Todorovic v Waller

It is desirable at the outset to deny the validity of some misconceptions to which some dicta have given rise. In the first place, the familiar observation that compensation cannot be perfect (see, for example, Pamment v. Pawelski [3] ; Lim Poh Choo v. Camden and Islington Area Health Authority [4] ) acknowledges the inevitable imperfections of the methods available to quantify financial loss or the incongruity of pecuniary compensation for non-pecuniary damage, but it does not warrant an arbitrary scaling-down of what is otherwise full and fair compensation for financial loss (Victorian Railways Commissioners v. Hale [5] ). The principle of "full compensation" (the phrase of Dixon J. in Pamment v. Pawelski [6] ) should be understood in the way in which Lord Reid expressed it in Gourley . The object is to ascertain what is the true extent of the plaintiff's financial loss, and the discount rate cannot be used as a paring tool for diminishing compensation below (or, for that matter, for increasing compensation above) what is full and fair.

1. (1949) 79 C.L.R. 406, at p. 410. 2. [1980] A.C. 174, at pp. 184, 193. 3. [1953] V.L.R. 477, at p. 495. 4. (1949) 79 C.L.R., at p. 411.

Secondly, although it is inaccurate to describe damages for diminution of earning capacity as damages for loss of earnings, the plaintiff recovers "not merely because his earning capacity has been diminished but because the diminution of his earning capacity is or may be productive of financial loss" (Graham v. Baker [7] ). The distinction between capacity and the fruit of its employment does not permit the Court to neglect the present value of future earnings in assessing damages for diminished capacity. There was a view, and it was most clearly expressed by Barwick C.J. in Ruby v. Marsh [8] , that although it was necessary to "make some conspectus of what the future might reasonably have brought to the injured person by way of financial gain by the exercise of the lost earning capacity", the Court should not undertake "a calculation of the wages as such which might in fact have been earned by the injured plaintiff during the remainder of his working life". It is now accepted that a calculation of the present value of lost future net earnings is an appropriate measure of damages for diminution of earning capacity (see per Mason J. in Griffiths v. Kerkemeyer [9] , and, if it were practicable to ascertain what the plaintiff would have earned during his working life, there is no reason why those amounts should not be taken to be "the financial loss which he will probably suffer", and why the present value of those amounts should not be regarded as an appropriate assessment of damages for diminution of earning capacity.

1. (1961) 106 C.L.R. 340, at p. 347. 2. (1975) 132 C.L.R. 642, at p. 650. 3. (1977) 139 C.L.R. 161, at pp. 188-189.

Next, attention has sometimes been diverted from the present value of the plaintiff's lost earning capacity to a different question, namely, the effect of inflation upon the amount awarded to a plaintiff, as though the purpose of the discount rate was to protect the plaintiff after judgment. Barwick C.J. in O'Brien [10] noted that a plaintiff "can protect himself against the possibilities of continuing or increasing inflation to the same extent as any other citizen with an investible fund", and Lord Scarman in Lim Poh Choo [11] held that "the victims of tort who receive a lump sum award are entitled to no better protection against inflation than others who have to rely on capital for their future support." But the question for determination is not how the plaintiff can preserve, much less how he will go about preserving, his award. A court is not concerned (except in cases of infancy or incapacity) to supervise the manner in which the damages are expended or invested. Nor is the court concerned to compare the plaintiff's position as an investor with that of another investor.

1. (1968) 118 C.L.R., at p. 547. 2. [1980] A.C., at p. 194.

The assessment of damages for future financial loss occasioned by diminution in earning capacity requires a comparison between the plaintiff's position as a person employing his capacity to earn with his position as an investor of a fund. It is not a question of how the plaintiff as an investor will cope with inflation, but how he will fare as an investor in comparison with how he would have fared as an earner of remuneration. Inflation may account for some increases in the earnings which the plaintiff might have received if he had not been injured, or for some of the rate of return on an invested fund; but inflation is not itself a factor upon which the principle of compensation depends or which is essential to the quantification of loss in accordance with that principle.

The question with which the court is concerned has, so to speak, two streams: the stream of future net amounts which the plaintiff would have received by employing his undiminished earning capacity if he had not been tortiously injured, and the yield which might be obtained by prudently investing a sum with a view to drawing out of it from time to time the net amounts which the plaintiff will not receive because of the tortious diminution of his earning capacity. Inflation may contribute to both streams, but the discount rate has to do with a comparison of the streams, not directly with the rate of inflation.

