MBP (SA) Pty Ltd v Gogic

1991, Feb. 26 Mason C.J., Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ.

This is an application by a defendant in an action for personal injuries for special leave to appeal against a judgment for the plaintiff in the sum of $107,776, being made up of an award of damages of $85,776 and interest of $22,000, entered by the Supreme Court of South Australia (Cox J.). The ground of the application is that his Honour wrongly awarded interest on damages for pre-trial pain and suffering at a commercial rate of interest. In awarding interest on this basis, Cox J. was giving effect to an answer to a question in a case stated by him to the Full Court of the Supreme Court of South Australia. This Court heard argument on an application for special leave to appeal from the judgment of the Full Court on the case stated. However, because of the decisions in Fisher v. Fisher [16] and Swiss Aluminium Australia Ltd. v. Federal Commissioner of Taxation [1] , a question arose as to whether the Court had jurisdiction to hear an appeal from the Full Court judgment: see now O'Toole v. Charles David Pty. Ltd. [2] . The application in that matter was stood over and listed for hearing with the present application. When the application came on for hearing, the Court decided to hear the present application instead of the application for special leave to appeal from the judgment of the Full Court because the real issue between the parties can be resolved in the present application without the necessity to determine the jurisdiction question which would otherwise have arisen.

1. (1986) 161 C.L.R. 438. 2. (1987) 163 C.L.R. 421. 3. (1990) 171 C.L.R. 232.

In South Australia, the Supreme Court is given power to award an amount by way of interest in a judgment for damages for personal injury by s. 30c of the Supreme Court Act 1935 S.A.. That section provides:

(1) Unless good cause is shown to the contrary, the court shall, upon the application of a party in favour of whom a judgment for the payment of damages, compensation or any other pecuniary amount has been, or is to be, pronounced, include in the judgment an award of interest in favour of the judgment creditor in accordance with the provisions of this section.

(a) shall be calculated at such rate of interest as may be fixed by the court;

(i) where the judgment is given upon an unliquidated claim - from the date of the commencement of the proceedings to the date of the judgment; or

(ii) where the judgment is given upon a liquidated claim - from the date upon which the liability to pay the amount of the claim fell due to the date of the judgment,

or in respect of such other period as may be fixed by the court; and

(c) shall be payable in respect of the whole or any part of the amount for which judgment is given in accordance with the determination of the court.

(3) Where a party to any proceedings before the court is entitled to an award of interest under this section, the court may, in the exercise of its discretion, and without proceeding to calculate the interest to which that party may be entitled in accordance with subsection (2) of this section, award a lump sum in lieu of that interest.

In Wheeler v. Page [3] , the Full Court of the Supreme Court of South Australia held that interest on damages for pre-trial economic loss should be assessed under s. 30c at the prevailing market rate or rates of interest applicable in the period for which the interest is awarded. But the Full Court held that interest for pre-trial pain and suffering should be assessed at a lower rate. King C.J., with whose judgment Wells and Jacobs JJ. agreed, said [4] :

Todorovic v. Waller [5] has given authoritative judicial recognition to the fact that a substantial portion of currently prevailing rates of interest merely compensates the investor for the diminution which inflation works on the value of the principal sum. It seems to me that these legal developments require a reconsideration of the practice as to the rates of interest used in computing the interest to be included in judgments.

Damages for pain, suffering and loss of the amenities of life sustained before trial, are assessed at trial on the basis of the value of money at the date of the assessment. There is no need to compensate the plaintiff for diminution in the value of money. Current interest rates, to the extent that they compensate for such diminution, are not appropriate to compensate the plaintiff for being kept out of his money. This would be achieved by using a rate which represents the difference between the prevailing rate for secure investments and the rate of inflation.

His Honour thought [6] that the rate for "pre-trial non-economic detriments" which ought to be adopted was 4 per cent per annum. 1. (1982) 31 S.A.S.R. 1. 2. (1982) 31 S.A.S.R., at p. 6. 3. (1981) 150 C.L.R. 402. 4. (1982) 31 S.A.S.R., at p. 7.

