Lewis (by his litigation guardian P Osborne) v Bundrock & Anor

Eardly Motterani for the first and second respondents

[1] In April 2003 the applicant was severely injured in a motor vehicle accident. Four years later, in March 2007, his claim was settled and on 21 March 2007 White J made a number of orders as part of the process of sanctioning that settlement. They included:

1. Pursuant to s.12 and s.245 of the Guardianship and Administration Act the National Australia Trustees be appointed as Administrator to administer the moneys to be paid to it on behalf of the Plaintiff after payment of the sums referred to in paragraph 5.
2. ...
3. The appointed Administrator:

(a) take possession of and control and manage the Trust Fund, including the administration fees to be determined as provided for in paragraph 5 hereof, in such a manner as the Administrator thinks fit for the benefit of the Plaintiff generally with the powers and duties defined and conferred in the Trusts Act 1973 until the Plaintiff shall cease to be under a disability;

(b) be entitled to charge remuneration for its services of such administration.

(a) The settlement sum of $1,400,000.00 be paid by the Defendants within 21 days of receipt of the letter of clearance checks from Centrelink and the Health Insurance Commission as follows:-

(b) The administration fees properly charged by a reasonable trustee to be agreed (subject to sanction) or failing agreement and sanction to be determined by the Court be paid within 21 days of the sanction or determination thereof by the Court by the Defendants to the Plaintiff's administrator, whose receipt thereof shall be sufficient discharge.

[2] After deductions, the sum received by NAT was $1,035,311.91. The sum of $10,000 as a set up fee was paid to NAT out of that amount.

[3] The parties have not been able to agree on the amount of the administration expenses and, by this application, the Applicant seeks an order fixing those expenses in the sum of $209,546.

[4] The dispute between the parties arises in relation to two issues:

(a) whether the defendant is required to pay, in addition to the management fees charged by NAT, further sums representing the fees NAT proposes to charge for the investment of its allocated administration and management fees; and

(b) whether the tax deductibility of part of the management fees and the financial advantages the plaintiff will thereby enjoy (which includes the deductibility of an annual fee of $500 for the preparation of his tax return) should be brought to account in the calculation of those fees to arrive at his true (after-tax) loss.

[5] An affidavit by the Investment Manager for Trustee Services of NAT discloses that NAT's management fee is 1% per annum and that that fee is chargeable on both the settlement amount and the management fees. The sum of $209,506 is arrived at in the following way[1]:

No explanation is given by the applicant for performing this calculation three times.

[6] The applicant argues that NAT is obliged to manage and invest the original sum of approximately $1,025,000 together with any funds paid to it as management fees and, thus, is entitled to apply its management fee to the two sums together, and, therefore, the respondents are liable to pay a higher amount to cover management fees. That is, an amount which includes the fee for managing the fund for the applicant and a fee imposed for managing the administrator's fee.

[7] The respondents refer to the decision of Burchett AJ in Buckman v M & K Napier Constructions Pty Ltd [2] and of Hidden J in Haywood v Collaroy Services Beach Club Ltd [3]. The applicant argues that both those decisions can be distinguished from this set of circumstances.

[8] In Buckman, the fees to be charged were subject to the Protected Estates Regulation 2003. Clause 8 of that regulation provided:

"(3) Such fees as may be prescribed for the purposes of this section shall be charged upon and payable out of the estate of a protected person ... whether or not, before payment, the management under this Act of the estate of the person has terminated."

[9] In considering the application that the management fee should be calculated upon the sum of the agreed amount to be paid to the plaintiff and the initial calculated fee, his Honour considered other authorities and said:

"[9] The principle upon which the court, in an appropriate case, allows a plaintiff the cost of fund management was considered by the High Court of Australia in The Nominal Defendant v Gardikiotis [1996] HCA 53; (1996) 186 CLR 49. In the joint majority judgment of Brennan CJ, Dawson, Toohey and Gaudron JJ it is stated (at 52) that "the question whether a need results from an accident is essentially a question of common sense", and their Honours made it plain an allowance should be made "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". McHugh J, in a separate judgment, held (at 57) that it was the full cost of fund management "necessitated by disabilities resulting from the defendant's negligence", so that "the plaintiff's money must be managed by others", the plaintiff having "no choice as to how he or she will use the verdict moneys", that should be allowed. For Gummow J, also in a separate judgment, quoting (at 67) King CJ in Campbell v Nangle (1985) 40 SASR 161, what is required is an allowance of "the amount which [the plaintiff] will be required to pay to a manager by reason of his incapacity."

[10] Burchett AJ then had this to say about a submission similar to that advanced by the Applicant in this case:

"[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."

[11] Hidden J followed that reasoning in Haywood:

"[5] Both experts arrived at what Mr Rossetto described as "an initial cost of funds management" in respect of the damages awarded, after some necessary deductions, based upon the fees charged by the Office of the Protective Commissioner. Mr Rossetto arrived at a figure of $635,186. Ms Lindsay's figure was $636,000. The defendant accepts that Ms Lindsay's slightly higher figure is appropriate.

