Willett & Anor v Futcher [2004] QCA 30

[1] THE COURT: The appellant (plaintiff) suffered severe brain damage and other injuries in a motor vehicle accident when she was nine weeks old. In December 2000 when she was 23 years old the compromise of her claim for damages was sanctioned in the sum of $3,850,000, together with a sum by way of damages in respect of reasonable management fees payable to an administrator pursuant to an Administration Order made by the Court. The learned hearing judge in that instance appointed Perpetual Trustees Queensland Limited ("Perpetual") as the administrator in relation to all financial matters concerning the amount of the compromise pursuant to s 12 and s 245 of Guardianship and Administration Act 2000.

[2] After certain authorised deductions from the compromise sum, the sum of $3,250,000 ("the fund") was the amount that had to be managed by the administrator (hereinafter "the fund manager"). The quantum of the "reasonable management fees" for the administration of the trust fund could not be agreed upon between the parties and the issue was referred to the Court for determination.

[3] The appellant claimed a sum of $713,052 for damages for fund management. Such a sum would approximate 20 per cent of the total fund and significantly exceeds the amounts allowed in cases where the need for fund management was similar. The claim is based upon proposals put forward by two potential fund managers - Perpetual and the Public Trustee of Queensland ("Public Trustee") - whose respective fees were approximately $800,000. Each proposal included as expense items the cost of taking independent investment advice from experts and the cost of ongoing brokerage fees. The learned primary judge made a detailed comparison of the two proposals and concluded that, although the approach of the Public Trustee was "more attractive conceptually", there was "little to distinguish" between the costs to be charged.[1] She disallowed the amounts which reflected "that 'extra' investment assistance and cost" on the basis that they "ought not to be part of the compensation which a defendant must make to an injured plaintiff even if the injury gives rise to the need for assistance in the management of the fund".[2]

[4] Details of the services and fees of the respective managers and expert comments upon those services were placed before the learned primary judge in affidavits and in oral evidence. The scope of Perpetual's services proposed were described in the following table:[3]

Underlying investment manager fees - Fund Manager Fee (Third Party)

Underlying investment manager fees - Initial Brokerage Fee (Third Party)

Underlying investment manager fees - Ongoing Brokerage Fee (Third Party)

[5] The learned primary judge allowed damages in the sum of $180,000 which comprised a one off fee to establish the fund and the capitalised present day value of ongoing discretionary portfolio management - categories A and B in the table above.

[6] The services identified in the table have been detailed in the reasons of the learned primary judge and need only to be summarised here. Those services involved in the establishment fee require little explanation. They include the costs of establishing accounts, the preparation of a financial plan and a review and implementation of the Strategic Plan and investment recommendations.[4] The discretionary portfolio management fee, as her Honour found, is for "decision making and fiduciary obligations" under the statute and "the elevated duty of care of a professional Trustee including the implementation of all ongoing strategic and investment advice and day to day investment decisions...".[5] In Ex B to the affidavit of Damien Gallagher sworn 11 December 2002 there are listed some of the benefits of this service which include access to wholesale managed investments, reduced brokerage rates and refund of commissions.[6]

[7] The learned primary judge gave details of the categories which were disallowed. Those in category C - advisory portfolio management fee - include such items as "six monthly investment reviews of asset allocation and all portfolio investments, annual review of strategic and investment advice...initial and ongoing independent company and fund manager research...".[7] This advice would be provided by in-house specialists including senior financial consultants, investment consultants, accountant and a trusts and estates solicitor. Also included were various administrative, custodial and reporting services which appear to overlap with services included in categories A and B. The services envisaged in categories D, E and F were those to be provided by outside experts with whom the fund manager would consult for expert investment advice and for initial and ongoing brokerage fees. These are the "extra" costs which the learned primary judge determined to be "outside the realm of compensatory damages".[8]

[8] This appeal requires the determination of the scope of fund management service fees which can be recovered by way of damages from a tortfeasor. The decision of the High Court in Nominal Defendant v Gardikiotis[9] made clear, as did a number of cases previously decided,[10] that such damages were properly recoverable by a plaintiff with causally related mental incapacity, but the High Court did not define the scope of the services to which regard should be had in assessing those damages.

[9] The learned primary judge looked firstly at the principles upon which damages are required to be assessed and cited from Todorovic v Waller,[11] the passage from the joint judgment of Gibbs CJ and Wilson J (at p 412):

"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."