The principle of compensation is translated into practice by adopting a method which was explained by Gibbs J. in Cullen v. Trappell [12] :

The method now usually adopted in assessing damages for economic loss to be suffered in the future is first to estimate what the loss will be, and over what period it is likely to occur, and then to estimate what sum, if paid at the date of judgment, would compensate the plaintiff for that future loss. This is usually done by applying actuarial tables which show the present vaue of a future loss, once an appropriate rate of interest has been selected. 1. (1980) 146 C.L.R. 1, at p. 12.

Of course discounting, whether and however it is done, offers no guarantee that an award will prove to be precisely right. It is freely acknowledged that the result of the discounting calculation cannot be proved to be correct, for it is impossible to prove with any show of accuracy the elements which must be evaluated and compared in ascertaining the plaintiff's future financial loss. Lord Scarman observed in Lim Poh Choo [13] that "There is really only one certainty: the future will prove the award to be either too high or too low." Though perfection in assessment is impossible, the purpose of the discounting process can be stated. I venture to repeat what I said as to the theory of the calculation in Armstrong v. Rudd [14] :

Why is it necessary to discount future net earnings at all? Clearly it is because the award of damages results in the immediate payment of a lump sum which, by some form of investment, may earn increments between the time of that payment and the time when the lost earnings would have been paid in the future. To give the injured party an undiscounted equivalent of future net earnings would over-compensate him because he would be awarded also the increments to the capital sum. Discounting reduces the capital sum so that, with the increments it may earn over time, it could provide no more than the recurrent payments of net earnings which would have been received over the same time if the plaintiff's earning capacity had not been tortiously destroyed or impaired. 1. [1980] A.C., at p. 183. 2. (1978) 46 F.L.R. 42, at pp. 46-47; 21 A.L.R. 166, at pp. 170-171.

The object of a discounting calculation is to arrive at a figure which fairly represents the present value of a stream of the plaintiff's future net losses of earnings (cf. per Stephen J. in Barrell [15] ).

To be true to the governing principle of compensation, the method of assessment must not assume in a time of relatively high inflation that the amount of net earnings will not increase. If O'Brien were understood to mean that such an assumption should govern the assessment of damages, the experience of the intervening years would require a departure from that proposition, and I respectfully agree with Mason J. when he said in Barrell [16] :

At this stage it is worth making the point that the O'Brien principle was based in some respects on factors which have been falsified by our experience since 1968. First, the case for saying that there will be a significant decline in the purchasing power of money over a given period in the future is very much stronger now than it was then. We cannot ignore the fact that wage rates have increased continuously for almost fifty years, the rate of increase having become more pronounced in recent times. The assumption that the rate of increase in the cost of goods and services will not be as much as three per cent per annum has been exploded, as has the conviction that investment in "equities" will render a capital fund immune to inflation. Secondly, the fact that we now live in an era of rapid inflation is in itself a reason for departing from the so-called principle that the law disregards changes in the purchasing power of money. If it ever was a principle, it was very much the product of an age in which currency had a stable value in terms of purchasing power. 1. (1981) 145 C.L.R., at pp. 676-677.

The judgment in O'Brien was delivered in September 1968. The average weekly earnings in Australia in the four quarters of the year ended 30 June 1981 was $65.50. The corresponding figure for the year ended 30 June 1968 was $281.40, an increase of 330 per cent. In each of the intervening years average weekly earnings have increased, the percentage increase varying between 7.5 per cent and 25.4 per cent. The major part of that increase must have been "due solely to the change in the purchasing power of money": the Consumer Price Index (All Group, six State Capital weighted average) averaged over the four quarters ended 30 June 1981 is 204 per cent higher than the index for the four quarters ended 30 June 1968. The percentage increase in gross average earnings is greater than the percentage increase in net average earnings, however, because the percentage of average earnings deductible for tax has increased. Nevertheless, an increase in net average earnings of the order of 300 per cent has occurred since the time when the judgment in O'Brien was delivered. In assessing compensation for diminution in earning capacity, it would be wrong for the courts to act on an assumption that in the future there will be no general increase in the level of net earnings when such an assumption is at odds with recent experience and with expectations which are commonly expressed in budgetary forecasts and public economic discussion and which are shared by the community at large (though there may be disagreement as to the extent of the increases expected). If the courts were to ignore generally expected increases in earnings in assessing compensation for future economic loss and to adhere to a practice which has tended to undercompensation, they would dismantle the legal principle expressed by Lord Reid in Gourley , and erect in its place a practice which ensures that a plaintiff will receive something less than "the financial loss which he will probably suffer". That would be to permit an adjectival rule to prevail over a substantive principle. As Stephen J. said in Barrell [17] :

In an era of endemic inflation to assess the plaintiff's damages on the assumption that current award rates will remain unchanged for the next thirty-four years disregards that principle of the law. It is an assumption which few members of the community would at the present day make in planning their own affairs. 1. (1981) 145 C.L.R., at p. 647.

