Cullen v. Trappell.

Members: Barwick CJ
Gibbs J
Stephen J
Mason J
Murphy J

Aickin J
Wilson J

Tribunal:
Full High Court

Decision date: Judgment handed down 1 May 1980.

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Aickin J.

This appeal comes before the Court by way of special leave to appeal from the decision of the Court of Appeal of the Supreme Court of New South Wales. Special leave was granted so as to enable the Court to reconsider its decision in
Atlas Tiles Ltd. v. Briers 78 ATC 4536 ; (1978) 52 A.L.J.R. 707 (the `` Atlas Tiles case ''). I do not need to set out the facts of the present case which are

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ATC 4200

fully stated in other judgments. Nor do I need to refer to the facts or in detail to the judgments of the members of the Court who heard the Atlas Tiles case .

This Court is free to re-examine its decision in the Atlas Tiles case and is also free to differ from the decision of the House of Lords in
British Transport Commission v. Gourley (1956) A.C. 185 (``Gourley's case'') . We are not bound by that decision nor by the decision in the Atlas Tiles case but we must pay close attention to the reasoning in both those cases, including therein the reasoning of those who dissented from the respective decisions. The decision of the House of Lords has been the subject of much discussion in textbooks and learned journals and its correctness in principle has been the subject both of vigorous attack and of equally vigorous support.

The other authorities dealing with this subject were fully discussed by the members of the Court in the Atlas Tiles case and have again been discussed in other judgments in the present case. I do not think that I can usefully add to the discussion of the authorities both before and after Gourley's case .

After consideration of all the judgments in the Atlas Tiles case and the speeches in Gourley's case and of the argument in the present case I find myself in agreement with the reasons for judgment of Jacobs J. in the Atlas Tiles case so far as he deals with loss of earning capacity. Like Jacobs J. I find myself unable to distinguish in principle between the problem raised in this Court in the
National Insurance Co. of New Zealand Ltd. v. Espagne (1961) 105 C.L.R. 569 and the problem raised in Gourley's case itself. In Espagne's case this Court held that an invalid pension payable under the Social Services Act 1947-1957 (Cth.) was to be disregarded in the assessment of damages for personal injuries caused by negligence. The invalid pension was for incapacity, including permanent blindness, which had been caused by the accident in question. It was held that the pension should be disregarded both in respect of the period from the date of the accident to the date of judgment and in respect of the period after the date of judgment. As Jacobs J. said (78 ATC 4536 at p. 4556 and (1978) 52 A.L.J.R. 707 at p. 720):

``If tax is deducted in arriving at the amount of damages it must be because it is deductible in computing, not loss of earnings, but financial or economic loss. Once that is recognised, it becomes impossible to distinguish financial or economic loss reduced because something earned would have been taken away by the state and such a loss reduced because something - a pension - is given by the state as compensation for his inability to earn.''

Faced with that conflict his Honour went on to observe:

``A different result in the two classes of case would need to be reached not on a conceptual level but on a level related to the realities, or the justice, fairness and public policy referred to by their Lordships in Parry v. Cleaver .''

Jacobs J. also took the view that in respect of loss during the period between the date of injury and the date of trial it was possible to calculate the amount of tax with reasonable certainty and without all the difficulties that are involved in Gourley's case to which he had previously referred. He therefore concluded that in respect of that period the loss of income should be calculated on an after-tax basis. This necessarily involved the making of an assumption that the plaintiff would have remained in the same job or occupation and would have received what was the level of payment prescribed from time to time by the relevant award in the case of plaintiffs whose employment was covered by an award or like determination. In the case of ``self-employed'' persons and of those not so covered the process of estimation will be much less easy. This is a departure from the logical consequence of the requirement that damages for loss of earning capacity must be determined as at the date of the accident. It may well be convenient and simple in many cases but it appears to be in the nature of a ``carry over'' from the former notion that the subject of compensation was loss of earnings rather than loss of earning capacity. The latter appears now to be accepted as the correct approach.