[10] The concept of damages being awarded once and forever as a lump sum necessitates the assessment of future loss and expenses by the application of notional investment returns and discount rates prescribed either by statute or by high authority. The damages which gave rise to the fund were assessed on that basis.

[11] The appellant in this case has such severe cognitive deficits, resulting from the tortfeasor's action, that she will never be able to manage her own affairs. She requires continuous care which is presently provided by her parents. In the intermediate future this care is likely to be provided upon commercial arrangements. She has a present life expectancy of 59 years. The purpose of the fund is to provide for the plaintiff's needs and future expenses. Notionally this will be achieved by the use of the fund income and by steadily depleting the fund capital over those 59 years so that the fund is reduced to zero at the end of the period.

[12] Having in mind that notional purpose which the damages must fulfil, the plaintiff's solicitors said, in providing particulars of reasonable management fees, that the assessment thereof must be calculated on the basis of some assumptions as to the impact which their payment would have on the damages sum. Those assumptions were:

• The value of the portfolio is $3,250,000 reduced to zero in a straight line over the estimated life expectancy of Belinda of 59 years;

• Projected earnings at five per cent per annum;

• Discounting at five per cent per annum;

• Inflation disregarded;

• The expense factor to reduce the portfolio value in a straight line is deducted annually at the beginning of each year;

• The fees and charges were assumed to be correctly stated;

• Ongoing fees continuing throughout the year.[12]

These assumptions were also adopted by Mr Day who gave expert evidence for the Public Trustee.

[13] No doubt these assumptions reflect the way in which the damages of $3,850,000 were assessed. The requirement for the fund to reduce to zero derives from Todorovic (supra); the projected earnings of five per cent is the figure adopted, despite "an inescapable element of arbitrariness", by the Court of Appeal of New South Wales in Government Insurance Office of New South Wales v Rosniak[13] as representing long term reasonable return on investment; the discount rate is that prescribed by statute; inflation is disregarded because that factor is taken into account in the adopted earnings rate; the deduction of the expense factor and the other assumptions are to permit an annual assessment of the quantum of the fund. However these assumptions may not be helpful, and may even be misleading, in assessing reasonable management fees.

[14] The learned primary judge stated what her Honour described as an important matter of principle in this case in the following terms:

"The determination raises an important matter of principle, namely, whether the cost to Belinda of obtaining suitable investment advice and other ancillary charges in respect of that part of the trust fund available for investment ought to be borne by the defendant as an aspect of the damages ordered to be paid 'in respect of reasonable management fees'. Those representing Belinda and Mr Rangiah for the Public Advocate submit that the defendant ought to do so on the ground that it is a need which has been created as a direct consequence of the defendant's wrong. The defendant and the Public Trustee argue that that cost to the plaintiff is not compensatory in nature being rather a means of maximising the compromise sum."

[15] In our opinion the correct principle in determining whether the fees sought to be charged are recoverable as part of the plaintiff's damages is whether they are, as stated in the above passage "a need which has been created as a direct consequence of the defendant's wrong" or as McHugh J put it in Nominal Defendant v Gardikiotis[14] "the necessary product of the defendant's negligence". However, as we will endeavour to show, such fees may be a necessary product of the defendant's negligence notwithstanding that they may also be "a means of maximising the compromise sum".

[16] Damages in the nature of such fees are awarded in order to place the plaintiff in the position in which she would have been, as far as money can do it, had she not been deprived, by the defendant's negligence, of her capacity to manage her own affairs.[15] So what is awarded by way of damages in respect of management fees is such sum as is necessary to manage the fund which the plaintiff would have managed had she not been so deprived.

[17] In assessing damages, courts are not concerned to ensure that the plaintiff will invest the sum awarded in a way which will ensure fulfilment of the assumptions on which the damages have been assessed.[16] Where the plaintiff is of full capacity a court plainly could not do so. But the court is no more concerned to ensure that fulfilment where the plaintiff lacks capacity to manage her own affairs, the only difference being that because, in that case, the plaintiff has been deprived by the defendant's negligence of the capacity to manage her own affairs, the damages must include a sum sufficient to pay for that lost capacity. But, subject to what we are about to say, the court is not concerned, in assessing those damages, to do so on any assumption that it will be invested in any particular way.

