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Damages for fund management

Extract from Kidd's Damages P.I.

Calculating the present value of the cost of fund management

In L F Bell as litigation guardian for DC Bell v Pfeffer & Anor 3/8/09 [2009] QSC 209 Dutney J considered “whether in calculating future management and investment fees, the correct starting point is the amount actually received by the Administrator which was $3,509,743.13 on the basis of a straight line amortisation at 5% over a life expectancy of 62 years”@5.  Dutney J considered such approach was appropriate. The amount received by the Administrator had diminished since the Court award.

 

[Rottenbury] “50 The only question in issue between the parties was whether:

In calculating the present value of the cost of fund management, does one take into account as a separate item the fact that the fund will earn income, which in some years will increase its capital value and in others will slow what would otherwise be the diminution of its capital value. …

52 The [D] submitted:

(a) the predicted earnings of the [P’s] fund is but one of a number of future variables that may affect the corpus; other variables equally incapable of any form of precise calculation include the effects of inflation on amounts to be drawn down from the fund, the tax regime to which the fund is subject, and the types of investments the fund managers make in the future. These variables may affect the corpus of the fund in different ways at different times. Some may have a negative effect on the corpus;
(b) it is unacceptable to adopt a model which includes only one of the these variables, namely fund earnings, while ignoring the rest. Predicting future trends in one variable is necessarily speculative; attempting to predict future values of all of the relevant variables would be mere guesswork;

(c) the effect of using a model which includes predicted future values of all relevant variables, even if a worthwhile model could be developed, amounts to a recalculation of the discount rate to be applied to the plaintiff’s future expenditure on the cost of managing his funds, which is impermissible. The statutory rate of 5% cannot be varied;
(d) this is consistent with statements by the majority of the High Court in Todorovic v Waller (1981) 150 CLR 402 at 422, 449, 458, 459 and 465. That case (which predated the imposition of the statutory discount rate in motor accident and other cases) established the discount rate of 3% which was treated as being of general application until overtaken by statute;

(e) the High Court considered the matters which ought to be taken into account in formulating an appropriate discount rate for the purpose of calculating the present value of 648-244 future losses and expenditures. The Court made it clear that a number of factors incapable of any precise calculation, not limited to the earnings the [P] might obtain on the investment of his lump sum damages, must be taken into account. The discount rate bundles together all of these factors. It must be assumed that the legislature took the same factors into account in mandating the statutory discount rate;

(f) all of these incalculable future variables are incorporated in the 5% discount rate provided by s 127 of the Act. Section 127 of the Act is applicable as the payment of fees to the fund manager is a liability www.pass4lead.com/ to incur expenditure in the future.

53 In my opinion the submissions of the [D] are compelling. Accordingly I hold that in calculating the present value of the cost of fund management one does not take into account as a separate item the fact that the fund will earn income.

Rottenbury by his tutor Wren v Rottenbury 13/3/07 [2007] NSWSC 215 Hislop J

 

General principles

$90,000 awarded as fee for management of the fund of verdict moneys – Commercial Assurance Co of Australia v Pelosi 2/2/96 [1996] NSWSC Full Court  Not on austlii

 

Claim for cost of management of fund allowed in the sum of $32,187 when the total award was $987,917 Slattery v Beare, Brambles Aust Ltd & Fletcher 29/3/01 [2001] SADC 44  @ 44 Smith J.

 

In Hills v State of Queensland 4/9/06 [2006] QSC 244, a case of an assessment for a P with cerebral palsy from birth with a life expectancy of 54 years McMurdo J awarded $287,011 under this head. The award did not include a component for the period after P reached 18 as he was quite capable intellectually to manage his own affairs.

 

See BJ by his next friend … Jones v Wilcox & Anor 11/12/08 [2008] NSWSC 1332 per Hoeben J at Baby – Brain injury where an assessment made under this head.

 

In Ehlefeldt v Rowan-kelly 1/5/09 [2009] NSWSC 331 Hoeben J awarded $1,017,000 under this head in the case of a 33y.o. woman suffering hypoxic brain injury and who was also assessed at 100% of the most extreme case. Such award was assessed in relation to an investment fund of $5m over 50 years.

 

The proper approach to the assessment of fund management fees discussed by Martin J in Waller v McGrath & Anor 19/6/09 [2009] QSC 158 in the case of a 12 y.o. (20 at judgment) suffering serious brain injury. “The defendants should not be obliged to pay, in addition to management fees charged by the fund administrator, further sums representing fees that the administrator proposes to charge for the investment of its allocated administration and management fees. See Lewis (by his litigation guardian P Osborn) v Bundrock & Anor [2008] QSC 189”@125. The use of straight line amortisation approved. But see appeal at Waller v Suncorp Metway Insurance Limited 16/2/10 [2010] QCA 17  [55 MVR 95] where appeal allowed in this respect and allowance for case management was increased.