It is no doubt a convenient and just procedure in many cases and it certainly is in accordance with current practice to deal with

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ATC 4201

the period between the date of the accident and the date of judgment in that way. If however the general rule continues to be that no account is to be taken of increases in wages or other income due to promotion, changes in awards due to ``indexation'' or ``work value'' or other matters in estimating loss of earning capacity, this practice, though realistic, is anomalous. In this branch of the law however anomalies are by no means unknown. At least in the case of a trial held a substantial time after the accident, the use of actual wage rates and actual tax rates during that period is likely to achieve a more just result than the process of using wages and tax rates as at the date of injury.

There is further reason, additional to those given by Barwick C.J. and Jacobs J., for regarding the use of after-tax figures as unsatisfactory which was pointed out in the course of argument in the present case. Attention was drawn to the problems which arise in the case of a plaintiff who was entitled to and received workers' compensation during the period up to the trial, but who also pursued his remedy at common law. In such a case the Workers' Compensation Act 1926 (as amended) (N.S.W.) provides in sec. 64(1)(a) that the plaintiff who succeeds in his common law action must repay out of the damages awarded the amount of compensation which the employer or his insurer has paid under the Act. Weekly payments under that Act are gross figures from which tax is deducted. Nonetheless the obligation under sec. 64(1)(a) is to repay the total figure which the employer was liable to pay. This would introduce an unjust anomaly in that weekly payments of compensation would be received after deduction of tax under the Income Tax Assessment Act and yet damages would be calculated upon an after-tax basis so that, in respect of the period between the date of the accident and the date of judgment, the successful plaintiff would be worse off because he would be obliged to repay the gross figure although he had received only the net figure after tax. A similar result is produced by workers' compensation legislation in each of the other States, though the procedural requirements differ.

Notwithstanding that the process of calculating separately monetary loss for the period between the date of injury and the date of judgment has long been the practice, and that indeed in some cases rules of court require that it be treated as ``special damage'' for which particulars are to be given, it is, as it seems to me, not really defensible in logic. It is plainly inappropriate in a number of cases when coupled with the view that only the after-tax figure should be used, whether calculated accurately with the benefit of hindsight or by the rough and ready method of using the ``take-home pay'', when the situation requires instalment deductions ascertained by examination of the relevant tables of deduction for a person having the same number of dependants as the plaintiff.

It amounts in practice to treating the period between the date of the injury and the date of the judgment as if it represented temporary incapacity, for which an after-tax figure may be defensible. It also involves treating permanent incapacity as though it relates only to the period subsequent to judgment. This is not readily reconcilable with the view that loss of earning capacity occurs at the moment of injury, though its extent may not be capable of ascertainment until a later date.

Logically indefensible though this practice is, it has become the settled method of calculation, but the use since Gourley's case of after-tax figures is truly appropriate only where the damage suffered is temporary loss of earnings rather than the loss of earning capacity. It may however be justified by long usage as a step in the estimation of the capital sum appropriate to compensation for loss of earning capacity, but if that is its purpose no real justification remains for using an after-tax figure. If it is in fact used, care must be taken to ensure that it does not distort the total figure ultimately arrived at for loss of earning capacity.

The law with respect to the mode of assessment of damages for personal injury has in recent years gone through a process of both refinement and elaboration which has however introduced what appears to me to be in principle serious anomalies. This however is not the occasion for an attempt to rationalize and restate the law in relation to the mode of calculation or estimation of damages for personal injury, even if it were desirable.

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ATC 4202

The process now used is primarily to take a plaintiff's weekly or other periodic wages or salary as at the date of the hearing, and to subtract from it in the case of partial incapacity the weekly amount which he is able to earn at the date of the hearing. The next step is to calculate the total sum which would be received if that figure represented actual earnings for the balance of the working life of the plaintiff. From the total figure so calculated a reduction is made for what were originally called contingencies but which are now usually referred to as ``the vicissitudes of life'' and then a chosen discount rate is applied in order to calculate from the appropriate tables the present value of that series of periodical payments. This exercise gives a figure which has, if I may say so, a spurious air of precision.

