O'Brien v McKean

118 CLR 540
1968 - 0910B - HCA

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(Judgment by: Barwick CJ)

Between: O'Brien
And: McKean

Court:

Judges:
Barwick CJMcTiernan J
Taylor J
Menzies J
Windeyer J

Subject References:
Damages
Personal injuries
Loss of earning capacity
Future expenditure
Inflation

Hearing date: Brisbane 27 May 1968
Judgment date: 10 September 1968

Adelaide

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Judgment by:
Barwick CJ

The appellant recovered a verdict of $150,186.20 in an action against the respondent tried by a judge of the Supreme Court of Queensland. The cause of action was negligence in the driving of a motor car on the Pacific Highway, north of Brisbane, Queensland, causing extensive personal injury to the appellant who was a passenger in the vehicle. Of the total amount of the verdict, $140,000 was awarded by the learned trial judge as general damages covering loss of earning capacity, pain, suffering, loss of enjoyment of life, actual physical injury, compensation for future needs that would not have existed but for the injury to the appellant and loss of expectation of life. In his reasons for judgment, the learned trial judge said:

"In fixing damages, I have borne in mind the factor of vicissitudes of life, where applicable. I have borne in mind the question of his ordinary maintenance. I have borne in mind that income tax may be incurred for interest or dividends he may receive from any investment of any part of the amount awarded. And I have borne in mind the likelihood of the value of money decreasing in the future."

The respondent appealed to the Full Court of the Supreme Court against, amongst other things, the award of general damages, generally on the ground that it was excessive but, particularly, on the ground that:

"the learned judge wrongly admitted evidence as to the future decline in the value of money and wrongly took into account the likelihood of the future decline in the value of money."

The Full Court allowed the appeal and reduced the award of general damages to the sum of $100,000 and the total verdict to $110,186.20. The appellant, by this appeal, seeks the restoration of the trial judge's verdict.

In giving judgment, the Full Court said:

"The learned trial judge has, in our view, stated the correct principles upon which a judge should proceed in arriving at an assessment of damages in such a case as this, with the exception that he has borne in mind the likelihood of the value of money decreasing in the future. As to this we respectfully adopt what was said by Windeyer J. in Parente v  Bell. ^[F1] To whatever extent his Honour's judgment allowed for future inflation it must be held in error. The figures given us show that the allowance for future inflation was probably considerable."

After discussing various aspects of the case, the Full Court came to the conclusion

"that the assessment of general damages is so excessive as to be erroneous to the extent that this Court should substitute its own assessment".

It did so. with the result I have already mentioned.

I agree with the Full Court that the initial award of $140,000 was excessive and am prepared to accept the amount of $100,000 for general damages as within the limits of a proper exercise of discretion. Being of this opinion. I would find no need for any discussion of the facts and circumstances of the case. But the appellant has pressed the view that the Full Court was in error in not taking into account as an augmenting factor when assessing general damages the likelihood of the further depreciation in the value of money over the years during which the appellant might normally have been expected to work and to earn income, and that the trial judge was right in doing so. Accordingly, the appellant submits that the trial judge's verdict should not have been disturbed.

At the time of the receipt of his injuries, the appellant was nineteen years of age and according to the trial judge "of more than average scholastic ability ... just entering the legal profession with a determination to succeed and with bright prospects of success ...". The Full Court does not seem to have been as impressed with the appellant's prospects as was the trial judge. But his Honour's estimate will suffice to indicate both the possible span of years during which the appellant might have been an earner and the nature of the possible source or sources of his income during that period.

The experience over past years, particularly those more proximate to the present time, during which the purchasing power of the currency has been reduced, was put forward in evidence at the trial as the basis of a prognosis of continuing and progressive depreciation in the value of the currency in the future: and it is submitted that its occurrence is sufficiently probable and the broad limits of its extent sufficiently certain to warrant the increase in the damages which it appeared to the Full Court had been made by the trial judge to allow for the loss of purchasing power of money in the future. Whilst the whole of the reduction of the verdict by the Full Court is not due to its exclusion of this element in the assessment of the general damages, clearly the rejection of the appellant's submission by the Full Court was a major factor in bringing about that reduction.

