Gray v Richards
[2011] NSWSC 877
•16 August 2011
Supreme Court
New South Wales
Medium Neutral Citation: Gray v Richards [2011] NSWSC 877 Hearing dates: 1, 2, 3 and 8 August 2011 Decision date: 16 August 2011 Before: McCallum J Decision: Plaintiff's claim for the future cost of managing the fund management component of her damages award allowed. Plaintiff's claim for the future cost of managing income earned upon investment of the fund allowed.
Catchwords: DAMAGES - motor vehicle accident - cost of managing future fund management costs - cost of managing future fund income - appropriate rate of assumed earnings on fund Legislation Cited: Civil Procedure Act 2005
Motor Accidents Compensation Act 1999
NSW Trustee and Guardian Act 2009
NSW Trustee and Guardian Regulation 2008Cases Cited: Bacha v Pettersen (Supreme Court of New South Wales, Hunter J, 20 September 1994, unreported)
Buckman v M & K Napier Constructions Pty Limited [2005] NSWSC 546;
GIO v Rosniak (1992) 27 NSWLR 665;
Haywood v Collaroy Services Beach Club Limited [2006] NSWSC 566
Lewis v Bundrock [2009] 1 Qd R 524; [2008] QSC 189
Nominal Defendant v Gardikiotis [1996] HCA 53; (1996) 186 CLR 49
Rottenbury v Rottenbury [2007] NSWSC 215
Todorovic v Waller (1981) 150 CLR 402;
Treonne Wholesale Meats v Shaheen (1988) 12 NSWLR 522
Willett v Futcher [2005] HCA 47; (2005) 221 CLR 627Category: Principal judgment Parties: Rhiannon Leigh Gray by her Tutor Kathleen Anne Gray
Corey Edward RichardsRepresentation: Counsel
A Morrison SC with I McGillicuddy (plaintiff)
P Deakin QC with B Kelleher and later S King (defendant)
Solicitors
Shine Lawyers (plaintiff)
TL Lawyers (defendant)
File Number(s): 2009/338685 Publication restriction: None
Rhiannon Gray sustained an extremely severe traumatic brain injury in a motor vehicle accident in 2003, when she was ten years old. Her father was killed in the same accident. Ms Gray is now significantly disabled and requires constant care. She will never be engaged in remunerative work.
By these proceedings, Ms Gray seeks damages (through her mother as tutor) in respect of the injuries she sustained. The defendant has admitted liability. An assessment hearing commenced before me on 1 August 2011. On the third day of the hearing, the parties reached agreement as to all components of damages claimed except for the future cost of fund management. Subject to the requirement under s 76 of the Civil Procedure Act 2005 that the settlement be approved by the Court, the parties nonetheless regarded it as a binding resolution of the proceedings, having agreed to abide by the Court's determination of the fund management issues.
On 5 August 2011, Hoeben J approved the settlement, which provided for a verdict for the plaintiff in the sum of $10 million (exclusive of fund management costs). Since the proposed verdict is the result of a compromise by agreement, no quantification of its components is available to the Court. To the extent that it includes allowance for future loss and expense, it must be taken to have been discounted to present value at the rate of 5 per cent in accordance with s 127 of the Motor Accidents Compensation Act 1999.
On 8 August 2011, I heard the remaining issues in the proceedings relating to fund management. This judgment determines some of those issues.
It is not in dispute that the plaintiff is incapable of managing her own affairs, or that her incapacity was caused by the negligence of the defendant. The plaintiff's mother has commenced proceedings in the Protective List of the Equity Division of the Court seeking a declaration as to incapacity and the appointment of a manager of the plaintiff's affairs under s 41 of the NSW Trustee and Guardian Act 2009. The defendant does not dispute the likelihood that such orders will be made.
In those circumstances, the defendant acknowledges that a substantial portion of the proposed verdict will be paid to the manager to be held and applied as part of the protected estate, as contemplated by sections 77 and 79 of the Civil Procedure Act . It is further acknowledged that Ms Gray is entitled to an award of damages to compensate her for at least some part of the cost of the manager's services.
Issues deferred for later determination
The first issue in dispute is the rate at which the plaintiff is entitled to have the cost of such services assessed. The plaintiff claims an amount calculated by reference to the fees ordinarily charged by her preferred private financial manager, the Trust Company. The defendant contends that the prescribed fees payable to the NSW Trustee and Guardian under the NSW Trustee and Guardian Regulation 2008 are significantly less than those charged by private managers and that the award should be assessed on the basis of the prescribed fees.