The choice of the rate of weekly earnings as at the date of the trial is, as I have said, a departure from logic which requires the ascertainment of the loss as at the date of the accident itself. It may perhaps be a survival of the earlier approach which was to regard the loss as a loss of earnings, rather than a loss of earning capacity. Such a loss up to the date of hearing reflects generally the changes in the wage rates between the date of accident and the date of the hearing. In respect of that period both inflation and other factors producing increases in monetary wage figures are thus taken into account.

To make as a matter of course an adjustment for unfavourable contingencies which may operate to reduce the estimate for the future, rather than to advert to both favourable and unfavourable contingencies is a departure from logic. However it is not customary to make allowances for the prospect of promotion to a more highly paid position, whether as a result of obtaining higher qualifications by reason of experience or of training either ``on the job'' or by undertaking appropriate courses and thereby acquiring new skills, at all events in the absence of evidence of such a possibility. These of course are imponderables, as are the risks of illness or redundancy. With due respect to those who have thought otherwise it appears to me that there is no sound basis for supposing that there is always a preponderance of bad luck over good luck. No statistical material has been put forward in support of that proposition. Not all contingencies are adverse nor all vicissitudes, i.e. changes, for the worse. I prefer the view expressed by Windeyer J. in
Bresatz v. Przibilla (1962) 108 C.L.R. 541 at pp. 543-4 and in
Teubner v. Humble (1963) 108 C.L.R. 491 at pp. 508-9 where he said:

``No just complaint can be made of the base figure so arrived at by his Honour [the trial judge]. But he reduced it by a third, having regard to what he described as `the usual deduction of one-third to one-quarter for contingencies' [1962] S.A.S.R. at p. 123. This, of course, would be quite correct if he thought that the `contingencies' that he foresaw for the appellant in the future justified such a reduction. But I find it hard to understand why there should be a convention that in all cases one is to take off a third for bad luck, or rather for the balance of future bad luck over future good luck. And, with respect, I am unable to agree in his Honour's reasons for refusing to make any allowance for what he said was the probability that the appellant's rate of pay would have gone up had he remained in his employment until he reached the age of sixty-five. His Honour said that the increases that `might fairly have been expected' `may have done no more than follow the fall in the purchasing power of money and may well not have represented any increase in real terms' [1962] S.A.S.R. at p. 123. But the very fact that wages measured in money go up as the value of money declines is one of the reasons why damages assessed in money have gone up so much in recent times. If damages are to be given for the incapacity to earn wages in the future they should be assessed having regard to the monetary wages that might have been earned in the future. The method adopted produced only the present monetary value of future receipts of wages assumed to continue at the same rate.''

The decision of this Court in
O'Brien v. McKean (1968) 118 C.L.R. 540 excludes the effect of inflation from the calculation in so far as it relates to the period beyond the date of the hearing.

All these aspects indicate what appears to me to be a tendency to be selective in the factors which may affect future earnings and

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ATC 4203

therefore enter into the calculation of the value to be attributed to the loss of earning capacity. One can readily understand an unwillingness to complicate the calculation, or more properly the estimation, by including other factors which though logically relevant are difficult to evaluate but this does not seem to me to justify an allowance for adverse contingencies but not for favourable contingencies.