The question whether probable future decrease in the purchasing power of the currency is a proper factor to be considered in awarding damages for personal injury received in road and factory accidents has been canvassed by judges in different courts at various times, both within and beyond Australia and with differing results. Consequently, it would seem appropriate that this Court take this opportunity to rule definitively on the matter so far as concerns Australia. The judicial pronouncements which have so far been reported are collected in the judgments of Tzouvelis v  Victorian Railways Commissioners: ^[F2] to which should be added Fletcher v  Autocar and Transporters Ltd, ^[F3] per Diplock L.J.: ^[F4] see also Reid v  Comalco Aluminium Bell Bay Pty  Ltd, ^[F5] an unreported decision of the Supreme Court of Tasmania (Crawford J.) and the Tasmanian decisions to which reference is there made. Of the reported cases, the firstly mentioned case contains the fullest discussion of the matter of principle involved. I shall refer to aspects of the judgments in that case a little later, but otherwise I see no need to discuss the decisions which those judgments canvass. Suffice it to say that the matter is not covered by any authority binding on this Court.

The elements of the general damages for personal injuries in relation to which it is said that allowance for depreciation in the value of money ought to be allowed, are the amounts intended to compensate for what is broadly referred to as the economic loss of the injured person. It is not suggested that any allowance should be made in respect of those aspects of such general damages as are intended to cover the injury itself, loss of amenities or pain and suffering.

There are, in my opinion, two consequences of personal injuries caused by negligence which need to be distinguished and to be separately treated in connection with the submission which has been made in this case as to the assessment of general damages; first, there is the destruction or diminution of earning capacity and, second, there is the need to expend money in the future because of the physical injuries received. I shall deal first with the question whether, assuming it can be established to the necessary degree, the expected decrease in the purchasing power of money ought to be reflected in the damages to compensate for loss of earning capacity.

Before doing so, however, I should point out that the question whether allowance should be made for changes in the purchasing power of the currency really arises in two quite different connexions. There is, on the one hand, what I might call the accrued depreciation in the value of the currency as at the time of the assessment of the damages and there is, on the other hand, the possibility or probability of further depreciation after the assessment has been made and judgment entered. In my opinion, no difficulty arises in relation to the accrued depreciation of the currency when making an award of damages for personal injuries. The successful plaintiff in an action for such damages is to be compensated in the money of the day, if I may be permitted what might be thought to be a departure in expression from a strict nominalistic theory of money. So much, I think, is well established in English law: Sands v  Devan; ^[F6] Glasgow Corporation v  Kelly. ^[F7] An illustration of an application of that principle is to be seen in Hart v  Griffiths-Jones ^[F8] and in Pamment v  Pawelski. ^[F9]

In the case of such personal injuries, though there may be something to be said logically for making the assessment of damages as at the date of the receipt of the injuries, the date of the verdict is, in my opinion, the proper date as at which to make the assessment. It may be that delay on the part of the injured person in bringing or prosecuting his claim could on this basis in some circumstances advantage the plaintiff, though, except in the case of some dramatic change in purchasing power, this possible advantage would be minimal and largely theoretical. However, even if in some case it became necessary to prevent a plaintiff obtaining a substantial advantage by his own dilatory conduct, the date as at which to make the assessment would not, in my opinion, be the date of the injuries but some later date, probably related to the time as at which a diligent plaintiff would have brought his proceedings to a verdict.

The assessment will therefore in general be made in relation to the purchasing power of the currency at the date of the assessment of the damages. It is this recognition of the change in the purchasing power of the currency which has already occurred at the date of the verdict to which the authors Mann, The Legal Aspect of Money, 2nd ed. (1953), at pp. 64, 95 and following and Nussbaum, Money in the Law (rev. ed. 1950), at pp. 180 and following respectively refer. The cases listed in note 51 to p. 182 are cases of this kind and not cases which deal specifically with the problem raised by the probable further depreciation of the currency after judgment: see Mann (above) Pt III for a general discussion and Nussbaum (above) Ch. 2, s. 12.