However, there is a discrete dispute as to whether the fees prescribed in the Regulation disclose the whole cost of management of a fund by the NSW Trustee. The plaintiff's expert actuary, Mr Plover, reads the recent annual reports of that entity as disclosing (in a footnote) the existence of a further cost of management amounting to 0.5 per cent per annum of the fund under management. That cost was described by the expert witnesses as a "managed expenses ratio" or MER. There is no occasion for the Regulation to address that cost because it is a private fee charged to the NSW Trustee and Guardian by the entity to which (as Mr Plover reads the relevant material) all of the NSW Trustee and Guardian's fund management is outsourced.
The parties sought an opportunity to adduce further evidence directed to that issue. It was agreed during the hearing before me that the appropriate rate should in any event be determined after the identity of the manager appointed by the Protective Division Judge is known.
Leaving that issue aside, it is common ground that, whether the manager is the NSW Trustee and Guardian or a private trustee, the fees charged are calculated as a percentage of the fund under management. Accordingly, a threshold task is to identify the relevant fund.
The parties are in agreement that certain out of pocket expenses should be deducted from the verdict approved by Hoeben J prior to payment out to the manager, giving a starting point of $9.934 million. The plaintiff noted that, subject to any order of the Court, the whole of the verdict is otherwise required to be paid to the manager in accordance with sections 77 and 79 of the Civil Procedure Act .
There is no dispute as to the inclusion in the relevant fund for management of any sum reflecting general damages. The approach of the parties in that respect accords with the decision of the Court of Appeal in GIO v Rosniak (1992) 27 NSWLR 665 at 673G per Kirby P; 688D per Mahoney JA and 694B per Meagher JA.
The defendant contended, however, that there might be other amounts that should properly be deducted from the putative fund on the basis that they are likely to be paid out early in the term of its management (as occurred in Rosniak ). The plaintiff contended that no assumption should be made as to the likelihood of payment out of any large sum early in the life of the fund, since the whole fund will have to be prudently managed to overcome what was asserted to be the draconian impact of the statutory discount rate of 5 per cent.
The parties asked the Court to return to that issue after the hearing of the application in the Protective List, when it will at least be known whether the Court made any specific order for payment to any person other than the manager appointed by the Court.
Accordingly it will be necessary, after the conclusion of the Protective List proceedings, to determine:
a) the rate of fees at which the final calculation should be undertaken (which may require the Court to determine whether the fees prescribed for the NSW Trustee and Guardian represent the whole cost of fund management by that entity);
b) whether any sum should be deducted from the proposed verdict as being likely to be paid out early in the life of the fund.
Issues determined in this judgment
The issues determined in this judgment relate to two additional allowances claimed by the plaintiff:
a) an allowance for the future cost of managing the component of damages awarded for future fund management costs (sometimes referred to as "fund management on fund management");
b) an allowance for the future cost of managing income derived from investment of the fund (referred to as "fund management on fund income"). It was contended by the plaintiff that, if such income is to be included in the putative fund, the calculation should be undertaken at an assumed earnings rate of 5 per cent to reflect the statutory discount rate.
Mr Plover and an expert accountant retained by the defendant, Mr Watt, gave joint evidence directed to those issues. Happily, before giving evidence, they reached agreement as to the percentage of the corpus fund that should be awarded on each of the competing scenarios contended for by the parties. The agreed percentages range from 10.2 per cent (assuming fees at the statutory rates prescribed for the NSW Trustee and Guardian, no additional amount by way of MER and neither additional allowance claimed by the plaintiff) to 25.2 per cent (assuming fees at the rates identified in respect of the private manager and both additional allowances claimed by the plaintiff). Interestingly, the percentages reached assuming inclusion of the MER allegedly charged to the NSW Trustee and Guardian are very close to those for the private manager (either slightly more or slightly less on each scenario).
Fund management on fund management
As already noted, the first allowance claimed is sometimes referred to, in shorthand, as "fund management on fund management". So described, the claim is potentially confounding, having the resonance of double counting. Upon analysis, however, it is difficult to fault the logic of the plaintiff's claim for such an allowance.
To adopt the illustration used in argument by Dr Morrison SC, who appeared with Mr McGillicuddy for the plaintiff, if the cost of managing a damages award of $10 million over the relevant term were, for example, $2 million (20 per cent of the corpus), the total verdict would be $12 million, to be received today and managed over time. A plaintiff under incapacity would have no better ability to manage the additional $2 million than the initial $10 million. It follows that the award of a component for fund management would itself give rise to future management expenses in the order of $400,000 (assuming fees charged on that amount at the same rate of 20 per cent). The additional $400,000 in turn would cost a further $80,000 to manage, which would cost a further $16,000, and so on.
