Thomas v SMP

Bowles & Whelan, "Judgment Awards & Simple Interest Rates", International Review of Law & Economics, Volume 1 (1981) 111 F A Mann, "On Interest, Compound Interest & Damages" (1985) 101 LQR 30 Jacobs' Law of Trusts in Australia, 7th ed, ed. J D Heydon & M J Leeming (Sydney, 2006) TEXTS CITED : United Kingdom Law Commission, "Pre-Judgment Intereset on Debts & Damages" Report Law Com No 287 (2004) United Kingdom Law Commission, "Law of Contract: Report on Interest", Report Law Com No 88 (1978) Practice Note No SC Gen 16 Snell's Equity, 29th ed, ed. P V Baker & P St J Langan (London, 1990)

Eric Clyde Thomas - first plaintiff John Leslie Sullivan - second plaintiff Softsand Design Investments Pty Limited - third plaintiff PARTIES : SMP (International) Pty Limited - first defendant Eugene King - second defendant David Joseph King - third defendant Gregory Paul Willett - fourth defendant Debra Willett - fifth defendant

COUNSEL : P E King - for the plaintiffs R Weber SC - for the fourth defendant

SOLICITORS : Hayes & Partners - for the plaintiffs Moray & Agnew - for the fourth defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2003/85446 - Thomas v SMP (international) Pty Limited (No 6)

The Issue 1 In my principal judgment Thomas v SMP (International) Pty Limited (No 4) [2010] NSWSC 984, I found that the fourth defendant (Mr Willett) had breached his fiduciary duty to the plaintiffs, Mr Thomas and Mr Sullivan. On 6 October 2010, I ordered Mr Willett to pay to Mr Thomas $3,326,588. I also ordered him to pay to Mr Sullivan $214,373. On 5 November 2010, I ordered that pre-judgment interest be added to those sums in the amounts of $4,382,291 and $471,972 respectively. I required the pre-judgment interest to be calculated on a compounding basis, at yearly rests, adopting the interest rates applicable from time to time pursuant to Practice Note 16. 2 The losses suffered by Mr Thomas and Mr Sullivan were incurred at different times and were constituted by a number of separate payments made almost 10 years ago by each of them. Given the lengthy time since the payments were made, it is obvious that the plaintiffs will not be fairly compensated unless there is a substantial award of interest. Whether that interest should be simple or compounding, what rates should apply, and, if compounding, what rests should be utilised, were the subject of submissions. These are my reasons for finding that the interest should be calculated on a compounding basis, at yearly rests, at the rates applicable from time to time pursuant to Practice Note 16. Compound Interest - Commercial Reality 3 My starting point is that, especially where the losses were incurred approximately ten years ago, there is a danger that simple interest will not provide sufficient compensation having regard to ordinary commercial principles. It has often been said that simple interest rarely reflects accurately the extent of a plaintiff's loss. In Hungerfords v Walker (1988) 171 CLR 125, Mason CJ and Wilson J stated at 149 that: "Simple interest almost always under compensates the injured party's true loss". They cited Bowles & Whelan, "Judgment Awards & Simple Interest Rates", International Review of Law & Economics, Volume 1 (1981) 111 at 112. 4 The reason why simple interest usually under compensates a plaintiff is that it does not reflect the commercial reality. Merchants, traders, banks, financial institutions and consumers ordinarily conduct their affairs on a basis that is predicated on the accumulation of interest that compounds at periodic intervals. This fundamental proposition was emphasised by the House of Lords in Westdeutsche Bank v Islington LBC [1996] AC 669 where Lord Goff (at 691) expressed his entire agreement with the following statement of the primary judge, Hobhouse J: Anyone who lends or borrows money on a commercial basis receives or pays interest periodically and if that interest is not paid it is compounded … I see no reason why I should deny the plaintiff a complete remedy or allow the defendant arbitrarily to retain part of the enrichment which it has unjustly enjoyed.