Although principle requires that increases in net earnings or in the costs of goods and services should not be left out of account, the method by which they are to be taken into account and the extent to which they are to be taken into account are questions of difficulty. The quantification of future increases in net wages and costs, and of future rates of interest and inflation, is too complex an inquiry for the courts to undertake in personal injury litigation. That has been the unwavering view of this Court since O'Brien , and that view was affirmed in Barrell. If it were possible to know at the time of trial what those amounts will be, the assessment would admit of greater precision than it does. Instead of taking the current level of net lost earnings and costs, the actual losses occurring at known future periods would furnish the respective amounts to be discounted to present value. The losses would be expressed in the nominal amounts of the period, and the discounting would be a practical exercise requiring an examination of the net yield which a capital sum might earn in the meantime. It would be possible to assess how much should be put into a plaintiff's pocket in order to allow him to take out from that amount and its increments the amounts which he would have taken out if his earning capacity had not been tortiously diminished.

But it has been held that it is not practical for a court in personal injury litigation to form an estimate of what the actual future losses would be and to discount those sums to a present value according to the actual yield which might be prudently obtained. The method was rejected, not because it was incompatible with the principle of compensation, but because it required prediction of the unpredictable (cf. per Mason J. in Barrell [18] ). A better method was devised which reduced the element of estimate or conjecture in the assessment.

In Barrell the plaintiff was the employer of an injured worker, the defendant an insurance broker which negligently failed to secure for the plaintiff an indemnity against liability for workers' compensation. The plaintiff was entitled to damages to indemnify it against its liability to pay to a statutory fund periodic amounts in respect of compensation payments to be made to the injured worker. Those payments were statutorily indexed, variable according to future wage movements. The Court, adhering to what was said in this respect in O'Brien , forbore from endeavouring to estimate what the effect of inflation on future wage movements would be; and equally, the majority of the Court sought to eliminate the effect of inflation (or, it may be, the effect of expected inflation) on interest rates. The resulting views of the Court were divided. Barwick C.J. would have adopted a discount rate of 5 per cent, Gibbs, Mason and Wilson JJ. a rate of 2 per cent, Stephen and Aickin JJ. would have adopted an undiscounted approach and Murphy J. came to the same conclusion though his approach may be more accurately described as a zero discount rate.

It is clear from the judgments in Barrell that the discount rate or the undiscounted approach is the means by which the court takes into account the effect of inflation. Thus Stephen J. explained his reasons for adopting an "undiscounted" approach [19] :

The only reason for discounting for present payment is to offset the unintended advantage which a plaintiff gets from present payment, namely, the chance to earn income from its investment. But against that should be weighed the disadvantage he suffers by only being compensated at present rates of wages (or at present rates of outgoings) when his lost future wages (or future outgoings) would have proved much greater in money terms. If the advantage and disadvantage can be seen approximately to offset each other, neither need figure in the process of assessment and the occasion for discounting disappears.

During periods of sustained inflation such as we have known in recent years and such as the expert evidence in this case predicts for the future, there does appear to occur something very like such a cancelling out of advantage and disadvantage. But, continuing as I do, to ignore for the moment the impact of income tax upon investment income, it does appear that so long as the future holds promise of continued and relatively high rates of inflation substantial justice would be done both to plaintiffs and to defendants by simply awarding as damages the total estimated loss of future earnings (or future outgoings) calculated at current rates and without making any discount for present payment.