In Wheeler v. Page, King C.J. made no reference to the judgment of this Court in Cullen v. Trappell [7] . In that case, Gibbs J. had said [8] :

In New South Wales it was held in Bennett v. Jones [9] that the amount awarded as damages in respect of pain and suffering and loss of amenities should be dissected into that part which relates to detriment suffered before judgment and that which relates to detriment suffered in the future, and that interest should be allowed only on the sum referable to detriment already incurred. It was further held that the rate of interest on that part of an award which is referable to non-economic detriment suffered in the past should be lower than the commercial rate which will be allowed on that part of the award which represents economic loss [10] . Their Honours considered that the damages for pain and suffering and loss of amenities, being fixed at the standard prevailing at the date of judgment, are higher than they would be if fixed for the same loss at the date of the accident and contained "a built in inflationary factor" [11] or "counter-inflationary benefit" [12] . With all respect, this seems to me to be the same fallacy as that which misled the Court of Appeal in Cookson v. Knowles [13] , and which was condemned by the House of Lords in Pickett v. British Rail Engineering Ltd. [14] .

The power to award interest in New South Wales is a discretionary power, and in the proper exercise of the discretion the judge must of course have regard to the facts of the particular case. It may sometimes be appropriate in the particular circumstances to dissect that part of the award which relates to non-economic loss and to allow interest only on the part that is awarded in respect of past loss. However, I do not understand Fire and All Risks Insurance Co. Ltd. v. Callinan [15] to require that the discretion should necessarily be exercised in that way. There is obviously a greater difficulty in dissecting into past and future loss that part of an award which is made in respect of pain and suffering and loss of amenities than there is in dealing with economic loss, and in many cases it will be unnecessary to make a dissection in the former case. The decision in Fire and All Risks Insurance Co. Ltd. v. Callinan permits a dissection to be made in appropriate circumstances, but does not require it to be made in all cases. Where interest is allowed, it should be allowed at ordinary commercial rates.

1. (1978) 140 C.L.R. 427. Stephen, Mason, Murphy and Wilson JJ. agreed with these reasons of Gibbs J.
   1. (1980) 146 C.L.R. 1.
   2. (1980) 146 C.L.R., at p. 21.
   3. [1977] 2 N.S.W.L.R. 355.
   4. [1977] 2 N.S.W.L.R., at pp. 371, 374, 380.
   5. [1977] 2 N.S.W.L.R., at p. 374.
   6. [1977] 2 N.S.W.L.R., at p. 380.
   7. [1977] Q.B. 913.
   8. [1980] A.C. 136.
   9. (1978) 140 C.L.R. 427.

In the present case, the Full Court recognized that its decision in Wheeler v. Page was inconsistent with these statements in Cullen v. Trappell. King C.J., who gave the leading judgment in the present case, said:

The decision of Cullen v. Trappell on the point in question has stood undisturbed for ten years and it is incumbent on this Court to give effect to it. This Court should therefore no longer follow Wheeler v. Page but should apply Cullen v. Trappell. Nevertheless, his Honour felt bound to say that he found "the view adopted by Gibbs J. to be unconvincing and the reasoning upon which it is based fallacious".

In Bryce v. Tapalis [16] , the members of the Court of Appeal of New South Wales (Kirby P., Mahoney and McHugh JJ.A.) were also of the opinion that the reasoning on this point in Cullen v. Trappell was erroneous but, Kirby P. dissenting, felt that the reasoning in that case was binding on them.

