Introduction

The High Court recently considered the entitlement to financial administration expenses where a plaintiff’s impairment requires damages to be paid into trust, clarifying that this may include not only the cost of managing the initial award but also the cost of managing those expenses. 

The High Court refused to award expenses for managing predicted future income derived from the trust, confirming the principle: 

“…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…” (Gibbs CJ and Wilson J, Todorovic v Waller [1981] CLR 402 at 412).

A matter of trust

The appellant (Gray) was involved in a motor vehicle accident in 2003, where she sustained a significant brain injury. The resulting intellectual impairment left Gray with no prospect of future paid employment and a general inability to manage her own affairs.

At trial, Gray’s damages were agreed at $10 million to be paid into trust together with a further amount to meet the costs of managing the trust. However, the following questions arose concerning the costs of managing the trust:

  1. whether damages should be awarded to also cover the costs of managing the trust management expenses awarded;
  2. whether an amount should be awarded to cover the cost of managing the predicted future income of the managed fund.

At first instance, the Supreme Court of NSW found in favour of Gray. This was overturned in favour of the respondent (Richards) on both counts on appeal, the Court of Appeal finding that:

  • it would be inappropriate to award further sums based on the assumption of fees for fund management expenses due to an injured plaintiff being unable to manage their own affairs, and the court is not to speculate on quantifying ‘fund management on fund management’ but instead ensure fair compensation which includes costs of managing the fund. (Government Insurance Office of New South Wales v Rosniak(1992) 27 NSWLR 665);  
  • an award for fund management costs for future fund income should not be allowed as it was contrary to the statutory discount on lump sums awarded for future economic loss in s127(1) of the Motor Accidents Compensation Act 1999, confirming the principles in Nominal Defendant v Gardikiotis [1996] 186 CLR 49and Todorovic v Waller.

Gray appealed to the High Court.

Should fund management expenses be allowed on damages awarded for fund management expenses?

In answering this question, the High Court noted such costs were recoverable as a consequence of Gray’s injury as the Court sought to ensure that Gray’s losses were met by the damages awarded.  If the costs were resultant on Richards’ liability to Gray, then Gray was entitled to damages to reflect those costs.

The Court also noted that the quantification of such costs included Gray being at liberty to choose the fund, and to receive compensation based on the fees of that fund:

“…the question of reasonableness of fund management expenses is not at large as a matter of judicial discretion.  The court does not make an open‑ended judgment about the reasonableness of the fund management expense component of damages. The court is not concerned to regulate the market for the provision of fund management services…there is no scope for the court to say that the amount is simply ‘too much’ as a matter of intuition or impression if the plaintiff has no practical ability to bargain for a lesser charge.” French CJ, Hayne, Bell, Gageler and Keane JJ at [46].

Should damages be awarded to meet expenses incurred from managing future fund income?

Gray submitted that she was entitled to an award for the cost of managing future income earned from the fund on the basis that the Court of Appeal erred in applying the discount for future economic loss under s14 of the Civil Liability Act 2002 and s127 of the Motor Accidents Compensation Act 1999. Gray argued the statutory discount was insufficient to meet such costs. French CJ did not accept Gray’s appeal, finding that the costs of managing future income generated by the fund are accounted for by the discount rate outlined in Todorovic and modified by s127 of the Motor Accidents Compensation Act 1999:

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,”  French CJ, Hayne, Bell, Gageler and Keane JJ at [64].

Counting the cost

The High Court held that where a plaintiff is unable to manage their own affairs (which, in this instance, included the ability to make financial decisions with respect to their damages award), there is an entitlement to the costs of managing the funds management expenses component of the award. A difficulty is likely to arise in obtaining evidence to challenge such claims, as it will invariably require evidence of funds management expenses from a variety of market sources.

In rejecting the second ground of appeal, the High Court confirmed that the application of discounts on awards for future economic loss was in accordance with the legislative intention of s127 of the Motor Accidents Compensation Act 1999. In doing so, the Court maintained consistency with Todorovic that a plaintiff may use an award of damages at their prerogative on receipt.