Smith by His Next Friend Ronald Kevin Smith v Hanrahan

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: SMITH by his Next Friend RONALD KEVIN SMITH -v- HANRAHAN [2006] WADC 20

CORAM: MCCANN DCJ

HEARD: 8 SEPTEMBER 2005

DELIVERED : 24 FEBRUARY 2006

FILE NO/S: CIV 1650 of 2003

BETWEEN: JOHN PETER PAUL SMITH by his Next Friend RONALD KEVIN SMITH
Plaintiff
AND
MARK ALSTON HANRAHAN
Defendant

Catchwords:

Damages - Remoteness - Protective trust of damages award - Whether damages should include trustee's cost of managing trust and obtaining independent financial planning advice

Legislation:

District Court of Western Australia Act 1969, s 52, s 53, s 57

Guardianship and Administration Act 1950, s 64(1), s70(1) and (2), s 83, s 117, s 118
Law Reform (Miscellaneous Provisions) Act 1941, s 5
Pubic Trustee Regulations 1942
Public Trustee Act 1941, s 37(1) and (2), s 38(1), s 39(1), s 40
Rules of the Supreme Court 1971, O 70, r 12 (1)
Supreme Court Act 1935, s 16(1)(d)
Trustee Companies Act 1987, s 8(2), (5) and (8)
Trustee Companies Act 1968 (QLD)

Trustees Act 1962 s 17, s 18(1) and (3), s 19(1) and (3), s 20 (1) and (3), s 75

Result:

Damages of $48,533 awarded

Representation:

Counsel:

Plaintiff: Mr M E Herron
Defendant: Mr J R Brooksby

Solicitors:

Plaintiff: Chris Phillips
Defendant: Greenland Brooksby

Case(s) referred to in judgment(s):

Campbell v Nangle (1985) 40 SASR 161
Kelly v Fletcher, unreported; FCt SCt of WA; Library No 970535; 22 October 1997
Miller v Motor Vehicle Insurance Trust, unreported; FCt SCt of WA; Library No 7106; 4 May 1988
Morris v Zanki (1997) 18 WAR 260
Nominal Defendant v Gardikiotis (1996) 186 CLR 49
Shaw v Cates [1909] 1 Ch 389
Tate v WA Government Railways Commission [1966] WAR 169
Willett v Futcher (2005) 221 ALR 16

Case(s) also cited:

Arnold v Teno [1978] 2 SCR 287
Chira v Savoulidis (NSWSC unreported, 19 November 1986)
Goode v Thompson and Suncorp General Insurance Ltd [2001] QSC 287
Government Insurance Office (NSW) v Rosniak (1992) 27 NSWLR 665
Lee v McClellan (1995) 127 FLR 383
Mandzuk v Viera; Insurance Corporation of British Columbia (1988) 53 DLR (4th) 606
Todorovic v Waller (1981) 56 ALJR 59
Treonne Wholesale Meats Pty Ltd v Shaheen (1988) 12 NSWLR 522
Wills v Bell [2002] QCA 419

MCCANN DCJ: By orders made on 1 July 2005 her Honour Judge French granted leave to compromise the plaintiff's claim for damages for personal injuries. The defendant agreed to pay the plaintiff the sum of $1,325,000 ("the settlement sum") in addition to agreed special damages. The settlement sum reflected an allowance of 40 per cent for the contributory negligence of the plaintiff. Her Honour made the following additional orders:
"3.Within 14 days of this order or the receipt by the Defendant of a notice of charge from the Health Insurance Commission whichever is the later the Defendant shall pay the sum of $1,325,000 to the Public Trustee in and for the State of Western Australia for investment on behalf of the Plaintiff and distribution to or on behalf of the Plaintiff as the Public Trustee in his discretion shall from time to time deem fit in the interests of the Plaintiff.
4.The Public Trustee do have authority to invest the same sum in investments outside the common fund.
5.There be liberty to apply as to the investment moneys.
6.On payment by the Defendant of the amount of the compromise and the Plaintiff's costs, the defendant be discharged from any further liability in the action.
7.The applications as to:
(a)the payment of the Public Trustee's investment and administration fees;
(b) …
are adjourned sine die".
Order 7 (a) pertains to a head of damages which has not been agreed and therefore did not comprise part of the settlement sum, that is, the damages which should be awarded to the plaintiff (if any) in respect of fees and charges for the administration and management of the plaintiff's trust which the Public Trustee intends to charge to, or recoup from, the trust. The issues which I must determine are whether an award of damages should allow for such fees and charges and, if so, the quantum of those damages.

Background

On 21 January 1998 the plaintiff was walking on Old Coast Road at Eaton near Bunbury in Western Australia when he was struck by a motor vehicle driven by the defendant. As a result the plaintiff suffered severe and irreversible brain injuries. He has significant mental disabilities including severe and permanent dementia and cognitive deficit causing memory loss, inability to communicate, inability to self‑care and aggressive and inappropriate behavioural problems. The plaintiff has resided in a secure ward at Graylands Hospital since July 1999 and will remain in that ward for the balance of his life. He was born on 16 July 1942 and is therefore 63 years of age at the moment.
As a result of his brain injuries and disabilities the plaintiff is incapable of managing his own affairs. On 16 June 2000 the plaintiff's next friend in this action, Ronald Kevin Smith, was appointed his administrator pursuant to an administration order made under s 64(1) of the Guardianship and Administration Act 1990. In accordance with this Court's orders the settlement sum will be held in trust for the plaintiff by the Public Trustee.
The plaintiff's solicitor, Mr Phillips, has sworn an affidavit in support of the plaintiff's claim for damages for the costs of the management of his trust fund by the Public Trustee. The affidavit annexes two letters from a Mr Nish Patel dated 21 June 2005 and 4 August 2005. Mr Patel is an Investments Manager employed by the Public Trustee. The letters set out estimates of the net present value of the fees which the Public Trustee intends to charge, and of the costs which the Public Trustee expects to incur for independent financial advice pertinent to the management of the plaintiff's trust fund, for the anticipated life of the trust. The Public Trustee intends to recover those fees and costs from the plaintiff's trust fund. Based upon Mr Patel's estimates, which assume that the plaintiff has a life expectancy of 70 years, the plaintiff seeks an award of damages in the sum of $48,533 calculated as follows:
Public Trustee's fund establishment fee (1.2% of $1,325,000) $16,563
Public Trustee's management fees calculated at 6.6% of
income from external investments over the life of the trust $14,480
Costs of obtaining financial planning advice for the $15,059
life of the trust

