Australia: Damages for funds management expenses following lump sum damages award: Gray v Richards

Last Updated: 27 October 2014
Article by Melissa Fenton and Rebecca Hosking

In brief - High Court allows appeal in part from NSW Court of Appeal

On 15 October 2014, in the case Gray v Richards [2014] HCA 40, the High Court unanimously allowed, in part, an appeal from the NSW Court of Appeal, which held that Ms Gray was not entitled to recover a head of damage in respect of the costs associated with managing a lump sum damages award.

The High Court held that the Court of Appeal had erred in deciding that no allowance should be made for the cost of managing the fund management damages, but was correct in deciding that no allowance should be made for the cost of managing the fund's predicted future income.

General principles - when are damages not awarded for funds management expenses?

It is well established that once a plaintiff receives an award of damages, he or she may use it as they wish. (See Todorovic v Waller [1981] CLR 402 at 412.) This is why we have a system which awards damages for future medical expenses, but does not compel a plaintiff to use their damages to fund any medical expenses in the future.

An obligation to manage damages awards appropriately by use of a funds manager or otherwise is not imposed, regardless of the plaintiff's capacity to manage the award or the size of the award. If the injury suffered had no impact on the plaintiff's intellectual abilities, no damages for funds management expenses will be awarded. (See Nominal Defendant v Gardikiotis [1996] 186 CLR 49 at 52).

When are damages awarded for funds management expenses?

In Gray v Richards, Ms Gray sustained a traumatic brain injury in a motor vehicle accident. She sustained a significant intellectual impairment and required constant care, retaining no prospects of future employment. Liability was conceded by Mr Richards and the claim settled for $10 million, excluding funds management expenses which were left for judicial determination.

Richards conceded that his negligence had caused Ms Gray's incapacity to manage her own funds. The High Court confirmed that a plaintiff is entitled to damages for funds management expenses where the incapacity to manage funds arises from the negligence of the defendant.

On what damages are funds management expenses allowed?

In this case, funds management expenses were allowed on the $10 million settlement sum.

The questions posed to the court were whether funds management expenses would be allowed:

  • on the damages awarded for fund management expenses; and
  • on the predicted income to be earned by the managed funds.

The High Court answered yes to the first question, finding that funds management expenses are one component of the loss consequent upon the injury suffered and, as such, a plaintiff is entitled to damages for the cost of managing that component.

The second question is more complex.

Cost of managing income derived from investing settlement money

Ms Gray submitted that the cost of managing income derived from investing her settlement monies should also attract damages for funds management expenses.

Richards responded that when calculating the present value of damages for future losses, a discount is applied. ( Section 14 of the Civil Liability Act 2002 (NSW) and section 127 of the Motor Accidents Compensation Act 1999 (NSW) (MACA) prescribe a 5% discount for future economic loss awards, which incorporates the costs of managing the income derived from the fund.)

The High Court found that section 127 of MACA "assumes... that the return from the fund takes into account the cost of generating that return".

The High Court rejected the notion that the discount rate assumes "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 latter, the High Court indicated, is not a compensable loss.

In so concluding, the High Court considered that to award funds management expenses on predicted income involves an assumption that the damages would be invested to generate income. This, the High Court found, would be inconsistent with the Todorovic v Waller principle that a person may do what they wish with any award of damages they receive.

Obtaining evidence to determine funds management expenses

In practice, damages for funds management expenses will only be awarded in cases where the plaintiff's incapacity to manage their own funds was caused or contributed to by the negligence of the defendant. This is a head of damages that will need to be carefully considered and assessed in claims where intellectual impairment is suffered.

When determining the total damages on which damages for fund management expenses are allowed, damages for fund management expenses must be included. Evidence will need to be obtained from the public trustee and private trustees to determine what comprises a reasonable amount to manage the funds under management in any given case.

Melissa Fenton Rebecca Hosking
Insurance and reinsurance
CBP Lawyers

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Melissa Fenton
Rebecca Hosking
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