A further consideration is the fact that the fund management award must itself be discounted to present value at the statutory rate of 5 per cent. It necessarily follows that, on the assumptions on which the verdict is based (the proper approach being to assess damages in the money of today), that sum will have to be invested so as to earn a net return approximating the discount rate.
In those circumstances, the plaintiff contends that the only way for her to obtain an adequate award of compensatory damages is to make an allowance for the cost of managing the sum awarded by way of fund management costs.
There is competing authority in decisions of single judges in this Court and in the Supreme Court of Queensland as to whether any such allowance should be made. Before turning to those cases, I should first consider a remark on this issue made by Meagher JA in the decision of the Court of Appeal in Rosniak .
His Honour said (at 698G):
Mr Kelly also submitted that an adjustment should be made to award a management fee in respect of each management fee paid; however, in my view, this submission ought be rejected as it would involve unwarranted double counting.
In my view, properly analysed, the plaintiff's claim does not involve any element of obtaining compensation twice for the same item. The payment to the manager of the fund management component of the damages award is not made by way of payment in advance to be held by the manager beneficially on account of his future fees. If it were, the cost to the plaintiff of managing that part of the fund would be avoided (or at least transferred to the manager) but that is not what happens. Section 79 of the Civil Procedure Act imposes a requirement that the proceeds of the verdict be held on trust by the manager and applied as part of the protected estate. The manager will pay himself periodically as fees are earned, just as he will pay carers and other expenses as accrued.
It was nonetheless maintained by Mr Deakin QC (who appeared with Mr Kelleher and later Ms King for the defendant) that I should follow the decision of Meagher JA in Rosniak to reject the claim. Mr Deakin submitted that, although the other members of the Court made no express reference to this issue, they were "broadly in agreement" with Meagher JA and so may be taken to have endorsed or joined in his Honour's view on that question.
In the absence of express reference to the issue in the judgments of the other two members of the Court, I do not think that the decision in Rosniak stands as binding authority on this question. The only reason given by Meagher JA for rejecting the claim was that it would involve unwarranted double counting. With great respect to his Honour, I think that description reveals that he may have misapprehended the nature of the claim and, accordingly, that his remarks on that issue should be considered as having been made per incuriam .
The plaintiff's position finds support in the decision of Hunter J in Bacha v Pettersen (Supreme Court of New South Wales, 20 September 1994, unreported). His Honour's reasoning appears to derive from the same analysis of the issue as mine (set out above). Hunter J said:
The principal questions are: (1) What is the fund? and (2) How should the management fee be determined? These questions give rise to considerations of (a) the likely expenditure by the Protective Commissioner on matters needed by the plaintiff from time to time; (b) the relevance of the tax deductibility (sic) nature of the management fee, when viewed in the context of income derived by the fund upon which management fees are calculated, and (c) whether the management fee should form part of the fund.
As to those matters, I am clear that the practicabilities of the problem dictate that any determination by me of a management fee will result in that sum going into the hands of the Protective Commissioner, and accordingly attract the establishment fee and the management fee on income. It will not go to the fund with any designation of it being a management fee. It will form part of the damages.
His Honour proceeded to calculate the allowance on the basis that the relevant fund included the management fee itself. A contrary view was reached by Burchett AJ in Buckman v M & K Napier Constructions Pty Limited [2005] NSWSC 546 at [13]. Although the relevant passage is lengthy, it is appropriate to set it out in full:
13 I turn to the second question, that raised by the plaintiff's contention to the effect I should add the amount required to meet the cost of fund management to the fund, and recalculate what is required, because any amount allowed will swell the fund and therefore be reflected in the charges ultimately made. Theoretically, this process could go on forever, although the plaintiff's counsel do not push the point so far. It is, indeed, a point reminiscent of the ancient mathematical fallacy of the hare and the tortoise: if, it was said, the hare can run ten times as fast as the tortoise, which has a ten yards start, while the hare runs the ten yards, the tortoise will go one, and while the hare runs that, the tortoise will go one tenth and so on, so the hare will never quite catch the tortoise! But, in my opinion, there is a simpler answer to the plaintiff's contention, which is not fallacious. The calculation of damages is not mathematically exact. It involves estimations. To strive for the precision the argument seeks in respect of the cost of the management of a fund components of which are themselves broad assessments of reasonable sums that are beyond calculation, such as damages for pain and suffering and the loss of the amenities of life, would just be incongruous. Furthermore, while a calculation utilising the figure of $2,700,000 in some way seems inescapable, it must be recognized, as McHugh J pointed out during the argument in Willett v Futcher, that even that basic step will lack precision, since a change in market conditions (a steep rise or fall in the share market, for instance) could, within a little time, change greatly the figure to which the Protective Commissioner's percentages will be applied, or, it may be added, a change in the regulation itself may intervene during the life expectancy of the plaintiff. It is, and must be, all a question of reasonable estimate which will determine the amount to be allowed. In my opinion, a sum calculated in the manner I have already indicated is the reasonable amount to allow in the present case.