Taxation fees for the life of the trust $ 2,071
$48,533

The defendant accepts that the plaintiff is entitled to an award of damages for the establishment fee ($16,563), the estimated management fees ($14,480) and the taxation fees ($2,071). Accordingly, the only item that is in dispute is the plaintiff's claim for damages for external financial planning costs for the estimated life of the trust ($15,059).
According to Mr Patel's letter dated the 4 August 2005, the establishment fee and management fee cover the Public Trustee's duties and services as trustee and are not covered by any specific fee or disbursement. They include establishing the trust, considering claims on the trust and making payments, and engaging services of carers and taking on the associated responsibilities (where appropriate), liaising with carers and family members, preparing annual financial statements and reviewing and carrying out the investment recommendations made by the financial planner.
The Public Trustee has a practice of investing large court settlements in portfolios outside the Common Fund if and when he is authorised to do so by the order of the court. The Public Trustee regards this practice as being in the beneficiaries' best interests from a long term financial planning point of view. The Common Fund is maintained by the Public Trustee pursuant to s 40 of the Public Trustee Act. It is held by the State Treasury and is guaranteed by the State Government. Its purpose is to provide a secure rate of return on trust funds held by the Public Trustee.
The Public Trustee has a portfolio committee which reviews numerous investment portfolios outside the Common Fund but he does not employ any in‑house specialist financial advisers. According to Mr Patel's letter to Mr Phillips dated 4 August 2005, the Public Trustee takes the view that under the present regulations the cost of obtaining in‑house specialist advice would have to be absorbed within the Public Trustee's own overheads, that is, it must be recouped as part of the management fee. The Public Trustee is not minded to bear that cost. Accordingly, the Public Trustee retains financial advisers such as the firm of Paterson Ord Minnett to provide independent, quarterly reviews and advice on the performance of the various portfolios. Paterson Ord Minnett charges fees based on an hourly rate for time actually spent in the provision of those services. One of the issues that I must address is whether the Public Trustee is empowered to obtain such advice externally in respect of court‑appointed protective trusts such as the plaintiff's trust, and if so, whether the cost of doing so can be recouped from the trust fund.
The claimed sum of $15,059 is based upon Mr Patel's estimate of the plaintiff's share of financial planning fees that will be charged by Paterson Ord Minnett to the Public Trustee for reviewing all of the Public Trustee's external investment portfolios. It is based on a share of an annual cost capitalised at the statutory discount rate of 6 per cent.

The parties' submissions

As I have said, it is common ground between the parties that the plaintiff is entitled to damages for costs which will be charged to his trust fund by the Public Trustee for the establishment of that fund (estimated to be $16,553), for ongoing management fees (estimated to be $14,480) and for the cost of preparing income taxation returns (estimated to be $2,071). Thus, it is common ground that the Public Trustee's charges for those services are regarded as causally related to the personal injuries that were suffered by the plaintiff as a result of the defendant's tort.
The live issue between the parties is whether the costs which the Public Trustee proposes to incur and pass on to the plaintiff's trust fund for external financial planning advice are causally connected to the defendant's tort and not too remote and therefore compensable as damages. The plaintiff submits that they will be properly incurred by the Public Trustee and recouped from the plaintiff's trust fund. It is submitted that the plaintiff has no choice but to suffer the Public Trustee to manage his award because of his accident‑related injuries, and that the Public Trustee has no choice but to engage independent advisers if he is to discharge his statutory and equitable duties to the plaintiff.
The defendant submits that:
(a)the settlement sum was invested with the Public Trustee for the protection of the plaintiff;
(b)the Public Trustee may advance funds to the plaintiff for his education, advancement or general welfare;
(c)the Public Trustee holds the settlement sum in trust and is under no obligation to do anything specific with that money;
(d)the settlement sum could be simply invested in an interest bearing account (including the Common Fund);
(e)if the Public Trustee wishes to maximise the return to the plaintiff by way of investment of the settlement sum, he must seek professional advice;
(f)anyone who has a significant sum of money from whatever source is required to pay for that professional advice;
(g)therefore, the cost of seeking that professional advice is a cost likely to be incurred by anyone who wishes to maximise the return from their investment, including any victim of a tort who has received a large sum of money (irrespective of the nature of the personal injury involved);
(h)the law would not regard the need for professional advice which is intended to maximise investment return as being a foreseeable consequence of a tortfeasor's negligence.