Aickin J. agreed in those reasons, and Murphy J. agreed in the result for reasons thus expressed [20] : The proper way to assess the present value of the amounts to be paid under the indexing machinery of the Workers' Compensation Act, is to ignore the effects of monetary inflation on increasing the payments and if any discount is applied, to adopt a rate, if there is one, which prevails as the difference between the rate of inflation and the return upon safe investment, which may be described as a "constant" or "real" interest. Otherwise, one is making an assessment in which monetary inflation, instead of being cancelled out, affects both the payments and the offsetting discount rate. But as Stephen J. shows, there is no "constant" or "real" interest. The variations above and below zero justify the adoption of a rough zero rate, in other words, no discount. Mason J., with whose reasons Gibbs and Wilson J. were in general agreement asked and answered what his Honour called the "fundamental question" [21] : Should the damages in this case be assessed by estimating future increases in wages or should the likelihood of such increases be ignored and a low discount rate applied? The reasons which underlie the decisions in O'Brien [22] and Lim [23] , are opposed to the first approach. The only distinction which this case presents is that here we have a statute which increases the amount of the liability at regular six-monthly intervals by reference to a statistical index. But the inevitable problems of determining whether inflation will continue, and at what rate, over a long future period remain with us. It was the presence of those problems and the difficulties in answering them that led to the decisions in O'Brien and Lim.

Some of the assumptions on which O'Brien was based were, as we have seen, unsound. None the less it is still correct to say that prediction of the inflation rate over the next thirty to forty years is a hazardous and uncertain enterprise and that the nature of the topic is such that it is incapable of being rendered certain by expert evidence or existing statistical materials. Moreover, it is undesirable that the assessment of damages for personal injury, already a complex undertaking, should be further complicated by an inquiry into future rates of inflation. Essentially it is for these reasons that I regard the attempt to calculate future wage increases as being too speculative and difficult to justify. Instead, I favour the calculation of damages, without attempting any such projection, by applying a low discount rate, if the application of such a rate be appropriate to the case.

This was substantially the view of Gibbs J. who accepted the 2 per cent discount rate favoured by Mason J. and who was in general agreement with his reasons. Gibbs J. said [24] : The only practicable course is, I think, that suggested by Lord Diplock in Mallett v. McMonagle [25] - " 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." 1. (1981) 145 C.L.R., at p. 658. 2. (1981) 145 C.L.R., at p. 685. 3. (1981) 145 C.L.R., at pp. 679-680. 4. (1968) 118 C.L.R. 540. 5. [1980] A.C. 174. 6. (1981) 145 C.L.R., at p. 639. 7. [1970] A.C. 166, at p. 176.

It is stated or assumed by Gibbs, Mason, Murphy and Wilson JJ. that in assessing the damages in Barrell it was fair to omit from consideration the effect of inflation upon wage levels if the discount rate does not reflect the effect of inflation (or the effect of expected inflation). Barwick C.J. declined to adopt this approach. He said [26] :

There remains the question of the rate of discount to be applied to the sum of the future liability in order to determine the amount of damages presently assessed. I agree that the percentage figure currently to be obtained for investment of money ought not to be used for this purpose. Nor do I think that an endeavour should be made to work out what might be called a "real" rate of interest, that is an endeavour to determine the extent of the inflationary element in the current rates of interest obtainable. I favour adhering to an artifical rate of discount which, when compared with the current or "going" rate of interest leaves some room for the successful plaintiff to some extent to offset the effect of declining value in money. After all, the discount rate traditionally used has in truth always, or at least for a considerable time, been to a degree artifical. On balance, I would continue the use of 5 per cent as the appropriate rate of discount. 1. (1981) 145 C.L.R., at p. 637.

With the exception of Barwick C.J. the Court did not approve of discounting a stream of workers' compensation payments calculated on present earnings, if the result would reduce the assessment below a sum which the plaintiff could invest and draw upon from time to time to put himself in the same financial position that he would have been in but for the defendant's tort. Applying that approach to the assessment of financial loss occasioned by a tortious diminution of earning capacity, the discount rate may be defined. When a stream of future lost net earnings is calculated on the net earnings current at the time of the assessment (Cullen v. Trappell [27] ) adjusted, if need be, to reflect savings in expenditure which would have been incurred in earning that income (Sharman v. Evans [28] ), the appropriate discount rate (if any) is the rate which, applied to that undiscounted stream, results in a sum which the plaintiff could invest and draw upon from time to time to put himself in the same financial position as he would have been in if his earning capacity had not been tortiously impaired or destroyed.

1. (1980) 146 C.L.R. 1. 2. (1977) 138 C.L.R., at p. 577.