 

In L F Bell as litigation guardian for DC Bell v Pfeffer & Anor 3/8/09 [2009] QSC 209 Dutney J considered “whether in calculating future management and investment fees, the correct starting point is the amount actually received by the Administrator which was $3,509,743.13 on the basis of a straight line amortisation at 5% over a life expectancy of 62 years” @5.  Dutney J considered such approach was appropriate. The amount received by the Administrator had diminished since the Court award.

 

In Gray v Richards 16/8/11 [2011] NSWSC 877 (59 MVR 85) McCallum J considered the “perceived incongruity between the inexact calculation of damages [for ‘fund management on fund management’] generally and the exactitude of a calculation that, theoretically, must be repeated to infinity” @29. He favoured the use of approximation. Concerning damages for management of fund including fund income, McCallum J was “satisfied that the allowance for fund management costs should be calculated on the assumption that the relevant fund includes returns on investment of the fund” @55. The decision of Rottenbury not followed. Statutory discount rate of 5% adopted. In this case a 10 y.o. with a life expectancy of over 60 years was significantly disabled and received a verdict of ten million dollars. Held “that the plaintiff's claim for the future cost of managing the fund management component of her damages award be allowed … [and] 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” @73. Various cases considered. Appeal allowed in part from this decision and related decisions on 2/12/13 in Richards v Gray [2013] NSWCA 402 [66 MVR 16]. McCallum J was correct in finding that it was not appropriate to make any deduction from the fund for the purpose of the calculation of fund management costs as it was speculative as to when certain payments would need to be made. McCallum J erred by allowing compensation for additional fees caused by the accretion of income to capital [137-143] and in granting compensation for fund management on fund management [144-148]. “[T]he calculation of the amount to cover fund management on fund management involves either speculation as to the performance of the fund in any given year, or assumptions as to the rate of dissipation of the fund management award which in all probability will bear little relation to reality” @147. Held it was “reasonable to award an amount for fund management fees on the basis of those charged by The Trust Company” @159. $1,495,000 awarded R in respect of fund management fees. See also case note at NSW – MACA s127. Appeal allowed in part 15/10/14 in [2014] HCA 40 where the High Court considered “whether an incapacitated plaintiff is entitled to recover costs associated with managing that component of damages which has been awarded to meet the cost of managing the lump sum recovered by way of damages … [and secondly] whether an incapacitated plaintiff is entitled to recover costs associated with managing the predicted future income of the managed fund” @5. Both these questions had been answered in the negative by the COA. COA found to have erred in its answer to the first question, but not the second. The discount rate prescribed by s 127 of the MACA does not imply a statutory requirement that the fund should achieve a net future earnings rate of five per cent. Nor does it imply that the award of damages must be supplemented in order to sustain such an income, net of the expenses incurred in achieving it. Section 127 assumes, as does the second of the Todorovic v Waller principles, that the return from the fund takes into account the cost of generating that return. The discount rate does not assume that the fund will produce an annual net income at an equivalent rate or imply that a lump sum award must be adjusted to ensure that result. The discount rate is a conceptual tool deployed for the purpose of arriving at a lump sum reflecting the present value of future losses” @63-64. “the cost of managing the income generated by the fund is not an integral part of the appellant's loss consequent upon her injury. One could view that cost as an integral part of that loss only if one were to assume that the income of the fund will, in fact, be reinvested in the fund and thereby swell the corpus under management. That assumption cannot be made, given that drawings from the fund may exceed its income. Further, that assumption should not be made, given that to do so would be contrary to the third of the Todorovic v Waller principles” @66.

 

In Best … v Greengrass 29/3/12  [2012] WADC 44 Wager J allowed P’s claim for management fees on management fees. See from paragraph 269.

 

In Wood v McKenzie 3/6/13 [2013] NSWDC 89 D “contended that the quantum to be managed and the associated fund management cost would be affected by a number of factors. First, the superannuation aspect of the compensation award might be invested in a separate superannuation fund. Second, a substantial amount would be deducted for solicitor/client costs. Third, the plaintiff might contribute a substantial lump sum to the purchase of a future residence (the plaintiff's partner indicated that the couple might ‘downsize’). Fourth, moneys might be expended on overseas travel (although the plaintiff's partner was doubtful that she could manage the plaintiff on a trip of any magnitude). Finally, the funds might run out by the time that the plaintiff attained the retirement age of 67 years. Similar arguments were considered and rejected in Gray v Richards (No 2) [2011] NSWSC 1502 (under appeal). Justice McCallum noted that a funds manager has an obligation to manage a fund so that it lasts for a plaintiff's lifetime and the Court should be slow to pre-empt the decisions of a trustee charged with the prudential management of a large sum of money. She noted that the payment of capital costs (in that case – house modification) was speculative. She could not confidently predict the impact on the fund of the future deduction of solicitor/client costs. Consequently, she was not satisfied that it was appropriate to deduct any sum from the verdict for the purpose of calculating future fund management costs. The circumstances of the present case are not relevantly distinguishable” @68-69 per Murrell SC DCJ. See also Richards v Gray appeal at Managing Fund – General principles.