Relevant principles

The issue raised in this application has received judicial attention in this State and in other jurisdictions and numerous authorities were cited to me in argument. The authorities which are binding upon this Court are Nominal Defendant v Gardikiotis (1996) 186 CLR 49, Morris v Zanki (1997) 18 WAR 260, Kelly v Fletcher, unreported; FCt SCt of WA; Library No 970535; 22 October 1997, BC97045411 and Willett v Futcher (2005) 221 ALR 16.
In Gardikiotis the plaintiff was injured in a motor vehicle accident when she was 21 years of age. She already had multiple sclerosis which was exacerbated or aggravated by the accident to such an extent as to confine her to a wheelchair for the rest of her life. She was of sound mind and suffered no mental injuries as a result of the accident. After a trial in the District Court of New South Wales, followed by an appeal to the Court of Appeal of that State, the plaintiff was ordered damages in the sum of $2,120,244 including an amount of $87,926 to compensate her for ongoing fund management costs which the plaintiff expected to incur for the day to day management of her money. The High Court (Brennan CJ, Dawson, Toohey, Gaudron, McHugh and Gummow JJ) held that the plaintiff was not entitled to damages for the fund management costs. Brennan CJ and Dawson, Toohey and Gaudron JJ said (p 52):
"[It] is contrary to commonsense to speak of the accident causing a need for assistance in managing the fund constituted by [the plaintiff's] … verdict moneys in circumstances where her intellectual abilities are not in any way impaired. It would be otherwise in the case of a plaintiff who is intellectually impaired as a result of a defendant's negligence or by reason of some pre‑existing disability."
Their Honours expressed themselves as being in "substantial" agreement with the reasons of Gummow J who approved (at p 67) the following statement of King CJ in Campbell v Nangle (1985) 40 SASR 161 (at 192):
"The fundamental principle on which damages are assessed is the principle of compensation that the plaintiff is to be placed, so far as possible, in the same position financially as he would have been if he had not sustained the wrong for which he receives the damages. The capital sum awarded to him is computed on the basis of an assumed real return for its investment. If the plaintiff has been rendered by the wrong for which he recovers damages incapable of managing his affairs so that the fund resulting from the damages must be managed for him, the fees payable to the manager will reduce the real return from its investment. Unless an amount is included in the damages to compensate for those fees, the plaintiff will not receive the full restitution to which the law entitles him. It seems to me that the liability for the fees is a loss flowing directly from the wrong and is recoverable as damages caused by the wrong. I should say for the sake of completeness that the same is true, in my opinion, where the plaintiff's incapacity to manage his affairs does not result from the wrong but is antecedent to it, being the result of legal disability or some other cause."
In Morris v Zanki the plaintiff was severely injured in a motor vehicle accident. He was 17 years of age at the time. As a result of his injuries the plaintiff suffered severe physical and mental impairment and was awarded a large sum. The Full Court of the Supreme Court of Western Australia considered two issues which are pertinent to the present matter, namely whether it was appropriate for an authorised trustee other than the Public Trustee (namely National Australia Trustees Ltd) to be appointed as the plaintiff's protective trustee and, second, what allowances should be made for the cost of managing the plaintiff's award of damages. These issues were inter‑related because the fee structures of National Australia Trustees Ltd and the Public Trustee were different.
The trial Judge awarded the plaintiff the sum of $17,281 for the cost of future fund management. That sum represented the Public Trustee's initial establishment fee. On appeal the plaintiff contended that the trial Judge had wrongly refused to allow future and recurrent fund management expenses of the Public Trustee which would be charged to the trust fund. In particular, the plaintiff contended that the trial Judge should have awarded damages for the fees and commissions which the Public Trustee incurred in order to invest the money outside the Common Fund (ie for investment advisers and other costs).
The defendant did not dispute on appeal that the plaintiff was entitled to an allowance for the costs of managing his award but contended that the trial Judge's allowance was appropriate and that the additional amounts claimed by the plaintiff were not causally related to the defendant's negligence.
The Full Court of the Supreme Court of this State applied the principles enunciated by the High Court in Gardikiotis and ruled in the plaintiff's favour. The results in the two cases differed because in Morris v Zanki the costs of fund management were a direct result of intellectual impairment that was caused by the defendant's negligence. That was not the case in Gardikiotis. At p 289 the Court (Malcolm CJ, Pidgeon and Owen JJ) dealt with "the costs that should be taken into account in assessing the level of the award under this head". Their Honours said:
"It must be borne in mind that the [plaintiff] has a normal life expectancy and it can be anticipated that the funds will be held for a very long time. There will be calls on the fund to provide for the day to day needs of the [plaintiff]. Counsel for the [plaintiff] submitted that the moneys should be invested by the trustee in a portfolio of investments which will provide long term capital growth in addition to regular income. We think this is correct, although it may be more accurate to say that the trustee must consider the prospects of income yield and capital appreciation so as to ascertain the best return from the investment. This has long been the law which attaches duties to the activities of trustees: see Cowan v Scargill; Re Mine Workers' Pension Scheme Trust [1985] Ch 270 at 287; Nestle v National Westminster Bank P/c [1993] 1 WLR 1260 at 1262. The primary duty of a trustee in relation to investments is to exercise ordinary business prudence. In the modern commercial environment ordinary business prudence would demand periodic reviews of investment portfolios and a consideration of the potential for capital, as well as income, returns. Recent amendments to the Trustees Act 1962 (WA) … oblige a trustee to have regard to the desirability of diversifying trust investments, the potential for capital appreciation and the likely income return: s 20(1)(b), (f) and (g)."
The Full Court dealt "with the argument … that inflation and income tax were already accounted for by the use of the 6 per cent discount factor under s 5 of the Law Reform (Miscellaneous Provisions) Act 1941". The Court held (p 290) that the inclusion of an allowance in an award of damages for the cost of fund management does not seek to compensate for the direct effects of inflation and income tax, but rather "seeks to value the cost of taking measures to counter those effects". The Court distinguished its earlier decision in Miller v Motor Vehicle Insurance Trust, (unreported; FCt SCt of WA; Library No 7106; 4 May 1988) and held that that case was not "authority for the proposition that, in all cases, the award of damages for future costs of fund management must be limited to the initial commission" charged by the protective trustee.
The Full Court held that the plaintiff was entitled to have his award increased to include the costs of future recurrent fund management. Depending on whether those costs were calculated in accordance with the evidence of the Public Trustee's charges, or in accordance with the evidence of National Australia Trustee's charges, the resultant award would be $86,663 or $108,004. The Court then dealt with the issue of the appointment of the trustee and over‑ruled the trial Judge and held that National Australia Trustee ought to be appointed. But, in returning to the question of the appropriate award of damages for the future cost of fund management, the Court held that the award should be calculated in accordance with a schedule based on the Public Trustee's charges (revised to allow for adjustments to other heads of damage) rather than a schedule based on National Australia Trustees' charges. The court said:
"[The] costs of future fund management … are compensable because they are directly referrable to the disabilities suffered as a result of the accident. What is not compensable is a cost that is not necessarily incurred but which results from the exercise of a choice by a plaintiff as to how to invest those damages. The fact of the creation of a trust fund and the necessity to incur management costs are what gives rise to the entitlement."