It is permissible to have regard to past experience to guide a judgment as to what is a fair discount rate to select, though the past does not furnish a prediction of what the future is likely to hold. Past experience is relevant to the range of discount rates which might properly be considered by this Court, though there is no assurance that past experience will be repeated. In considering past experience, inflation and its effects may be taken into account - its effect on levels of earnings and on investment yields - but it is not necessary to assume that inflation has made or will make an equal contribution to the levels of earnings and to investment yields. Perhaps an assumption of that kind was made by Lord Diplock in Mallett v. McMonagle [29] or flows from what his Lordship said in that case, but it is an assumption of fact, and unless its accuracy be demonstrated, it is better to make a direct comparison between levels of earnings and investment yields. In my opinion, a comparison between rates of interest and rates of inflation is not the appropriate comparison: the appropriate comparison is between what earning capacity has produced on the one hand and what capital has yielded on the other, for capital is the vehicle of compensation for diminution in earning capacity.

If it be possible to ascertain how a plaintiff in receipt of average earnings would have fared in previous years if his earning capacity had not been diminished, in comparison with how he would have fared if he had received an undiscounted award calculated on his then current earnings, we have some information upon which an opinion may be formed as to whether a plaintiff whose earning capacity is tortiously diminished is financially either better off or worse off by receiving an undiscounted award than if he gainfully employed his undiminished earning capacity. And the study should show incidentally whether a plaintiff is financially better able to cope with inflation by employing his earning capacity or by investing an amount equal to the undiscounted current earnings.

In Jetson v. Hankin, some evidence of past experience was tendered and admitted, but there are difficulties in the way of using that evidence exclusively as the historical material to guide the selection of a discount rate. First, it would not be right to reach a result in Todorovic v. Waller upon evidence given in another trial, much less to select a discount rate for general application by reference only to evidence given in a particular case. Secondly, the evidence in Jetson v. Hankin is incomplete in some relevant respects, does not fully describe the methods used for calculating inflation and real rates of return and, except for one series of bonds, does not specify fully the statistical and other sources upon which conclusions are founded.

Rather than rely upon evidence in a particular case, resort should be had to notorious economic data published by the Australian Bureau of Statistics and the Reserve Bank of Australia. The Bureau publishes quarterly and annual estimates of average weekly earnings per employed male unit and quarterly and annual percentage increases in the Consumer Price Index for a "basket" of goods and services, deriving a weighted average of the indices for the six State capitals. The Reserve Bank publishes a list of Commonwealth bond rates or theoretical yields available from time to time. All series cover the last twenty years, though a change from rebatable to non-rebatable bonds in November 1968 (Income Tax Assessment Act 1936 Cth, s. 160AB) affects the accuracy of comparisons prior to that year. Since 1974, the Bureau has published estimates of median weekly earnings (male), but those figures, which have not fallen short of the average figure by more than $5.80, are not available for earlier years. The average weekly earnings series is defined to be total weekly earnings divided by total male employees plus a proportion of female employees, the proportion being derived from the estimated ratio of female to male average earnings. Earnings comprise award and over-award wages and salaries, the earnings of employees not covered by awards, overtime earnings, bonuses and allowances, commissions, directors' fees and payments made retrospectively or in advance during the quarter. It is an adequate series to use for comparison with yields on investment.

It is impossible for a broad comparison to make allowances for the peculiar features of each case, and in particular to allow for the incidence of tax upon income earned either by the employment of earning capacity or by the investment of a capital sum. It is necessary to start with average gross figures, for want of any method which is more sensitive, appreciating that information so crudely derived furnishes no more than a preliminary guide to the selection of a rate. Moreover, a broad comparison cannot take account of the variety of yields upon the investment or mix of investments available from time to time. It is better to take the longest term bond rate for comparative purposes, assuming that the rates on those securities bear a sufficient relationship to other sound securities to indicate the movement in yields from year to year, although some upward adjustment of the bond rate is needed to give reality to the comparison.

By reference to the series mentioned, it can be seen that average weekly earnings have increased each year for the last twenty years, the rate of increase exceeding the increase in the Consumer Price Index for each of those years (i.e., years ended 30 June) with the exception of 1977, 1979 and 1980. Except for the years 1973 to 1977 and 1980 the twenty year bond rate available from June in the previous year (rebatable until 1968, non-rebatable thereafter) also has exceeded the increase in the Consumer Price Index for the following year. However, the real rate of return on bonds differs, year by year, from the percentage of real earnings increase, and the arithmetic mean of the available bond rates is approximately 2 per cent less than the arithmetic means of the annual increases in weekly earnings. It is not right to assume, therefore, that inflation (as quantified by the Consumer Price Index) is reflected equivalently in average earnings and the bond rate; nor is it right to assume that increases in average earnings are matched by the bond rate. It seems that a yield of the order of the bond rate plus 2 per cent has been required to match what the employment of average earning capacity would have produced during the last twenty years.