With great respect to the judgment of Gibbs J. in Cullen v. Trappell, although it is a fallacy to refuse to award any interest on the ground that the verdict contains a built-in inflationary factor, it is equally fallacious to hold that a plaintiff will be properly compensated for the delay in obtaining damages for pre-trial pain and suffering only if the award of damages contains an amount for interest calculated at the commercial rate or rates. The function of an award of interest is to compensate a plaintiff for the loss or detriment which he or she has suffered by being kept out of his or her money during the relevant period: Batchelor v. Burke [17] , per Gibbs C.J. But the loss or detriment which a plaintiff suffers by being kept out of his or her damages for pre-trial pain and suffering cannot be equated with the amount which those damages, invested at the commercial rate of interest, could have earned during the relevant pre-trial period. The determinants of rates of interest have been the subject of much dispute among economists. But it cannot be denied that during periods of significant inflation, such as those which have existed in Australia during the last twenty-five years, commercial rates of interest reflect a component to compensate a lender for the decline, by reason of inflation, in the real value of the principal which occurs during the period of the loan: see the comments, for example, in Hawkins v. Lindsley [18] ; Sharman v. Evans [19] ; Todorovic v. Waller [20] . Damages for pre-trial non-economic loss, however, are assessed in accordance with the value of money as at the time of the award. In no way is any loss which a plaintiff incurs by reason of being deprived of his or her damages for pre-trial non-economic loss brought about by inflationary factors. In those circumstances, to award interest on damages for non-economic loss during the pre-trial period by reference to commercial rates is to compensate the plaintiff for a "loss" which he or she has not sustained.

1. (1981) 148 C.L.R. 448, at p. 455. 2. (1974) 49 A.L.J.R. 5, at pp. 6-7; 4 A.L.R. 697, at p. 699. 3. (1977) 138 C.L.R. 563, at p. 588. 4. (1981) 150 C.L.R., at pp. 429, 448.

No doubt whatever interest rate is used to compensate a plaintiff, it can be at best only a rough guide as to the value of the plaintiff's loss during the period when he or she was deprived of the use of his or her money. Nevertheless, to award interest at commercial rates for periods of pre-trial pain and suffering appears to be a breach of the principle that a plaintiff in a personal injuries action should not receive a sum for general damages greater than the "sum which, so far as money can do so, will put him in the same position as he would have been in if the tort had not been committed": Butler v. Egg and Egg Pulp Marketing Board [21] . The proposition that, during periods of inflation, interest on pre-trial non-economic loss ought to be calculated at commercial rates, therefore, is erroneous in principle. On this point, Cullen v. Trappell should no longer be regarded as authoritative.

Mr. Anderson Q.C., for the respondent, contended, however, that the approach of Gibbs J. in Cullen v. Trappell was correct because an award of interest should always be approached in a broad, practical way and that the use of commercial rates of interest as a base for the calculation of the award was the most appropriate way of achieving that object. Mr. Anderson contended that criticism of the reasoning in Cullen v. Trappell is based on two erroneous assumptions: (1) that money awards for non-economic loss change only by reason of inflation; and (2) that the real interest rate, calculated by deducting the inflationary component from the prevailing commercial rate, remains little changed over the passage of time. But even if these assumptions are erroneous, neither error provides any support for the use of the commercial rate of interest to determine the plaintiff's loss in being deprived of the use of his damages for pre-trial non-economic loss.

Even if, as Mr. Anderson contended, the value of money awards for non-economic loss changes over the passage of time for reasons other than inflation, there are at least three reasons why that fact cannot support the reasoning in Cullen v. Trappell. First, any change in the judicial approach to the monetary assessment of pretrial pain and suffering, brought about by non-inflationary factors, is unlikely to be of significance having regard to the short period usually involved. Secondly, any change is just as likely to be in favour of the plaintiff as against him or her. Thirdly, even if, over the relevant period, any change in the judicial approach to damages, brought about by non-inflationary factors, is against the plaintiff, it is difficult to see how the commercial rate of interest can appropriately measure the change. There is simply no correlation between the two subjects.

