HCA: catastrophic claims & recovery of fund managers costs

Gray v Richards [2014] HCA 40 (15 October 2014)

I refer you to the High Court judgment summary.

1. FRENCH CJ, HAYNE, BELL, GAGELER AND KEANE JJ. In Todorovic v Waller[1], Gibbs CJ and Wilson J summarised the principles which regulate the assessment of damages for personal injuries as follows:

“In the first place, a plaintiff who has been injured by the negligence of the defendant should be awarded such a sum of money as will, as nearly as possible, put him in the same position as if he had not sustained the injuries. Secondly, damages for one cause of action must be recovered once and forever, and (in the absence of any statutory exception) must be awarded as a lump sum; the court cannot order a defendant to make periodic payments to the plaintiff. Thirdly, the court has no concern with the manner in which the plaintiff uses the sum awarded to him; the plaintiff is free to do what he likes with it. Fourthly, the burden lies on the plaintiff to prove the injury or loss for which he seeks damages.”

2. Generally speaking, the third of these principles operates so that a plaintiff does not recover damages for costs he or she might incur in managing a lump sum awarded by way of damages. That is because such costs are not regarded as a loss resulting from the plaintiff’s injury. In Nominal Defendant v Gardikiotis[2], Brennan CJ, Dawson, Toohey and Gaudron JJ said that:

“it is contrary to common sense to speak of the accident causing a need for assistance in managing the fund constituted by [the] verdict moneys in circumstances where [the plaintiff’s] intellectual abilities are not in any way impaired.”

3. To similar effect, McHugh J said[3] that damages are not recoverable where:

“the plaintiff seeks damages, not for expense necessarily incurred as the result of a disability caused by the defendant’s negligence, but for an expense arising merely from the size of an award of damages and the exercise of a choice by the plaintiff as to how to invest those damages. The expense of exercising that choice is not the consequence of the plaintiff’s injury.”

4. The decisions of this Court in Nominal Defendant v Gardikiotis[4] and Willett v Futcher[5] refined this aspect of the operation of the third principle in Todorovic v Waller so that, in a case where a defendant’s negligence has so impaired the plaintiff’s intellectual capacity as to put the plaintiff in need of assistance in managing the lump sum awarded as damages, expense associated with obtaining that assistance is a compensable consequence of the plaintiff’s injury. In such a case, “the liability for the [management expenses] is a loss flowing directly from the wrong and is recoverable as damages caused by the wrong”[6]; and, in accordance with the first and second of the principles stated in Todorovic v Waller, the inclusion of such a component in the lump sum award ensures that the plaintiff receives full restitution for the harm he or she has sustained.

5. In this appeal, two questions arise out of this refinement of the operation of the third principle stated in Todorovic v Waller. The first question is whether an incapacitated plaintiff is entitled to recover costs associated with managing that component of damages which has been awarded to meet the cost of managing the lump sum recovered by way of damages. The second question is whether an incapacitated plaintiff is entitled to recover costs associated with managing the predicted future income of the managed fund.

6. Both these questions were answered in the negative by the Court of Appeal. For the reasons which follow, the Court of Appeal erred in its answer to the first question, but was correct in its answer to the second question.

Background

7. The appellant was born on 31 August 1992. On 22 August 2003, she sustained a traumatic brain injury when a motor vehicle driven by the respondent collided with a motor vehicle in which she was a passenger. As a result of her injury, she has been left with a significant intellectual impairment and requires constant care. She has no prospects of future remunerative employment.

36. The appellant’s principal contention was that the Court of Appeal’s decision was a departure from the first principle stated in Todorovic v Waller. In particular, it was said that to disallow the components of damages in question is apt to produce a shortfall in the appellant’s estate equal to the cost of the Trust Company having to manage the fund management component of her damages and the fund’s income. The shortfall was said to be unavoidable having regard to the requirement in s 79 of the CPA that both fund management damages and fund income must be managed as part of the appellant’s estate.

37. The respondent’s principal contention in response was that recovery of the costs associated with managing the fund management component of the appellant’s damages and the income of the fund was precluded by s 127 of the MACA. It was also said that this outcome was warranted by the third principle in Todorovic v Waller.