 

See Patterson v Khalsa (No. 3) 27/9/13 at ‘Most extreme case – Example of 100%’ where mid-wife negligent and baby suffered cerebral palsy, quadriplegia and moderate intellectual disability. Five million to be managed for 59 years.

[Campbell] “Finally, [counsel] attacked a sum of $50,000 which the learned Judge included in the damages as the cost of the management of the respondent's damages. Attention has been directed to the cost of management of the fund created by an award of damages to a person who is incapable of managing his own affairs, as an item of damages, only in relatively recent times. So far as I am aware it had never been sought or allowed, at least explicitly, as an item of damages in this State until 1972 when Walters J allowed it in Meadows v Maloney (1972) 4 SASR 567. The plaintiff in that case had been rendered incapable of managing her affairs by the injuries for which she sued. Walters J said:

'Moreover, as Mrs Meadows is incapable of managing her affairs, she will not have the handling of her moneys, which will be invested by Public Trustee on her behalf, within the range of permitted investments. And, of course, the return from these investments will be abated to the extent of the statutory deductions which Public Trustee is authorized to make from moneys coming into his hands. One must take into account this charge of the service to Mrs Meadows by Public Trustee; the continuing cost of this service is something for which some allowance must be made in the assessment'. [@576]

The next reported case of such an allowance being made occurred in 1976 in Canada in Teno v Arnold (1976) 67 DLR (3d) 9 and on appeal to the Supreme Court of Canada (Arnold v Teno (1978) 83 DLR (3d) 609). The injured plaintiff was a six year old child who had suffered severe brain damage in the accident which was the subject of the litigation. It is sufficient to quote from the judgment of Spence J (with whose judgment the other members of the Court agreed as to damages) in the Supreme Court of Canada:

'The last topic with which I must deal is that mentioned for the first time in the reasons in the Court of Appeal for Ontario although I am sure that Keith J had it in mind when fixing the global award. Even if the infant plaintiff were adult and not disabled, she would need professional assistance in the management of such a large sum of money as is being awarded to her in this case. Although the management of that sum, until she is an adult, will be in the efficient hands of the Official Guardian for the Province of Ontario, she will have the whole burden of management so soon as she becomes an adult and at that time she will have to retain the services of skilled financial advisers. It is appropriate to allow an amount to cover the annual fee which will be entailed.' [@ 635]

For the position in England it is sufficient to quote from the judgment of O'Connor LJ (with whom the other members of the Court of Appeal agreed) in Rialas v Mitchell The Times, 17th July 1984, (an unreported case in which judgment was delivered on 6th July 1984):

'Lastly there is the question as to whether the fees of the Court of Protection for managing the fund created by the award of damages can be recovered as a separate head of damage. It seems that this head of damage was first awarded by Mr Jowitt QC sitting as a Deputy High Court judge in Futej v Lewandowski (1980) 124 SJ 777. The basis of the award was that as a result of his injuries the plaintiff was unable to manage his affairs and that the sums charged by the Court of Protection were greater than those which would be incurred by a plaintiff managing his own affairs. We are told that this head of damage has become common form: see for example Hefferman v Walker [1984] Current Law 93 decided by Glidewell J in 1983 …. It seems to me that Futej v Lewandowski … was correctly decided on this point and I think that this is a loss directly flowing from the injury and is recoverable.'

We were referred also to, another order to the same effect made in 1980 by Deputy High Court Judge Jowitt QC in Duller v South East Lincs Engineers [1981] Current Law 585.

[Counsel] relied upon two passages occurring in the judgment of Mason J in Todorovic v Waller (1981) 150 CLR 402 in the course of his discussion of the appropriate discount rate to be applied in computations used in the assessment of damages. He said at p442: 'In the vast majority of cases the injured plaintiff will be without investment capacity or experience, he will be dependent on others for advice and if he obtains expert advice he will have to pay for it.' At p449 his Honour, when considering the return to be derived from investment of the amount of a judgment, referred to the 'real return … after allowing for the cost of professional advice'. In those two passages, Mason J referred, in my opinion, to the cost of professional advice which would be needed by any injured plaintiff as to how to manage the proceeds of a large judgment. Such advice is taken into account in determining the discount rate and is therefore not to be made the subject of a separate allowance. His Honour did not refer in those passages to the cost of the management of the fund produced by the judgment which is necessitated by the fact that the plaintiff is incapable of managing his affairs.

It seems to me that the principles of the law relating to damages for tort require the inclusion in an incapacitated plaintiff's damages of the amount which he will be required to pay to a manager by reason of his incapacity. A plaintiff is entitled to recover the loss caused by the tort. The fundamental principle upon which damages are assessed is the principle of compensation that the plaintiff is to be placed, so far as possible, in the same position financially as he would have been if he had not sustained the wrong for which he receives the damages. The capital sum awarded to him 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. It seems to me that the liability for the fees is a loss flowing directly from the wrong and is recoverable as damages caused by the wrong. I should say for the sake of completeness that the same is true, in my opinion, where the plaintiff's incapacity to manage his affairs does not result from the wrong but is antecedent to it, being the result of legal disability or some other cause. A wrongdoer must take the person he injures as he finds him. If the person is under a legal disability or is otherwise incapable of managing his affairs, his position is the same as regards the head of damages under discussion, as if the incapacity were caused by the wrong.