5 The observations of Lord Woolf at 724-726 are to similar effect. So also are the observations of Lord Denning MR in Wallersteiner v Moir (No 2) [1975] QB 373 at 388 and the observations of the late Dr F A Mann in an article entitled "On Interest, Compound Interest & Damages" in (1985) 101 LQR 30. 6 A comprehensive analysis of the arguments in favour of compound interest is contained in a report of the United Kingdom Law Commission entitled "Pre-Judgment Interest on Debts & Damages": Report Law Com No 287, 24 February 2004. The authors stated that the obvious reason for awarding compound interest is that it reflects economic reality. They added that simple interest can never be relied upon to produce a just indemnity for the loss occasioned by delay in payment. 7 At a general level, and as a matter of principle, the many statements in favour of compound interest are truisms. This explains why in Canada, the Law Reform Commission of British Columbia stated in 1987 that pre-judgment interest should be mandatory and should be compounded monthly: LRC 90. It also explains why in 1994, the New Zealand Law Commission published Report No 28 stating that with few exceptions, there should be mandatory compound interest on all judgments for money claims and that the compounding should be monthly. 8 However, it should be recognised that in any particular case, depending on the rate adopted, or the period of calculation, simple interest may operate fairly. Of course, the disadvantage of simple interest will be magnified the longer the period of calculation. But that disadvantage may be offset if the simple interest rate is set at a high level. An arithmetical graph can be constructed readily to demonstrate, for example, that over a five year period, 7% compound interest will produce the same result as 8% simple interest. On the other hand, over 10 years, the differential will be significant. And of course the differential will increase exponentially: Report Law Com No 287 (supra), Appendix A. 9 This offsetting effect, by using a high rate for the calculation of simple interest, is exemplified by the policy approach taken in relation to the Late Payment of Commercial Debts (Interest) Act 1998 (UK). That Act provides that any qualifying debt carries only simple interest. The government's Green Paper recommended an interest rate of 4% above the base rate. It favoured simple rather than compound interest because it was said to be significantly easier to calculate and because the difference between compound and simple interest was thought to be immaterial in most cases. Following consultation, the government adopted the suggestion of the Bank of England and increased the proposed interest rate to 8% above the base rate. This higher rate was said to represent the rate of overdraft interest available to the smallest and most vulnerable businesses: Report Law Com No 287 (supra), paragraphs [2.25] and [2.26]. The evident purpose of the selection of a rate 8% above the base rate, was to ensure that a successful plaintiff received sufficient compensation, albeit on a simple interest basis. Compound Interest - Equitable Principle 10 Quite independently of statute, equity has always adopted a broad approach to the award of interest. Equity courts have regularly awarded interest, including not only simple interest but also compound interest when justice demanded. This has included circumstances where money has been withheld or misapplied by a trustee or fiduciary: Hungerfords v Walker (supra) at 148. Lord Brandon made a statement to the same effect in President of India v La Pintada Compania Navigacion SA [1985] AC 104 at 116B. And in Wallersteiner v Moir (No 2) (supra), Lord Denning MR said at 388: In addition, in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business … It may be that the company would have used it in its own trading operations; or that it would have used it to help its subsidiaries. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, ie compound interest. 11 In 1978, the United Kingdom Law Commission described the equitable jurisdiction to award interest in broad terms: Law of Contract: Report on Interest (Law Com No 88). The authors stated: 21 The equitable jurisdiction to award interest and to fix the rate at which it should be paid is extensive … In such cases the court has an inherent power to order the payment of interest at whatever rate is equitable in the circumstances and may direct that such interest be compounded at appropriate intervals … Accordingly, we make no recommendations for change in relation to the equitable jurisdiction.

