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Coventry, Carolyn; Clohesy, James --- "A roads authority's qualified immunity from suit" [2017] PrecedentAULA 32; (2017) 140 Precedent 25


FUTURE ECONOMIC LOSS CLAIMS – CLIPPING THE WINGS OF RESTITUTIO IN INTEGRUM

By Travis Schultz

Despite Australians narrowly avoiding a no-fault compensation scheme during the reformative Whitlam years, the common law rights of the injured have progressively fallen victim to ‘scheme sustainability’ measures across all jurisdictions. Now, all states embrace a system in which the principle of restitutio in integrum has been statutorily modified in a legislative attempt to balance the interests of claimants against those who pay premiums. And while it should be readily accepted that a legislative framework needs to guide any efficient compensation scheme, the current approach to curtailing awards of future economic loss is efficiently achieving a significant reduction in claim cost, but in a way that is arbitrary and most often penalises those who are most in need of support.

While opinions will differ, it is difficult to argue against the ideology that an insurance scheme should prioritise compensating accident victims who need commercially sourced care and assistance or who will suffer ongoing economic loss due to negligently inflicted injury. Despite this, the various permutations of Civil Liability Acts impose cost control measures which are most punitive to these very type of litigants.

RESTITUTIO IN INTEGRUM

It is now well-accepted at common law that a negligently injured person should be awarded a sum of money that will compensate them for their consequent losses, to the extent that money can do so. As recently as 2014,[1] the High Court confirmed the validity of this pillar of our legal system.

The approach to be taken by a court in assessing the award to impairment of earning capacity was recently summarised by the ACT Court of Appeal in Howard v Aikman,[2] where the Court provided an overview of the relevant principles. It was said:

‘84. First, the purpose of an award of damages is to put the plaintiff in the position he or she would have been had it not been for the injury.

85. Secondly, as we have already observed, damages are not awarded for loss of earnings but for the diminution in a plaintiff’s earning capacity caused by the injury the subject of the proceedings to the extent that it is or may be productive of financial loss: Graham v Baker above. That means it is necessary to identify the capacity that has been lost and the economic consequences that will or might flow from that loss: Husher v Husher [1999] HCA 47; (1999) 197 CLR 138 at [7] (Gleeson CJ, Gummow, Kirby and Hayne JJ).

86. Thirdly, the evaluation of a loss of capacity to earn is of its nature more imprecise than the assessment of lost income; resting, as it does, “on the hypothesis – that the plaintiff will have undiminished capacity – which has been rendered false by events”: New South Wales v Moss at [71], [72] (Heydon JA). Indeed, “[d]amages founded on hypothetical evaluations defy precise calculations”: Malec 640 (Brennan and Dawson JJ).

87. Fourthly, where questions arise as to the hypothetical effects of an injury (whether before or after the assessment is being made), save in the case of virtual certainty on the one hand or mere speculation on the other, a court is required to determine the degree of probability of the occurrence of the associated future or hypothetical events and adjust the award up or down to reflect it: Malec at 643 (Deane, Gaudron and McHugh JJ).’

This approach, however, is now generally required to be undertaken by courts within the handcuffs of statutorily modified compensation schemes. Where awards of economic loss are concerned, the parliamentary draftsperson has used levers to restrict awards, which include caps on the weekly earnings used for the calculation of past and future economic loss and the use of actuarial discount rates for awards of damages for future losses.[3]

STATUTORY REFORMS

Over the last 30 years, workers’ compensation and compulsory third party (CTP) schemes around Australia have been the subject of statutory modification in an attempt to make them fundamentally ‘sustainable’. In some instances, common law access to damages has been abolished entirely in favour of no-fault schemes.[4] However, in at least three instances, these common law rights were later reintroduced.[5] Quite apart from limiting access to damages through use of arbitrary thresholds, most jurisdictions have also introduced quantum restrictions with a view to reducing claim costs. Most state governments have also imposed caps on what may be awarded by way of general damages. Other costs controls have included restricting the ability to recover legal costs and abolishing or imposing thresholds before gratuitous care awards can be made.

Each of these measures impacts on individual claimants in different ways. However, the question is whether the balance is right – are those who suffer ongoing economic loss being unfairly treated?