Burchett AJ was evidently troubled by a perceived incongruity between the inexact calculation of damages generally and the exactitude of a calculation that, theoretically, must be repeated to infinity.
I do not think that should be an impediment to the plaintiff's claim. The starting point is to observe that the cost of future fund management is a recognised head of future loss, the entitlement to which is beyond question, having been affirmed by the High Court: Nominal Defendant v Gardikiotis [1996] HCA 53; (1996) 186 CLR 49; Willett v Futcher [2005] HCA 47; (2005) 221 CLR 627 (the latter was decided after the decision in Buckman ). It is difficult to understand why the nature of its calculation (being repetitive and ever-diminishing) should preclude the grant of an award adequate to compensate the plaintiff for a recognised loss.
Burchett AJ does not appear to have been taken to the decision of Hunter J in Bacha (which, it must be acknowledged, is unreported); or to have received assistance of the kind I have received from the expert evidence in the present case. The actuary, Mr Plover, produced a ready calculation of the appropriate amount (repeating the calculation until the additional amount was negligible). The terms of the judgment of Burchett AJ suggest that his Honour was not provided with such assistance, and may even be read as revealing that the plaintiff had invited his Honour to undertake the relevant calculation.
The decision in Buckman has been followed in this Court in Haywood v Collaroy Services Beach Club Limited [2006] NSWSC 566 at [8] per Hidden J. In that case, there were competing opinions of experts, as in the present case. His Honour rejected the claim, adopting the reasoning of Burchett AJ in Buckman as a matter of comity and expressing his agreement with it. His Honour did not undertake any discrete analysis of the issues that have been agitated in the hearing before me, and does not appear to have had the decision of Hunter J in Bacha drawn to his attention. It may also be noted that the amounts involved in that case were substantially smaller than in the present case.
Buckman and Haywood were subsequently followed by the Supreme Court of Queensland in Lewis v Bundrock [2009] 1 Qd R 524 ; [2008] QSC 189 at [16] per Martin J. Again, the unreported decision of Hunter J in Bacha does not appear to have been brought to the attention of the Court.
Martin J analysed the reasoning of Burchett AJ in Buckman and expressed his agreement with it, noting that an award of damages is only ever an estimate of the fair and reasonable compensation required. His Honour specifically referred, as Burchett AJ had, to the fact that the calculation required to give effect to the plaintiff's claim "could be extended indefinitely, with ever-decreasing increments" (at [15]).
At most, that is a reason for insisting on a measure of approximation at the tail end of the plaintiff's calculation (there would be no sense in taking it beyond the smallest denomination of the currency in any event). I do not think it is a reason for keeping the plaintiff out of the award that is necessary to meet an identifiable future cost.
I do not think I am constrained by any obligation of comity on this question, since I am faced with a choice between two lines of authority in decisions of single judges (albeit that one of the lines is a single point). For the reasons explained above, I prefer the reasoning of Hunter J in Bacha .
A separate submission put on behalf of the defendant related to the state of the evidence as to whether the services of any of the proposed managers could be obtained more cheaply having regard to the size of the fund under management. It is true that there was no evidence specifically directed to whether the proposed manager would accept fees at a lower rate to manage a fund of the size agreed in the settlement between the parties (including the fund management costs component). In light of the fact that there is to be a further round of hearing in any event, the plaintiff should have leave to adduce evidence directed to that issue.
Fund management on fund income
The plaintiff's position on the second issue rests on a series of uncontroversial principles and propositions, namely:
a) the principle of restitutio in integrum and the requirement at common law that damages be quantified as a lump sum representing compensation once and for all;
b) the need in that context to have regard to the time value of money (reflected both in the plaintiff's entitlement to interest on past loss and the defendant's entitlement to have any award for future loss discounted to present value);
c) the proposition that the rate at which a future loss or liability is discounted in order to find its present value reflects a prediction on present assumptions as to earnings over time;
d) the law's imposition in the assessment of damages for personal injury of a fixed, assumed discount rate in lieu of the entitlement (of either party) to adduce evidence directed to establishing the actual rate that is appropriate in any particular case or in any particular economic climate;
e) the recognition that earnings in fact received upon investment of the proceeds of the verdict in the present case will be required to be returned to the protected estate to be held by the manager and applied as part of that estate.