12 And in Hagan v Waterhouse (1991) 34 NSWLR 308, a well-known case at first instance, Kearney J awarded compound interest where he found certain breaches of trust and fiduciary duty by the defendant. He stated that he was doing so on the basis explained in Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818 at 843, namely that: …A trustee may, and normally will, be charged with compound interest with yearly rests not only where he has used the money for his own commercial purposes but also where he has been guilty of fraud or serious misconduct. 13 See also Snell's Equity, 29th edition, 1990 at pages 288-289 and Jacobs' Law of Trusts in Australia, 7th edition, 2006 at paragraphs [2208] - [2209]. 14 There is reason to question whether "fraud or serious misconduct" should necessarily be a criterion for an award of compound interest. I return to this question in paragraphs [16] and [17] below. But if it is, this is a case of serious misconduct by Mr Willett. He procured the payment of monies by Mr Thomas and Mr Sullivan in circumstances involving a dishonest breach of his fiduciary duty to them. I have explained those circumstances more fully in my principal judgment.

Rate of Interest 15 Even when it is appropriate to award compound interest, a question arises as to the appropriate rate of interest. Historically, in cases involving breaches of trust and breaches of fiduciary duty, a distinction was drawn between the "trustee" rate and the higher "mercantile" rate. This is exemplified in the judgment of Street J (as he then was) in Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211. The history is traced by Kearney J in Hagan v Waterhouse (supra) at 391-2. In Jacobs' Law of Trusts in Australia (supra), the authors maintain the distinction, stating that the mercantile rate is applicable where there has been fraud or serious misconduct by the trustee or fiduciary. 16 As there should be no element of punishment in the award of interest, I prefer not to base my decision on any distinction between an innocent breach and one resulting from fraud or serious misconduct. Whether the breach was innocent or not, the question is one of compensation. It is difficult to see why the amount of compensation should depend on the moral quality of the breach. In the passages of the judgments in each of the appellate decisions in Australia and England to which I have referred, the distinction was not mentioned in terms. What was mentioned was the appropriateness of compound interest in circumstances which include the misapplication of monies by a trustee or fiduciary. See Hungerfords (supra) at 148 (Mason CJ and Wilson J); La Pintada (supra) at 116 (Lord Brandon); Westdeutsche (supra) at 692 (Lord Goff); and Wallersteiner v Moir (No 2) (supra) at 388 (Lord Denning MR). 17 A misapplication of monies by a trustee or fiduciary may be inadvertent or dishonest. But in both cases, the breach may give rise to the same level of losses. As I have foreshadowed, the question whether "fraud or serious misconduct" should be a pre-requisite, either for an award of compound interest, or for the use of a "mercantile" rate, is to my mind problematic. However, I need not resolve the question in this case as Mr Willett's breach of fiduciary duty amounted to serious misconduct.

18 A second issue arises concerning the appropriate rate of interest. Historically, courts adopted a fixed mean rate when awarding interest at the trustee rate or the mercantile rate. But this is not the modern practice. As Kearney J said in Hagan v Waterhouse (supra) at 393, the chosen rate "should reflect the reality of the marketplace as it exists under a regime not in contemplation" at the time of earlier pronouncements when there was greater monetary stability. He thought that the judicial attitude mentioned by Street J in Re Dawson (supra) should no longer continue to apply in today's context of fluctuating interest rates. He relied particularly on the reasoning in Wallersteiner v Moir (No 2) (supra) where an ambulatory rate was adopted, possibly for the first time. That rate was 1% above the official bank rate from time to time, with yearly rests. Subsequently, in Morgan Equipment Co v Rodgers (1993) 32 NSWLR 467 at 487, Giles J endorsed the reasoning of Kearney J on this issue. 19 I propose to adopt the same approach. The use of a fixed mean rate, and indeed the very distinction between a trustee rate and a mercantile rate, has an antediluvian commercial quality to which I am not attracted. It seems difficult to justify the reasoning that must underpin the distinction. As I have said, the question is one of compensation not punishment. And the appropriate measure of compensation should not, I think, vary according to the nature and quality of the breach - no matter how well intentioned or inadvertent the trustee or fiduciary may have been.