[6] However, Mr Rossetto made a further calculation upon the basis that that initial cost would itself become part of the fund to be managed. He assessed the Commissioner's fees to manage that amount of $635,000 odd dollars, arriving at a figure of $103,278. He then repeated the process in respect of that latter amount, producing a figure of $12,107, and the application of the process yet again to that amount led to a figure of $1,126. He stopped at that point because no significant sum would have been produced by any further calculation. Adding those three additional amounts to the initial cost which he had assessed, $635,186, he arrived at a total cost of funds management of $751,697. It is that amount which the plaintiff claims.

[7] Mr Maconachie submitted that I should not adopt that approach, which is unsupported by authority. He relied upon the judgment of Burchett AJ in Buckman v M & K Napier Constructions Pty Limited [2005] NSWSC 546, in which the plaintiff had argued for a somewhat similar approach. In that case his Honour was considering the cost of funds management in respect of an award, after certain deductions, of $2,700,000. He rejected the plaintiff's argument, dealing with it in this way at [13]:

[His Honour set out the paragraph from Buckman]

[8] It will be seen that the approach contended for in that case is somewhat different from that for which the plaintiff in the present case argues but, in my view, it is relevantly similar. As a matter of comity, I would adopt the reasoning of Burchett AJ in the passage quoted and, in any event, I respectfully agree with it. I would not allow the additional amount which the plaintiff seeks for funds management. The appropriate allowance is $636,000."

[12] The applicant in this case seeks to distinguish those two decisions. In the applicant's written outline the following appears:

"NAT on behalf of the plaintiff is obliged to manage and invest the original sum of $1,035,000, together with any funds paid to it by way of management fees, and will charge the applicant 1% p.a. on the whole sum. The order of White J is that the management fees are included in the sum to be administered." (emphasis added)

In other words, the applicant argues that NAT is required to charge a management fee on its own management fee.

[13] In making that argument the applicant points to the fourth order made:

(a) take possession of and control and manage the Trust Fund, including the administration fees to be determined as provided for in paragraph 5 hereof, in such a manner as the Administrator thinks fit for the benefit of the Plaintiff generally with the powers and duties defined and conferred in the Trusts Act 1973 until the Plaintiff shall cease to be under a disability;

(b) be entitled to charge remuneration for its services of such administration.

[14] It was contended by the applicant that the entitlement to "charge remuneration for its services of such administration" referred to in Order 4(b) is an entitlement to charge a management fee for the administration of the Trust Fund and, because of Order 4(a), the Trust Fund includes the administration fees. This necessarily flows from the applicant's written submission that "the fund NAT will be required to manage includes the management fees." As it is required to manage that "fund", so the argument goes, it must be entitled to charge a management fee for managing the management fee.

[15] Such an argument, as was observed by Burchett AJ[4], could be extended indefinitely, with ever-decreasing increments. In fact, in Haywood, the recalculation of fee upon fee only stopped when no significant sum would have been produced by further calculation. It may be that the same has occurred in this case where, as in Haywood, the calculation was undertaken three times. The reasoning of Burchett AJ is, in my respectful opinion, apposite. While "[t]he difficulty inherent in the assessment of damages provides no reason for the courts to shirk the task of arriving at the estimate most likely to provide fair and reasonable compensation"[5] it remains the case that it is only an estimate of fair and reasonable compensation which is required. As Mason J said: "... we cannot hope to achieve precision in the assessment of damages ..."[6].

[16] The argument of the applicant, on the basis of the reasoning in Buckman and Haywood, cannot be accepted. The logic of that position would require a never-ending series of calculations because, while each successive increase would be smaller than its predecessor, it would never reach zero.

[17] The respondents are not required to pay, in addition to the management fees charged by NAT, further sums representing the fees NAT proposes to charge for the investment of its allocated administration and management fees.

[18] I turn now to the second issue: whether the tax deductibility of part of the management fees should be brought into account in calculation of those fees.

[19] The applicant says that the tax deductibility of the expenses incurred by NAT in investing the money should be ignored on the basis that it has been subsumed in the five per cent discount applied to loss of future earning capacity. On the other side, the respondents argue that, because part of the fees will be tax deductible, the applicant will never have to meet their full cost and that results in a reduction of the true cost to him of the management fees.

[20] To answer this question requires a review of the reasons in Todorovic v Waller[7]which led the high Court to decide that, in an award for loss of earning capacity[8] the present value of the future loss ought to be quantified by adopting a discount rate of three per cent. That figure has been altered by legislation to five percent[9] but there is no reason to assume that the factors which were taken into account by the High Court are no longer relevant.