In those circumstances, the plaintiff contends that, in order that she should be adequately compensated, an allowance should be made for the cost of managing the part of the estate that represents income earned by the fund. She further contends that the rate of earnings adopted for the purpose of calculating that entitlement should be 5 per cent to reflect the statutory discount rate, since that rate represents a legal assumption as to the earnings of the fund over time which should, for consistency, equally apply to the present calculation.
Restitutio in integrum and payment in a lump sum
The first are fundamental principles which have been described as being so well established that it is unnecessary to cite authority in support of them: Todorovic v Waller (1981) 150 CLR 402 at 412.3. First, the plaintiff should be awarded a sum of money that will, as nearly as possible, put her in the position in which she would have been had she not sustained her injuries. Secondly, the award must be by way of a lump sum representing a once and for all settlement. There is no power to order periodic payments. (I have not overlooked the third fundamental principle stated in the same passage in Todorovic , relied upon by the defendant. It will be necessary to return to that issue.)
The time value of money
In the case of future loss or expense, the task is, accordingly, to find "a present equivalent for all future pecuniary loss": Todorovic at 414.2. In undertaking that task, the Court must have regard to the time value of money. The law considers that a person who (for example) needs $1,000 per week for 500 weeks does not need $500,000 to meet that future cost if she receives a lump sum today. The basis for that approach is the recognition that a lump sum received today can be invested and the return used to supplement the fund. If the Court were to ignore the investment value of large sums of money not yet required to be spent, the plaintiff (upon investment of the fund) would receive a windfall. It is for that reason that lump sum awards of compensation for future loss or future expense are discounted to present value. The discount represents the net earning capacity of the fund over time.
The rationale for a fixed discount rate
Whilst the rationale for discounting future liabilities may thus readily be understood, its quantification is more difficult, and will vary according to the purpose of the question. In the case of a reporting entity such as an insurance company making provision for long tail liabilities in its financial statements, the discount rate is amenable to regular revision each year based upon updated predictions as to future earnings. One would also expect, in that context, to see administration costs (including fund management costs) separately disclosed. In the context of personal injury litigation and the fundamental principles stated above, different considerations prevail.
Divergent approaches to the task of determining an appropriate discount rate in cases governed by the common law prompted the High Court in Todorovic to pronounce a uniform approach in the interests of justice, namely, that all awards for future loss or expense should be discounted to present value at the rate of 3 per cent. A statement read by the Chief Justice when the decision was published explained:
In an action for damages for personal injuries, evidence as to the likely course of inflation, or of possible future changes in rates of wages or of prices, is inadmissible. Where there has been a loss of earning capacity which is likely to lead to financial loss in the future, or where the plaintiff's injuries will make it necessary to expend in the future money to provide medical or other services, or goods necessary for the plaintiff's health or comfort, 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 provision. 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.
It is important to understand what the rate determined in Todorovic denotes. The controversy quelled in that case was not whether the underlying rationale for discounting to present value was sound. The question was how, in the context of adversarial litigation and in the interests of containing legal costs, to account for the uncertainties of inflation and income tax in determining the appropriate earning (discount) rate. The High Court's resolution of that issue is helpfully summarised in the judgment of Clarke JA in Treonne Wholesale Meats v Shaheen (1988) 12 NSWLR 522 at 531B:
The gravaman of Todorovic was that there were so many complications in endeavouring to make specific allowance in damages awards for inflation in the future and the impact of taxation upon the investment of funds resulting from the award that a discount rate of 3 per cent should be adopted as a matter of policy in all cases.
That brings me to the third and fourth fundamental principles brought into play in Todorovic (at 412 per Gibbs CJ and Wilson J, and see 421.9):
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.
The defendant's argument appeared to construe the Court's prefatory remarks and the third principle stated by Gibbs CJ and Wilson J as prohibiting the consideration of income earned by the fund in the present context. Thus it was submitted (at T222) that, since the Court is not concerned with what the plaintiff in fact does with his or her money, the Court should have no regard to what it may or may not earn in the future. The matter was put in the defendant's written submissions as follows: "to allow but one variable, in this case the increase due to an assumed rate of interest, is to ignore a raft of other potential factors affecting the worth of the corpus". It was submitted that if the potential swelling of the fund by returns on investment were to be taken into account, then all variables would have to be taken into account, subverting the purpose of section 127 of the Motor Accidents Compensation Act .
With great respect to the careful submissions put on behalf of the defendant on that issue, I think the argument entails a misconception. The plaintiff has not invited the Court to attempt to calculate the actual income the fund will earn. Rather, the argument rests on the existence of a mandatory discount rate, which quells uncertainty as to the future by the device of a statutory assumption as to future earnings. The plaintiff's contention is that it would be incongruous to impose such certainty on plaintiffs, while denying the availability of that assumption when it is relied upon for the purpose of obtaining, rather than reducing, a compensatory award.