Having found that the Public Trustee was capable of handling the plaintiff's investment, the court held (p 295) that "costs over and above those that would have been incurred had the fund remained with the Public Trustee [were] … not compensable in accordance with the principles enunciated in Gardikiotis".
The facts of Kelly v Fletcher were similar to Morris v Zanki. The plaintiff was an infant when he suffered severe intellectual injuries in a motor vehicle accident caused by the negligence of the defendant. A substantial portion of the plaintiff's damages award was ordered to be paid to the Public Trustee and invested on the plaintiff's behalf, such investment not to be restricted to the Common Fund. The trial Judge included allowances in the plaintiff's award of damages for the Public Trustee's initial fee for establishing and setting up the trust fund, together with charges related to the ongoing costs of obtaining investment advice. However, the trial Judge disallowed the costs of the Public Trustee's ongoing management fees and transaction costs. The Full Court of the Supreme Court of Western Australia (Kennedy, Ipp and Owen JJ) applied and followed Gardikiotis and Morris v Zanki and held that the trial Judge ought to have included an allowance for the ongoing management fees and transaction costs. Their Honours referred to the passage in Morris v Zanki which I have cited in par 20 above and emphasised that the plaintiff (ie the Public Trustee as his protective trustee) had no choice but to regularly review the trust fund, and to change investments from time to time, having regard to the plaintiff's life expectancy and the anticipation "that the funds will be held in trust for a long time".
The judgment of the High Court of Australia in Willett v Futcher was delivered the day before the hearing of this matter and was brought to my attention shortly after the hearing. Neither party wished to make any submissions in relation to that decision. The appellant suffered severe brain damage and other physical injuries in a motor vehicle collision which occurred when she was nine weeks of age. The matter was settled by mediation when she was 23 years of age on the basis that the defendant would pay the plaintiff the sum of $3,850,000 "plus costs plus trustee Administration and Management Charges". There were two proceedings in the Supreme Court of Queensland. First, Byrne J made orders approving the compromise and ordering that certain amounts be paid or satisfied out of the settlement sum. His Honour also appointed Perpetual Trustees Queensland Ltd as administrator in relation to all financial matters relating to the balance of the sum and gave directions for the subsequent determination of "the sum by way of damages in respect of reasonable management fees of the administrator". White J assessed those damages and awarded the plaintiff a sum of $180,000 which comprised allowances for two categories of charges described as an "establishment fee" and a "discretionary portfolio management fee". Four other categories of charges ("advisory portfolio management fee", "fund management fee", "initial brokerage fee" and "ongoing brokerage fee") were disallowed. White J held that the disallowed fees were not compensable because "[t]he purpose of investment advice and decision-making in both investments which concerns the present determination is to maximise a return over and above the amount of compensation awarded which already has an investment strategy inherent in it". Thus, the plaintiff was effectively awarded the cost of setting up an investment fund and administering the same, but not the cost of reviewing and restructuring the investment from time to time, and obtaining advice on the same. The Queensland Court of Appeal upheld White J's decision. However, the High Court allowed an appeal and remitted the matter to the Court of Appeal for further determination. The Court (Gleeson CJ, McHugh, Gummow, Hayne, Callinan and Hayne JJ) summarised the "central issue" as follows (par 8):
"… [W]hat kinds of costs of managing the damages awarded to a person incapable of managing his or her own affairs, whose incapacity was caused by the defendant's negligence, are to be allowed in assessing the damages to be allowed to that person."
The court began its analysis by referring to general principles of causation and held (par 10) that the plaintiff's "need to have others administer her financial affairs was caused by the respondent's negligence" since the respondent "caused [her] … impaired intellectual capacity".
The court held (at par 49) that the amount to be awarded to such a plaintiff was:
"[A]n amount assessed as allowing for remuneration and expenditures properly charged or incurred by the administrator of the fund during the intended life of the fund. No distinction … between investment advice and other services should be drawn in assessing that amount. Because the allowance to be made is for remuneration and expenditure properly charged or incurred, the distinction … between fees for services necessary to enable [the protective trustee] … to perform its obligations, and for fees for services not necessary to perform those obligations, becomes inapposite. The services properly to be provided … must first be identified. And the identification of what remuneration and expenditure is properly charged or incurred, as with identification of the amount of the remuneration and expenditure properly allowed, all require close attention to the statutes governing those matters".
At par 52 the Court said as follows:
"Assessing what remuneration and expenses are properly charged or incurred … requires consideration of the relevant statutory limitations on those charges."
The High Court rejected an approach which predicated that the only charges and expenses which were compensable were those which would be incurred in carrying out financial management tasks which an ordinary, able adult with no financial skill or training would carry out on his own behalf. Their Honours said (at par 51):
"The plaintiff can make no decision about the fund. 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. That requires comparison with the position the plaintiff would have been in without the award of a lump sum for damages. It does not, as the distinction adopted by White J supposes, require or permit comparison that the position that the plaintiff would have been in had the disabling injuries not been sustained but the plaintiff nonetheless had a lump sum to invest. That comparison is irrelevant and inapt. In the ordinary course a person who is not injured will not have to husband a large sum of money over a long period of time in such a way as to ensure an even income stream but the complete exhaustion of the fund at the end of the period."
Thus, the High Court endorsed the contentions relied upon by the plaintiff in this matter and rejected those relied upon by the defendant (see pars 12 and 13 (f), (g) and (h) above). The Court noted that the question whether expenses incurred by a plaintiff in managing his or her award as a result of physical disabilities of a non‑intellectual kind were compensable was not considered in Gardikiotis(since a claim of that kind was not pleaded or proved). The High Court left the question undecided in Willett v Futcher. It must therefore be regarded as an open issue.
In conclusion, in my view, the abovementioned authorities establish the following propositions:
1.If a defendant's negligence causes a plaintiff to suffer intellectual impairment which renders the plaintiff incapable of managing his or her own financial affairs, so that the plaintiff needs others to do so, the costs incurred are a loss caused by the defendant's negligence and are recoverable as damages.
2.The same is true when the plaintiff's intellectual incapacity to manage his or her own affairs does not result from the defendant's tort, but was antecedent to it.
3.The award of damages should compensate the plaintiff for fees and expenditure properly charged or incurred by the protective trustee or administrator (or both) in respect of the management and administration of the plaintiff's fund. Regard must be had to the statutes and principles of the general law which govern the duties and powers of the administrator and/or trustee. In the light of those provisions and principles, and subject to the size and expected longevity of the trust and the facts and circumstances of each case (as emerging from the evidence), it is appropriate to include an allowance for financial planning and advisory fees and expenses associated with the ongoing review and adjustment of the invested component of an award of damages (ie costs associated with "financial planning") in addition to allowances for establishment and ongoing management fees.
4.A plaintiff who does not suffer from any incapacity to manage his or her own financial affairs is not entitled to be compensated for the expense of managing his or her award, even if such is prudent in the circumstances (by reason of the size or life expectancy of the plaintiff or otherwise). The entitlement of a plaintiff whose capacity to manage his or her affairs is compromised by physical disabilities of a non-intellectual kind is undecided at this time.
Against this background it is necessary to examine the statutory and equitable framework pertaining to protective trusts in Western Australia and to determine when a trustee may properly charge or incur expenses which are to be borne by the trust fund.

