchase of a private policy of insurance and the basis for the Bradburn rule. Where the evidence demonstrates that the plaintiff paid for the wage indemnity or disability benefits, either monetarily by payroll deductions, or indirectly, through trade-offs such as lower wages, then the wage indemnity/disability benefits received should not be deductible. It follows that in this case no deductions should have been made for either the short-term or the long‑term disability plan.

Subrogation

Generally, subrogation has no relevance in a consideration of the deductibility of the disability benefits if they are found to be in the nature of insurance. However, if the benefits are not "insurance" then the issue of subrogation will be determinative. If the benefits are not shown to fall within the insurance exception, then they must be deducted from the wage claim that is recovered. However, if the third party who paid the benefits has a right of subrogation then there should not be any deduction. It does not matter whether the right of subrogation is exercised or not. The exercise of the right is a matter that rests solely between the plaintiff and the third party. The failure to exercise the right cannot in any way affect the defendant's liability for damages. However, different considerations might well apply in a situation where the third party has formally released its subrogation right.

Should There Be a Deduction for Income Tax

The defendants McNee argue that as a result of damage awards for lost income not being taxable the plaintiff Shanks is overcompensated. They contend that had the plaintiff not been injured, he would have paid tax on the income he would have earned. As a result of the injury, the plaintiff receives damages to replace the income, but the damages, unlike the income, are not taxable: Cirella v. The Queen, 1977 CanLII 3011 (FC), [1978] 2 F.C. 195 (T.D.); V. Krishna, The Fundamentals of Canadian Income Tax (4th ed. 1993), at pp. 315-16. The defendants therefore argue that a deduction should be made in assessing damages for lost income to reflect tax which would have been payable on the income, had the plaintiff not been injured.

In Canada, the cases have consistently held that damage awards should be calculated without taking into account taxes that would have been paid if the sum awarded had been received by the plaintiff in the form of income: The Queen v. Jennings, 1966 CanLII 11 (SCC), [1966] S.C.R. 532; Andrews v. Grand & Toy Alberta Ltd., 1978 CanLII 1 (SCC), [1978] 2 S.C.R. 229; Guy v. Trizec Equities Ltd., supra; Watkins v. Olafson, 1989 CanLII 36 (SCC), [1989] 2 S.C.R. 750. In contrast, tax is taken into account in England and Australia: British Transport Commission v. Gourley, [1956] A.C. 185; National Insurance Co. of New Zealand v. Espagne (1961), 105 C.L.R. 569 (Austl. H.C.); O'Brien v. McKean (1968), 118 C.L.R. 540 (Austl. H.C.). The position in the United States varies from state to state.

In The Queen v. Jennings, supra, Judson J., writing for the Court on this issue, held that income tax should not be taken into account in assessing damages for lost income. In doing so he expressly rejected the principle stated by the House of Lords in British Transport Commission v. Gourley. In the course of his reasons, Judson J. observed at pp. 545-46:

To assess another uncertainty ‑- the incidence of income tax over the balance of the working life of a plaintiff ‑- and then deduct the figure reached from an award is, in my opinion, an undue preference for the case of the defendant or his insurance company. The plaintiff has been deprived of his capacity to earn income. It is the value of that capital asset which has to be assessed. In making that determination it is proper and necessary to estimate the future income earning capacity of the plaintiff, that is, his ability to produce dollar income, if he had not been injured. This estimate must be made in relation to his net income, account being taken of expenditures necessary to earn the income. But income tax is not an element of cost in earning income. It is a disposition of a portion of the earned income required by law. Consequently, the fact that the plaintiff would have been subject to tax on future income, had he been able to earn it, and that he is not required to pay tax upon the award of damages for his loss of capacity to earn income does not mean that he is over-compensated if the award is not reduced by an amount equivalent to the tax. It merely reflects the fact that the state has not elected to demand payment of tax upon that kind of a receipt of money. It is not open to the defendant to complain about this consequence of tax policy and the courts should not transfer this benefit to the defendant or his insurance company.

The principle established by this Court in Jennings is still recognized and applied by litigants and government. The recovering of tax damages for lost wages is a matter between the state and the individual, and does not affect the damages due to the plaintiff from the defendant. In this respect, I agree with the conclusion reached by the Ontario Law Reform Commission in the Report on Compensation for Personal Injuries and Death (1987), at p. 54:

The Commission has concluded that the existing rule should continue to govern the determination of damages for loss of working capacity in cases of non-fatal injury, and we so recommend. It is our view that the incidence of taxation is a concern extraneous to the assessment of damages as between plaintiff and defendant; it is a matter solely between the plaintiff and Revenue Canada. Should the impact of the Income Tax Act be regarded as overgenerous to plaintiffs, the legislation may be amended by Parliament.

The taxation of damages for lost income is a question which should be left to the legislatures which can, if they wish, readily pass amendments to make damages for lost income taxable.

This is really a question of tax policy and not of tort law.

For these reasons, the plaintiff Shanks' damages for lost income should not be reduced by the amount of tax which would have been payable had they been earned as income.

Disposition

In the result, the appeal in Cunningham v. Wheeler is allowed. The disposition of the appeal and cross-appeal in Shanks v. McNee is as follows: the appeal by the appellant Shanks with respect to the deductibility of the short‑term benefits is allowed; the cross-appeal by the McNees with respect to the deductibility of the long‑term benefits and the taking into account of income tax is dismissed. The appeal in Miller v. Cooper is dismissed.

The plaintiffs in all three cases should have their costs throughout.

Appeal in Cunningham v. Wheeler allowed with costs, appeal in Cooper v. Miller dismissed with costs, appeal by plaintiff in Shanks v. McNee with respect to deductibility of short‑term benefits allowed with costs. La Forest, L'Heureux‑Dubé and McLachlin JJ. are dissenting. Cross‑appeal by defendants in Shanks v. McNee with respect to deductibility of long‑term benefits and taking into account of income tax dismissed with costs.

Solicitors for the appellant John Earl Miller, the appellants/respondents Thomas Harry McNee and Beverly Ann McNee and the respondents Cherylee Lyn Wheeler and Edward Kenneth Wheeler: Harper Grey Easton, Vancouver.

Solicitors for the respondent Mariea Cooper: Ramsay, Thompson, Lampman, Nanaimo, B.C.

Solicitor for the appellant/respondent Samuel H. Shanks: John F. Carten, Comox, B.C.

Solicitors for the appellant Bradwell Henry Cunningham: Sugden, McFee & Roos, Vancouver.

Solicitors for the interveners: Ladner Downs, Vancouver.

• See Erratum, [1994] 1 S.C.R.iv

• See Erratum, [1994] 1 S.C.R. iv