Against that analysis, it may be seen that the rate of earning of 5 per cent assumed in the plaintiff's case does not reflect one of the variables for which the High Court made allowance when it fixed the discount rate to be applied at common law. The discount is the assumed earnings rate. That is what it denotes. To take such assumed earnings into account does not subvert s 127 of the Motor Accidents Compensation Act . On the contrary, it invokes the very assumption implicit in the imposition of a fixed discount rate. The critical question, in my view, is not whether income on the fund should be taken into account but whether the appropriate method of doing so is to adopt that assumption.
The purpose of prescribing a fixed rate in Todorovic was to obviate the need to quantify the actual likely earnings rate in any particular case. That was the point, as I would understand it, of the Court's reference to the third and fourth fundamental principles stated above (that the Court has no concern with the actual use of the sum awarded and that the plaintiff must prove his loss).
The decision in Todorovic was not concerned with fund management costs. I doubt whether the High Court's reliance upon the principle that the court has no concern with the manner in which the plaintiff uses his money was intended to be construed as an edict prohibiting the consideration of future earnings in an appropriate case, such as where such consideration is necessary for the purpose of quantifying the future cost of fund management. The principle was invoked in Todorovic , I think, as a corollary of the proposition that damages are awarded "in terms of the money of today" ( Treonne at 531D), which was in part the warrant for adopting a fixed rate as a matter of policy. The point of the principle is that the Court does not need to concern itself with the near certainty that the future will not bear out the present assumptions on which the award is based.
As explained in Todorovic at 421.8 per Gibbs CJ and Wilson J, the application of a discount rate of 3 per cent identifies the sum of money required today to meet the requisite future payments on the assumption that the fund will earn a return of 3 per cent net of inflation and "the ravages of taxation" ( Treonne at 531.8) over the term of its management (assuming uniform drawings and depletion of the fund to zero on the last day of the term). The likelihood that the performance of the fund will in fact exactly reflect those mathematical assumptions is, of course, small. The judgments in Todorovic openly acknowledge that the rate is an approximation and, to an extent, arbitrary. What is clear, however, is that an award discounted to present value is unlikely (to a level of certainty) to meet the expenses it assumes if it is not invested so as to earn a return that approximates the discount rate.
The need to quantify future earnings in the present case
The verdict approved in the present case (exclusive of fund management costs) is $10 million. The receipt of such a large sum by a woman who has, by reason of the very negligence on which she sues, been rendered incapable of managing her own affairs creates the need for the appointment of a trustee to manage the fund.
It is common ground (or at least not seriously in dispute) that the plaintiff will in fact incur fees payable to the trustee. The expected term of management of the fund is 66 or 67 years. It is common ground that, on present expectations, fund management fees throughout that period will be calculated by reference to the amount of the fund under management.
Thus the capacity of the fund to earn income is critical to its adequacy. The plaintiff contends that it must be assumed, in those circumstances, that income will be earned; that the income will itself become part of the managed fund and that, accordingly, management fees will be incurred on that income. The plaintiff submits that it must follow that if income earned by the fund is excluded from the calculation of fund management costs to be awarded to her, there will be a shortfall in the damages allowed on that account and there will be insufficient money to manage the plaintiff's damages.
In my view, the logic of those contentions is irresistible. I am satisfied that the allowance for fund management costs should be calculated on the assumption that the relevant fund includes returns on investment of the fund (the proper method of calculating that amount is considered separately below).
There is authority for the contrary view in the decision of Hislop J in Rottenbury v Rottenbury [2007] NSWSC 215. The defendant's submissions on this issue rested heavily on his Honour's reasoning in that case. Although I am not bound to follow a decision of another puisne judge, as a matter of comity I should follow the decision in Rottenbury unless I am persuaded that it is plainly wrong.
It is appropriate to set out his Honour's reasoning on this question in full (at [50] to [53] of the judgment):
50 The only question in issue between the parties was whether:
In calculating the present value of the cost of fund management, does one take into account as a separate item the fact that the fund will earn income, which in some years will increase its capital value and in others will slow what would otherwise be the diminution of its capital value.
51 The plaintiff submitted that because the fund will, on the balance of probabilities, earn something each year, an assessment should be made of its probable earnings and those probable earnings should be included in the fund upon which the management fees are to be charged.
