The High Court looks at the Cost of Fund Management

Motor Vehicle Directions

Rhiannon Gray by her Tutor Kathleen Anne Gray V Richards [2014] HCA 40

DATE OF JUDGMENT: 15 October 2014

The High Court has unanimously allowed, in part, an appeal from the Court of Appeal of the Supreme Court of New South Wales, and held that the appellant was entitled to recover in damages the cost of managing fees allowed in damages to manage her award of damages (so called ‘fund management on fund management’).

Background

On 22 August 2003, Rhiannon Grey (‘the appellant’) who was then almost 11 years of age, sustained catastrophic brain damage when a motor vehicle driven by the respondent collided with a motor vehicle in which she was a passenger.

Because of her brain damage, the appellant could not manage her own affairs, and so her personal injury damages would have to be professionally managed for her over her lifetime. The fees associated with that professional management are known as fund management damages.

In New South Wales, the NSW Trustee and Guardian (‘NSWTG’) is the body established by Parliament to manage damages for disabled people (amongst its many other functions). Similar public trustees exist in other Australian States and Territories. The fees charged by the NSWTG are set by Parliament and can be readily calculated.

On 19 July 2006, the appellant commenced proceedings in the District Court of NSW against the respondent. On 3 August 2011, those proceedings were settled for the sum of $10 million plus an amount of damages to cover expenses associated with managing the settlement sum: ‘the fund management damages’.

On 2 September 2011, before the hearing of the argument about the fund management damages, on the appellant’s application in proceedings which did not involve the respondent, Justice White of the Supreme Court appointed The Trust Company Limited as manager of the appellant’s estate. The Trust Company proposed to charge higher fees to manage the appellant’s damages than would be charged if the damages were managed by the NSWTG. The respondent contended that he should only have to pay damages calculated in accordance with what the NSW Trustee and Guardian would have charged as that was all that was reasonable (whatever more expensive arrangement the appellant’s tutor elected to put in place). He also contended that he should not have to pay damages for the cost of the professional manager managing that part of the award which was for fund management damages (ie fund management on fund management damages).

Issues

First Instance

McCallum J had two questions to determine in determining the fund management damages:

  • Whether the appellant was entitled to damages for the cost of managing the fund management damages (ie fund management on fund management)
  • Whether, when calculating fund management damages, an assumption should be made that the fund would earn income which would be reinvested, making the fund larger (and thereby necessitating higher management fees).

The primary Judge resolved both of these issues in the appellant’s favour.

Appeal

On 2 December 2013, the NSW Court of Appeal (Bathurst CJ, Beazley P, McColl, Basten and Meagher JJA) overturned the decision of the primary judge on both issues.

High Court Determination

The appellant appealed to the High Court having been granted special leave by French CJ and Bell J on 16 May 2014.

The High Court (French CJ, Hayne, Bell, Gageler And Keane JJ ) held that the Court of Appeal erred in deciding that no allowance should be made for the cost of managing the fund management damages. In other words, it allowed fund management on fund management.

The High Court found that ascertaining the cost of managing the fund management damages ‘is not an exercise separate and distinct from assessing the present value of fund management expenses as part of the appellant’s future outgoings. The expenses in question are not incurred separately from the cost of fund management; they are an integral part of that cost’.

The High Court considered the real question as to the reasonableness of the appointment of the Trust Company (as opposed to the NSW Trustee and Guardian) was whether the management arrangement with the Trust Company ‘was so unreasonable in its terms that it could not be regarded, as a matter of common sense, as a consequence of the appellant’s injury’.

The High Court held that where a reasonable arrangement is not made, the expense in question can fairly be seen, not as a loss consequential on the plaintiff’s injury, but as a loss attributable to an unreasonable bargain with the manager.

In this instance, the respondent did not suggest that the appellant’s tutor’s preference for the appointment of the Trust Company, rather than the NSW Trustee, to manage the appellant’s fund was unreasonable and so the High Court allowed the higher fees charged by the private trustee. 

Implications

The decision stands for the following, in relation to the cost of fund management:

  • An allowance can be made for the cost of managing the fund management damages.
  • An allowance should not be made for the cost of managing the fund’s predicted future income.

Insurers should review their reserves in claims where fund management damages are sought, as the High Court’s decision changes the common law in NSW and means higher damages will be recoverable.

Those readers who remember the complex forensic accounting evidence which became commonplace in personal injury claims to justify large awards for damages for lost superannuation may also remember the NSW Parliament’s response. Section 15C of the Civil Liability Act provides for a cheap and easy method of establishing the damages available for loss of superannuation benefits, which has eliminated the need for costly accounting reports to quantify that head of damage. This caps the damages that can be recovered (it is not concerned with the actual loss sustained). Perhaps insurers will now approach Parliament to advocate for similar reform regulating fund management damages.

Authored by Judith Waldock, Partner, Sydney.


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