45. Contrary to the view of Bathurst CJ[40], the issue is not whether “[t]he court should … order additional amounts” in respect of fund management damages. The ascertainment of the cost of managing the fund management damages is not an exercise separate and distinct from assessing the present value of fund management expenses as part of the appellant’s future outgoings. The expenses in question are not incurred separately from the cost of fund management; they are an integral part of that cost. In Willett v Futcher, in accordance with the first of the Todorovic v Waller principles, Gleeson CJ, McHugh, Gummow, Hayne, Callinan and Heydon JJ said[41]:

“An administrator must be appointed. The administrator must invest that fund and act with reasonable diligence. It follows that the administrator will incur expenses in performing those tasks. The incurring of the expenses is a direct result of the defendant’s negligence. The damages to be awarded are to be calculated as the amount that will place the plaintiff, so far as possible, in the position he or she would have been in had the tort not been committed.”

46. In addition, the question of reasonableness of fund management expenses is not at large as a matter of judicial discretion. The court does not make an open-ended judgment about the reasonableness of the fund management expense component of damages. The court is not concerned to regulate the market for the provision of fund management services. The court’s concern is to ensure that the plaintiff’s actual loss is compensated. There is, for example, no scope for the court to say that the amount is simply “too much” as a matter of intuition or impression if the plaintiff has no practical ability to bargain for a lesser charge.

47. The real question is whether the management arrangement with the Trust Company was so unreasonable in its terms that it could not be regarded, as a matter of common sense, as a consequence of the appellant’s injury. If the fund management expense component of an award reflects actual market conditions, and is not contrary to any statutory control, then it may be seen, as a matter of common sense, as an expense consequent upon the tortfeasor’s wrong and, therefore, compensable.

48. One can understand the concern which weighed with Bathurst CJ and Basten JA that, notwithstanding the requirement of s 79 of the CPA that the fund be held by the manager and applied as part of the protected estate, a reasonable accommodation must be made, as between the plaintiff and the manager, in relation to the management of the fund. It may be that where a reasonable arrangement is not made, the expense in question can fairly be seen, not as a loss consequential on the plaintiff’s injury, but as a loss attributable to an unreasonable bargain with the manager. But in the present case there was no issue as to whether the appointment of the Trust Company sanctioned by the order of White J was a reasonable response by the appellant (or those representing her) to the need to engage a manager of her estate; and there was no evidence that the Trust Company, in charging its management fees on the whole of the fund, was not acting in accordance with the practice of the market, or that its rates of charge were outside the market. Nor was there any suggestion that the Trust Company’s charges were contrary to any statutory provision regulating such fees.

55. It is well settled that “the common law does not permit difficulties of estimating the loss in money to defeat an award of damages” by way of compensation for loss actually suffered[44].

Fund management on fund income

58. In relation to the fund management on fund income issue, Bathurst CJ held[47] that the primary judge had erred in concluding that the discount rate prescribed by s 127 of the MACA expressed a statutory assumption as to the net earnings rate of the damages awarded to the appellant. After reviewing earlier decisions of this Court[48] involving the application of the discount rate, his Honour concluded[49] that:

“[T]he discount rate applied in respect of damages awarded is referable to the matters referred to in s 127(1)(a)-(d) of the [MACA] and was designed to take into account the effect of inflation and notional tax on income earned from the fund. Neither the [MACA] nor the cases to which I have referred lend support to the proposition that for all purposes a constant rate of diminution to the fund is to be assumed or that interest will be earned at a constant rate throughout the life of the fund, although these assumptions underpin the calculation of the discount rate.”

59. Bathurst CJ concluded[50] that the appellant’s claim with respect to the fund management on fund income issue should not be allowed. It is sufficient to note the principal reasons[51] for that conclusion:

“[T]he discount rate assumes a rate of return sufficient to provide the injured plaintiff with fair and just compensation for the claimed loss[52]. The return is assumed to take into account the costs of earning income which would include any fees payable as a consequence. …

Even if the cost of earning the income was not taken into account for the discount rate set under s 127, there seems no basis to make an assumption as to the actual income earned for the purpose of the calculation and the court would inevitably be speculating as to what income would be derived from the fund from time to time.”