The supervisory role of the Court

The historical roles of the Supreme Court and the District Court, and of protective trustees, in connection with compromising causes of action of persons under disabilities, and the disposition and administration of the proceeds of compromised claims and awards of damages, are set out in Morris v Zanki at 284 ‑ 285. Historically, the Court of Chancery had jurisdiction as the delegate of the Crown as parens patriae in respect of persons under a disability. That jurisdiction is now part of the inherent jurisdiction of the Supreme Court (see s 16(1)(d) of the Supreme Court Act 1935). The jurisdiction of the Supreme Court and its practice and procedures have been conferred on the District Court in respect of actions which fall within the District Court's jurisdiction (see District Court of Western Australia Act 1969, s 52, s 53 and s 57). Accordingly what follows is applicable to this Court.
Section 37(1) of the Public Trustee Act 1941 provides that the investment of moneys under the control of, or subject to any order of the Supreme Court shall be made by the Public Trustee. Section 37(2) provides as follows:
"All moneys or damages so received or awarded by or to the Public Trustee shall, subject to any specific or general directions of the appropriate court, be held and applied by him in such manner as he thinks fit for the maintenance and education or otherwise for the benefit of the persons entitled thereto."
In Morris v Zanki the Full Court said (p 285) that s 37(1) of the Public Trustees Act "might, at first glance, be seen as obliging the Court to place the funds [payable pursuant to an approved compromise or damages award] with the Public Trustee". However, the Court approved the decision of Jackson J (as he then was) in Tate v WA Government Railways Commission [1966] WAR 169 (at p 170) in which His Honour held that s 37(1) only applies to moneys which the Court retains under its continuing supervision and control. Jackson J held that s 37(1) did not affect the Court's powers pursuant to those provisions of the Rules of the Supreme Court which deal with the disbursal of moneys awarded to a person under a disability. Order 70, r 12(1) of the current Rules provides as follows:
"12(1)Where –
(a)in any proceedings money is recovered by or on behalf of or is adjudged or ordered or agreed to be paid to or for the benefit of a person under disability; or
(b)in any proceedings money paid into court is accepted by or on behalf of a plaintiff who is a person under disability; or
(c)in an application under Rule 11(1) the court has ordered the payment into court or investment of any monies relating to a settlement or compromise,
the money shall, unless otherwise ordered by the Court be paid to the Public Trustee for investment on behalf of the person under disability, and if the Court so orders may be invested by the Public Trustee in investments outside the Common Fund."
So, in the case of a plaintiff who is under a disability the proceeds of an approved compromise (such as the settlement sum in this case) or a damages award must be paid to the Public Trustee unless the Court orders otherwise, and the Court has power to order that the Public Trustee be entitled to invest the money in investments outside the Common Fund.

