Australia: Value is in the eye of the beholder

Last Updated: 2 July 2019
Article by Andrew Ross

Value is in the eye of the beholder

The principles of value established in this case may also, with the passage of time, inform concepts of value as they relate to other intangible personal rights such as privacy, beliefs and personal preferences.

Many claims for loss and damage require identification of the 'value' of an asset or interest. But what does 'value' mean, and how is it to be established? In this case, the High Court of Australia considered how to arrive at an 'objective economic value' for certain native title rights and how to determine the amount of compensation for 'cultural loss'. The principles of value established in this case may also, with the passage of time, inform concepts of value as they relate to other intangible personal rights such as privacy, beliefs and personal preferences.

Background

These appeals concerned the amount of compensation payable by the Northern Territory of Australia to the Ngaliwurru and Nungali Peoples ('the Claim Group'), pursuant to Pt 2 of the Native Title Act 1993 (Cth), for loss, diminution, impairment or other effect of certain acts on the Claim Group's native title rights and interests over lands in the area of the township of Timber Creek. Timber Creek is located on the Victoria Highway about halfway between Katherine and Kununurra in the north western area of the Northern Territory.

The Claim Group's claim for compensation comprised claims for:

  1. compensation for economic loss of the native title rights and interests to be determined as if the effect of each compensable act was equivalent to the compulsory acquisition of an unencumbered freehold estate in the subject land;
  2. compound interest at the superannuation rate or alternatively on a compound 'risk free rate' of yields on long-term (10 year) government bonds or alternatively simple interest at the Pre Judgment Interest Rate fixed by the Federal Court of Australia Practice Note CM16 ('the Practice Note rate') on the amount of compensation awarded for economic loss to be computed from the date as at which the compensation was assessed until judgment or payment; and
  3. compensation for loss or diminution of connection or traditional attachment to land and intangible disadvantages of loss of rights to live on and gain spiritual and material sustenance from the land, to be assessed by adaptation of the criteria in Sch 2 rr 2(b) (special value) and 9 (intangible disadvantage) of the Lands Acquisition Act (NT), to be assessed as at the time of trial.

The outcomes awarded at first instance and on appeal to the Full Court of the Federal Court of Australia are summarised in the table below:

Economic loss Interest Non-economic loss Total
First instance $512,400 $1,488,261 $1,300,000 $3,300,661
Full Court $416,325 $1,183,121 $1,300,000 $2,899,446

As this summary suggests, the appeal to the Full Court produced different outcomes for economic loss and interest.

The claim for economic loss required:

  • an assessment of the unencumbered freehold value of the land in relation to which the Claimant Group held native title rights; and
  • an assessment of the deduction, if any, that should be made to the unencumbered value derived in paragraph above to reflect the fact that the Claimant Group's native title rights were 'non-exclusive', not 'exclusive' rights.

The unencumbered freehold value of the relevant land adopted at both first instance and on appeal to the Full Court was $640,500. The differing outcomes in relation to economic loss set out in the table above arose due to differences in the deduction made to that value, with the trial judge deducting 20% (i.e. adopting 80% of the freehold value), while the Full Court deducted 35% (i.e. adopting 65% of the freehold value).

On the question of interest, the differing outcomes set out above reflected the difference in outcomes in relation to the economic loss claim, with both courts awarding interest payable as part of compensation for economic loss on a simple interest basis calculated at the Practice Note rate from time to time and computed from the date of extinguishment of native title until judgment.

The Claim Group appealed on two grounds, being in substance that:

  • the Full Court had erred in assessing the Claim Group's economic loss at 65% of the freehold value of the subject land and should have assessed it as being the freehold value of the land without reduction; and
  • the Full Court had erred in awarding interest only on a simple interest basis computed at the Practice Note rate and should have allowed interest on a compound basis computed at the risk free rate.

The Northern Territory and the Commonwealth both appealed on the ground that the requisite deduction to the unencumbered freehold value should have been 50% (producing a loss at 50% of that value). Both these parties also argued that the award of compensation for non-economic loss at $1.3 million was, inter alia, manifestly excessive. The Commonwealth also argued that interest should have been awarded 'on compensation' rather than 'as part of compensation'.

