(h) Disposal
161It follows that based on the agreed position of the experts, I am of the opinion that the appeal should be allowed in part and that an amount of $1,495,000 should be awarded to the respondent in respect of fund management fees. Order (1) made by the primary judge on 15 December 2011 (and entered on 16 December 2011), giving judgment for the plaintiff in the sum of $12,151,000 should be set aside and replaced by an order giving judgment for the plaintiff in the sum of $11,424,000, being the total of the fund as otherwise agreed ($9,929,000) and the additional figure noted above as the appropriate cost of fund management ($1,495,000). As to the costs of the appeal and the costs of proceedings below, I agree with the orders proposed by Basten JA for the disposal of these matters.
162BEAZLEY P: I agree with the reasons of and the orders proposed by Bathurst CJ.
163McCOLL JA: I agree with the Chief Justice's reasons and the orders his Honour proposes.
164BASTEN JA: Where a tortiously caused injury renders the plaintiff incapable of managing a fund intended to provide for her needs for many years, full compensation may require a sum to cover the cost of administering the fund. This case does not challenge the entitlement to such an allowance, but rather seeks to establish the proper basis on which it should be calculated. However, the basis on which it is awarded will inform the proper method of calculation.
(1) Proceedings below
165Damages for heads of loss other than the cost of fund management were agreed in a sum of $10 million, the settlement being approved by Hoeben J on 5 August 2011. A trial in relation to the remaining issue was heard by McCallum J, the question of how the additional sum should be calculated being dealt with in two tranches. It was accepted that a trustee/manager would charge fees calculated by reference to the value of the fund from time to time and that fees would continue to be charged until the fund was exhausted. In her first judgment, Gray v Richards [2011] NSWSC 877, at [74], McCallum J made two rulings:
"(a) that the plaintiff's claim for the future cost of managing the fund management component of her damages award be allowed;
(b) that the plaintiff's claim for the future cost of managing income earned upon the investment of the fund at an assumed rate of 5 per cent be allowed."
166These findings 'allowed' as part of the corpus of the fund on which the fees were payable (a) the amount of the fees, and (b) an estimate of the income to be earned by the fund. Both findings were challenged by the appellant, who was the defendant at trial.
167There were a number of subsidiary questions to be determined. McCallum J reserved for further consideration two questions which were addressed in a judgment delivered on 8 December 2011, Gray v Richards (No 2) [2011] NSWSC 1502, identified at [3] in the following terms:
"(a) the rate of fees at which the final calculation of future fund management costs should be undertaken;
(b) whether any sum should be deducted from the proposed verdict as being likely to be paid out early in the life of the fund."
168Extensive evidence was adduced. There was a dispute as to whether the fees were to be calculated by reference to those presently charged by the private financial manager preferred by the plaintiff's tutor, namely The Trust Company Limited, or, as the defendant contended, by reference to the fees payable to the NSW Trustee and Guardian under the NSW Trustee and Guardian Regulation 2008 (NSW). The plaintiff adduced evidence from an actuary as to the proper understanding of the costs charged by the NSW Trustee and the defendant called evidence from an officer working in the office of the NSW Trustee.
169The plaintiff's actuary asserted that the cost of management by the NSW Trustee was not limited to the disclosed rates, but included certain additional (indirect) costs which ought properly to be taken into account. There was a dispute, maintained in this Court, as to whether Mr Plover (the plaintiff's actuary) had the necessary expertise to give evidence as to the "additional" or "indirect" costs and as to the basis of his calculation. The figures in issue were not small: they were summarised in the second judgment, at [11], as involving the following amounts:
(a) fees of NSW Trustee at prescribed rates - $1,286,000;
(b) additional indirect costs - $106,000, and
(c) Trust Company fees - $2,499,000,
although on one calculation Mr Plover asserted that the real costs of the NSW Trustee were actually higher than those of The Trust Company.
170The trial judge accepted that the appropriate figure was that charged by The Trust Company. On that basis, she did not need to resolve the dispute as to the proper calculation of the costs incurred through the use of the NSW Trustee, but indicated that she was not satisfied that any sum should properly be awarded for such additional indirect costs: at [57]. The respondent has not sought to challenge that conclusion, being content to rely upon the award of a sum sufficient to cover the costs of The Trust Company.
171The trial judge's conclusion that it was appropriate to allow as an amount for the cost of fund management the sum charged by The Trust Company was based upon satisfaction that "the tutor's choice of a private manager was entirely reasonable": at [82]. The factual finding may be accepted: the question is whether the tutor's choice was relevant to the exercise of assessing the compensation payable by the tortfeasor under this head of damages.
172It is important to note that these issues were addressed purely for the purpose of calculating the compensation payable by the defendant tortfeasor. The Court was not being called upon to sanction any particular fees charged by a particular trustee. As McCallum J noted, between the date of her first judgment (16 August 2011) and the date of her second judgment (8 December 2011), namely on 2 September 2011, White J (dealing with the matter in the Protective List in the Equity Division) had declared the plaintiff to be a person incapable of managing her own affairs and had ordered that her estate be subject to management under the NSW Trustee and Guardian Act 2009 (NSW), s 41. White J appointed The Trust Company as the manager of the plaintiff's estate and ordered that the proceeds of the damages proceedings be paid to The Trust Company in its capacity as manager.