Part 6 of the Guardianship and Administration Act

Pursuant to s 64(1) of the Guardianship and Administration Act 1990 the Guardianship and Administration Board (now the State Administrative Tribunal) had power in the plaintiff's case to declare him to be in need of an administrator of his estate, and to appoint a person to be his administrator, on the grounds that he was unable by reason of mental disability to make reasonable judgments in respect of matters relating to all or any part of his estate and that he was in need of an administrator. Pursuant to s 70(1) an administrator is required to "act according to his opinion of the best interests of the represented person" and, pursuant to subsection (2) the administrator is to be taken to be acting in the best interest of a represented person if, inter alia, he acts (by par (d)) "in such a way as to protect the represented person from financial neglect or abuse or exploitation".
Section 83 of the Act provides:
"Nothing in this Part should be read as limiting the operation of any rules of court –
(a)whereby a person under a disability is required in any proceedings to sue by a next friend and defend by a guardian ad litem; or
(b)relating to the approval of any compromise, settlement or acceptance of money paid into court affecting a person under a disability."
Pursuant to s 117(1) and s 117(2) an administrator is not entitled to remuneration for services rendered to a represented person unless the same was fixed and ordered by the Board (now the State Administrative Tribunal), although pursuant to subsection (3) the Public Trustee is entitled to such remuneration as he is entitled to receive pursuant to the Public Trustee Act 1941.
Pursuant to s 118, an administrator is entitled to reimburse himself for, or pay out of the estate of a represented person, all expenses reasonably incurred in or about the performance of his functions.

Payment and reimbursement of protective trustees

I shall initially deal with the legislation which specifically relates to the Public Trustee. Pursuant to s 38(2) of the Public Trustee Act the Public Trustee is entitled to charge fees "in addition to all moneys properly expended in respect of the estate" which do not exceed those set out in that subsection. The current scale of those fees is set out in the second schedule of the Public Trustee Regulations 1942. For the purposes of this action the fee structure set out in Mr Patel's letter to Mr Phillips dated 21 June 2005 and expanded upon in Mr Patel's letter to Mr Phillips dated 4 August 2005 is not in dispute. That is as follows:
1.An establishment fee of 1.25 per cent of the initial trust fund invested (ie 1.25 per cent on $1,325,000 or $16,563);
2.A fee of 6.6 per cent of income derived from investments made outside the Common Fund for the ongoing management of the plaintiff's affairs.
3.$110 per hour for the preparation of annual income tax returns.
In my view these fees and charges are properly charged by the Public Trustee.
What of expenses incurred for external advice? In my view the phrase "all moneys properly expended in respect of the estate" in s 38(2) refers to expenses which are recoverable pursuant to s 39(1) of the Public Trustee Act which provides:
"In addition to any charges otherwise prescribed, all expenses incurred by or on behalf of the Public Trustee in respect of the maintenance of a represented person or the control, management, administration of any trust estate or property, shall be charged against and payable out of the trust estate or property".
In Willett v Futcher (supra) the High Court considered the phrase "in addition to all moneys properly expended by the trustee company and chargeable against the estate" in the Trustee Companies Act 1968 (Queensland). The Court said the following (at par 34):
"It would not be useful to attempt to give a list of all of the kinds of expenditure that would be chargeable against the estate. But one example of such an expenditure is immediately relevant. Where a trustee company engages a third party to act as stockbroker in connection with a dealing in listed securities forming part of the trust fund under administration, the brokerage chargeable on that transaction would be a sum properly expended and chargeable against the estate under administration."
So, the Court countenanced the concept that third party expenses associated with the trust investments may readily be regarded as "properly" expended and chargeable against the estate.
The words "in respect of" in s 38(2) and s 39(1) are of wide import. In my view an act could be said to be "in respect of" the control, management or administration of a trust fund if such act relates to the control, management or administration of the trust. Having regard to the fact that trust funds are under the control and management of the Public Trustee, in my view decisions and measures which relate to the investment of such funds are taken "in respect of" the exercise of that control or management. It follows that expenses incurred by the Public Trustee in relation to the investment of trust funds (such as brokerage) are incurred in respect of the control or management of the trust estate and can be recouped from the trust pursuant to s 39(1) of the Public Trustee Act. In my view there is no reason to distinguish between the use of a broker (which relates to the acquisition and disposal of investments) and obtaining investment advice (which relates to the trustee's need to regularly review the trust investments).
Although it is not necessary to do so for the purposes of deciding this matter, for completion I shall consider the statutory provisions specifically relating to protective trustees other than the Public Trustee, that is to say companies that are authorised to act as trustees pursuant to the Trustee Companies Act 1987. Pursuant to s 18(2) of that Act a trustee company is entitled to charge "commissions and other charges not exceeding those fixed from time to time by the board of directors and set out in the latest scale of charges of that trustee company published before the administration of" the relevant trust commences. Further, a trustee company is entitled to charge a reasonable fee for the preparation and lodgement of taxation returns (s 18(8)) of the Act). Further, s 18(5) of the Act provides that nothing in that section "prevents the reimbursement to a trustee company of all disbursements properly made by the trustee company in the administration or management of an estate". In the light of these provisions a trustee company may obtain professional investment advice, and recover the cost of the same from the trust, by two means. First, if the advice is provided by an in‑house adviser, by incorporating the cost into the trustee's fees and charges as determined by the Board and published. Second, by obtaining the advice from an independent or external adviser. In my view external advice could be said to have been obtained "in the administration or management" of the trust estate for the same reasons I have given in relation to the Public Trustee's entitlements pursuant to s 39(1) of the Public Trustee Act (see par 43 above). In my view there is no material difference between the phrase "in respect of" which appears in s 39(1) of the Public Trustee Act and the word "in" which is used in s 18(5) of the Trustee Companies Act. The proviso to the latter provision requires the disbursement to have been "properly made", which directs attention to the trustee's equitable and statutory duties and powers, which I shall refer to later in these reasons.