[18] However it was common ground in this case that, because of the defendant's negligence it was necessary to appoint an administrator in relation to all financial matters concerning the amount of the compromise pursuant to s 12 and s 245 of the Guardianship and Administration Act 2000 and appropriate, as Byrne J did, to appoint Perpetual as such administrator. And it necessarily followed that Perpetual was thenceforth the trustee of that amount subject to the obligations of a trustee under the Trusts Act 1973 and the general law.

[19] Under the Trusts Act, Perpetual is obliged to "exercise the care, diligence and skill a prudent person engaged in that profession, business or employment would exercise in managing the affairs of other persons" (s 22(1)(a)). It is obliged to "exercise the powers of a trustee in the best interests of [the beneficiary]" (s 23(2)(a)).[17] It is obliged "to invest trust funds in investments that are not speculative or hazardous" (s 23(2)(b)). It is obliged to obtain advice where necessary; in which case the reasonable cost of obtaining the advice is payable out of the trust funds (s 23(2)(d), (4)). It is obliged to have regard to the purposes of the trust and the needs of the beneficiary (s 24(1)(a)). It is obliged to have regard to the need to maintain the real value of the capital of the trust (s 24(1)(d)). It is obliged to have regard to the potential for capital appreciation (s 24(1)(f)). And it is obliged to have regard to the probable duration of the trust (s 24(1)(i)). These obligations will need to be borne in mind in considering what are reasonable management fees.

[20] The first ground of appeal relates to the refusal by the learned primary judge to follow the decision of the Court of Appeal in Wills v Bell[18] which the appellant contends was binding upon her. If that decision "was wrong" as the learned primary judge opined[19] then it is necessary for this Court to reconsider it. For the reasons which will appear later a reconsideration of Wills is not necessary.

[21] By the second ground of appeal the appellant argues that the learned primary judge erred in principle in distinguishing between the categories of services and fees and allowing damages based on only two of those categories. This error is said to occur in para 26 of Her Honour's reasons which reads, in part, as follows:-

"The purpose of investment advice and decision making about investments which concerns the present determination is to maximise the return over and above the amount of compensation awarded which already has an investment strategy inherent in it. The underlying principle in making a defendant responsible for the cost of management services to a plaintiff under a disability is to place her in the position she would have been in but for the injury so far as money can do so. The trustee who administers the fund does for the plaintiff what she cannot do for herself, that is, make choices and decisions, inter alia, about investments. Detailed research and analysis about investments may occur in part 'in-house' and in part by retained third parties. Difficulties arise in isolating the costs for those services provided 'in-house' which are outside the range of unassisted decision-making which an able adult of no particular skill, training or interest in the subject would make. But if they can be, it is at that point that the compensatory principle ends. An amount to reflect that 'extra' investment assistant and cost ought not to be part of the compensation which a defendant must make to an injured plaintiff even if the injury gives rise to the need for assistance in the management of the fund."

[22] Her Honour therefore appears to have concluded that, notwithstanding that the appointment of a trustee, subject to obligations under the Trust Act and under general law, was a necessary product of the defendant's negligence, a notional line must be drawn at the point where, in the performance of those obligations, the trustee goes beyond the range of unassisted decision-making which an able adult of no particular skill, training or interest in the subject would make. And her Honour apparently concluded that any fees for services rendered for work beyond that line, whether or not required by obligations by which the trustee was bound under the Trusts Act or the general law, were not recoverable.

[23] But in a case such as the present, a necessary product of the defendant's negligence was the appointment of a trustee with statutory and other legal obligations. And to the extent that the performance of those obligations must go beyond that which is necessary to put the plaintiff, in the management of the sum, in the same position as she would have been had she not been deprived of her capacity to manage it, the need to perform those obligation is, in our opinion, the product of the defendant's negligence the cost of which is recoverable from the defendant.

[24] The reason for that is that the cost of performance by Perpetual of such services as it is necessary to perform in order to discharge its obligations as a trustee in respect of the management of the sum, is not a cost in the expenditure of which the plaintiff has, or had at any time, a choice; it is incurred because the defendant's negligence caused the incapacity requiring appointment of a trustee and because a trustee has those obligations at law. As McHugh J said in Gardikiotis:[20]

"Damages may therefore be awarded for the expense of managing a plaintiff's verdict moneys where the plaintiff's disabilities prevent him or her from managing those moneys and the disabilities are the foreseeable consequences of the defendant's negligence. Damages may also be awarded for the expense of investment advice where, as the result of the defendant's negligence, the plaintiff is no longer able to make adequate decisions concerning his or her own financial affairs. In both cases, damages are payable by the defendant because the expense is the necessary product of the defendant's negligence and is not the result of the free, informed and voluntary act of the plaintiff."

