Fund management & damages for fund management costs

Richards v Gray [2013] NSWCA 402

 

Before Bathurst CJ at [1], Beazley P at [162], McColl JA at [163], Basten JA at [164], Meagher JA at [241] 
Decision 1. Appeal allowed in part.
2. Set aside order (1) entered on 16 December 2011 and, in place thereof, give judgment for the plaintiff in the sum of $11,424,000.
3. Each party file and serve within 14 days his or her primary submissions with respect to appropriate orders as to the costs of the trial and the costs of the appeal, such submissions not to exceed 10 pages.
4. If there have been offers of compromise relied upon by the parties, the submissions should be accompanied by an affidavit annexing the relevant material.
5. Each party should have a further period of 14 days to reply to the principal submissions of the other party, such replies not to exceed 5 pages. 
Catchwords DAMAGES – award – measure of damages – personal injuries – negligence causing incapacity to manage own affairs – cost of fund management – whether certain amounts should be taken into account for the calculation of fund management costs. DAMAGES – cost of fund management – principles in Todorovic v Waller (1981) 150 CLR 402 – whether an allowance should also be made in respect of managing the sum awarded for fund management costs. DAMAGES – cost of fund management – whether an allowance should also be made in respect of managing income earned by the fund during the existence of the fund. DAMAGES – cost of fund management – whether fund management fees should be allowed at rates charged by a private trustee or at the rates of the relevant public trustee. 

[This headnote is not to be read as part of the judgment]

 

In 2003 the respondent suffered severe injuries including a traumatic brain injury as a result of a motor vehicle accident. The respondent, as a consequence of the accident, is a person who has significant disabilities and requires constant care.

 

Through her mother as tutor, the respondent brought proceedings against the appellant claiming his negligence was the cause of her injuries. The proceedings were compromised and a judgment in the sum of $10 million with an amount for the costs of administering the verdict sum was awarded to the respondent. The proceedings the subject of the appeal concerned the amount to be awarded to the respondent for the costs of managing the judgment sum of $10 million.

 

It was not in dispute before the primary judge that the amount awarded to the respondent should include an allowance for fees incurred in managing the award of damages. However, the parties disagreed in respect of four issues that were relevant to the quantum of the amount awarded for fund management fees:

first, whether in calculating fund management fees an allowance should be made not only in respect of the fees necessary to manage the $10 million verdict, but also a further amount to manage the funds set aside for that purpose. This was referred to as “fund management on fund management”;

second, whether the fund management fees should not only include an amount to manage the capital of the fund, but also a further amount to manage income derived from the fund. This was referred to as “fund management on fund income”;

third, whether components of the verdict should not be accounted for when calculating the fund management fees on the basis they would be paid out early in the life of the fund. These amounts were for additional solicitor and client costs, past Griffiths v Kerkemeyer (1977) 139 CLR 161 damages, and house modification and swimming pool costs; and

fourth, whether fund management fees should be based on rates charged by The Trust Company Limited or the lower fees charged by the NSW Trustee and Guardian.

 

The primary judge found in favour of the respondent in relation to all four issues.

 

The primary judge gave a further judgment in relation to applications as to costs. Both the appellant and the respondent by cross-appeal challenged this judgment.

 

The issues for determination on the appeal were:

(i) whether the amount awarded for fund management expenses should include an amount for fund management on fund management;

(ii) whether the amount awarded for fund management expenses should include an amount for fund management on fund income;

(iii) when calculating the amount awarded for fund management expenses, whether certain components should be deducted from the corpus of the verdict;

(iv) whether fund management expenses at the rates of The Trust Company or the rates of the NSW Trustee were reasonable, the latter being lower; and

(v) the issue of costs, both in the proceedings below and on the appeal.

 

The Court held, allowing the appeal in part:

 

In relation to (i):

1. It is not appropriate to extend the principle by which fund management expenses are awarded to a plaintiff who is incapable of managing his or her award of damages by reason of their injuries to in turn cover fees for managing that fund. Additional amounts should not be awarded on the assumption that fees will also be paid on the amount set aside for fund management expenses or on the basis that fund management expenses will also need to be managed: [145]-[146] (Bathurst CJ); [162] (Beazley P); [163] (McColl JA); [200] (Basten JA); [241] (Meagher JA).