However, the appropriate comparison is not between annual figures; rather it is desirable to ascertain how a plaintiff whose earning capacity would have produced the average wage during a span of years would have fared, year in and year out, as an investor of a fund calculated on his gross earnings current at the time of the award extended over those years.

An undiscounted award allocates to each year during the period of compensable loss the amount of earnings current at the time when the award is made. If gross earnings current in each of the last twenty years are compounded by the percentage increase in average weekly earnings in the years following and if the same gross earnings are compounded by a percentage equal to the available bond rate plus 2 per cent in the years following, a year by year comparison can be made. The year by year comparison leads me to the view that the bond rate plus 2 per cent is a fair approximation of the gross yield on investment required to match increases in gross average weekly earnings. Such a calculation does not carry forward the surplus or deficit of each year; it treats each year's allocation as a separate fund. It is clear that if a carry forward calculation were done - and it could be useful only if it were done on a net basis - the early years after an award are of the greatest significance to its long term sufficiency or inadequacy.

Leaving income tax out of account for the moment, is it fair to assume that an amount of damages assessed in compensation for diminished earning capacity can be invested to yield 2 per cent above the bond rate, and be available when required to make good the lost earnings which the plaintiff would have received from time to time?

In selecting a discount rate, it is necessary to evaluate comparatively the risk which a person runs of losing his earning capacity because of death, ill health, or loss of his source of earnings and the risk which an investor runs of losing his capital or the expected yield on his investment. The risk of a plaintiff's losing his earning capacity for reasons other than the injury for which the tortfeasor is responsible requires some allowance to be made on the earnings side, unless that risk is allowed for in some other way. Where that risk is allowed for in estimating the period during which the plaintiff's diminution in earning capacity will be productive of financial loss, as frequently occurs, it would be wrong to select a discount rate which assumes a return obtainable on an investment which is not secure. To provide the equivalent of an assured stream of earnings, a reasonably secure investment must be posited. The level of security required by a notional investor of a sum to compensate for future economic loss would preclude the seeking of a yield significantly in excess of 2 per cent above the bond rate. On that hypothesis, the experience of the last twenty years suggests that an undiscounted award of gross earnings current at the date of an award does not provide a fund from which to draw significantly more than the gross earnings which might be earned if the plaintiff's earning capacity were undiminished. The crude comparison between the level of gross earnings and a yield of 2 per cent above the bond rates suggests that a plaintiff who receives an undiscounted award calculated on gross average earnings does not receive a financial advantage above what he would have received by way of gross earnings if he were gainfully employing his undiminished earning capacity. But the comparison cannot be relied upon to warrant the selection of a zero discount rate, because the relevant comparison is not between gross earnings and gross yields. The comparison leaves two factors - important but not amenable to quantification - out of account.

The first factor is income tax. The relevant comparison from period to period is between what net amount could be drawn out from a notionally invested fund and what net earnings would have been if earning capacity had not been diminished. The method of calculation adopted since Cullen v. Trappell [30] uses current net earnings, not current gross earnings, as the factor to be multiplied. And thus the question in whether present experience suggests that an undiscounted assessment would be likely to result in over-compensation of a plaintiff who is entitled to draw out from the fund the net earnings which he would have received if his earning capacity had not been diminished. As we have seen, the percentage increase in net earnings since O'Brien is less than the percentage increase in gross earnings, and unless the graduated tax scale is indexed to earnings that trend will continue. On the other hand, the yield on investments which must be relied on to cover increases in net earnings may be eroded by the incidence of tax. It is not possible to quantify the difference between the incidence of tax upon future increases in earnings and the incidence of tax upon the yield on investments. The scale of tax applicable to an increase in earnings may not be the same as the scale applicable upon the yield on the sum invested. Whatever differential could be shown at the commencement of a period would alter at the end of the period as increases in earnings are added one upon another, and the yield decreases as capital is consumed. But one circumstance is clear: earnings derived from the employment of earning capacity are assessable income; and yields upon sums invested may not be. At least a proportion of the yield on investments in a given year may fall outside the ambit of assessable income in a particular year, and perhaps escape the incidence of tax entirely, dependent upon the investment which is made.