(2) Basis of entitlement
173Before turning to the questions of calculation, it is helpful to understand the basic principles in assessing damages and, in particular, the present value of awards covering future losses. In Todorovic v Waller [1981] HCA 72; 150 CLR 402 at 412, Gibbs CJ and Wilson J, prior to discussing the calculation of the present value of future loss, set out four fundamental principles:
"Certain fundamental principles are so well established that it is unnecessary to cite authorities in support of them. In the first place, a plaintiff who has been injured by the negligence of the defendant should be awarded such a sum of money as will, as nearly as possible, put him in the same position as if he had not sustained the injuries. Secondly, damages for one cause of action must be recovered once and forever, and (in the absence of any statutory exception) must be awarded as a lump sum; the court cannot order a defendant to make periodic payments to the plaintiff. Thirdly, the court has no concern with the manner in which the plaintiff uses the sum awarded to him; the plaintiff is free to do what he likes with it. Fourthly, the burden lies on the plaintiff to prove the injury or loss for which he seeks damages."
174In discussing the first principle, their Honours stated that "the process must always be one of judgment rather than calculation": at 413. They noted that calculations "may sometimes give a false appearance of accuracy", because the figures on which they are based may be the result of "estimate or speculation": at 412. (That is why the current practice of calculating damages to the nearest cent is misleading and categorically wrong.) That is not to say the assumptions upon which the calculations are based should not be spelled out (the principle of transparency requires that they should) but that the element of speculation involved in some assumptions may defy logical dissection into constituent parts. Further, the procedural obligation to facilitate the just, quick and cheap resolution of disputes should not be subverted by the construction of substantive law principles which complicate the nature of litigation beyond a point at which the increased cost renders any increase in fairness and accuracy unacceptable.
175The compensatory principle is further qualified by the need to identify limits to the kinds of loss which are properly compensable by the tortious defendant. These questions may be described as involving principles of causation or "remoteness". Under the Civil Liability Act 2002 (NSW) they are treated as part of the assessment of causation by asking whether it is "appropriate for the scope of the negligent person's liability to extend to the harm so caused": s 5D(1)(b). The application of a similar general law principle, which is particularly concerned with economic loss, is exemplified by the cases referred to by Luntz, Assessment of Damages for Personal Injury and Death (4th ed, 2002), Ch 2, sec 7.
176The second and fourth principles require no comment. The third principle is important in two respects for present purposes. First, because the law is unconcerned with the use which the plaintiff may make of the money received by way of compensation, evidence as to his or her intentions will be inadmissible, because irrelevant. Secondly, the principle draws attention to the fact that the law may make its own assumptions about future use for the purposes of calculating loss. In other words, if the cost of funds management is, as a matter of law, an accepted head of damages, it will not matter whether the funds will in fact be invested. As will be seen, other aspects of future circumstances may be dictated by principles of law, rather than evidence as to likely events.
177The principle that the court calculating an award of compensation on a once only basis is not concerned with how the plaintiff might actually use the award in the future, does not imply that future events are irrelevant. Indeed, the determination in Todorovic v Waller that a discount rate (with a particular value) should be applied in calculating the present value of future income or expenditure, rested on a number of assumptions. One was that the fund provided would be invested and would earn income. A second was that the income would be taxed. A third was that the net return on investment would exceed the rate of inflation and any other factor tending to increase the value of the income or expenditure (the amounts in the award, whether for lost earning capacity or future medical expenses, being calculated by reference to present values).
178An award for fund management assumes that the incompetent plaintiff will invest the money prudently and apply the available resources for the purposes for which they are required. More accurately, given that the plaintiff is incompetent, the assumption is that the person's guardian will, in the exercise of his or her fiduciary duties, so act. In policy terms, it might be thought desirable to provide funds which would allow a large award to be prudently managed rather than effectively creating circumstances in which it is likely to be mismanaged or frittered away.
179That policy might well apply to many plaintiffs who, in varying degrees, may be incapable of managing a large sum of money. However, that is not the approach which the law has adopted in this country. The governing principle is that stated in the joint reasons of Brennan CJ, Dawson, Toohey and Gaudron JJ in Nominal Defendant v Gardikiotis [1996] HCA 53; 186 CLR 49 at 52:
"True it is that, but for the accident, the respondent would not have a verdict to invest and, thus, would not need assistance in its management. But it is contrary to common sense to speak of the accident causing a need for assistance in managing the fund constituted by her 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."
180As explained by King CJ in the South Australian Supreme Court in Campbell v Nangle (1985) 40 SASR 161 at 192, in a passage adopted as correct by Gummow J in Gardikiotis (with the agreement of other members of the Court other than McHugh J) at 67:
"The capital sum awarded to [the plaintiff, on account of future loss] is computed upon the basis of an assumed real return from 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."
181In principle, it would be possible to treat the cost of realising a return on an investment as covered by the overall discount rate. Mason J in Todorovic expressly recognized that to invest the award the plaintiff would be expected to incur the cost of professional advice; at 442 and 449; see also Wells v Wells [1999] 1 AC 345. Indeed, the adoption of a discount rate to determine the present value of future income or expenditure assumes that the plaintiff will invest the fund 'prudently'. However, the approval in Gardikiotis of an amount for the cost of fund management is inconsistent with treating the cost as covered by the discount rate, in the case of a plaintiff disabled by the tortious conduct of the defendant from administering the fund.