THE IPP REPORT

While most states had implemented their own version of the Civil Liability Act just prior to the publication of the Ipp Report,[6] the review was intended to be influential on the state legislatures; informing their policy on the structuring of compensation schemes. In that report, the Panel of Eminent Persons (the Panel) expressed the view that it was ‘neither necessary nor desirable to impose a threshold on damages for loss of earning capacity’[7] and recommended that discount rates not be used to reduce damages payable. The Panel gave a useful example to justify its opposition to arbitrary discount rates:

‘13.100 Assume that a 25 year old is totally and permanently incapacitated for work. This means that damages for future loss of earning capacity will be calculated to cover a 40-year period. The effect of increasing the discount rate from 3 per cent to 5 per cent would be to reduce the lump sum to 75 per cent of its 3 per cent level. Thus, an increase of 2 percentage points in the discount rate would lead to a reduction of 25 per cent in the award.’

Out of fairness to the Panel, a detailed consideration of the drivers of discount rates was probably outside their terms of reference, but then, as now, a recurring after-tax earning of 3 per cent seems well beyond the reach of the average investor. It could be suggested that even sophisticated investors would need to take enormous risks to achieve those lofty levels of after-tax earnings – and even higher risks to achieve a net 5-6 per cent annual return! As was observed in Todorovic v Waller (Todorovic), even Professor Street, in Principles of the Law of Damages, submitted that ‘the test should be the yield obtainable from safe easily realisable investments at the time of receipt of the judgment damages’.[8] In Todorovic, the Court considered the issue in the context of the investments that would be made by a prudent man in the position of the plaintiff who was concerned to preserve his capital, but not over cautious. It was said that given prevailing circumstances ‘at the present time [2001], it would not seem unreasonable to suppose that an interest rate of at least 15% would be obtainable on such securities’.[9]

The Panel went on to conclude:

‘13.104 It is obvious, therefore, that an increase in the discount rate would have a marked effect on the compensation payable. Indeed, increasing the discount rate would be the easiest and most effective way of reducing damages in cases of continuing loss and permanent impairment.

13.105 But, in the Panel’s opinion, using a discount rate higher than can reasonably be justified by reference to the appropriate criteria would be an unfair and entirely arbitrary way of reducing the total damages bill. Furthermore, we have seen that the group that would be most disadvantaged by doing so would be those who are most in need – namely the most seriously injured. It would be inconsistent with the principles that have guided our thinking in this area to reduce the compensation recoverable by the most seriously injured by increasing the discount rate, simply because damages awards in serious cases could thereby be significantly reduced. In this context, it should be noted that although an increase in the discount rate can yield large reductions in awards in serious cases, such cases represent only a relatively small proportion of the total compensation bill.

13.106 The remaining question, therefore, is what an appropriate discount rate would be. We have seen that in 1981 the High Court, taking all the relevant factors into account, settled on a rate of 3 per cent. Table 8 shows that legislatures in recent years have chosen 5 per cent instead. However, the Panel has been informed by the Australian Government Actuary that, in his view, at present, a realistic after-tax discount rate might be in the order of 2 to 4 per cent......This suggests to the Panel that 3 per cent remains a reasonable rate, and does not appear to be any good reason to go above 4 per cent. We therefore recommend a nationally uniform discount rate of 3 per cent.’

Of course, what was apparently not considered[10] in the Ipp Report was the transformational shift in economic circumstances that has taken place since the High Court handed down its decision in Todorovic.[11] It was back in 1981 that the High Court had regard to recent history and found that a 3 per cent discount rate for future losses was appropriate.

In Todorovic, the members of the Court had largely different views as to what the appropriate rate of discount should be. In the views of Murphy J, no discount should have been applied at all.[12] Stephen J thought likewise. On the other hand, Mason J would have preferred a discount rate of 2 per cent.[13] Gibbs CJ and Wilson J preferred a rate of 4 per cent while Aickin J thought that 5 per cent was an appropriate allowance prior to tax being considered. Ultimately, a 3 per cent discount rate was agreed upon as being appropriate. Importantly, however, implicit in the views of the members of the Court, was that such a rate should be adopted only while it was regarded as appropriate. In his judgment, Brennan J referred to ‘the economic history of the past 20 years showing the relationship between average earnings and the long-term bond rate earlier mentioned’,[14] while Gibbs CJ and Wilson J made it quite clear that they thought the 3 per cent rate should apply ‘while general economic circumstances remain as they are’.[15]