It has been the inveterate practice of this Court to order that damages awarded to a plaintiff who is under a legal disability be managed by Public Trustee. There is power under s8a of the Aged and Infirm Persons Act, 1940, to make a protection order and appoint a manager in respect of the estate of a plaintiff who is incapable of managing his affairs. It is to be expected, unless there be sound reasons to the contrary, that the Public Trustee would be appointed manager in such cases. It seems to me therefore that the reasonable and proper measure of a defendant's liability for fees of management are the fees which the Public Trustee is authorized to charge.”

Campbell v Nangle (1985) 40 SASR 161 @ 190-192 King CJ (Full Court)  Not on austlii

 

Campbell v Nangle was considered by the High Court per Gummow J in Nominal Defendant v Gardikiotis (1996) 186 CLR 49 @ 66-69 to have correctly stated the principles re damages for cost of fund management. Gardikiotis involved a 21 y.o. woman whose pre-existing multiple sclerosis was aggravated in a MVA to the point where she needed to be confined to a wheelchair and had difficulty writing. She suffered no mental impairment, but before the MVA there was only a 30% chance she would have deteriorated to the extent of needing to be wheelchair bound. Held that “the only amount which can be provided in relation to an expense incurred in managing verdict moneys was an amount directly referable to the physical impairment suffered as a result of the accident” per head note. Various other cases on issue of fund management widely canvassed.

 

[Lipovac] “46. There is a need, given the size of the verdict and the state of the plaintiff's health and mental capacity, to make an allowance for the professional management of the fund represented by this verdict.   47. The calculation of that allowance should, I consider, accord with the principles adopted by the [NSWCA], in [GIO] (NSW) v Rosniak (1992) 27 NSWLR 665. The High Court has recently added its authority to those principles in [ND] v Gardikiotis (1996) 136 ALR 1. … 48. It is not merely the award of a large verdict which, in this case, creates that need. Thus, as McHugh J confirmed in Gardikiotis (supra), at 7, there is no call for a deduction from the true cost of fund management for some ‘allowance’ for fees which may have been incurred had the plaintiff retained a capacity for financial management unimpaired by the consequences of his tortious injury but received a large verdict.  49. The method of calculation used in Rosniak (supra) was not in issue in Gardikiotis. No exception was expressed to it in the course of the general approval of Rosniak.            50. Kirby P (as he then was), in Rosniak, noted that there had been an order that the Protective Commissioner (equivalent to this Territory's Public Trustee for relevant purposes) should manage the plaintiff's funds. It is necessary first to calculate the sum available for investment. Items such as allowances for home modifications would probably be expended soon after the verdict is received and so not require management. If any ‘establishment fee’ is required, it should be allowed in full, Kirby P at 676. The annual fees must be capitalised and allowed as a lump sum. Contingencies and the tax deductibility of the fees must be allowed for. The general impact of those allowances has been applied already to other heads of damage, see also Meagher JA, 696-698.  51. It is assumed that the plaintiff will survive for 41 years. The current rate of return on investments by the Public Trustee is 7%pa. The Public Trustee will charge 1% as an establishment fee, 5% as an annual management fee and an annual audit fee of $27.00.

  1. An alternative suggestion was utilisation of the Westpac fund management facility.
  2. The difference may be illustrated this way. Assuming a $5m fund, Coopers & Lybrand calculate that to exhaust the fund after 40 years would incur fees requiring a present lump sum allowance of $213,192.00. If CPI is taken into account, the figure would be $200,233.00. Coopers & Lybrand express the opinion that if the fund is managed as the plaintiff's expert actuarial report suggests, then the capital sum representing those fees might be as high as $262,985.00. 54. Towers Perrin calculate, however, that to use the private sector, exemplified by Westpac, would require an allowance of $432,000.00 (approximately).
  3. Nevertheless, plaintiff's counsel submits that the latter course is to be preferred. It would result, they say, in a higher net annual return. The Public Trustee is obliged to follow a more conservative line and so the benefit to the plaintiff would be much less. 56. It should be observed that the allowances made for costs of future care, lost income and the like, have assumed a conservative rate of return on future investment of the monies. It is not for this court to dictate to the plaintiff's custodian or guardian how his funds will be managed, subject only to the general protective power of the court in approving the disposition of verdict monies in respect of a plaintiff suffering disability.
  4. No methodology will be entirely satisfactory nor is mathematical precision possible. I find the result urged by the third defendant's submissions, using the Towers Perrin methodology, but taking account of tax deductibility of the fees, to be the most persuasive. 58. The sum to be allowed for the future management of the fund should be calculated as follows, Total Damages $7,583,768.55 Less Past expenses $607,680.00 Household renovations $469,250.00 $1,076,930.00 TOTAL – $6,506,838.55 59. The sample calculations were based on a fund of $5m. The above figure should be rounded down to that figure to allow for other items presumably subject to immediate payment, such as the past Griffiths v kerkemeyer allowance and interest thereon, and past medical and other expenses incurred or paid. I allow $250,000.00 for this item.”