Practice Note 16 20 A commercial and flexible policy is reflected in Practice Note 16, which commenced on 1 July 2010. The rate specified in the Practice Note is 4% above the cash rate last published by the Reserve Bank of Australia. Although the Practice Note mentions neither simple interest nor compound interest, it seems to pre-suppose simple interest. That is how it, and its predecessor provisions, have generally been applied. 21 The stated purpose of the Practice Note is to set the rate of pre-judgment interest that may be awarded under Section 100(1) and (2) of the Civil Procedure Act, 2005. Practitioners and litigants are informed that the court will "have regard to" the specified rates, which were agreed upon by the Discount & Interest Rate Harmonisation Committee following a referral by the Council of Chief Justices. Although the Practice Note states that its purpose is to "set" the applicable rate, it is not prescriptive. Section 100(1) makes clear that the power in relation to the amount, period and rate of interest is discretionary. The court may include interest "at such rate as the court thinks fit" on the whole or any part of the money and for the whole or any part of the period between accrual of the cause of action and judgment. 22 Section 100(1) is not however the only source of power to award interest. For the reasons explained in paragraphs [10] to [14] above, I am, in the circumstances of this case, exercising an equitable discretionary power to award interest. That power is independent of statute. For that reason, I do not need to resolve the question whether the prohibition against interest on interest in Section 100(3)(a) prevents an award of compound interest. The equivalent statutory provision in the United Kingdom is Section 35A of the Supreme Court Act, 1981. It also contains a prohibition against interest on interest which has been construed to mean that it does not authorise the award of compound interest: Westdeutsche Bank v Islington LBC (supra). On the other hand, it has also been held that the prohibition does not apply where the judgment is really an award of damages calculated by reference to interest that the plaintiff may have paid or foregone: Bushwall Properties Ltd v Vortex Ltd [1975] 1 WLR 1649 at 1660. If necessary, I favour this approach. Cash Rate Plus 4% 23 Nonetheless, the formula utilised in the Practice Note provides valuable guidance to me in the exercise of my equitable discretion. The Reserve Bank of Australia cash rate is the interest rate paid by banks in the overnight money market in Australia. It is one of the tools by which the central bank regulates monetary policy. It is currently 4.75%. In 1990 it was 17.5%. In February 2000 it was 5.50%. In recent times it has been as low as 3%. These are all matters of public record and common knowledge. The standard variable rate is a base rate used by lenders. It is the rate to which loans revert after the application of any discounted introductory rate. Information about a lender's standard variable rate is publicly available. The standard variable rate moves up or down depending on movements in the cash rate and may vary between lenders. But it is always higher than the cash rate. The margin above the cash rate is often approximately 2% but it may be greater. Business overdraft rates on the other hand are generally higher than the standard variable rate and personal overdraft rates are higher still. By contrast, term deposit rates are the rates offered by financial institutions on monies deposited with them. They vary substantially depending on the amount of the deposit and the length of the term, but at any particular point in time, they are less than lending rates. Conclusion 24 I have taken into account all of these considerations in arriving at my decision. I am satisfied that compound interest provides a just outcome in this case. I have had regard to the guidance provided by the Practice Note in determining the appropriate rates. Yearly rests are reasonable. The parties are agreed on the actual arithmetical calculations. A rate which is 4% above the cash rate is not so high that I should take steps to ameliorate its effect. I do not think that I should award only simple interest. My intention is to give to Mr Thomas and Mr Sullivan the most complete compensation that equitable principle permits. 25 Although in my principal judgment it was not necessary for me to make findings to this effect, Mr Willett was in the habit of saying to Mr Thomas and Mr Sullivan from time to time: "I will get you 10%". Of course, the purpose of an award of compound interest is not to fulfil a plaintiff's expectations. But Mr Willett's statement illustrates the commercial context in which the monies of Mr Thomas and Mr Sullivan were misapplied. Monies invested in a business would ordinarily be expected to be returned on a compounding basis. I have given the benefit of all reasonable doubts to the plaintiffs and have adopted the approach explained by Lord Denning MR in Wallersteiner v Moir (No 2) (supra) at 388F-H. It is appropriate that the plaintiffs should have the return of their misapplied monies on a compounding basis with yearly rests at the rates recommended by the Practice Note. I regard this outcome as within an acceptable commercial range.

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