52 The defendant submitted:
(a) the predicted earnings of the plaintiff's fund is but one of a number of future variables that may affect the corpus; other variables equally incapable of any form of precise calculation include the effects of inflation on amounts to be drawn down from the fund, the tax regime to which the fund is subject, and the types of investments the fund managers make in the future. These variables may affect the corpus of the fund in different ways at different times. Some may have a negative effect on the corpus;
(b) it is unacceptable to adopt a model which includes only one of the these variables, namely fund earnings, while ignoring the rest. Predicting future trends in one variable is necessarily speculative; attempting to predict future values of all of the relevant variables would be mere guesswork;
(c) the effect of using a model which includes predicted future values of all relevant variables, even if a worthwhile model could be developed, amounts to a recalculation of the discount rate to be applied to the plaintiff's future expenditure on the cost of managing his funds, which is impermissible. The statutory rate of 5 per cent cannot be varied;
(d) this is consistent with statements by the majority of the High Court in Todorovic v Waller (1981) 150 CLR 402 at 422, 449, 458, 459 and 465. That case (which predated the imposition of the statutory discount rate in motor accident and other cases) established the discount rate of 3 per cent which was treated as being of general application until overtaken by statute;
(e) the High Court considered the matters which ought to be taken into account in formulating an appropriate discount rate for the purpose of calculating the present value of future losses and expenditures. The Court made it clear that a number of factors incapable of any precise calculation, not limited to the earnings the plaintiff might obtain on the investment of his lump sum damages, must be taken into account. The discount rate bundles together all of these factors. It must be assumed that the legislature took the same factors into account in mandating the statutory discount rate;
(f) all of these incalculable future variables are incorporated in the 5 per cent discount rate provided by s 127 of the Act. Section 127 of the Act is applicable as the payment of fees to the fund manager is a liability to incur expenditure in the future.
53 In my opinion the submissions of the defendant are compelling. Accordingly I hold that in calculating the present value of the cost of fund management one does not take into account as a separate item the fact that the fund will earn income.
With great respect to Hislop J, I am of the view that the submissions put forward by the defendant in that case, which his Honour adopted without qualification, were misconceived and led his Honour into error. For the reasons already explained, it misconceived the plaintiff's argument to describe the predicted income as but one of a number of variables.
Upon analysis, the defendant's submissions in Rottenbury identified no good reason why income on the fund should not be taken into account in calculating the future cost of its management. The defendant submitted, in substance, that a model based on predicted earnings of the fund should be rejected on the basis that it went behind the statutory discount rate of 5 per cent. For the reasons explained above, that proposition misapprehends what is denoted in a fixed discount rate. The argument invoked the impenetrability of a fixed discount rate, without appreciating that that was the very premise of the plaintiff's calculation.
What the argument overlooked was the fact that, whether calculated by reference to actual predicted earnings or the assumed earnings implicit in the statutory discount rate, it can confidently be predicted at the time damages are assessed that income will be earned and added to the fund. Once that is accepted, the question, in my view, is not whether the plaintiff is entitled to the cost of managing that additional component of the fund (plainly she is) but how it should be measured.
For those reasons, with great respect to Hislop J, I do not think that I should follow his Honour's decision in Rottenbury . In my view, the award for fund management costs should be calculated on the premise, which I regard as certain, that the fund under management will be invested and will earn income that will be returned to the fund and so also fall under management and attract fees.
The rationale for adopting the statutory discount rate
On that premise, it is logical and consistent, in my view, to undertake the calculation by reference to the earnings rate of 5 per cent that is implicit in the statutory discount rate. In my initial analysis of the plaintiff's claim, I distracted myself with a concern that the methodology adopted by Mr Plover appeared to assume that the whole of the fund represented damages for future loss that had been discounted at 5 per cent in accordance with s 127 (whereas in fact the settlement sum is likely also to represent some past loss and general damages).
Upon reflection, I think my concern was misconceived. The critical consideration is not what the fund represents, but what assumption should be made as to how it will be expended, as explained in the following exchange with Mr Plover at the hearing at T193 (I have corrected some obvious transcription errors in the extract below):
HER HONOUR: I think my earlier question was, was there some sense or logic in applying a uniform rate even if part of the fund doesn't represent future need.
WITNESS PLOVER: If part of the fund did not represent the future need that would alter the assumption of the drawings from the fund. The idea being if there was a large expenditure immediately that amount should be withdrawn immediately. That does not change the rate of investment or the discount level if somebody alters the level of drawings.
HER HONOUR: If I asked you to assume that the proper approach is to apply the fiction of uniform drawings, then your calculations would remain the same?
WITNESS PLOVER: They would, yes.
As already explained, the issue whether any particular expenditure should be deducted from the fund to be managed has been deferred in the present case for consideration after the determination of the application in the Protective List. Leaving that question aside, two principles govern the determination of the appropriateness of the assumed earnings rate of 5 per cent contended for by the plaintiff.