[25] Where the standard of services which a plaintiff is obliged to accept, as a matter of law, as a necessary product of the defendant's negligence, is higher than the standard which would be provided by the unassisted decision-making of an adult of no particular skill, training or interest, the defendant is liable to pay the cost of those services at that higher standard. In Wills v Bell[21] these principles were not discussed. We do not think that there is any reason to conclude that that case was wrongly decided.

[26] The question then is whether all of the services for which fees are claimed will be necessary to enable Perpetual to perform its obligations under the trust of which it was appointed trustee having regard, amongst other things, to the purpose of the trust, the needs of Belinda and the intended duration of the trust, namely 59 years; or whether, on the other hand, some of them are services to be performed in the exercise of Perpetual's discretion as trustee but not necessary to discharge those obligations. The difficulty in answering that question, it seems to us, is that none of the evidence adduced was directed towards it.

[27] The learned primary judge determined the amount of reasonable fees at $180,000 which was, in effect, the total of fees A and B in the table above, after comparing those fees with the equivalent fees which would be charged by the Public Trustee. The question is therefore whether any of the fees in categories C, D, E and F were fees for the performance of services which Perpetual was obliged to perform or pay for in order to discharge its obligations as trustee. It may be accepted, as the learned primary judge held, that all of those services would be beyond the decision-making capacity of an able adult of no particular skill, training or interest in the subject.

[28] The discretionary portfolio management fee, category B, was said by Perpetual to include the following specific services:

"• The decision making and fiduciary obligations undertaken by Perpetual to act as Administrator as defined by the Guardianship and Administration Act 2000.

• The elevated duty of care of a professional Trustee including the implementation of all ongoing strategic and investment advice and day to day investment decisions made on behalf of the Second Plaintiff."

[29] If the services provided in category B covered the services necessary to be provided by Perpetual in the performance of its obligations as trustee of the sum, as the quoted statements seem to imply, then in our opinion the fees proposed to be charged in category C are not recoverable. Moreover a perusal of the services provided for the advisory portfolio management fee (category C) appears to indicate, with greater specificity, the kinds of things which a professional trustee would be required to do under B to perform its fiduciary obligations in a situation such as this.

[30] The underlying investment manager fees - fund manager fees (category D) - appear to be charged on the assumption that an external manager will be engaged to manage the fund. As one witness pointed out, the Public Trustee would perform that function itself. But whether it is performed by Perpetual or by the engagement of an external manager, it adds nothing to C or, relevantly, to B. It is therefore not recoverable.

[31] It may well be that Perpetual, in order to perform obligations imposed on it as trustee, will incur some brokerage fees, both initially and thereafter from time to time during the life of the trust. It is impossible to say that the estimates of those amounts, totalling about $8,000 are excessive.

[32] However as the learned primary judge correctly said, the estimate of a total present value amount for a reasonable management fee in respect of the compromise sum is not a mathematical exercise. In our opinion, even if the sums totalling approximately $8,000 were included, her Honour's estimate of a reasonable sum for such fees at $180,000 is unappealable.

[9] [1996] HCA 53; (1996) 186 CLR 49.

[10] Treonne Wholesale Meats Pty Ltd v Shaheen (1988) 12 NSWLR 522; Government Insurance Office of New South Wales v Rosniak (1992) 27 NSWLR 665; Campbell v Nangle (1985) 40 SASR 161.

[11] [1981] HCA 72; (1981) 150 CLR 402.

[13] (1992) 27 NSWLR 665 at 678, per Kirby P.

[14] [1996] HCA 53; (1996) 186 CLR 49 at 54.

[15] Campbell v Nangle (1985) 40 SASR 161 at 192, cited with approval by Gummow J in Gardikiotis at 67.

[16] See, for example, Gardikiotis at 61 - 62.

[17] And that means, in this context, in the best financial interests of the beneficiary: Cowan v Scargill [1985] 1 Ch 270 at 287, 289.

[18] [2002] QCA 419; Appeal No 82 of 2002, 11 October 2002.

[19] Record, Vol 2, p 378, para [27].

[20] [1996] HCA 53; (1996) 186 CLR 49 at 54 - 55.

[21] [2002] QCA 419; Appeal No. 82 of 2002, 11 October 2002.