And thus the comparison of gross earnings and gross yields requires considerable adjustment when considering the ability of a fund calculated on current net earnings to provide for net drawings equal to net earnings in the future. An inability to quantify the adjustment precludes the use of comparison of the gross figures of earnings and yields to suggest a discount rate applicable to a calculation based on current net earnings. All that can be said is that the incidence of tax is likely to bear more heavily on increases in earnings than on the yield of an invested sum upon which a plaintiff may draw, and as the object of the discount rate is to equalize the net amount which can be drawn out of the fund year by year with the net amount which the plaintiff would have earned, the tax advantage enjoyed by yield in comparison with earnings must be taken into account by reducing the capital sum which is available for investment. In other words, a positive discount rate must be adopted.

There was argument in the present appeals as to whether income tax should be taken into account as though it were exigible only upon the notional income assumed to be derived from investment of a capital sum at a low notional rate of interest equal to the discount rate selected (a view which commended itself to Gibbs J. in Barrell [31] ) or whether it should be taken into account as exigible upon an income derived from the investment of a capital sum at a commercial rate of interest. The question arises in that form if one searches for a discount rate in the field of real interest rates. In that search, one deducts an inflation rate (whether derived from the Consumer Price Index or some other index) from the rate of interest available on government bonds or some suitable investment and then makes an allowance for tax liability upon interest. The argument is between making an allowance for tax upon the whole of the assumed interest or upon so much interest as would be earned at an interest rate found by deducting the inflation rate. As I would search for the discount rate in a different field, assuming that the yield on an invested sum is likely to enjoy a tax advantage over increases in earning, I do not find it necessary to answer the question in the precise form in which it was raised. In selecting a discount rate to be used as a practical operational tool, I do not find it possible to attribute a particular tax rate to either earnings or yields, and I do not find it necessary to attribute an hypothetical rate of tax to the yield. The material circumstance to be borne in mind is the difference in the incidence of tax upon earnings and investment yields.

The second factor is the real but unquantifiable advantages which present possession of a discounted stream of net future earnings confers upon a person whose earnings would otherwise have been received over a period. The advantages may be manifold. A particular advantage is the saving in interest and borrowing charges which might have been paid out of future earnings to acquire a home, car or some other asset. A plaintiff who might have appropriated amounts out of his future net earnings to repay the amount borrowed and to pay interest and borrowing charges can buy the asset without incurring a liability for interest and borrowing charges. There is an advantage in being able to do so, and some allowance should be made for it and for other advantages which flow from possession of a capital sum.

In the result, there is no calculable figure which presents itself as the appropriate discount rate. It is essentially a matter for judgment, and different minds would attribute a different weight to the immeasurable factors in selecting a discount rate. In practice the discount rate adopted by this Court will be its guide in determining appeals challenging the assessment of damages, and it will thus be a rate effective to guide the courts from which those appeals may come. As the discount rate is neither a principle of law nor a fact deducible from evidence or other material, the selection of a discount rate is a function peculiarly suited to the collective opinion of the Court. It follows that the coalescing of judicial opinions on a particular figure gives the best assurance of a proper selection. For my part, the rates adopted before Barrell appear to be too high to result in fair and full compensation in the great majority of cases. I would join in the selection of a discount rate of 3 per cent, finding that rate to be not outside the range which gives appropriate weight to the factors which, in my view, are material to the selection.

Perhaps it is desirable to recapitulate those factors: the continuance of the practice of making a calculation of future net earnings losses based on current net earnings adjusted for savings in expenditure during a span of years discounted for the possibility of losses caused otherwise than by the defendant's tort, the economic history of the past twenty years showing the relationship between average earnings and the long term bond rate earlier mentioned, the comparative incidence of income tax upon gross earnings and yields on investments, and the advantages to be derived from present possession of a capital sum in comparison with an entitlement to payment of moneys over a period where the capital sum represents the present value of the aggregate of those payments. I would anticipate that the generality of awards assessed on the footing of a 3 per cent discount rate are likely to be within the appropriate limits of a sound judicial discretion.

In the ordinary course of personal injury litigation, no evidence should be given or economic material received with a view to establishing a discount rate other than 3 per cent. None of the factors material to the selection of a discount rate is an issue for consideration by the tribunal of fact in a personal injuries action. It would unduly encumber the hearing of such an action to investigate Australian economic history, and if some future period throws up a substantially different comparison between average earnings and yields on secure investments, the relevant facts can be brought to the attention of this Court and the Court might then be asked to consider whether 3 per cent ought to be retained as the appropriate rate.