I turn now to the provisions of the Trustees Act 1962. That Act applies to trusts under the control of all trustees, including the Public Trustee (see s 23(1) of the Public Trustee Act) and trustee companies.
Pursuant to s 17 of the Trustees Act a "trustee may, unless expressly prohibited by the instrument creating the trust –
(a)invest trust funds in any form of investment; and
(b) at any time, vary an investment or realize an investment of trust funds and reinvest money resulting from the realization in any form of investment."
Pursuant to s 18(1)(a) of the Trustees Act a professional trustee "shall, in exercising a power of investment … exercise the care, diligence and skill that a prudent person engaged in that profession, business or employment would exercise in managing the affairs of other persons".
Pursuant to s 18(3) of the Trustees Act, and subject to the instrument creating the trust, "a trustee must, at least once in each year, review the performance (individually and as a whole) of trust investments".
Section 20(1) of the Trustees Act provides as follows:
"Without limiting the matters that a trustee may take into account when exercising a power of investment, a trustee shall, so far as they are appropriate to the circumstances of the trust, have regard to –
(a)the purposes of the trust and the needs and circumstances of the beneficiaries;
(b)the desirability of diversifying trust investments;
(c)the nature of and risk associated with the existing trust investments and other trust property;
(d)the need to maintain the real value of the capital or income of the trust;
(e)the risk of capital or income loss or depreciation;
(f)the potential for capital appreciation;
(g)the likely income return and the timing of income return;
(h)the length of the term of the proposed investment;
(i)the probable duration of the trust;
(j)the liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment.
(k) the aggregate value of the trust estate;
(l)the effect of the proposed investment in relation to the tax liability of the trust;
(m)the likelihood of inflation affecting the value of the proposed investment or other trust property;
(n)the costs (including commissions, fees, charges and duties payable) of making the proposed investments; and
(o)the results of a review of existing trust investments."
Whilst the circumstances of each trust will vary, it is clear in my view from what was said by the Full Court in Morris v Zanki (see par 20 above) and by the High Court in Willett v Futcher (see par 27 above), and from the statutory duties referred to in s 18(1)(a) and (3) and s 20(1) of the Trustees Act, that it would be proper for a prudent trustee in this State to regularly obtain qualified investment advice in respect of a large protective trust which is intended to serve the many and varied needs of the beneficiary for a considerable period of time. It is difficult to envisage a prudent trustee in that situation doing otherwise. Such advice might be provided to the trustee by an in‑house advisor, or by an external consultant. Either way, compliance with such responsibilities will inevitably impose costs upon the trustee. The Public Trustee elects to obtain that advice externally and to recover the costs from the trust fund, rather than to bear the cost within the Public Trustee's existing fee structures. Trustee companies may use in‑house advisors and build the cost into their fee structures or use external advisors, or both. To what extent does the Trustees Act entitle a trustee to recover the cost of obtaining such advice?
Section 19(3) of the Trustees Act provides that if "a trustee is under a duty to take advice, the reasonable costs of obtaining the advice are payable out of trust funds". In my view the "duty to take advice" referred to in that subsection is the same "duty to take advice" as is referred to in s 19(1)(d) of the Act which provides, relevantly, as follows:
"Any rules and principles of law or equity that impose a duty on a trustee exercising a power of investment including, without limiting the generality of those duties, rules and principles that impose –
…
(d)a duty to take advice,
continue to apply except to the extent that they are inconsistent with this or any other Act or the instrument creating the trust."
Thus, in my view, s 19(3) of the Trustees Act is applicable when a trustee exercising a discretionary power of investment is under a duty, by reason of the principles of law or equity, to take advice. In my view, a duty to take advice is a concomitant of a trustee's duty to exercise business prudence and arises whenever the trustee lacks the knowledge, qualifications or experience to act unassisted or, notwithstanding the possession of those attributes, the situation calls for impartial advice. (See Shaw v Cates [1909] 1 Ch 389 at 396; Ford & Lee's Principles of the Law of Trusts, par 10,100). As such, a trustee of a large protective trust who has a discretion as to the investment of the trust funds but lacks the knowledge, qualifications or experience to make investment decisions would generally be under a duty to take periodic financial planning advice, and would be entitled to recover the reasonable cost of so doing from the trust funds pursuant to s 19(3) of the Act. It is not necessary for the purposes of this matter to decide whether "in‑house" advice qualifies as "advice" for the purposes of s 19(1)(d) and s 19(3) of the Act. However, I have significant doubt about it. Historically, a trustee was entitled and expected (both in equity and pursuant to statutory provisions such as the current s 75) to take competent advice as required, for example, legal or valuation advice in relation to contentious or unusual disbursements or investments. As a rule this advice is expected to be competent and impartial (see Ford & Lee at par 18040)
I now turn to s 20(3) of the Trustees Act which provides that a " … trustee may –
(a)obtain and consider independent and impartial advice reasonably required for the investment of trust funds or the management of the investment from a person whom the trustee reasonably believes to be competent to give the advice; and
(b)pay out of trust funds the reasonable costs for obtaining the advice."
So, provided that independent advice is reasonably required for the investment of the trust funds or the management of the investment; that the adviser is a person who the trustee reasonably believes to be competent to give the advice; and the cost or charge which the trustee recoups from the trust funds is reasonable, a trustee could be said to properly obtain independent financial planning advice and recover the cost of so doing from the trust funds.
This provision differs from s 19(3) in that it confers a right to recover costs of advice obtained in the exercise of a discretionary power to take advice (if it is reasonably necessary), not a duty to take advice.
In conclusion, in my view the Public Trustee is entitled to take independent, professional investment advice in respect of funds held by him on protective trust and is entitled pursuant to s 39(1) of the Public Trustee Act and s 19(3) and s 20(3) of the Trustees Act to recover the costs of such advice from the trust funds. Although not strictly necessary for the purposes of this judgment, for completeness I have also touched on the entitlements of trustee companies pursuant to the Trustee Companies Act and the Trustees Act. In my view, trustee companies are also entitled to take professional investment advice in relation to protective trusts under their management. A trustee company is entitled to recover the costs of obtaining in‑house advice by allowing for the same within its authorised fee structure and is entitled to recover the cost of advice obtained from an independent source pursuant to s 18(5) of the Trustee Companies Act and s 19(3) and s 20(3) of the Trustees Act. These powers and entitlements of protective trustees are founded in their equitable and statutory duties to act prudently and with reasonable care, skill and diligence, and the ultimate question as to whether the taking of advice, and the recovery of the costs of obtaining the same, are proper must be judged with those duties and powers in mind having regard to the facts of each case.