60. Basten JA agreed with Bathurst CJ that the primary judge had erred in holding that the discount rate prescribed by s 127 of the MACA expressed a statutory assumption about a maintainable net earnings rate[53].

61. In this Court, the appellant argued that the Court of Appeal erred in concluding that the potential costs of managing fund income were covered by the discount rate prescribed by s 127 of the MACA. In particular, it was said that Bathurst CJ erred in holding that the discount rate did not represent the net earnings rate of the fund. In that regard, the appellant invoked the observation made by Gibbs CJ and Wilson J in Todorovic v Waller[54] which referred to “the assumption … that the income [of the fund] is earned at the discount rate”.

62. The appellant’s challenge to the reasons of Bathurst CJ and Basten JA on this issue should not be accepted.

63. The discount rate prescribed by s 127 of the MACA does not imply a statutory requirement that the fund should achieve a net future earnings rate of five per cent. Nor does it imply that the award of damages must be supplemented in order to sustain such an income, net of the expenses incurred in achieving it. Section 127 assumes, as does the second of the Todorovic v Waller principles, that the return from the fund takes into account the cost of generating that return.

64. The discount rate does not assume that the fund will produce an annual net income at an equivalent rate or imply that a lump sum award must be adjusted to ensure that result. The discount rate is a conceptual tool deployed for the purpose of arriving at a lump sum reflecting the present value of future losses. In Nominal Defendant v Gardikiotis[55], McHugh J explained:

“Use is made of a discount rate to assess the present value of future economic loss and expense because it is perceived to be the conceptual tool best suited to determine what is fair and reasonable compensation for that loss or expense. The discounting exercise is a hypothetical construct and does not attempt to reflect, anticipate or govern the future actions or intentions of the plaintiff. It simply attempts to determine what sum represents the present value of the anticipated losses or expenses of the plaintiff. When that sum is determined, then, subject to any allowance for the contingencies of life, the law will equate it with fair compensation for those losses or expenses, irrespective of what the plaintiff intends to do with that sum.” (emphasis in original)

65. The obiter observations by Gibbs CJ and Wilson J in Todorovic v Waller[56] cannot sustain a different view. In Todorovic v Waller[57], Gibbs CJ and Wilson J joined Stephen, Mason, Murphy, Aickin and Brennan JJ in a statement that:

“where the plaintiff’s injuries will make it necessary to expend in the future money to provide medical or other services … the present value of the future loss ought to be quantified by adopting a discount rate of 3 per cent in all cases, subject, of course, to any relevant statutory provisions. This rate is intended to make the appropriate allowance for inflation, for future changes in rates of wages generally or of prices, and for tax (either actual or notional) upon income from investment of the sum awarded. No further allowance should be made for these matters.”

66. This statement does not suggest that the cost of managing the income generated by the fund to ensure that it maintains a net income at a given rate is a compensable loss. Indeed, that suggestion would seem to be inconsistent with their Honours’ comprehensive dismissal of any “further allowance”. Further, it is distinctly inconsistent with the second of the Todorovic v Waller principles, which operates on the assumption that the capital and income of the lump sum damages awarded in respect of future economic loss will be exhausted at the end of the period over which that loss is expected to be incurred. And finally, the cost of managing the income generated by the fund is not an integral part of the appellant’s loss consequent upon her injury. One could view that cost as an integral part of that loss only if one were to assume that the income of the fund will, in fact, be reinvested in the fund and thereby swell the corpus under management. That assumption cannot be made, given that drawings from the fund may exceed its income. Further, that assumption should not be made, given that to do so would be contrary to the third of the Todorovic v Waller principles.

67. Section 127 of the MACA does not warrant a different view. Under s 127 the discount rate is now set at five per cent. That prescription reflects a judgment by the legislature as to the appropriate discount rate, having regard comprehensively to inflation, changes in wages and prices, and imposts on the income of the fund. Such imposts include the costs of managing that income. Section 127 does not, either expressly or impliedly, invite the making of an assessment of damages calculated to maintain a net income from the fund of five per cent per annum. 

David Cormack – Brisbane Barrister & Mediator

Related Posts

Recent Comments

    Categories