When one comes to consider the question of tax there will be many cases in which its estimation even at the rates prevailing at the date of the trial will present great difficulty. No doubt the case of a plaintiff whose only income is his wages or salary presents a situation where calculation of his tax for a full year as at the date of the trial is relatively simple but only relatively so. His tax will depend not only on the relevant rate but also on both allowable and concessional deductions under the tax regime current in the year of income during which the accident occurred and the rates and deductions in each year up to the date of the hearing. In this exercise the trial judge has the valuable aid of hindsight although even then it may be impossible to calculate accurately what allowable or concessional deductions or rebate would have been available over the whole of the then current financial year if the accident had not occurred. Further complications arise when the weekly deductions under the P.A.Y.E. system change in the course of a year of income either to slow down or to accelerate the rate of deduction so as to produce a particular result over the whole of year of income, as has been not uncommon. It has been said that to take the weekly or monthly pay rate as at the date of hearing is to give the plaintiff an advantage, i.e. an advantage in the sense that changes in rates of wages due to inflation or to re-assessment of ``work value'' would have been reflected in the most recent awards or determinations of wages so that a higher weekly rate is used. To deny the benefit of some estimate of future adjustment on the same basis is, if I may say so with respect, illogical, though no doubt it makes the task much simpler. Though inflation cannot be regarded as having the same inevitability as death and taxes there have been periods in which reasonable predictions can be made by those with the relevant expert knowledge. No doubt long-term averages may be calculated from past figures and current short-term estimates of the rate of inflation are frequently made by qualified economists. Such estimates are no less a matter for expert opinion than the duration of disabilities, the prospects of their disappearance and the degree of permanent disability, all of which are commonly the subject of expert medical opinion. With due respect I see no reason in principle why such evidence should not be admissible and given, whatever weight the trial judge or the jury think appropriate to give it in the light of other relevant material. However authority is against that view. The result is one which in my opinion works unfavourably to a plaintiff.

It has been frequently observed that it is curious that no question of the influence of tax upon damages for loss of earning capacity, or loss of earnings, was raised until 1949, and that no mention of tax in relation to wrongful dismissal was made prior to 1933, with no decided case between 1933 and 1949. It has however to be remembered that in England prior to 1933 the usual mode of trial for claims in negligence for personal injury was by jury and that after the legislative changes made in that year it became the almost invariable rule that such cases were tried by a judge sitting alone. In Australia it is only in the State of Victoria that it is still usual (though not invariable) for such trials to take place before a jury. It appears to me to be not unnatural that the refined calculations which have come to be involved in the ascertainment of loss to be attributed to impairment or destruction of earning capacity would have been thought generally unsuitable in a trial before a jury. Moreover a jury neither gives reasons for its verdict nor dissects the total and attributes individual figures to each of the elements which enter into the total damage suffered by the plaintiff. Since the decision in Gourley's case where the trial has to be by jury, appropriate directions must be given by the trial judge as to the manner in which they should take account of the incidence of tax. However it is seldom, or perhaps never, that it is possible to tell to what extent a jury will have attempted the kind of calculations which are now usually employed by judges sitting alone. No doubt they are given both in

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ATC 4204

addresses and in the trial judge's summing up instructions and sample calculations but when the result emerges as a combination of items some of which are exactly calculable, some of which are capable of estimation and some of which represent no more than a value judgment, such as pain and suffering or loss of amenities of life, it can be but seldom that it is possible to say that the jury has made, or wrongly failed to make, any allowance for future tax in their calculations, assuming the result to have been arrived at by calculation. Where trials of claims for personal injury are by judge alone, dissection is not only possible but is almost invariable; indeed in some cases it may be mandatory - see
Fire and All Risks Insurance Co. Ltd. v. Callinan (1978) 52 A.L.J.R. 637 in which the trial judge did not dissect, at least as between economic and non-economic loss. The Full Court of the Supreme Court of Queensland remitted the case back to the trial judge for such dissection to be made for the purpose of enabling an appropriate award for interest to be made and that decision was upheld on appeal by this Court. It may well be that it is only since the legislation making the award of interest either permissible or mandatory, according to the particular State legislation, that dissection has become common but it remains impossible in cases of trial by jury.

The effect of all these factors has been to convert what is usually a major item in damages for personal injury, i.e. loss of earning capacity, into a matter of calculation upon specified assumptions rather than a matter of judgment in the light of all the factors, calculable and incalculable. This might perhaps be a just and satisfactory basis, if all factors likely to affect future earnings in monetary terms could be the subject of arithmetical calculations upon some assumed and just basis.