Nor should evidence be admitted in an endeavour to show that a discount rate other than 3 per cent can be supported in a particular case by measuring the immeasurable factors (tax and advantages from possession of a capital sum). These factors are taken into account in selecting a discount rate not because they have been shown to represent accurately the circumstances of each case, but because it is necessary to bear them in mind in selecting a basis by reference to which Australian courts may assess damages which will give comparable compensation in comparable cases being as fair to plaintiff and defendant as the uncertainties of the future and the limited ability of courts to receive evidence about them permit. The method of assessing damages for future economic loss without encumbering trials with inquiries incompatible with the efficient discharge of the courts' functions necessitates the adoption of a discount rate which is likely in the generality of cases to result in an award which accords with the legal principle of compensation. If it be shown that a calculation made on the footing of a 3 per cent discount rate does not accord with that principle, the principle would require that the discount method be rejected or an adjustment made. But proof of the effect of the immeasurable factors in the case of a particular plaintiff does not warrant discarding the 3 per cent discount rate or establish that the result thereby calculated does not accord with the principle. The parties are at liberty, of course, to lead evidence on an issue relevant to the other factors in the calculation: the likelihood of promotion carrying a higher salary, the expected period of loss, or any of the other matter peculiar to the plaintiff which courts are accustomed to evaluate in assessing damages.

The selection of a discount rate for application in assessing the amount needed to defray the future costs of goods and services presents at first sight a different problem. It may be thought that the Consumer Price Index furnishes a sufficient guide (at least in the absence of contrary evidence) to movement in costs of goods and services which a plaintiff is likely to require because of the injury tortiously inflicted on him. If that were so, the Consumer Price Index rather than the movement in wage levels would require comparison with the yield on investments. But the Consumer Price Index is manifestly not a sufficient guide to the movement in the cost of those goods and services for which an injured plaintiff is ordinarily entitled to compensation from a tortfeasor. A high proportion of the cost of those goods and services usually consists in the payment, directly or indirectly, of wages and the wage comparison is as good a guide as a comparison with the Consumer Price Index. The incidence of tax upon the yield on investment will often be offset to some extent by the deductibility of the outgoing, and the possession of a capital fund to defray future costs and expenses confers a benefit similar to that mentioned in respect of the assessment of damages for diminished earning capacity. I would accept 3 per cent as an appropriate discount rate for the future cost of goods and services, in part because a different rate has not been demonstrated to be likely to be more appropriate and in part because, as Stephen J. observed in Barrell [32] , "The complexity which any such a distinction would introduce outweighs, I think, any loss of accuracy which is entailed in ignoring it."

It remains to apply these conclusions to the present appeals. In Todorovic v. Waller, the Court of Appeal has exposed its reasoning in arriving at the several components in its assessment of the plaintiff's damages, and it is possible to dissect the calculations made by the Court and rectify them by applying a discount rate of 3 per cent. The Court of Appeal, before taking adverse contingencies into account but after deducting superannuation payments and travelling expenses, assessed the respondent's net future lost earnings at the date of judgment at the undiscounted figure of $321,467. An actuarial calculation making the same deductions but applying a 3 per cent discount rate, would alter that assessment to $233,470. Although adverse contingencies are usually and desirably to be taken into account in estimating the years of loss before applying the discount rate, the Court of Appeal made an allowance for adverse contingencies in the present case by reducing the undiscounted figure by 15 per cent and rounding the assessment to $275,000. A reduction by 15 per cent of an amount arrived at by applying a discount rate of 3 per cent is arguably too high, but the relationship between the discount rate and the allowance for contingencies in this case was not argued, and the same approach in this respect should govern this Court's assessment of the respondent's damages. The resulting figure is $198,450. Discounting the value of the respondent's superannuation benefits at 3 per cent and making the same percentage allowance for contingencies as that allowed by the Court of Appeal, the assessment for this loss should be reduced from $90,747 to $20,444. The judgment of the Court of Appeal should be correspondingly altered.

In Jetson v. Hankin, the Full Court of the Supreme Court of Victoria order a new trial, and the adoption by this Court of a 3 per cent discount rate precludes any departure from that order. We were invited to assess the damages in order to save the costs of a new trial, but as the award was not dissected it is impossible to ascertain the assessment in respect of lost earnings much less to examine the other elements in the award. The order for a new trial should stand.

I agree in the orders proposed by the Chief Justice and Wilson J.