Economic Loss
Loss of earning capacity
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Generally, a plaintiff who has suffered a negligently caused personal injury is able to recover three types of loss:1
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Non-pecuniary losses such as pain and suffering
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Loss of earning capacity (distinguished from earnings)
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Actual financial losses, such as medical costs and home modifications (incurred or expected)
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Putting non-pecuniary and actual losses to the side, what is a loss of earning capacity? Earning capacity is the ability to accumulate wages through the deployment of one's labour and skill.2
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Legally, there is a clear difference between one's earnings and their earning capacity. Some reasons for this distinction can be placed into two categories: (1) the direct link of the loss to the injury;3 and (2) the principal of equality before the law
Direct link
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What is lost due to a tortfeasor's negligence is one's earning capacity. The tortfeasor has not directly prevented the plaintiff's employer from paying the plainitff's wages.5 Instead they have directly diminished the plaintiff's earning capacity. It is clear that the negligence has caused the plaintiff to lose both their earnings and earning capacity, but the loss of earning capacity is what is directly affected.
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Equality before the law
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Adhering to a strict definition of earning capacity limits the head of damages so that it is not compensation for the enjoyment of all financial assets. This ensures that compensation for lost earning capacity is not affected by the assets a plaintiff owns (assets which deliver passive returns). If all earnings were compensated for, then a plaintiff who had capital invested in an annuity would receive more than one who didn't. This would lead to higher compensation for those with more wealth, which would go against the principal of that that all are equal before the law.6
How to measure earning capacity
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Due to compensation being for a plaintiff's earning capacity, rather than earnings, how is such an amount measured? The first principal is that the reduction of one's earning capacity must produce a financial loss.7 This means that if someone could have worked full time in a high paying role, but they likely would have worked only part time in a low paying role, the latter scenario is what the loss should be measured by.
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1. CSR Limited v Eddy [2005] HCA 64 [29-31] (Gleeson CJ, Gummow and Heydon JJ).
2. Amaca Pty Limited v Latz [2018] HCA 22 [29] (Kiefel CJ and Keane J).
3. Ibid [48-50] (Kiefel CJ and Keane J).
4. Ibid [79] (Kiefel CJ and Keane J).
5. Arthur Robinson (Grafton) Pty. Ltd. v Carter [1968] HCA 9 [20] (Barwick CJ).
6. Ibid (n 4).
7. Ibid (n 1) [30] (Gleeson CJ, Gummow and Heydon JJ).