(3) Calculation of cost of fund management
(a) general factors
182In broad terms, the calculation of the cost of fund management will depend upon four factors, namely:
(a) the basis of calculation;
(b) assumptions as to the use of the fund by the plaintiff;
(c) the quantum on which the calculation will be based, and
(d) policy considerations relevant to the scope of the defendant's liability.
183With respect to the first question, it is quite possible that the basis on which fees are charged may change over time. For example, the cases reported from the mid-1980s suggest that fund managers calculated their fees as a percentage of income earned by the fund: eg, GIO of NSW v Rosniak (1992) 27 NSWLR 665 at 687G. The present case indicates that fund managers currently calculate their recurrent fees primarily by reference to the value of the funds under management from time to time.
184The second question requires assumptions as to those matters which are not taken into account as a matter of general principle, namely how the plaintiff will draw down on the fund for expenditure. If the fund is heavily drawn down in the early years, costs will diminish rapidly. If the fund is drawn down steadily, that will not necessarily be so.
185The third factor requires determination of the corpus of the fund by reference to which costs will be calculated. The fourth factor, namely policy considerations, may inform the correct approach to assessment of the first three factors, including whether to add the cost of fund management to the fund in order to calculate the fees, so that the fund manager is being paid to manage its future fees.
(b) legal principles
186It is necessary to address first the principles relevant to assessing the cost of fund management. As explained in Willett v Futcher [2005] HCA 47; 221 CLR 627, it is necessary to have regard to the legal framework under which the fund resulting from the award of damages will be managed and hence the legal basis for the entitlement to charge.
187The first step (which has already been taken) is for the plaintiff's tutor to apply to the Court for orders pursuant to s 41 of the Trustee and Guardian Act. That section relevantly provides:
41 Orders by Supreme Court for management of affairs
(1) If the Supreme Court is satisfied that a person is incapable of managing his or her affairs, the Court may:
(a) declare that the person is incapable of managing his or her affairs and order that the estate of the person be subject to management under this Act, and
(b) by order appoint a suitable person as manager of the estate of the person or commit the management of the estate of the person to the NSW Trustee.
188The orders made under s 41(1) by White J on 2 September 2011 resulted in the plaintiff becoming a "protected person" and thus a "managed person", pursuant to s 38 of the Trustee and Guardian Act. As such, the Court (or the NSW Trustee) could order payment from the estate of "remuneration, of a specified amount, to the manager of the estate": s 115(1)(b).
189Prior to 6 May 2010, the entitlement of a trustee company (or, more accurately, those listed in a schedule to the Act) to charge "a commission" was regulated by the Trustee Companies Act 1964 (NSW), s 18. Under that regime, the amounts allowed were not to exceed 4.25% of the corpus (or capital value) of the estate and 5.25% of the annual income: s 18(1)(c). The court had power to reduce the commission if it considered the amount "excessive": s 18(3).
190The repeal of that provision coincided with the commencement, on 6 May 2010, of Chapter 5D of the Corporations Act 2001 (Cth), entitled "Licensed trustee companies". A "licensed trustee company" was defined to mean "a trustee company that holds an Australian financial services licence covering the provision of one or more traditional trustee company services": s 601RAA. A licensed trustee company was empowered to charge fees for the provision of "traditional trustee company services", which were not to exceed any limit imposed by Part 5D.3: s 601TBA. Limits were provided, but only in respect of a trustee or manager of a charitable trust: Part 5D.3, Div 4. Although they have no application in the present case, it may be noted that the basic scheme was to allow a commission calculated by reference to the gross value of the trust's assets and an annual income commission, or an annual management fee "at a rate not exceeding 1.056% of the gross value of the charitable trust's assets": s 601TDD(1), and see s 601TDC. For a licensed trustee company not acting as the trustee or manager of a charitable trust, the only control is the requirement to disclose fees, both publicly and to "clients": ss 601TAA and 601TAB.
191In GDR v EKR [2012] NSWSC 1543, White J referred to an "interim judgment" in which he had expressed the tentative view that "a private manager is not entitled to payment of remuneration (as distinct from reimbursement of expenses) out of the estate of a protected person unless the Court (or in limited circumstances, the NSW Trustee and Guardian) so orders": referring to the Trustee and Guardian Act, s 115 and established authority in support of that principle, adding, at [30] a reference to the discussion of the right to remuneration under the predecessor to the Trustee and Guardian Act, namely the Protected Estates Act 1983 (NSW) in Gell v Gell [2005] NSWSC 566; 63 NSWLR 547 at [21] (Campbell J). White J continued at [32]:
"It has been long established that a private manager is not entitled to payment of remuneration out of the protected person's estate, although the Court may authorise payment of remuneration where it is in the protected person's interest so to do. The position concerning remuneration of financial managers (apart from the NSW Trustee and Guardian and trustee companies that have a statutory right to remuneration) is analogous to that of trustees. Unless the trust deed otherwise provides, a trustee is required to act gratuitously, but the Court has inherent jurisdiction to allow remuneration where it is advantageous to the trust estate to allow such remuneration...."