Lipovac v Hamilton Holdings P/L & Ors and ACT 17/1/97 [1997] ACTSC 3 Higgins J

 

[Smith v Hanrahan] “14 The issue raised in this application has received judicial attention in this State and in other jurisdictions and numerous authorities were cited to me in argument. The authorities which are binding upon this Court are Nominal Defendant v Gardikiotis (1996) 186 CLR 49, Morris v Zanki (1997) 18 WAR 260, Kelly v Fletcher, unreported; FCt SCt of WA; Library No 970535; 22 October 1997, BC97045411 and Willett v Futcher (2005) 221 ALR 16.

15 In Gardikiotis the [P] was injured in a motor vehicle accident when she was 21 years of age. She already had multiple sclerosis which was exacerbated or aggravated by the accident to such an extent as to confine her to a wheelchair for the rest of her life. She was of sound mind and suffered no mental injuries as a result of the accident. After a trial in the [D/C NSW], followed by an appeal to the Court of Appeal of that State, the [P] was ordered damages in the sum of $2,120,244 including an amount of $87,926 to compensate her for ongoing fund management costs which the [P] expected to incur for the day to day management of her money. The High Court (Brennan CJ, Dawson, Toohey, Gaudron, McHugh and Gummow JJ) held that the [P] was not entitled to damages for the fund management costs. Brennan CJ and Dawson, Toohey and Gaudron JJ said (p 52):

‘[It] is contrary to commonsense to speak of the accident causing a need for assistance in managing the fund constituted by [the P’s] … verdict moneys in circumstances where her intellectual abilities are not in any way impaired. It would be otherwise in the case of a [P] who is intellectually impaired as a result of a [D’s] negligence or by reason of some pre-existing disability.’

16 Their Honours expressed themselves as being in ‘substantial’ agreement with the reasons of Gummow J who approved (at p 67) the following statement of King CJ in Campbell v Nangle (1985) 40 SASR 161 (at 192):

‘The fundamental principle on which damages are assessed is the principle of compensation that the [P] is to be placed, so far as possible, in the same position financially as he would have been if he had not sustained the wrong for which he receives the damages. The capital sum awarded to him is computed on the basis of an assumed real return for its investment. If the [P] 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 [P] will not receive the full restitution to which the law entitles him. It seems to me that the liability for the fees is a loss flowing directly from the wrong and is recoverable as damages caused by the wrong. I should say for the sake of completeness that the same is true, in my opinion, where the [P’s] incapacity to manage his affairs does not result from the wrong but is antecedent to it, being the result of legal disability or some other cause.’

17 In Morris v Zanki the [P] was severely injured in a motor vehicle accident. He was 17 years of age at the time. As a result of his injuries the [P] suffered severe physical and mental impairment and was awarded a large sum. The Full Court of the Supreme Court of Western Australia considered two issues which are pertinent to the present matter, namely whether it was appropriate for an authorised trustee other than the Public Trustee (namely National Australia Trustees Ltd) to be appointed as the [P’s] protective trustee and, second, what allowances should be made for the cost of managing the [P’s] award of damages. These issues were inter-related because the fee structures of National Australia Trustees Ltd and the Public Trustee were different.

18 The trial Judge awarded the [P] the sum of $17,281 for the cost of future fund management. That sum represented the Public Trustee's initial establishment fee. On appeal the [P] contended that the trial Judge had wrongly refused to allow future and recurrent fund management expenses of the Public Trustee which would be charged to the trust fund. In particular, the [P] contended that the trial Judge should have awarded damages for the fees and commissions which the Public Trustee incurred in order to invest the money outside the Common Fund (ie for investment advisers and other costs).

19 The [D] did not dispute on appeal that the [P] was entitled to an allowance for the costs of managing his award but contended that the trial Judge's allowance was appropriate and that the additional amounts claimed by the [P] were not causally related to the [D’s] negligence.

20 The Full Court of the Supreme Court of this State applied the principles enunciated by the High Court in Gardikiotis and ruled in the [P’s] favour. The results in the two cases differed because in Morris v Zanki the costs of fund management were a direct result of intellectual impairment that was caused by the [D’s] negligence. That was not the case in Gardikiotis. At p 289 the Court (Malcolm CJ, Pidgeon and Owen JJ) dealt with ‘the costs that should be taken into account in assessing the level of the award under this head’. Their Honours said:

‘It must be borne in mind that the [P] has a normal life expectancy and it can be anticipated that the funds will be held for a very long time. There will be calls on the fund to provide for the day to day needs of the [P]. Counsel for the [P] submitted that the moneys should be invested by the trustee in a portfolio of investments which will provide long term capital growth in addition to regular income. We think this is correct, although it may be more accurate to say that the trustee must consider the prospects of income yield and capital appreciation so as to ascertain the best return from the investment. This has long been the law which attaches duties to the activities of trustees: see Cowan v Scargill; Re Mine Workers' Pension Scheme Trust [1985] Ch 270 at 287; Nestle v National Westminster Bank P/c [1993] 1 WLR 1260 at 1262. The primary duty of a trustee in relation to investments is to exercise ordinary business prudence. In the modern commercial environment ordinary business prudence would demand periodic reviews of investment portfolios and a consideration of the potential for capital, as well as income, returns. Recent amendments to the Trustees Act 1962 (WA) … oblige a trustee to have regard to the desirability of diversifying trust investments, the potential for capital appreciation and the likely income return: s 20(1)(b), (f) and (g).’

21 The Full Court dealt ‘with the argument … that inflation and income tax were already accounted for by the use of the 6 per cent discount factor under s 5 of the Law Reform (Miscellaneous Provisions) Act 1941’. The Court held (p 290) that the inclusion of an allowance in an award of damages for the cost of fund management does not seek to compensate for the direct effects of inflation and income tax, but rather ‘seeks to value the cost of taking measures to counter those effects’. The Court distinguished its earlier decision in Miller v Motor Vehicle Insurance Trust, (unreported; FCt SCt of WA; Library No 7106; 4 May 1988) and held that that case was not ‘authority for the proposition that, in all cases, the award of damages for future costs of fund management must be limited to the initial commission’ charged by the protective trustee.

22 The Full Court held that the [P] was entitled to have his award increased to include the costs of future recurrent fund management. Depending on whether those costs were calculated in accordance with the evidence of the Public Trustee's charges, or in accordance with the evidence of National Australia Trustee's charges, the resultant award would be $86,663 or $108,004. The Court then dealt with the issue of the appointment of the trustee and over-ruled the trial Judge and held that National Australia Trustee ought to be appointed. But, in returning to the question of the appropriate award of damages for the future cost of fund management, the Court held that the award should be calculated in accordance with a schedule based on the Public Trustee's charges (revised to allow for adjustments to other heads of damage) rather than a schedule based on National Australia Trustees' charges. The court said:

‘[The] costs of future fund management … are compensable because they are directly referrable to the disabilities suffered as a result of the accident. What is not compensable is a cost that is not necessarily incurred but which results from the exercise of a choice by a [P] as to how to invest those damages. The fact of the creation of a trust fund and the necessity to incur management costs are what gives rise to the entitlement.’

23 Having found that the Public Trustee was capable of handling the [P’s] investment, the court held (p 295) that ‘costs over and above those that would have been incurred had the fund remained with the Public Trustee [were] … not compensable in accordance with the principles enunciated in Gardikiotis’.

24 The facts of Kelly v Fletcher were similar to Morris v Zanki. The [P] was an infant when he suffered severe intellectual injuries in a motor vehicle accident caused by the negligence of the [D]. A substantial portion of the [P’s] damages award was ordered to be paid to the Public Trustee and invested on the [P’s] behalf, such investment not to be restricted to the Common Fund. The trial Judge included allowances in the [P’s] award of damages for the Public Trustee's initial fee for establishing and setting up the trust fund, together with charges related to the ongoing costs of obtaining investment advice. However, the trial Judge disallowed the costs of the Public Trustee's ongoing management fees and transaction costs. The Full Court of the Supreme Court of Western Australia (Kennedy, Ipp and Owen JJ) applied and followed Gardikiotis and Morris v Zanki and held that the trial Judge ought to have included an allowance for the ongoing management fees and transaction costs. Their Honours referred to the passage in Morris v Zanki which I have cited in par 20 above and emphasised that the [P] (ie the Public Trustee as his protective trustee) had no choice but to regularly review the trust fund, and to change investments from time to time, having regard to the [P’s] life expectancy and the anticipation ‘that the funds will be held in trust for a long time’.

25 The judgment of the High Court of Australia in Willett v Futcher was delivered the day before the hearing of this matter and was brought to my attention shortly after the hearing. Neither party wished to make any submissions in relation to that decision. The [A] suffered severe brain damage and other physical injuries in a motor vehicle collision which occurred when she was nine weeks of age. The matter was settled by mediation when she was 23 years of age on the basis that the [D] would pay the [P] the sum of $3,850,000 ‘plus costs plus trustee Administration and Management Charges’. There were two proceedings in the Supreme Court of Queensland. First, Byrne J made orders approving the compromise and ordering that certain amounts be paid or satisfied out of the settlement sum. His Honour also appointed Perpetual Trustees Queensland Ltd as administrator in relation to all financial matters relating to the balance of the sum and gave directions for the subsequent determination of ‘the sum by way of damages in respect of reasonable management fees of the administrator’. White J assessed those damages and awarded the [P] a sum of $180,000 which comprised allowances for two categories of charges described as an ‘establishment fee’ and a ‘discretionary portfolio management fee’. Four other categories of charges (‘advisory portfolio management fee’, ‘fund management fee’, ‘initial brokerage fee’ and ‘ongoing brokerage fee’) were disallowed. White J held that the disallowed fees were not compensable because ‘[t]he purpose of investment advice and decision-making in both investments which concerns the present determination is to maximise a return over and above the amount of compensation awarded which already has an investment strategy inherent in it’. Thus, the [P] was effectively awarded the cost of setting up an investment fund and administering the same, but not the cost of reviewing and restructuring the investment from time to time, and obtaining advice on the same. The Queensland Court of Appeal upheld White J's decision. However, the High Court allowed an appeal and remitted the matter to the Court of Appeal for further determination. The Court (Gleeson CJ, McHugh, Gummow, Hayne, Callinan and Hayne JJ) summarised the ‘central issue’ as follows (par 8):

