Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd

Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd - [1981] HCA 3 - HCA 1981 case summary — Zoe

[29]

In my opinion the courts should, generally speaking, adhere to the rule, established by O'Brien v. McKean [7] , that in the assessment of damages for personal injuries no allowance should be made for inflation. To attempt to ensure that damages provide protection for the plaintiff against future inflation is, as Lord Scarman said in Lim Poh Choo v. Camden and Islington Area Health Authority [8] "seeking after a perfection which is beyond the inherent limitations of the system". It is unreasonable to suppose that any economist will be able to predict with accuracy the nature and extent of changes in the purchasing power of money during a period extending for several decades ahead. Whether inflation increases or is brought under control depends upon political and economic events and decisions at home and abroad as to whose occurrence it is not possible to do more than conjecture. Predictions as to the economic future in thirty years time may perhaps be made by a soothsayer but expert evidence cannot rationally be given on such a subject. Testimony as to the rate of inflation at times many years in the future would prolong trials and render more difficult the assessment of damages without providing any real assistance to the court. "Solid proof, on the basis of probability" (to use the words of the Chief Justice in O'Brien v. McKean [9] is impossible to obtain on such an issue. The only practicable course is, I think, that suggested by Lord Diplock in Mallett v. McMonagle [10] : "to leave out of account the risk of further inflation, on the one hand, and the high interest rates which reflect the fear of it and capital appreciation of property and equities which are the consequence of it, on the other hand". His Lordship was there speaking of cases under the Fatal Accidents Acts, but in my opinion his remarks are applicable to the case of the assessment of damages for personal injuries. In such a case, as well as in cases under the Fatal Accidents Acts, money should (except in exceptional cases) be treated as retaining its value, but in calculating the present value of payments which would have been received in future years, interest rates appropriate to times of stable currency should be adopted.

[31]

There are in my opinion points of distinction between the present case and cases in which it is necessary to assess damages for personal injuries. In cases of the latter kind, in the very nature of things perfect compensation cannot be awarded. It is true that a full compensation, or a just and fair compensation, must be awarded in such a case, but "in assessing a just and fair compensation the purpose is not to attempt by means of money completely to insure that the plaintiff will be placed for the rest of his life in the same position as if he had not sustained the injuries": Pamment v. Pawelski [11] , per Dixon J. In a case such as the present, however, the wrong done to Pennant Hills is purely economic, and the court is required to essay the difficult task of putting Pennant Hills in the same position as if the wrong had not been committed. Moreover, although in assessing damages for personal injuries the compensation in respect of loss of earning capacity is capable to some extent of calculation, it must be remembered that in such a case damages are estimated for the present loss of a capacity or faculty, albeit a loss which will or may be productive of financial loss: see such cases as Paff v. Speed [12] ; Graham v. Baker [13] ; Parente v. Bell [14] . In the present case there is, it is true, a present wrong or breach of contract, but the loss for which damages are to be given is not a present loss, but a loss that will occur from time to time in the future when the payments of worker's compensation fall to be made. However, in O'Brien v. McKean [15] , although Barwick C.J. and Windeyer J. recognized that different considerations may apply where an assessment is made of the cost of expenditure in the future from those that apply in relation to compensation for loss of earning capacity [16] , it was held that in general the possible depreciation of the purchasing power of money is not relevant in either case. I need not consider whether the matters which I have mentioned are sufficient to distinguish O'Brien v. McKean, since it is enough to hold, as I do, for the reasons that I am about to state, that the present is a case of an exceptional kind in which the interests of justice require that regard be had to estimated future wage rates, even if those rates have resulted from inflation. I should however make it clear that the present decision does not in my opinion affect the authority of O'Brien v. McKean.

[35]

As I endeavoured to explain in Cullen v. Trappell [17] when, in assessing damages, the present value of economic loss is determined by the use of tables which show the present value of a sum of money to be received over a period of time in the future, it is necessary, in order that the method followed should be consistently applied, that regard should be had to the notional tax on the income assumed to be derived from the amount awarded for the future economic loss. I must again emphasize that what is referred to is notional tax on notional income. The court is in no way concerned to enquire what tax if any will actually be payable by the plaintiff. The present value of the future loss is arrived at by the use of tables which show what sum, if invested at the given rate, would produce sufficient income to allow the given weekly sum to be obtained by recourse both to income and capital over the whole period, so that at the end of the period the fund is entirely exhausted. It is not assumed that in fact the plaintiff will invest the sum in this way. It is fundamental that the court has no concern with what the plaintiff actually does with his damages. Therefore, in the present case, it is quite irrelevant that Pennant Hills may in fact receive a tax deduction in respect of the payments of worker's compensation when it comes to make them. Pennant Hills may cease to carry on business, so that no deduction is claimable, or for some other reason a tax deduction, if allowable, may be of no value to it, but questions of this kind are collateral to the issue of damages and must be entirely disregarded. It would be a misapprehension of the method discussed in Cullen v. Trappell to set off, against notional tax, expected real tax benefits. The reason why it is necessary to consider the incidence of tax in assessing the amount payable to a plaintiff whose earning capacity has been lost or damaged is that damages are compensatory, and it would be unreal to measure the loss by reference to gross earnings when in fact the earnings would have been subject to tax. We are now concerned with a quite different question: in applying an arithmetical method to determine the present value of a future loss, is it right to have regard to the probable taxation position of the individual plaintiff? In my opinion it is not, for the method is a purely abstract one, which leads to the same result irrespective of the circumstances of the particular case. The estimated amount of the loss, and the length of time for which it will be suffered, depend entirely on the circumstances of the individual case, but the present value of such a loss is merely a matter of calculation, to which the facts of the case are not relevant. To avoid possible misapprehension, I should add that the quite different question, whether it was relevant to take into account the tax that it was said would be payable on the sum received as damages, although the subject of argument and decision the Supreme Court, was not argued on appeal to this Court, and I accordingly say nothing about it.