When the nature of the calculation required necessarily excludes some factors which may operate so as to increase the monetary figure placed upon the loss of earning capacity, there appears to me to be no sound basis for introducing what was in 1955 a further unfavourable factor contrary to what had been the established practice. That practice had been established either by a general recognition that rates of tax were irrelevant to the valuation of what was in substance a capital asset, or in accordance with the series of decisions in England, below the level of the House of Lords, to that effect. Such a change appears to me not to have been justifiable unless it had been part of a process of complete restatement which would require account to be taken of all factors which may according to ordinary probabilities affect in one way or another the amount of actual earnings in real terms. In a system which has developed on what may be described as a series of assumptions individually justifiable but collectively incomplete the introduction of a significant unfavourable factor without re-appraising the position of other real, though perhaps less readily calculable, factors is not justifiable.

There is, as it seems to me, an air of unreality in the assumption that the plaintiff's wages would remain static at the figure appropriate at the date of the trial and that the rate of tax would likewise remain static for perhaps 30 years.

The decision in Gourley's case itself, when viewed with the benefit of hindsight demonstrates how unsafe the latter assumption may be. An examination of the rate schedules of the Commonwealth Income Tax Acts of the last 10 years will demonstrate how radically they have changed in that period of time. It is not to be supposed that they will remain as they now are for an indefinite period. The manner in which the indexation of the tax scales has been introduced, varied and suspended, is another example which demonstrates that the automatic application of the rates of tax current at the date of trial is likely to be an unreliable guide.

The above considerations are of a very general character and they do not deal directly with the basis expressed for the decision in Gourley's case , namely, that damages are compensatory only, a principle which is not challenged. The need, which is inescapable, for a judgment to take the form of a single sum of money as a once for all compensation for the totality of the loss suffered by the injured plaintiff makes its ascertainment more a matter of judgment than of calculation, though such a judgment must be formed after an examination of such estimates and calculations as can reasonably be made. The fact that a judgment must be

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ATC 4205

for a single lump sum is itself confirmation that it is proper to treat loss of earning capacity as in the nature of a capital loss. That is not a wholly accurate description because the usual sense in which that term is employed is in relation to disposable assets, but such assets when part of an income earning business or activity are employed in the generation of income. In this sense there is an analogy with a capital asset involved in the conception of earning capacity which is normally employed in the production or earning of income. It has an enduring quality which enables its useful employment throughout the working life of the individual, and no doubt it can be properly said that, like the more usual form of capital assets such as machinery, it suffers from depreciation with the passing of time and for many (but not all) of the population has a calculable end point by reference to customary ages of retirement. Its value in money to an injured plaintiff must reflect in part its productive capacity, of which some measure is provided by current earnings and some by prospects of future earnings, as well as other factors. The value of other forms of capital assets is unlikely however to be directly affected by the individual tax position of the particular owner for such items have substantially standard prices and values on the open market, influenced by costs of manufacture, as well as profitability.

Gourley's case involved a relatively uncomplicated situation where figures had been agreed on the two assumptions, either that tax was taken into account or it was not. Approximately half the relevant period until the assumed retirement from the firm had already gone by, so that no question of an assumption that the tax rates would remain constant for a long period of time arose.

The general tendency appears to have been to disregard matters which are in truth not capable of precise estimation notwithstanding that they are both relevant and probable. This however is to proceed on the footing that damages are a matter of arithmetic only, not of judgment in the light of all the circumstances. All the circumstances must be examined, those the consequences of which are capable of calculation and those whose existence and consequences are predictable but not capable of arithmetic calculation, though monetary compensation must be provided for them.

All these considerations point to the conclusion that the use of after-tax income, whether calculated roughly or as exactly as may be possible, as at the date of the trial is to use what is only one consideration as if it were an exact measurement. A figure for loss of earning capacity can properly be arrived at only by reference to a number of factors, most of which involve an exercise of judgment and not mere arithmetic.

Accordingly I am of opinion that this appeal should be dismissed, even though the Court of Appeal reached its conclusion by giving to mere calculation an undue weight, but in a manner which effected a reasonable balance when the adverse treatment of the other factors to which I have referred is taken into account.