The first is that, as established in Rosniak , even if parts of the award may represent past loss and general damages, the fiction of uniform drawings is the appropriate assumption in a case such as the present: at 678C per Kirby P; at 696D per Meagher JA; but cf Mahoney JA at 690B to 691E especially at 691B.
The second is that a consistent approach should be adopted for the calculation of all components of damages. In determining the plaintiff's entitlement to damages for future liabilities to which she will be exposed as a result of the defendant's negligence, the statute assumes she will be able to invest the amount awarded so as to earn income at 5 per cent. Why should any different assumption be made when the need to quantify future income on the fund arises in the calculation of a different component of her damages?
The desirability of a consistent approach in cases where there is a need to consider future investment returns and the discount rate applicable to the cost of managing such returns was considered in Treonne. In that case, it was the plaintiff who contended (unsuccessfully) for an inconsistent approach. The evidence established that the Protective Commissioner charged a percentage fee on the capital invested and a commission of 5.25 per cent on the income derived during the years of investment. An actuary calculated the relevant income assuming an investment rate of 16 per cent per annum for the first year (reducing over time). The plaintiff submitted that, although his future fund management costs had been calculated assuming that favourable rate, that component of his award should nonetheless be discounted at the rate of only 3 per cent prescribed in Todorovic .
Clarke JA rejected that submission, explaining the need for consistency with admirable clarity (at 532):
It is said, however, that the learned judge was in error when he spoke of the need to maintain internal consistency. This overlooks the fact that his Honour drew this phrase from the evidence of the actuary who supplied all the relevant figures. In my opinion the approach, which accords internal consistency, avoids the complication of over-compensation by the adoption of a rate of interest which reflects inflation for the determination of the loss sustained over the period of years and a rate of interest which denies the existence of inflation for the discounting the loss to obtain the present value. In accordance with this view and contrary to the submissions of the respondent, I would conclude that his Honour would have erred if he had in the circumstances, adopted a discount rate of 3 per cent.
There were, it seems to me, two choices open to him. He could follow the course which was adopted. That is, apply interest rates thought to be probable and discount by the same rates, or, preferably, disregard the effects of inflation and adopt the 3 per cent rate for return on income and discounting. Whichever approach is adopted should throw up substantially the same figure. In these circumstances I do not agree that his Honour erred in his choice of a discount rate.
In Rosniak , the economic boot was on the other foot. In that case, the defendant sought to rely on Treonne in support of a consistent approach, but the submission was rejected. The defendant argued that future income on the fund should, for consistency, be assumed to be 3 per cent to reflect the common law discount rate. In rejecting the submission, Meagher JA expressed the view (at 697) that "the charms of symmetry may be illusory", and were illusory in that case, the evidence having established that the Protective Commissioner had in fact obtained a much higher actual rate of return over the previous decade than was reflected in the discount rate of 3 per cent established in Todorovic . By majority, the Court fixed upon a different (higher) arbitrary rate of assumed earnings on future investment, namely 5 per cent: at 678D per Kirby P; at 698D per Meagher JA; Mahoney JA dissenting at 691E.
In the result, the decision in Rosniak stands as an example of a case in which the principle of consistency was rejected as potentially operating unfairly to the plaintiff.
There is no evidence of actual rates in the present case. The plaintiff contends that the manager will struggle to achieve a net return on investment of 5 per cent but there is no evidence to support that complaint and I do not think that I should take it into account.
Conversely, the defendant has not descended into any debate as to whether the Court should calculate the "fund management on fund income" component of the award by reference to actual rates or otherwise. The defendant rests on the submission that no such allowance should be made at all. Against the risk that the Court would reach a different view, the defendant's expert accountant, Mr Watt, was asked to undertake the task of quantifying the claim on the same assumption as was adopted by the plaintiff, namely, assumed earnings of 5 per cent.
In the circumstances, it is neither necessary nor appropriate to embark on a consideration as to whether any different rate is appropriate. It is appropriate to adopt the rate of 5 per cent proposed by the plaintiff, to reflect the assumption as to earnings implicit in the statutory discount rate. It might be noted, however, that even if the statutory discount rate were not adopted, Rosniak might stand as persuasive authority for adopting the rate of 5 per cent in any event, as being the appropriate standard assumed earnings rate to be adopted across the board for reasons of policy.
My rulings on the issues raised are, accordingly:
(a) that the plaintiff's claim for the future cost of managing the fund management component of her damages award be allowed;
(b) that the plaintiff's claim for the future cost of managing income earned upon the investment of the fund at an assumed rate of 5 per cent be allowed.
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Decision last updated: 16 August 2011
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