[60]

The principal opposing argument is that future inflation or deflation is speculative, and that the injured person can in any event invest his recovery in equities such as land and thus have the benefit of both inflation and the income. United States decisions reflect the whole spectrum of possible views. There are jurisdictions which resolutely disregard future inflation - Williams v. United States [32] (United States Court of Appeals, 1st Circuit) and Johnson v. Penrod Drilling Co. [33] (5th Circuit). There have been intimations that "if inflation should continue at its present pace, courts may have to reconsider the propriety" of existing practice - Yodice v. Koninklijke Nederlandsche S.M. [34] (2nd Circuit) per Judge Friendly, a prediction to which the Second Circuit gave effect in Feldman v. Allegheny Airlines [35] (United States District Court). There have been carefully reasoned decisions to follow a discerned "trend among a number of courts to allow the jury to consider the impact of future inflation" in personal injuries cases where loss of future income is in question, at least where expert evidence of the impact of future inflation, based upon a proper factual foundation has been tendered - District of Columbia v. Barriteau [36] (D.C. Court of Appeal) and see United States v. English [37] (9th Circuit). There have been seemingly more radical solutions in which discounting for present payment is simply abandoned so as to make allowance for future inflation - Beaulieu v. Elliott [38] (Alaska) and Leavitt v. Gillaspie [39] (Alaska). In general, there appears to be a distinct movement away from disregard of future inflation and towards the adoption of varying methods of taking it into account. 1. (1974) 217 N.W. 2d 708, at p. 727. 2. (1970) 435 F. 2d 804. 3. (1975) 510 F. 2d 234. 4. (1971) 443 F. 2d 76, at p. 79. 5. (1975) 524 F. 2d 384; (1974) 382 F. Supp. 1271. 6. (1979) 399 A. 2d 563, at p. 567. 7. (1975) 521 F. 2d 63. 8. (1967) 434 P. 2d 665. 9. (1968) 443 P. 2d 61.

[75]

However, founded as it is upon the assumed existence of a relatively constant rate of "real interest", if that assumption be shown to be false, the method loses the rationale upon which it depends. Past Australian economic experience appears to provide little support for the concept of a relatively constant rate of "real interest". Year by year a figure for "real interest" can of course be calculated, simply by subtracting from nominal interest rates the rate of inflation. But these figures are no more than a series of numbers bearing no resemblance to any relatively constant rate of interest which lenders are supposed to demand and borrowers to pay after allowing for estimated inflation. If official statistics for the past twelve calendar years are consulted, the Reserve Bank of Australia's Statistical Bulletins supply interest rates on two-year Australian government bonds (non-rebatable) and the O.E.C.D. Economic Outlook - July 1980, p. 105 and p. 143, supplies annual percentage changes in consumer prices, which gives a measure of inflation. The difference figure year by year, which should represent the "real interest" rate, averages out at a negative average rate of interest of -1.46, the widest fluctuations found in particular years being a positive rate of 2.58 per cent and a negative rate of -6.61 per cent. Nothing resembling a relatively constant positive rate of 2 per cent-3 per cent emerges. An equally random series of numbers, showing no steady rate of "real interest", appears as Table 9.1 in the recent Interim Report of the Campbell Committee of Inquiry (Australian Government Publication Service (1980)). For the period of thirty years which that Table covers, from 1950 to 1979, the average "implicit real interest rate" is a negative rate of -.7 per cent, with 4 per cent as the greatest positive rate in any year and -20.2 per cent as the greatest negative annual rate. If the material in Table 9.1 is confined to approximately the same time span as the twelve year period earlier referred to it generally confirms the earlier results. It shows an average negative rate of -.6 per cent with variations up to a positive 3.3 per cent and down to a negative -8.2 per cent. Discrepancies between the two sets of results are due to differences in the base periods and in the statistical sources of information. Table 156 in Ch. 28 of the Pearson Report, showing "real rates of return on capital" provides a convenient comparison of United Kingdom figures. Mr. Bruce's article in Canadian Public Policy, earlier referred to, contains on p. 162, a similar tabulation of Canadian experience of real interest rates.

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