The Court in Todorovic seems to have assumed that interest rates would move largely in line with inflationary pressures. The prevailing economic circumstances were, of course, markedly different to those that face investors in 2017. The discount rate was selected by the members of the Court bearing in mind inflation, income and the effect of taxation. In 1980, Australian inflation ran at about 10.136 per cent.[16] In 1981, it ran at 9.488 per cent while in 1982, this climbed to 11.352 per cent.[17]

If a 20-year history is to be considered[18] in setting an appropriate discount rate for future losses, the 20-year period between 1994 and 2014 paints a very different picture of inflation and investment earnings. Since 1994, Australian CPI has ranged between 0.86 per cent in 1998 to as high as 4.628 per cent in 1995. The average CPI over that period was only 2.82 per cent.

One can only assume that if the same High Court were considering the issue today, a substantially lower discount rate than 3 per cent would have been adopted!

CAPS ON DAMAGES

In handing down its report, the Panel[19] found that it was ‘neither necessary nor desirable to impose a threshold on damages for loss of earning capacity’.[20] However, it also considered it ‘important to impose a cap on damages for loss of earning capacity’.[21] It was said that ‘such a cap provides high earners with a desirable incentive to insure against loss of the capacity to earn more than the amount of the cap’.[22] Across all Australian jurisdictions, legislation generally limits the recoverable loss to three times average weekly earnings.[23]

The various states have articulated slightly different provisions to affect the cap,[24] but the provisions have been not without their own uncertainties and have required judicial interpretation to provide guidance as to their application.[25] What perhaps remains unclear is how the various caps apply where awards are discounted due to contributory negligence and where discounts are applied for vicissitudes. In Queensland and South Australia at least, it seems open to argument that the cap should be applied after any discount for contributory negligence or vicissitudes. In Doughty v Cassidy,[26] the trial judge had applied a discount of 15 per cent for vicissitudes after the cap had already been applied. Since that time, however, the Queensland legislation has been amended.

If the approach of penalising high-income earners is said to be justified by the assumption that the group can fund their own income protection insurance, it is both arbitrary and smacks of socialist ideology. The approach may be politically expedient and attractive to the actuaries, but undermines the ‘full compensation’ theory.

VICISSITUDES

Any consideration of the effect of statutory modification of common law principles in awarding future economic loss requires a mention of discounting for ‘contingencies’. Each of the levers of actuarial discount rates and caps is significant in isolation, but exists in an environment where courts are also bound to apply relatively high discounts for contingencies. Despite Professor Luntz[27] arguing that the discount for contingencies should (at the time of publication) have been less than 10 per cent in most cases, the widespread practice in Australian courts is to adopt a base 15 per cent discount for these contingencies. While the key reason for discounting for contingencies is death, other factors which have typically been considered include ‘unemployment, industrial disputes, other accidents or illness’.[28] Of course, there are many examples of instances where far higher discounts have been applied to take into account factors such as pre-existing conditions, plaintiffs’ personal circumstances or residual earning capacity.[29]

CONCLUSION

Accepting that any CTP, WorkCover or public liability insurance scheme requires controls to ensure its economic viability, the choice of levers to make it sustainable requires an informed value judgement by our politicians. Regrettably, the current framework seems to be guided by fiscal and actuarial considerations and achieves maximum cost savings by impacting most on a numerically small, but significantly injured, cohort.

Is it a case of political expediency over equality before the law, and economics trumping ideology?

Travis Schultz is a Professional Services Firm Consultant and an Accredited Specialist in Personal Injuries Law. He was formerly Managing Partner at Schultz Toomey O’Brien. PHONE 0419 441 977 EMAIL travis.schultz@outlook.com.au.


[1] See Gray v Richards [2014] HCA 40; [2014] 253 CLR 660.

[2] Howard v Aikman [2015] ACTCA 64 (18 December 2015).

[3] In NSW, the Civil Liability Act 2002 sets the discount rate at 5 per cent under s14(2)(b). So too does Victoria under s28I(2)(b) of the Wrongs Act 1958 and South Australia under s55 of the Civil Liability Act 1936, which defines the ‘prescribed discount rate’ under s3 at 5 per cent. Tasmania and Northern Territory have legislated their discount rates at 5 per cent under Civil Liability Act 2002 s28A(b) and Personal Injuries (Liabilities and Damages) Act, s22(2)(b), respectively. Western Australia’s discount rate is 6 per cent under s5(1)(e) of the Law Reform (Miscellaneous Provisions) Act 1941. ACT follows Todorovic v Waller [1981] HCA 72; (1981) 150 CLR 402 and Civil Liability (Wrongs) Act 2002 s98, which is silent as to a discount rate.