192The fee chargeable by a manager which is a licensed trustee company is thus unregulated, except to the extent that the court which approves the appointment under the Trustee and Guardian Act may exercise the power under s 115. That aspect was not addressed in argument and may raise issues as to the operation of Ch 5D of the Corporations Act and, consequentially, the provisions dealing with the interaction between the Corporations Act and State laws set out in Pt 1.1A. The position with respect to the NSW Trustee, however, falls into a different category. The entitlement of the NSW Trustee to charge fees derives from s 111 of the Trustee and Guardian Act. That section further provides that the amount of any such fees is to be prescribed by the Regulations: s 111(2). The next step is to identify the fees payable pursuant to the NSW Trustee and Guardian Regulation 2008 (NSW). Clause 38 prescribes fees payable to the NSW Trustee "in respect of the management of estates of managed persons". According to cl 37, words and expressions used in Pt 4 have the same meaning as in the Mental Health Act 2007 (NSW). Part 4 is itself entitled "Managed estates". Unfortunately, neither that term nor other relevant terms used in cl 38 are defined in the Mental Health Act. Rather, the expression "managed person" is defined in the Trustee and Guardian Act. The order rendering the person's estate subject to management is provided for in the Guardianship Act 1987 (NSW). It was assumed (no doubt correctly) that the terms in cl 38 deal with the fees payable in respect of the plaintiff, as a managed person under the Trustee and Guardian Act. So far as presently relevant, the fees identified as applicable were an establishment fee of 2.1% of the value of the estate and thereafter an annual fee of 1.1% of the value of the estate: cl 38(1)(a). There were other fees chargeable for the "management of an investment for a managed person in a common fund" and for the cost of a manager of an estate (other than the NSW Trustee) as a percentage of net annual income: cl 38 (1) (b) and (c). For the purposes of calculating the "value" of the estate, the defined meaning is "the gross amount of the value of the assets (whether real or personal) of the estate without deduction of debts or liabilities secured or unsecured, but does not include the value of the person's last known principal place of residence": cl 38(5).
193There was evidence that the NSW Trustee did not in fact charge the full amount of fees permitted under the Regulation. The situation, as explained by Mr Farrell, the Director of Finance and Client Funds Management at the NSW Trustee, evidence identified by the trial judge as uncontested, was that there were three types of fees levied on clients directly managed by the NSW Trustee, namely:
(a) an establishment fee of 1% for the first year only, capped at $3,300;
(b) an annual management fee of 1.1% of "chargeable assets" capped at $15,000 per annum;
(c) an investment fee of 0.5% charged to the various investment funds held by the NSW Trustee.
The only other charges levied in the year 2010-2011 totalled 0.013% of the value of the total funds under management: at [43]. That amount was properly ignored as insignificant.
194The plaintiff noted that the "caps" were not imposed by regulation and that, if they were disregarded, the fees chargeable by the NSW Trustee would exceed those charged by The Trust Company. That was no doubt true, but was not directly relevant. If the inference was that a fee uncontrolled by legislation could be raised at any time, the same could be said of The Trust Company's fees. That there was a degree of flexibility in the private marketplace was revealed by evidence that The Trust Company had offered during the course of the proceedings to reduce its fees from those originally disclosed to the plaintiff. (As noted above, an award of damages would not constitute 'approval' of any fee actually levied in the future.)
(c) inclusion of fund management cost in fund
195The plaintiff's case was that once it be accepted that the cost of fund management is a head of damage recoverable from the tortfeasor, there is no reason to treat it differently from other heads of damage. On the basis that the fees will accrue over time, that factor must be taken into account when awarding a single amount at the date of judgment. A calculation of the present value of those fees will be made according to an appropriate algorithm. Within the terms of s 127(1) of the Motor Accidents Compensation Act 1999 (NSW), the head of damages constitutes "a liability to incur expenditure in the future" which must be "qualified" (presumably meaning quantified) by "adopting" the prescribed discount rate. The sum thus calculated will be part of the award of damages and thus part of the fund to be managed. To the extent that the cost of fund management will itself depend on the size of the fund, that amount will need to be included in the fund, as part of the relevant calculation.
196The appellant raised three broad objections to that approach. The first was that the manager was being paid to manage its own future fees, a step characterised in an earlier case as involving "unwarranted double counting": see Rosniak (1992) at 698 (Meagher JA). That language does not clearly identify the problem, but the idea seems to be that a trustee entitled to fees from a fund should not be paid to administer that part of the fund which notionally represents its own future fees. One alternative would be to pay the fund manager a discounted amount on account of all future fees: that sum would also presumably be held on trust and managed until appropriated, but whatever approach the trustee adopted, the tortfeasor would not be required to pay the cost of managing that satellite fund. Absent some legal arrangement which is not presently contemplated, it may tend to tie the plaintiff to the one fund manager.
197The second objection is that the process of calculation "could go on forever": see Buckman v M&K Napier Constructions Pty Ltd [2005] NSWSC 546 at [13], per Burchett AJ, referring to Zeno's paradox. In principle, each time a calculation is made that amount should be added to the corpus and a further calculation made with respect to the added amount. In practice the calculation can readily be undertaken by use of an appropriate algorithm; the additional amounts become insignificant after a relatively small number of iterations. Nor is the reference to Zeno's paradox entirely apt: the paradox says that before an arrow can reach its destination it must first travel half the distance and therefore can never arrive. On that reasoning the arrow must first travel half the distance to any point on its trajectory, and therefore never starts. The paradox implies not eternal flight but the impossibility of movement. (What it actually demonstrates is the power of imagery to subvert logic.) In the present case the infinite regression is ended by rounding: cf Lewis v Bundrock [2008] QSC 189; [2009] 1 Qd R 524 at [16] (Martin J).