I turn now to that question, namely, whether any allowance for future changes in the purchasing power of the currency should be made when damages to compensate for loss of earning capacity are being considered. I have elsewhere pointed out in relation to this aspect of economic loss in cases of personal injury, that it is the loss of earning capacity which has occurred by reason of the accident which is to be the subject of compensation by an award of damages: it is not a case of replacing the wages which would have been earned in the future by a sum of money which represents the present value of the total of such wages: see Arthur Robinson (Grafton) Pty  Ltd  v  Carter. ^[F10] That loss of earning capacity has already occurred and is either permanent or likely to continue for some estimable time. The fair compensation for it is to be determined as a matter of judgment and not of calculation. But it is of course to be an informed judgment. Though the damages as I have said are not to be a replacement of the future wages, part of the relevant information for the purpose of forming a judgment as to the fair and reasonable compensation is a broad estimate of what that earning capacity before its destruction or diminution was capable of producing during such time as it would have been likely to be gainfully exercised.

In obtaining such a conspectus, the vicissitudes of life, as it has been said, must not be lost sight of. Included in the matters so to be observed and acknowledged in the broad estimate to be made is the probability, if it exists, that the lost or diminished capacity would in the future have produced more in real terms than it has done or does at the current time. But what would be thus earned would be expressed in money terms and the increased money returns from the exercise of the earning capacity may be due either to an attempt to compensate for a reduction in the purchasing power of money or to an advancement in the real reward paid for work performed, or partly to each of these considerations. In my opinion, changes in the amounts which would have been paid for the exercise of the lost or impaired earning capacity and which would be due solely to changes in the purchasing power of money ought not to be considered as relevant to the assessment of compensation for the lost earning capacity. But it is otherwise with respect to real advances in remuneration due to an increase in the real reward for an increased or a better regarded exercise of that capacity if there is solid evidence upon which the probability of such an advance can be inferred. Thus the probability that the injured person's present capacity would in time lead to his advancement, so that he would earn more in real terms may be reflected in the compensation for the lost capacity: but the probability that the current reward will increase in nominal terms merely to keep pace with a lessening in the purchasing power of money should not be so regarded.

The earning capacity which has been lost or diminished cannot, in my opinion, command any greater compensation because in future the purchasing power of the nominal sum it presently earns will be maintained by an increase in the nominal reward for its exercise. Indeed, if that were not likely to happen, the present capacity which has been lost should be worth much less because its effective return in terms of what it will purchase throughout the future would be a diminishing quantity. If the compensation is assessed on the footing that the present value of the wages commanded by the earning capacity prior to the injury would be maintained, and the compensation expressed in money appropriate to the date of the assessment, the plaintiff will in my opinion, be justly compensated for the lost or diminished earning capacity in a case where there is no probability that the earnings it will produce will advance in real terms. Smith J. in Tzouvelis v  Victorian Railways Commissioners ^[F11] approached this aspect of the problem from a somewhat different point of view but reached the conclusion that to increase the award to reflect decreases in the value of the currency would result in an over compensation of the plaintiff. I respectfully agree with this conclusion and if one were making a mathematical calculation of the kind used in his Honour's analysis, I would also agree with his Honour's steps in reaching it. But, as I have said elsewhere, I do not favour any attempt to arrive directly at the amount of general damages by calculations of that kind.

For the loss of a present capacity, with all its inherent probabilities, the injured person is to be presently compensated by an immediate payment of money. Upon the award being made, the successful plaintiff becomes entitled to that money free to do with it what he will. He can protect himself against the possibilities of continuing or increasing inflation to the same extent as any other citizen with an investible fund. The successful plaintiff has, as it were, exchanged an earning capacity for such a capital fund. In my opinion, neither possible nor probable changes in the purchasing power can be relevant to the assessment of the capital sum so to be paid.

Smith J. reached this conclusion in Tzouvelis v  Victorian Railways Commissioners. ^[F12] However, I do not think the question concerns the discount rate which is commonly used in determining the present value of a periodic sum paid regularly over a period of years. In my opinion, so far as the lost or diminished capacity to earn is concerned, the exclusion of any consideration of further depreciation in the purchasing power of money in the future should be founded directly upon the reason that the injured person is being presently compensated for the loss which has already occurred by the payment of money which he is free to employ or invest in any way he may see fit. It would follow that, in my opinion, evidence directed to establishing the further decline in purchasing power of the currency in the future in relation to compensation for lost or dimished earning capacity is not admissible.