Assessment of damages in relation to a protective trustee's charges

A protective trustee will not always need to take independent advice. As a general rule the question of the need for regular investment advice will only arise in respect of trust moneys over which the trustee will have discretionary investment powers.
When it is assessing damages (or considering whether to approve a compromise) the Court will be required to make a finding as to the likely need for the trustee to obtain advice over the life of the trust. As with the assessment of all heads of future loss and damage, the Court must bear in mind that needs may vary over time and should allow for contingencies which may affect them. Two important factors which it will be necessary to take into account will be the size of any discretionary component of the trust fund and its likely term, since a protective trustee will usually have a need of ongoing specialist advice which is proportionate to the size and likely lifespan of the trust. In that respect it will be necessary to have regard to how the agreed or awarded damages are calculated, and how the same will be disbursed over time. As a general rule the Court will be entitled to act upon reliable evidence that the trustee intends to take advice over the life of the trust fund.
Turning to the matter before me, it must be borne in mind that all four components of the damages claimed by the plaintiff in this case must be considered, and approved, by the Court. That is to say the Court must not only make a determination as to the plaintiff's entitlement to damages in respect of the disputed component (financial planning costs) but also in relation to the agreed amounts in respect of the other components.
In my view, based on the undisputed evidence and the equitable and statutory obligations and powers of the Public Trustee, all of the fees or expenses which the Public Trustee proposes to charge to the plaintiff's trust fund, or recoup from the fund (and in particular the financial planning expenses) are in respect of services which will be properly carried out by, or for, the Public Trustee. Having regard to the size of the trust and the premise that its lifespan will be at least seven years, I find that it will be reasonable and proper for the Public Trustee to invest a significant proportion of the trust fund in investments outside the Common Fund and it will be necessary for him to take independent financial planning advice from a firm such as Paterson Ord Minnett to ensure that the investments are adequately monitored. Accordingly, I find that the plaintiff's share of the cost of obtaining that advice is properly chargeable to the plaintiff's trust fund pursuant to s 39(1) of the Public Trustee Act and s 19(3) and s 20(3) of the Trustees Act.
Accordingly, I find that the plaintiff is entitled to an award of damages for all of the costs of managing his trust fund, including an establishment fee and ongoing management fees, the costs of preparing annual taxation returns and the costs of the Public Trustee obtaining independent financial planning advice from advisers such as Paterson Ord Minnett for the likely life of the trust fund.
I turn now to the assessment of the plaintiff's damages for these items. Mr Patel's letter to Mr Phillips dated 21 June 2005 estimated the present discounted value of the Public Trustee's fees and expenses for the life expectancy of the trust. Mr Patel's calculations are based on a number of assumptions as follows:
1.    The plaintiff's life expectancy is 70 years.
2.    The sum which will be invested in the Common Fund will be $64,422.
3.    The interest rate payable by the Common Fund will average 4.5 per cent per annum.
4.    The balance of the settlement sum available for investment in external investments is $1,224,016. (This leaves the sum of $36,562 unaccounted for, but I assume that this represents initial disbursements such as the Public Trustee's establishment fee itself).
5.    The externally invested funds will enjoy capital growth of 5 per cent per annum and income of 4 per cent per annum.
6.    Inflation will average 3 per cent per annum.
Based on these assumptions Mr Patel estimated that the present value of the Public Trustee's fees and expenses for the life expectancy of the plaintiff's trust will be the sums set out in par 5 thereof.
Mr Patel's first letter set out a number of contingencies that could impact on the expenses and income of the trust and hence his estimates. The following were given as examples:
1.    Withdrawals for special needs prior to the initial investment of the trust monies.
2.    Fluctuations in inflation.
3.    Annual investment performance.
4.    Large unexpected capital withdrawals.
5.    Variations to annual administration fee scales.
6.    The actual longevity of the trust.
7.    Legislative changes.
8.    Changes to taxation legislation and rates.
Of these, the actual longevity of the trust requires a specific comment. For the purposes of the compromise proceedings before Her Honour Judge French, and in the assessment of damages before me, the parties have agreed that the plaintiff's life expectancy is 70 years. In granting leave to compromise the plaintiff's action Her Honour approved the parties' agreement as to the plaintiff's life expectancy. The parties have not suggested that I should adopt any other course, and in all circumstance I intend to proceed on the basis that the plaintiff's life expectancy is indeed 70 years.
Given the undisputed evidence I find that the plaintiff is entitled to an award of damages to allow for the costs of fund management by the Public Trustee in the sum of $48,533. It is not necessary to reduce this sum for contributory negligence because the necessary apportionment is factored into the settlement sum. I propose to order that the damages be paid to the Public Trustee on the same terms as the settlement sum.

[2006] WADC 20

24 February 2006

Key Legal Topics

Areas of Law

Trusts & Equity

Legal Concepts

Constructive Trust

Protective Trust

Compensatory Damages