Overall approach to assessing compensation

In addressing the connection between the two main elements of the Claim Group's claim for compensation (economic and non-economic loss), the High Court said (footnotes excluded):

"The parties were agreed before the trial judge and the Full Court that the approach to the assessment of just compensation should proceed according to what was described as the bifurcated approach of first determining the economic value of the native title rights and interests that had been extinguished and then estimating the additional, non-economic or cultural loss occasioned by the consequent diminution in the Claim Group's connection to country. That was an appropriate way to proceed. Just as compensation for the infringement of common law land title rights and interests is ordinarily comprised of both a component for the objective or economic effects of the infringement (being, in effect, the sum which a willing but not anxious purchaser would be prepared to pay to a willing but not anxious vendor to achieve the latter's assent to the infringement ) and a subjective or non economic component (perhaps the most common instance of which is an allowance for special value), the equality of treatment mandated by s 10(1) of the Racial Discrimination Act, as reflected in s 51 of the Native Title Act, necessitates that the assessment of just compensation for the infringement of native title rights and interests in land include both a component for the objective or economic effects of the infringement (being, in effect, the sum which a willing but not anxious purchaser would have been prepared to pay to a willing but not anxious vendor to obtain the latter's assent to the infringement, or, to put it another way, what the Claim Group could fairly and justly have demanded for their assent to the infringement) and a component for non-economic or cultural loss (being a fair and just assessment, in monetary terms, of the sense of loss of connection to country suffered by the Claim Group by reason of the infringement."

'Objective economic value'

In applying the first stage of this 'bifurcated' approach, the High Court observed that:

In this Court, all parties accepted that the economic value of the native title rights and interests should be determined by application of conventional economic principles and tools of analysis, and, in particular, by application of the Spencer test adapted as necessary to accommodate the unique character of native title rights and interests and the statutory context.

The High Court commented further on the application of the 'Spencer' test, as follows:

Admittedly, there is a degree of artificiality about applying an adapted Spencer test in circumstances where it may be assumed that the Claim Group would not have been at all interested in selling their native title rights and interests and it is plain that no one could lawfully have bought them. But, at the same time, the native title rights and interests unquestionably existed and they had a recognisable economic worth which lay in the sum that might fairly and justly have been demanded for their lawful extinction in favour of the Crown. In those circumstances, it is no more artificial to seek to assess their economic value by means of the Spencer test of what a willing but not anxious purchaser would have been prepared to pay to a willing but not anxious vendor in order to buy them (or, more accurately, to obtain the latter's assent to their extinguishment) than it is to apply the Spencer test to the assessment of just compensation for the compulsory extinguishment of, say, a general law easement or profit à prendre.

The statements suggest that the High Court considers that an 'adapted Spencer' test of value is relevant when considering the value of intangible personal and cultural rights, which are plainly difficult to value. If this is correct, then this approach could also apply in cases involving the extinguishment of other personal rights such as privacy, beliefs and personal preferences.

On the question of the value of the subject land, at both first instance and on appeal to the Full Court, the 'economic' value of the subject land adopted by the Court was $640,500. That was the value that had been derived by an expert land valuer, 'Mr RC', called on behalf of the Commonwealth.

Before the High Court, the parties were agreed that Mr RC's valuations should form the basis of the assessment of compensation for all of the relevant land except one lot, lot 16. For that lot, the Northern Territory urged the High Court to adopt the (lower) valuation provided by its expert land valuer, 'Mr WW'. Mr WW had arrived at his valuation for lot 16 after considering an alternative methodology for valuing native title rights and interests proposed by another expert witness, 'Mr WL'.

Mr WL's thesis was that, in the absence of a relevant market or comparable sales data, the fair value of the Claim Group's native title rights and interests was to be determined by reference to an appropriate comparator. Because the freehold value of land increases with the availability of services and surrounding infrastructure, whereas the Claim Group's enjoyment of their native title rights and interests did not, Mr WL's opinion was that the appropriate comparator was freehold market value stripped of so much of that value as reflected the availability of services and infrastructure.

According to Mr WL, that figure could be gleaned by taking the market value of a large nearby rural block without road access, power or water, yielding what Mr WL termed a 'usage value', and then adding an uplift or 'negotiation value', which Mr WL postulated could be derived by splitting the difference between the market value of the land (which included the value of the availability of services and infrastructure) and the usage value of the native title rights and interests calculated using his approach. This, according to Mr WL, was an approach described as consistent with the "principles of behavioural economics and game theory, economic experience and notions of fair dealing".