[4] For example, in the 1980s, NSW abolished workers’ compensation and CTP common law rights; in the 1990s, Victoria abolished common law rights in WorkCover claims; in South Australia, workers’ compensation claims lost common law rights in the 1990s and, similarly, in the Northern Territory, CTP rights were abolished alongside WorkCover common law rights in the 1980s.

[5] In NSW, CTP and workers’ compensation common law rights were abolished by Labor in 1987, but were subsequently reintroduced with retrospective application by the coalition. In Victoria, workers’ compensation common law rights were abolished by the coalition in 1997, but later reintroduced by a Labor Government in 2000.

[6] Commonwealth, Review of the law of negligence: final report (September 2002).

[7] At 13.63 (p197).

[8] Todorovic v Waller [1981] CLR 402 at 415 quoting Professor Street in Principles of the Law of Damages, Cambridge University Press, 1962, p116.

[9] Ibid.

[10] (At least on the author’s reading of the Ipp Report.)

[11] Todorovic v Waller [1981] HCA 72; (1981) 150 CLR 402.

[12] Ibid, at 454.

[13] Ibid, 451.

[14] Ibid, 478.

[15] Ibid, 423.

[16] International Monetary Fund, World Economic Outlook Database, April 2015.

[17] Ibid.

[18] (As Brennan J, suggested.)

[19] See above note 6.

[20] Ibid, [13.63].

[21] Ibid, [13.64].

[22] Ibid.

[23] Wrongs Act 1958 (Vic) s28F(2); Civil Liability Act 2003 (Qld) s54; Civil Law (Wrongs) Act 2002 (ACT) s98; Civil Liability Act 2002 (Tas) s26; Civil Liability Act 2002 (NSW) s12(2); Civil Liability Act 1936 (SA) s54; Civil Liability Act 2002 (WA) s11(1).

[24] Victoria: Wrongs Act 1958 s28F(2); Tasmania: Civil Liability Act 2002 s26; South Australia: Civil Liability Act 1936 s54; NSW: Civil Liability Act 2002 s12(2); Queensland: Civil Liability Act 2003 s54; Western Australia: Civil Liability Act 2002 s11(1); Australian Capital Territory: Civil Law (Wrongs) Act 2002 s98.

[25] See, for example, Tuohey v Freemasons Hospital [2012] VSCA 80; Doughty v Cassidy [2004] QSC 366; [2005] 1 Qd R 462; Taylor v The Owners – Strata Plan No. 11564 [2014] HCA9; Dinnison v Mindarie Regional Counsel [2005] WADC 252; Eicas v Dawson [2016] SASCFC 124.

[26] Doughty v Cassidy [2004] QSC 366; [2005] 1 Qd R 462.

[27] Professor Harold Luntz, Assessment of Damages for Personal Injury and Death, 4th ed, Butterworths, 2002.

[28] Wynn v NSW Insurance Ministerial Corporation [1995] HCA 53; (1995) 184 CLR 485 at [497].

[29] See recent examples in Berkeley Challenge Pty Ltd v Howarth [2013] NSWCA 370, Nominal Defendant v Ismail [2014] NSWCA 432, The Nominal Defendant v Aychahawchar [2015] NSWCA 58, Coles Supermarkets Australia Pty Ltd v Fardous [2015] NSWCA 82, Vincent v Woolworths Limited [2015] NSWSC 435, Phillips v MCG Group Pty Ltd [2013] QCA 83, Martin v Golding Contractors Pty Ltd [2014] QSC 53, Eaton v Tricare (Country) Pty Ltd [2015] QDC 173, Thomas v Trades and Labour Hire Pty Ltd & Anor [2015] QSC 264, Garth v BSE Slipways Pty Ltd [2015] QDC 343, Rawlings v Rawlings [2015] VSC 171, Mathews v Winslow Constructors (Vic) Pty Ltd [2015] VSC 728, Broome Helicopter Services Pty Ltd v Anderson [2014] WASCA 12, Salkeld v COCCA [2013] SASCFC 138, ANWAR v Mondello Farms Pty Ltd [2015] SASCFC 109.


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