 

2. The calculation of the amount for fund management on fund management involves speculation and it is not for the court to speculate as to every possible circumstance but rather to give fair compensation: [147] (Bathurst CJ); [162] (Beazley P); [163] (McColl JA); [241] (Meagher JA).

 

Government Insurance Office of New South Wales v Rosniak (1992) 27 NSWLR 665 considered.

 

In relation to (ii):

3. The claim for fund management on fund income should not be allowed. The claim appears contrary to s 127 of the Motor Accidents Compensation Act 1999 as the discount rate assumes a rate of return that accounts for the costs of earning income; consideration of income earned on a fund will require reference to matters for which use of a discount rate was intended to avoid; there will be income tax consequences; and, it cannot be said with certainty that the exclusion of an award for fund management on fund income will operate unfairly: [138]-[143] (Bathurst CJ); [162] (Beazley P); [163] (McColl JA); [241] (Meagher JA).

 

Government Insurance Office of New South Wales v Rosniak (1992) 27 NSWLR 665; Nominal Defendant v Gardikiotis [1996] HCA 53; (1996) 186 CLR 49; Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd [1981] HCA 3; (1981) 145 CLR 625; Commonwealth v Blackwell [1987] HCA 44; (1987) 163 CLR 428 considered. Todorovic v Waller [1981] HCA 72; (1981) 150 CLR 402 applied.

 

4. Although the result may underestimate the likely cost of fund management, the disadvantage of engaging in such speculative exercises, as an exception to general principle, means that it should not be adopted: [202]-[206] (Basten JA).

 

In relation to (iii):

5. It is not appropriate to make any deduction from the fund for the purpose of calculating fund management expenses as there is no reason to suggest that the whole of the fund would not initially be available for investment and, further, the timing of the relevant payments remains a matter of speculation: [127]-[134] (Bathurst CJ); [162] (Beazley P); [163] (McColl JA); [241] (Meagher JA).

 

Nominal Defendant v Gardikiotis [1996] HCA 53; (1996) 186 CLR 49 considered.

 

6. The principle with respect to calculating the corpus is to reduce the amount of the damages awarded by the amount of existing legal liabilities. In the present case there should have been a reduction of $200,000 for solicitor/client costs incurred at the time of approval of the settlement: [208]-[213] (Basten JA).

 

Government Insurance Office of New South Wales v Rosniak (1992) 27 NSWLR 665 considered.

 

In relation to (iv):

7. The power of the Court and the NSW Trustee and Guardian to approve fees payable is preserved: [154]-[157] (Bathurst CJ); [162] (Beazley P); [163] (McColl JA); [241] (Meagher JA).

 

8. The question is what is reasonable compensation in the circumstances. It is reasonable in the present case to award fund management fees based on the rates charged by The Trust Company rather than the NSW Trustee, taking into account the fact that The Trust Company’s fees are competitive, the concerns of the respondent’s mother regarding the NSW Trustee and the fact that the judge who approved the appointment was aware of the fee differential: [158]-[159] (Bathurst CJ); [162] (Beazley P); [163] (McColl JA); [241] (Meagher JA).

 

Morris v Zanki (1997) 18 WAR 260; Willett v Futcher [2005] HCA 47; (2005) 221 CLR 627 considered.

 

9. The question is what, making an informed estimate on the basis of current practice, would be an appropriate basis for calculating the likely cost of fund management over the life of the fund. It is established principle that what a plaintiff does with their award is immaterial and that should not be abandoned because a fund manager has already been appointed: [215]-[218] (Basten JA).

 

Best v Greengrass [2012] WADC 44 considered.

 

10. The percentages of fees calculated on the initial sum were 15.1% (The Trust Company) and 10.2% (NSW Trustee). Rather than undertaking precise calculations, it is appropriate to adopt a figure of 12.5%: [219]-[222] (Basten JA).

 

In relation to (v):

11. The parties are to make further submissions as to costs in accordance with directions. However, a preliminary view is that it was appropriate for the primary judge to award part or all of the costs for a particular period, in the absence of manifest error the Court would be loathe to interfere with the primary judge’s evaluative assessment and no precise apportionment of costs is appropriate: [223]-[240] (Basten JA).

 

David Cormack – Brisbane Barrister.

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