The High Court rejected this approach, stating:

As will be apparent, the principal difficulty with [Mr WL's] thesis is that what it purports to value is not the economic value of the native title rights and interests in the subject land as required by the Native Title Act, but rather what the Claim Group might have been prepared to pay to acquire other land at a different location on which they might have lived and behaved in much the same way that they had been entitled to live and behave in the exercise of their native title rights and interests in the subject land.

In any case, the High Court said:

There is, too, a further, pragmatic reason to eschew the sort of approach favoured by Mr WL. An opinion of the kind that the Northern Territory commissioned Mr WL to produce is a complex and expensive exercise, and, as experience shows in litigation, where one party introduces an expert report of that complexity and expense it more often than not leads to another party commissioning another expert to produce a similarly complex and expensive report to rebut the thrust of the first, leaving it to a trial judge, often after extensive cross-examination of both experts at further considerable cost, to decide between the two. That degree of complexity and cost can be avoided if economic value is determined by the comparatively simple and relatively thrifty means of assessing the freehold value of the subject land and applying the appropriate percentage discount according to the nature of the native title rights and interests in suit. Given the presumably limited resources of most native title claimants, such simplicity and economy is surely to be encouraged.

Ultimately, after considering the limited nature of the Claim Group's residual native title rights, the High Court concluded that the appropriate amount of the Claim Group's economic loss was derived by applying a deduction of 50% to the freehold value of $640,500.

Interest on economic loss

The High Court summarised the issue it was considering as follows:

It was common ground that interest should be awarded on the economic value of the extinguished native title rights and interests in order to reflect the time between when the entitlement to compensation arose and the date of judgment, and that the function of such an award is to compensate a party for the loss suffered by being kept out of his or her money during that period. The issue was whether the interest should be calculated on a simple basis or compound basis and, if on a compound basis, at what rate it should be compounded.

After an extensive review of the authorities, the High Court concluded that the Claim Group had no entitlement at law to compound interest. Since no party had argued for rates of simple interest which differed to the Practice Note rates, the High Court confirmed the applicability of those rates (albeit on the reduced amount of economic loss).

The High Court also considered the Commonwealth's argument that interest should have been awarded 'on compensation' rather than 'as part of compensation'. Having considered the statutory context of the claim, the High Court agreed.

Non-economic (or 'cultural') loss

The High Court described this element of the claim as follows:

Compensation for the non-economic effect of compensable acts is compensation for that aspect of the value of land to native title holders which is inherent in the thing that has been lost, diminished, impaired or otherwise affected by the compensable acts. It is not just about hurt feelings, although the strength of feeling may have evidentiary value in determining the extent of it. It is compensation for a particular effect of a compensable act – what is better described as 'cultural loss'.
As the trial judge explained, his Honour's task was to determine the essentially spiritual relationship which the Ngaliwurru and Nungali Peoples have with their country and to translate the spiritual hurt from the compensable acts into compensation.

After disposing of a variety of arguments relating to the process adopted by the trial judge (and finding no error), the High Court addressed the question of whether the outcome produced reflected 'manifest error'. In that respect, the High Court said:

To contend that an award is manifestly excessive invokes the last of the bases for appellate review in House v The King: that the assessment is self-evidently wrong as involving manifest excess. The question for this Court is whether the amount is "so extremely high or so very small as to make it, in the judgment of this court, an entirely erroneous estimate of the damage". It is not.
The trial judge – the judge who saw and heard the evidence – arrived at a figure of $1.3 million. His Honour had the substantial benefit of hearing, and seeing, first-hand the evidence from the Claim Group of their connection to the land; the effects, under their laws and customs, when country is harmed; and, then, the effects of the compensable acts on their connection to and relationship with country. That is reflected in the trial judge's detailed treatment of that evidence and related extensive findings, summarised in the preceding parts of these reasons.
Given that this is the first compensation determination to come before this Court, ... what, in the end, is required is a monetary figure arrived at as the result of a social judgment, made by the trial judge and monitored by appellate courts, of what, in the Australian community, at this time, is an appropriate award for what has been done; what is appropriate, fair or just. ... There is nothing to suggest that the trial judge's award would not be accepted by the Australian community as appropriate, fair or just. The amount is not so large that it suggests a failure to apply proper principles by reference to relevant considerations. The amount awarded is not shown to be inconsistent with acceptable community standards, when it is recognised that this aspect of the award is compensation to the Claim Group, on just terms, for the effect of the compensable acts on their native title rights and interests – their cultural loss.

Footnote

1 This was a reference to the commonly accepted definition of market value in Spencer (1907) 5 CLR 418 at 432, 440-441.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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