In support of his contention that criticism of Cullen v. Trappell [22] is erroneous because the criticism assumes that the real interest rate is constant, Mr. Anderson submitted that the difference between the commercial rate of interest and the inflationary component since 1982 when Wheeler v. Page [23] was decided had been significantly greater than 4 per cent. Since commercial interest rates are the product of market forces, it is inevitable that the real rate of interest will fluctuate. Government policy, general economic conditions and the rates of return on capital investment, shares, real estate and comparable investments all affect the supply of and demand for money and, consequently, the level of interest rates. During periods of economic stability, the real rate of interest may be 2-3 per cent. During periods of extreme optimism, demand may push the real rate of interest very much higher. During periods of high inflation and government action to depress interest rates, as occurred in Australia in the period 1970-1980, the real rate of interest may even be a negative figure: cf. Todorovic v. Waller [24] . It does not follow, however, that the use of the commercial rate of interest is to be preferred to a fixed rate of 4 per cent, for example, because the real rate of interest fluctuates or because the real rate of interest during a relevant period was a figure higher than 4 per cent. A plaintiff who is awarded interest at 4 per cent on damages for pretrial non-economic loss has not had to risk his or her capital and arguably does not have to pay income tax on that interest. Most investors in fixed securities in Australia since 1982 would be well satisfied to have maintained the real value of their capital and to have received an arguably tax-free return of 4 per cent per annum on the current value of that capital.

1. (1980) 146 C.L.R. 1. 2. (1982) 31 S.A.S.R. 1. 3. (1981) 150 C.L.R., at p. 445.

The contentions of Mr. Anderson that the use of the 4 per cent figure selected in Wheeler v. Page has worked to the disadvantage of plaintiffs in South Australia and that the use of the commercial rate of interest is more consonant with the objectives of an award of interest on damages for pre-trial non-economic loss than the 4 per cent figure cannot be accepted.

The question remains, however, whether it is not fairer to the parties to use a formula which applies the real rate or rates of interest applicable in the relevant period rather than a fixed figure such as the 4 per cent figure selected in Wheeler v. Page. This could be done, for example, by taking the commercial rate or the ten-year bond rate and deducting a figure for inflation. This approach has the advantage of focusing on the real interest rate which would have been available to a plaintiff for the purpose of investment during the period that the plaintiff was kept out of his or her money. But it tends to assume - erroneously - that the purpose of the award of interest is to compensate a plaintiff for being deprived of the opportunity to invest his or her money. A plaintiff is awarded interest because he or she has been deprived of the use of his or her money, not because he or she has forgone investment opportunities. It would be wrong, for example, to refuse to award a plaintiff interest simply because the real rate of interest during the relevant period was zero or a negative figure. Moreover, to award interest calculated by reference to the real rate of interest, when it has been a positive figure, ignores the important fact that the return to the real-life investor from his or her investment is diminished by income tax on both the inflationary and real profit components of that return. Thus, the use of the real rate of interest figure as the measure of a plaintiff's loss in being deprived of his or her damages for pre-trial pain and suffering does not seem inherently superior to the use of a fixed figure.

No doubt the selection of a figure such as the 4 per cent figure chosen in Wheeler v. Page is somewhat arbitrary. But it represents the judgment of the Supreme Court of South Australia as to what is fair and reasonable compensation for a plaintiff in that State for being deprived of the use of his or her money after taking into account that, from time to time, the real rate of interest will rise above or fall below that figure. Until the present case it had been acted upon in South Australia for over seven years. In the circumstances, the use of the 4 per cent figure seems to us to be more likely to achieve fair and reasonable compensation for plaintiffs than the use of the real rate of interest figure - which may result at times in a plaintiff obtaining no or little interest and at other times an amount of interest greater than the return which could be achieved by real-life investors on a comparable sum after the incidence of income tax.

Special leave to appeal should be granted. The appeal should be allowed. The judgment of the Supreme Court of South Australia in favour of the plaintiff in the action should be varied by deleting the award of interest for pre-trial non-economic loss. The matter should be remitted to the Supreme Court of South Australia to reassess the interest for pre-trial non-economic loss in accordance with the judgment of this Court. In accordance with the applicant's undertaking, it should pay the respondent's costs of this application.