198The third objection seems to be quite simply that the value of the fees will be large. The cost will depend upon the rate at which the charge is levied, the size of the fund and the number of years for which the fund must be managed. It will also depend upon a matter to be addressed below, namely whether the fund should be assumed to reduce at a steady rate, or whether, taking account of income earned in the early years the rate of reduction will be slow in the early years and greater in the later years. Assuming a steady rate of reduction and that the fund is to last for 50 years, the cost of management will be the average amount in the fund (that is half the total) multiplied by 1% and by the number of years. This may be represented as J = D + Cfm, where J is the amount of the final judgment, D the damages other than the fee, and Cfm the cost of fund management. On the parameters set out above, Cfm will be the sum of a series the first item being 1/100 x J/2 x 50, which = J/4. The first iteration will produce a further sum calculated as 1/100 x J/4 x 50, which = J/8. Further iterations will give amounts which in total (without discounting to present value) will approximate 50% of D, or 33% of the judgment.
199The calculation proposed by the appellant uses D instead of J; where D is $10m, the result will be that Cfm (without discounting to present value) will approximate 33% of D, rather than 50%.
200McCallum J accepted the logic of the plaintiff's calculation. No doubt with a managed investment portfolio, the manager will commonly be entitled to recoup its fees from the corpus and will, in that sense, have been managing its own future fees. However, there is a policy question whether a limit should be placed on the amount to be awarded for this head of loss. The liability of the defendant is not necessarily dictated by a particular means of calculating the cost of managing her award. In principle, the plaintiff should reasonably be required to offer the fund manager prepayment of fees by transferring the equivalent of a satellite fund, notionally set aside for that purpose, calculated by reference to the corpus of the main fund.
(d) should the fund include an amount for income?
201The second matter addressed by McCallum J in her first judgment was whether an amount should be included in the fund, for the purpose of assessing management costs, as reflecting income derived from the investment of the fund. She recorded the plaintiff's submission as being that if such income were to be included, "the calculation should be undertaken at an assumed earnings rate of 5 per cent to reflect the statutory discount rate": at [16] and [39]. The defendant's submissions were that "if the potential swelling of the fund by returns on investment were to be taken into account, then all variables would have to be taken into account, subverting the purpose of section 127 of the Motor Accidents Compensation Act": at [46]. The trial judge dismissed that argument on the basis that the Court was not asked to calculate the "actual income the fund will earn" but to adopt "the device of a statutory assumption as to future earnings": at [47]. She then stated at [48] that the discount rate "is the assumed earnings rate". The trial judge accepted that approach, relying on the assumption said to underlie the discount rate, namely that the fund would earn income and at the discount rate.
202The argument below, and in this Court, proceeded on the basis that the prescription by s 127 of the Motor Accidents Compensation Act of a discount rate reflected the exercise undertaken in Todorovic. Whether or not that is so, it is not accurate to describe a discount rate as an earnings rate or even a net earnings rate. A discount rate of 5% would imply a net earnings rate of approximately 5.26%; an interest rate of 5% would attract a discount rate of 4.74%.
203There are other difficulties: by describing the discount rate as an allowance for "net earnings" it is necessary to ask, net of what? If the cost of the fund manager were assessed according to the value of the fund, on what basis is the fund to be valued, and at what intervals? Are unrealised capital gains to be taken into account, or only realised gains? In the latter case, what assumptions are made about the incidents of taxation, if any? Further, for the purpose of calculating the discount rate, though not necessarily for the purpose of calculating the cost of the fund manager, the intended benefit to be offset is the increase in value of the award after allowance for inflation. The need for that allowance flows from the fact that both income and expenditure are measured, in assessing damages, according to figures current at the time of judgment. If the size of the award does not increase by more than the rate of inflation (covering the cost of living, increase in wages and the cost of major expenses such as medical treatment) then no discount should be required. Furthermore, a realistic discount rate should take into account the kind of investments which are likely to be appropriate to a severely disabled plaintiff: see Wells v Wells.
204To adopt the statutory discount rate as an assumed basis for increasing the value of the fund, in order to calculate the costs of the fund manager, is to adopt an arbitrary figure. Further, the calculation appears to have been justified on the basis of an assumption of "uniform drawings and depletion of the fund to zero on the last day of the term": at [51]. That assumption may well be appropriate for some purposes, but it will provide a very imperfect basis for calculating income.
205While it is true that a discount in order to quantify present value of future payments assumes that the investment will appreciate over time, it does not follow that the calculation of the value of the fund from time to time should be adjusted on an arbitrary basis to reflect that assumption. Assuming steady repayments, a graph of the size of the fund over time would not involve a straight line diminution, but rather a line which bulges at the top and diminishes rapidly towards the end (rather in the way that a mortgage repayment chart will commence with payments which are comprised largely of interest and a small amount of capital and will finish with payments which involve a small component of interest and a large element of capital).