[21] In the joint reasons of Gibbs CJ and Wilson J (with whom Aickin J agreed) their Honours said:

"In deciding upon the ultimate rate of discount, it becomes important to decide on the manner in which notional tax is to be taken into account. The question is whether the notional tax is that which would be payable on the income from a fund invested at the discount rate, or that payable on income at the rate at which the plaintiff might in fact invest the damages when he got them, if he wished to do so."[10] (emphasis added)

"The necessity to consider the effect of notional tax introduces a further element of speculation into calculations which, to cite again from Lord Diplock's judgment in Paul v. Rendell, are already "far removed from all reality". It is quite impossible to know, or even to guess, what the tax scales, and the allowable rebates and deductions, will be even a few years hence. The actuary in Jetson v. Hankin, in calculating the effective net discount rate that should be used to take tax into account, assumed that the interest earned would be subject to tax at current tax scales - i.e., that the tax laws will remain unaltered. It needs little knowledge of fiscal history to know that it cannot be assumed that taxing statutes will be as the laws of the Medes and Persians. No assumption can safely be made as to what the tax scales will be in the near future, still less a decade hence. For these reasons, notional tax can be taken into account only in the broadest way, by making an adjustment to the discount rate, it is impossible to make even a pretence of accuracy in doing so."[11] (emphasis added)

"Should allowance be made for the impact of income tax? The answer must be "yes". Otherwise the injured plaintiff will be given a lump sum inadequate to produce the desired payments. What allowance should be made? Should an attempt be made to calculate and allow for tax in each particular case? Or should we adopt a rule of thumb by fixing a lower discount rate to be applied in every case, whatever the plaintiff's liability to tax may be? In favour of the first alternative is the consideration that it is likely to yield a result more precisely tailored to the plaintiff's case. In favour of the second alternative is the strong argument that it simplifies the assessment of damages. I favour the second alternative partly because we cannot hope to achieve precision in the assessment of damages and partly because simplification of the assessment of damages is very desirable."[12] (emphasis added)

[23] Justice Brennan (as he then was) made several references to the relevance of the incidence of taxation[13]. At p 477 he said:

"All that can be said is that the incidence of tax is likely to bear more heavily on increases in earnings than on the yield of an invested sum upon which a plaintiff may draw, and as the object of the discount rate is to equalize the net amount which can be drawn out of the fund year by year with the net amount which the plaintiff would have earned, the tax advantage enjoyed by yield in comparison with earnings must be taken into account by reducing the capital sum which is available for investment. In other words, a positive discount rate must be adopted." (emphasis added)

[24] Finally, before judgment was delivered in Todorovic, Gibbs CJ said:

"Because of the practical importance of the decision in these cases, the Court now publishes this statement as to its effect.

"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 provisions. This rate is intended to make the appropriate allowance for inflation, for future changes in rates of wages generally or of prices, and for tax (either actual or notional) upon income from investment of the sum awarded. No further allowance should be made for these matters."[14] (emphasis added)

[25] It seems tolerably clear that the High Court, in arriving at the discount rate of three per cent, took into account the incidence of taxation and, in doing so, should not be regarded as having ignored the prospect of the deductibility of expenses affecting the taxation otherwise payable.

[26] I was referred to two decisions of this Court which are contrary to the submissions of the applicant. Both of them were dealt with on the papers. In Curry v Aughey[15], the issue was the same. The respondent's argument in that case was along the same lines as the respondents' in this case, namely, that a plaintiff cannot recover more than the loss sustained and, so, tax deductions available to the fund ought to be considered in setting the administrator's fee. Holmes J, in dealing with that argument, said:

"In my view, where it can be demonstrated that the burden of management fees is likely to be reduced by deductibility of those fees against the income produced and the information as to the extent of that deductibility is sufficient[ly] clear to allow reasonable approximation of the amount returned, an adjustment ought to be made."

[27] The other decision was that of White J in Robinson v Beatty[16] in which there was evidence that the Public Trustee, in calculating its management fee, had not made allowance for an income tax deduction. It appears that the Public Trustee, on being apprised of that information before the determination of the sanction, voluntarily reduced its fee to a level consistent with it having taken account of the available deductions. Her Honour noted that and sanctioned that part of the plaintiff's damages award.

[28] In both of those cases their Honours do not appear to have been referred to Todorovic on this point. In the latter, White J did not have to decide the point.

[29] In the circumstances I am persuaded that the reasoning in Todorovic dictates that I must hold that the administrator's fee should not be reduced by any amount on account of the deductibility, under the relevant taxation legislation, of its fees.

[30] The parties have agreed on the amount which would be appropriate to be fixed in the light of this decision.

[31] I fix the administration expenses payable by the First and Second Respondents at $184,174.

[1] Third affidavit of M J Lolas, para 3

[2] [2005] NSWSC 546

[3] [2006] NSWSC 566

[4] At [13] by reference to Zeno's paradox concerning the hare and the tortoise.

[5] Todorovic v Waller [1981] HCA 72; (1981) 150 CLR 402 at 413, per Gibbs CJ and Wilson J

[8] or where the plaintiff's injuries will make it necessary in the future to expend money for the provision of goods and services for the plaintiff's health and comfort.

[9] See, for example, Civil Liability Act 2003, s 57

[15] Unreported, Holmes J, BS7631 of 2001, 23 February 2005

[16] [2006] QSC 11