‘… [W]hat kinds of costs of managing the damages awarded to a person incapable of managing his or her own affairs, whose incapacity was caused by the [D’s] negligence, are to be allowed in assessing the damages to be allowed to that person.’

The court began its analysis by referring to general principles of causation and held (par 10) that the [P’s] ‘need to have others administer her financial affairs was caused by the [R’s] negligence’ since the [R] ‘caused [her] … impaired intellectual capacity’.

26 The court held (at par 49) that the amount to be awarded to such a [P] was:

‘[A]n amount assessed as allowing for remuneration and expenditures properly charged or incurred by the administrator of the fund during the intended life of the fund. No distinction … between investment advice and other services should be drawn in assessing that amount. Because the allowance to be made is for remuneration and expenditure properly charged or incurred, the distinction … between fees for services necessary to enable [the protective trustee] … to perform its obligations, and for fees for services not necessary to perform those obligations, becomes inapposite. The services properly to be provided … must first be identified. And the identification of what remuneration and expenditure is properly charged or incurred, as with identification of the amount of the remuneration and expenditure properly allowed, all require close attention to the statutes governing those matters’.

At par 52 the Court said as follows:

‘Assessing what remuneration and expenses are properly charged or incurred … requires consideration of the relevant statutory limitations on those charges.’

27 The High Court rejected an approach which predicated that the only charges and expenses which were compensable were those which would be incurred in carrying out financial management tasks which an ordinary, able adult with no financial skill or training would carry out on his own behalf. Their Honours said (at par 51):

‘The [P] can make no decision about the fund. An administrator must be appointed. The administrator must invest that fund and act with reasonable diligence. It follows that the administrator will incur expenses in performing those tasks. The incurring of the expenses is a direct result of the [D’s] negligence. The damages to be awarded are to be calculated as the amount that will place the [P], so far as possible, in the position he or she would have been in had the tort not been committed. That requires comparison with the position the [P] would have been in without the award of a lump sum for damages. It does not, as the distinction adopted by White J supposes, require or permit comparison that the position that the [P] would have been in had the disabling injuries not been sustained but the [P] nonetheless had a lump sum to invest. That comparison is irrelevant and inapt. In the ordinary course a person who is not injured will not have to husband a large sum of money over a long period of time in such a way as to ensure an even income stream but the complete exhaustion of the fund at the end of the period.’

28 Thus, the High Court endorsed the contentions relied upon by the [P] in this matter and rejected those relied upon by the [D] (see pars 12 and 13 (f), (g) and (h) above). The Court noted that the question whether expenses incurred by a [P] in managing his or her award as a result of physical disabilities of a non-intellectual kind were compensable was not considered in Gardikiotis (since a claim of that kind was not pleaded or proved). The High Court left the question undecided in Willett v Futcher. It must therefore be regarded as an open issue.

29 In conclusion, in my view, the abovementioned authorities establish the following propositions:

  1. If a [D’s] negligence causes a [P] to suffer intellectual impairment which renders the [P] incapable of managing his or her own financial affairs, so that the [P] needs others to do so, the costs incurred are a loss caused by the [D’s] negligence and are recoverable as damages.
  2. The same is true when the [P’s] intellectual incapacity to manage his or her own affairs does not result from the [D’s] tort, but was antecedent to it.
  3. The award of damages should compensate the [P] for fees and expenditure properly charged or incurred by the protective trustee or administrator (or both) in respect of the management and administration of the [P’s] fund. Regard must be had to the statutes and principles of the general law which govern the duties and powers of the administrator and/or trustee. In the light of those provisions and principles, and subject to the size and expected longevity of the trust and the facts and circumstances of each case (as emerging from the evidence), it is appropriate to include an allowance for financial planning and advisory fees and expenses associated with the ongoing review and adjustment of the invested component of an award of damages (ie costs associated with ‘financial planning’) in addition to allowances for establishment and ongoing management fees.
  4. A [P] who does not suffer from any incapacity to manage his or her own financial affairs is not entitled to be compensated for the expense of managing his or her award, even if such is prudent in the circumstances (by reason of the size or life expectancy of the [P] or otherwise). The entitlement of a [P] whose capacity to manage his or her affairs is compromised by physical disabilities of a non-intellectual kind is undecided at this time.”