206As a matter of fact, there may also be a difficulty with the assumption that drawings will be at a steady rate. A seriously disabled plaintiff may incur heavy capital expenditure immediately after obtaining an award, which would render the attempt to increase the size of the fund on account of income invalid. The principle that the Court should not be concerned with the manner in which the plaintiff will use the award, requires that these matters be disregarded in calculating the amount in the fund from time to time. Although the result may be to underestimate the likely cost of fund management, the disadvantage of engaging in such speculative exercises, by way of an exception to general principle, means that it should not be adopted by this Court.
(e) deductions from award
207On the basis that the amount of the damages has been settled, the remaining question is whether there should be any deductions from the corpus of the fund. The appellant argued that certain amounts which were to be paid out of the damages immediately they were approved should have been deducted from the corpus before calculating the cost of fund management. These amounts were:
(a) $200,000 representing the difference between party and party and solicitor and client costs;
(b) $200,000 payable to the plaintiff's mother for past domestic services, and
(c) $250,000 to cover modifications to her home and provision of a swimming pool.
208The appropriate principle with respect to calculating the corpus is to reduce the amount of the damages awarded by the amount of existing legal liabilities. Otherwise, in accordance with the principle that the Court is not concerned what the plaintiff does with her award, it is inappropriate to speculate in that regard, even though in the case of a tutor or guardian, owing fiduciary duties to the plaintiff, it would be reasonable to assume that amounts reasonably necessary to be expended forthwith will be expended. Apart from any effect on the establishment fee (which will be a minimal sum overall) the proper assumption (if somewhat arbitrary) is that the corpus will be reduced by a steady amount over the life of the fund. As a practical justification, the likelihood that there may be greater expenditure in the first few years may be offset by the fact that higher income will be earned in those years.
209Applying the relevant principle, there should have been a reduction for the amount of costs already incurred and payable, but not with respect to the other amounts. By their nature, past gratuitous domestic services (provided by the plaintiff's mother) were accompanied by no legal liability, nor did the anticipated early expenditure for capital expenses involve any extant legal liability.
210From a proposed judgment (disregarding fund management costs) of $10 million, as approved by Hoeben J, deductions of $66,000 appear to have been made for repayment of Centrelink payments, an advance for the purchase of a motor vehicle and Medicare costs. Hoeben J identified the total deduction as approximately $266,000, of which $200,000 was attributed to solicitor/client costs. Calculations of the corpus of the fund should have been reduced by the full amount of $266,000, as envisaged by Hoeben J. That would have given a figure of $9,734,000.
211The appellant sought to argue for a more expansive approach to deductions, based on the reasoning of this Court in Rosniak. In Rosniak at 699, Meagher JA stated:
"[Senior counsel for the appellant] also submitted that there should be included in the 'deductibles' from the 'fund' any sums allowed in respect of past care, but I do not see why. There was no evidence from the respondent that she had any intention to repay such moneys to the providers of the past care, and it is not entirely clear that the Protective Commissioner would be empowered to do so."
212That approach would not have permitted a deduction on account of past gratuitous domestic services. The amount contained in the schedule of damages for the plaintiff in this case was $373,000, as to which Hoeben J noted that he would have been prepared to recommend to the trustee an immediate payment to the plaintiff's mother of $200,000. Foreshadowed approval of a possible disbursement does not create a liability in the trustee to make a payment which may or may not be sought.
213Nevertheless, the calculation in Rosniak did allow reduction for two amounts, one involving purchase of outstanding property interests ($210,000) and "swimming pool modifications" ($200,000): p 694D. Kirby P referred to those items at 674-675, but did not consider the principles by which such deductions were appropriate. It is not entirely clear how they were dealt with in the calculation undertaken by Mahoney JA. Meagher JA did not discuss why they should be allowed. Further, the discussion in Rosniak was premised on the need to calculate the costs of fund management by reference to the annual income of the fund. In that case the timing of any major expenditure may have taken on a different significance to the current practice of calculating such fees. To the extent that a principle was identified, it was simply that any calculation of the cost of fund management should be undertaken by reference to amounts which will in fact be paid to the trustee. Accordingly, the only additional deduction beyond those accepted by the parties in the present case is the amount of $200,000 for solicitor/client costs already incurred at the time of approval of the settlement.
(4) Calculations
214Both parties made calculations as to how the various fees operated: not all the assumptions were entirely clear. For example, the fees appear to have been calculated on the assumption that there would be no purchase of freehold property; the offer of a reduced fee by The Trust Company was conditioned on the absence of a plan to purchase freehold property "in the short or medium term". However, The Trust Company also proposed to charge a minimum annual fee of $16,500 (at a rate of 0.55% per annum) which implied that the fund would notionally never drop below $3 million.
215Although the trial judge did not ultimately calculate the appropriate fee on the basis of those charged by the NSW Trustee, she gave careful consideration to the actuarial evidence of Mr Plover for the plaintiff, stating at [70]:
"70 I am persuaded by the evidence of Mr Plover that there is a small but appreciable risk that the assumption adopted on behalf of the defendant (that the existing fee structure of the NSW Trustee will continue for 67 years) would produce an underestimate as to the true future cost of fund management calculated by reference to the fees of the NSW Trustee."
216The only relevance of that finding appears to have been to inform a conclusion as to whether the tutor's choice of a private manager was reasonable: at [82] and [86]. However, the question was not whether the plaintiff would pay a particular manager a particular amount, but rather what, making an informed estimate on the basis of current practice, would be an appropriate basis for calculating the likely cost of fund management over the life of the fund.
217In accordance with established principle, what the plaintiff did with her award was immaterial. Evidence that she was likely to fritter it away was as irrelevant as evidence of what she (or in this case her tutor) proposed to do by way of fund management. That principle should not be abandoned because, as a matter of chronology, a fund manager had in fact been appointed, with Court approval, prior to a final judgment in the damages claim. Nor was the approval irrevocable. In principle, evidence of the fees which would have been charged by The Trust Company was admissible as a basis for assessing reasonable costs in the market, unless as a matter of principle a different approach should have been adopted. The first question is whether, as asserted by the appellant, the costs recoverable from the defendant should have been restricted to the costs charged by the NSW Trustee, which were regulated.
218In Best v Greengrass [2012] WADC 44, Wager DCJ, sitting in the District Court of Western Australia, was invited to determine a similar question by reference to the costs charged by the National Australia Trustees ("NAT"), an organisation which apparently managed many trusts on behalf of brain injured people in that State, and those charged by ANZ Trustees Ltd: at [270]-[272]. On a fixed corpus of $2.4 million, the NAT fund management fee was 20.4% of the corpus and that of ANZ, 13.8%. Judge Wager adopted a sum that "recognises the plaintiff's preference for NAT but that is reasonable in the circumstances", adopting a figure of 19%: at [289]. The judge appears to have relied upon the reasoning of McCallum J in Gray v Richards (No 2) - at [287] - in giving weight to the plaintiff's preference for a particular trustee, but in fact did not adopt either proffered figure. She was entitled to take the latter approach, although it was not appropriate to take account of the future intention or preference of the plaintiff.
219In the present case, assuming a corpus of $9.934 million, and a life expectancy of 67 years, the experts accepted that, calculating fees on the initial sum only, the respective percentages were 15.1% (The Trust Company) and 10.2% (NSW Trustee). If allowance were to be made for the inclusion of fees in the corpus, the disparity increased to 20.5% (The Trust Company) and 12.0% (NSW Trustee). The approach accepted above does not permit the inclusion of fees in the corpus on which the fees are calculated. Nor did it accept the corpus was $9.934m.
220To seek to assess likely changes in legislation and the market for financial services with respect to managed estates is to engage in speculation. It is also to engage in speculation as to what the plaintiff (or, more accurately, her tutor) will do with the funds in the future. Whether or not a plaintiff who obtains an award of damages on the basis of a high estimate of future fees will then switch to a cheaper option once the award has been paid, or will make some other change over the course of the plaintiff's life is not a fruitful area for inquiry. The proper course is to adopt what may be considered a reasonable fee, having regard to the services available and the needs of the plaintiff.
221It would almost certainly be preferable if there were a fixed basis upon which to calculate the costs of fund management, even if the result was to a degree arbitrary. That is not, however, a matter for this Court to determine. Because it is inappropriate to allow either the cost of the fund manager or a separate element for income to be included in the corpus to be managed, the appropriate differential in the present case lies between 10.2% and 15.1%. Those figures will not be significantly affected by reducing the corpus to $9.734m.
222The disparity between the two figures could reflect a number of factors, including the level of service provided, the likelihood that the private trustee company will seek to derive a profit from its activities, whilst the government authority may well be subsidised. On the other hand, the fact that The Trust Company sought to adopt a minimum annual fee of $16,500 suggests that the failure to cap its fees in early years may give rise to unreasonable profits in those years. Given the size of the particular fund in the present case (which is likely to be between $10m and $11m) it is appropriate to err on the conservative side. Rather than undertake precise calculations, it is appropriate to adopt a figure of 12.5% of the fund as defined as the rate for calculating the fee.
(5) Costs of trial
223The first judgment of McCallum J was delivered on 16 August 2011, following four days of hearing, which had concluded on 8 August. The appellant did not resist an order that it pay the plaintiff's costs of the trial up to that time.
224The second tranche of the hearing occurred on 25 November and 1 December 2011, the second judgment being delivered on 8 December 2011. A substantial issue addressed in that hearing was a question as to the proper quantification of the fees charged by the NSW Trustee. The plaintiff sought to establish, through expert evidence of Mr Plover, that properly understood those fees were of the same order as the fees charged by The Trust Company. It failed in that regard. The appellant sought an order that the plaintiff pay its costs either for that period, or with respect to that issue. In the alternative, it sought an order that there be no order as to the costs of the parties incurred during that period.
225For her part, the plaintiff sought an order that her costs incurred between 28 October and 11 November 2011 should be paid on an indemnity basis because of failures by the appellant to comply with directions of the Court as to the times within which evidence was to be filed. McCallum J noted the defendant's response to that claim that the delay was "largely if not wholly a result of the sheer complexity of the task in reviewing the financial operations of the NSW Trustee & Guardian": Gray v Richards (No 3) [2012] NSWSC 344 at [36]. She accepted that submission and declined to order indemnity costs.
226With respect to his application, the appellant submitted that the affidavit obtained from Mr Farrell (referred to above) and served on 19 August 2011, should have put the position beyond doubt. Although the trial judge treated that date as significant, she did not think it was "unreasonable" for the plaintiff to persist in her investigation of the issue thereafter. Nevertheless, McCallum J considered that part of the cost of having done so should lie with the plaintiff. In the end she ordered that "the defendant pay the plaintiff's costs of the proceedings except for half of the plaintiff's costs from 19 August 2011 to 8 December 2011". She adopted the period rather than the issue as the basis for assessment, to avoid the potentially difficult task for an assessor to differentiate between costs incurred on different issues: at [32].