Smith (by his next friend) v Hanrahan 24/2/06 [2006] WADC 20 McCann DCJ

 

Management Expense Ratio Fees (MERs)

See L F Bell as litigation guardian for DC Bell v Pfeffer & Anor 3/8/09 [2009] QSC 209 where Dutney J considered the principles for assessing fees charged by funds in which the P’s money is invested (MERs).

 

Public trustee

See Hulanicki bhnf Hulanicki v Walton 7/3/14 [2014] ACTSC 17 where Burns J did not consider it unreasonable “to impose on the defendant the extra cost of the Public Trustee, compared to Perpetual Trustees, managing the plaintiff’s damages” @177.

 

Tax issues

 

[Hills] “[269] Returning to the question of tax deductibility, Mr Gallagher says, and the defendant agrees, that Perpetual’s ongoing management fee would be deductible but not the other fees. Mr Gallagher’s report calculates a tax deduction upon the fee at various levels of income and in turn provides a calculation of the net present value of Perpetual’s fees after allowance for that tax deduction. In that calculation
Mr Gallagher assesses the tax deduction by looking at the tax which would be paid on the earnings which he has assumed for this report, which are five per cent per annum of the capital sum. The total income tax on those assumed earnings can then be expressed as a percentage and it is that percentage which Mr Gallagher has applied to the Perpetual ongoing management fee to reach his total after tax cost of funds management.  [270] There seems to be no argument on the plaintiff’s behalf that there should be no consideration of the tax deductibility of these fees. Mr Gallagher was called in the plaintiff’s case and his report details the tax effect upon the cost of this funds management. The particulars of the plaintiff’s claim in this respect were formulated by reference to an earlier report of Mr Gallagher which was not tendered. It seems from the amount there claimed, when compared with the current report, that the plaintiff was accepting that an allowance had to be made for the tax deductibility of these fees. No contrary argument was advanced in the oral or written submissions of the plaintiff. The issue instead is one of the extent of that allowance.  [271] The defendant argues that an allowance should be made at the top marginal rate for personal income tax, rather than effectively at an average rate as Mr Gallagher has calculated. In my view the defendant’s argument should be accepted. The plaintiff’s need requires the expenditure of money, and the expense is a loss of which the defendant’s negligence was the cause: Willett v Futcher [2005] HCA 47 at [10]. The expense to the plaintiff should be measured by accounting for the tax deduction which this expenditure will provide. Mr Gallagher’s evidence, and in turn the plaintiff’s case in this respect, assumes that the fund will result in assessable income of the order of five per cent of the capital. So the deductibility of the relevant portion of Perpetual’s fees will affect the true expense according to the top marginal tax rate. Mr Gallagher’s report was apparently based upon the previous tax rates before those introduced in the last Budget, so that the difference between his figures and what would follow from the use of the top marginal rate is somewhat less.

[272] Otherwise I will adopt Mr Gallagher’s evidence as to the likely fees by Perpetual or another trustee. The result is that upon the award of $5,140,782, which is the total of the other components of this judgment less $75,000 for out-of-pocket expenses, the present value of the relevant fees before allowance for tax deductibility is $419,124. That includes what Perpetual calls its ongoing management fee in the sum of $293,585. Allowing for a tax deduction on that at the rate of 45 per cent, the sum of $132,113 should be deducted. The result is that I assess the present value cost of the necessary administration and management of Christopher’s award until he is aged 18 at $287,011.” Hills v State of Queensland 4/9/06 [2006] QSC 244 McMurdo J

 

[Peak] “17. The Defendant does not contest that the Plaintiff will never be capable of managing her own financial affairs. Nor is it in issue that this circumstance has arisen as a direct consequence of the injuries suffered by the Plaintiff. I find therefore that it is appropriate to make an allowance for the future cost of funds management charges in accordance with well established principles and I propose to include that allowance in my assessment of the Plaintiff’s entitlement for damages. Willets -v- Futcher [2005] 221 CLR 627.18. On the assumption that the Plaintiff will probably survive for a further 55 years, Mr Rickert … has undertaken the task of calculating the present value of funds management charges on an initial projected investment of a balance of $2,580,000 over a projected lifetime of 55 further years. This sum has been identified … in the sum of $727,035 using the 5% discount tables.

  1. The evidence discloses that this sum is calculated in accordance with the principles in Willets and includes the factor of management expense ratio in line with that authority. The calculations assume that the fund will not be taxed as the investment that is proposed will not attract taxation because under the superannuation laws, as a disabled person, the Plaintiff is entitled to a tax free pension from such fund as a consequence of the regime propounded by Perpetual. The Vincent report tendered by the Defendant sought to argue matters of tax and management expense ratios which are therefore inappropriate to the circumstances. I prefer and accept Mr Rickert’s analysis.
    20. I therefore assess the Plaintiff’s entitlement to future funds management charges in the sum of $727,035.

Peak v Dunleavy (No. 2) 7/11/08 [2008] NSWDC 240 Levy SC DCJ