227The appellant has challenged the failure to make an order in the terms it originally sought in respect of that issue; the plaintiff has, by a cross-appeal, challenged the reduction of costs recoverable by her for the period from 19 August until 8 December 2011.
228An affidavit of the appellant's solicitor, dated 31 January 2012, estimated that its costs of responding to the allegation that there would be undisclosed fees and charges incurred if the NSW Trustee were used to administer the fund, were at least $170,000.
229Shortly after filing its notice of cross-appeal, the plaintiff apparently decided that it was necessary to seek leave to cross-appeal and filed a summons for that purpose. The appellant did not oppose a grant of leave, were that necessary.
230In his written submissions, the appellant noted that the evidence and submissions dealing with the costs judgment were "voluminous and complex" and proposed that all costs issues be deferred until this Court had determined the substantive issues: written submissions, par 102-106. While it is true that a variation of the approach adopted by the trial judge will itself give rise to a different outcome with respect to costs, the proposition that the Court will tolerate some expansive and voluminous paper war in respect of costs should not be entertained. In the end, the parties agreed that costs should be dealt with by way of written submissions, following delivery of the principal judgment. Despite that, the plaintiff put in a further written submission (with leave) following the hearing, on 3 May 2013. Directions will be appropriate to allow that course to be completed, but given the apparent propensity of the parties (or at least their lawyers) to incur costs, it is convenient to indicate the Court's preliminary view at this stage so that the parties have an indication as to how the matter might best be approached and possibly resolved by agreement.
231So far as the circumstances as they arose before the trial judge are concerned, three points should be made. First, there is no reason to interfere with her conclusion that it would be desirable to avoid any assessment on an issue-by-issue basis. Awarding part or all of the costs for a particular period was an appropriate course to take.
232Secondly, the assessment made by the trial judge of the reasonableness of the respective approaches of the parties was informed, not only by full knowledge of the material submitted by the parties and the positions taken in the course of the hearing, but by her assessment of the significance of particular issues in the proceedings. That the trial judge acted on that basis is clear from the reasons given in her third judgment: in the absence of manifest error, this Court would be loathe to interfere with that evaluative assessment.
233Thirdly, no precise apportionment of costs is appropriate. The adoption of a broad brush approach is not to be dismissed because the parties, through their own efforts, have incurred significant costs in the course of the litigation.
234Any reassessment of costs must now take into account the fact that the outcome on substantive issues has changed. The outcome has demonstrated why the attempts at factual precision as to the likely costs of fund management, to be incurred over a period of 67 years, were misguided. Further, attempts to speculate as to what changes might occur in the future were also misguided. Given the outcome of the appeal in this Court, and on the basis that the Court would not otherwise interfere with the order made by the trial judge in the circumstances which confronted her, an appropriate variation could now be to require either that each party to bear his or her own costs of the proceedings from the date of the first judgment, namely 16 August 2011, or that the plaintiff pay the defendant's costs for that period. On that basis the cross-appeal would be dismissed and the appeal, so far as it concerned the costs order made by the primary judge, would be allowed consequentially on the appellant's success on the substantive issues.
(6) Costs in this Court
235With respect to the issue concerning the basis for calculating the cost of fund management, the appellant has been successful in identifying error on the part of the trial judge. With respect to the amounts to be included in the corpus for the purpose of calculating the cost of the fund management, the appellant has been successful in excluding any calculation on account of income earned on the fund and in seeking to exclude from the corpus the costs of fund management.
236With respect to deductions from the fund, the appellant has been partly successful and partly unsuccessful, although the issue was not a significant one in terms of the time consumed on appeal.
237It should also be recognised that the case was treated as a test case to establish relevant principles and, to the extent necessary, to reconsider and refine the approach adopted in GIO v Rosniak. It should be recognised that the appeal is not ultimately of any concern to the individual appellant, but has a broader concern for the appellant's insurer, which will take the benefit or bear the cost of the outcome, with flow-on effects for other cases. The interests of the respondent are entirely her own personal interests. Nevertheless like any other party, she had (and may have taken) such opportunities as were available to avoid further litigation.
238Having been unsuccessful in her cross-appeal and largely unsuccessful in resisting the appeal, the respondent must bear part of the costs of the appellant. An appropriate proportion may lie in the range of 50%-80%.
239Given these indicative parameters, the parties should be able to deal with the question of costs succinctly in writing. To that end, the Court should make the following directions:
(1) Each party file and serve within 14 days his or her primary submissions with respect to appropriate orders as to the costs of the trial and the costs of the appeal, such submissions not to exceed 10 pages.
(2) If there have been offers of compromise relied upon by the parties, the submissions should be accompanied by an affidavit annexing the relevant material.
(3) Each party should have a further period of 14 days to reply to the principal submissions of the other party, such replies not to exceed 5 pages.
240The parties have leave to apply jointly for an extension of time for compliance with these directions on the ground that discussions directed to settling the appropriate orders for costs are taking place.
241MEAGHER JA: I agree with the reasons of and orders proposed by Bathurst CJ.