I would pass now to the other aspect of compensation for economic loss consequential upon personal injuries, namely, the continuing necessity caused by the personal injuries to expend money for medical treatment, nursing and other physical assistance and the like. Here, the trial tribunal in assessing compensation is dealing in reality with the cost of goods and services in contrast to fixing compensation expressed in money for a lost or diminished earning capacity. The problem is to determine what is the fair sum to award an injured person to compensate him for the need to obtain goods and services rendered reasonably necessary for health and comfort by the nature and extent of physical or, in a proper case, mental injuries, caused by the other party's negligence. The award is to furnish the plaintiff with the financial ability to purchase the necessary goods and services throughout the time it is established on the probabilities that he will need to procure them. If it can be established that the cost of these goods and services will probably increase during that time. I can see no reason in principle why some allowance should not be made for such increase in cost-or as it may be expressed in connection with the present discussion, for the diminished purchasing power of money. On that hypothesis, the injured person will have to expend more money in nominal terms to obtain these goods and services. Thus the sum presently paid to him to compensate him for the need to make this expenditure might well reflect the increasing cost of those goods and those services, if the probability of that increase is established.

I shall deal in a moment with the question whether or no any solid grounds exists upon which to make any such allowance. But before doing so, I would point out that the total sum awarded a successful plaintiff which, amongst other items, covers compensation for having to make such reasonably necessary expenditures in the future, is presently payable in full. It is thus an investible fund until there is need in the future to use it. I have elsewhere referred to the unwisdom of using actuarial tables to compute or calculate an award of damages, even in the case of compensation for the need to expend money to procure goods and services. If the sum awarded is to be, as it should be, the result of an exercise of judgment, as distinct from attempted mathematical computation, its produce by investment, or use in some other aggrandizing manner, can be borne in mind when it is suggested that in connection with the purchase of goods and services there is likely to be increases in cost. Though the injured person will need ready cash from time to time to purchase what his injuries have rendered necessary, the sum awarded remains at least for a considerable period of time investible in securities of a kind which could provide a hedge against future inflation. But I would observe in passing that, even if the assessment of compensation to cover the necessary expenditure were to be made by a mere mathematical computation, the reasoning of Smith J. in Tzouvelis v  Victorian Railways Commissioners ^[F13] would deny the propriety of using a different percentage for arriving at the present value of such payments, in order to allow for further depreciation in the currency.

It is, of course, probable changes in the cost of the particular goods and services required by the particular plaintiff which must be considered and not the cost of goods and services generally, though it may be that in some cases a very broad but inexact guide to those costs can be derived from an overall picture of changing costs of goods and services generally.

This brings me to the final question, namely, whether or not a firm basis can be found for the inclusion amongst the factors to be considered in deciding the proper global sum to be awarded for personal injuries of a figure to reflect the probability of rising costs of the particular goods and services. It can be conceded that in the past over a substantial period of time the purchasing power of the nominal unit of currency in general has declined. Indeed, it may be possible to express that decline in percentage terms of the nominal value of the unit of currency. This decline is not a new experience but an experience of mankind over centuries: but changes in purchasing power have not always been by way of decline nor has the decline been uniform. At times because of particular economic or social conditions in particular places the rate of decline may accelerate, or, for that matter, decelerate, or there may be occasions in the future as there have been in the past when the currency will appreciate. No doubt also there will be periods of greater inflation, such as the present generation has known.

So many imponderables must, of course, enter into the causes of these fluctuations; for example, alterations in the mode of production or distribution of the particular community in question or of a representative commodity or commodities of which the cost is taken as a reference point for a general conclusion, or alterations in the social habits of the community creating or diminishing the demand for a commodity. But, notwithstanding these fluctuations, it is possible, by taking a long span of time, that a progressive decline in the purchasing power generally may be demonstrated, though it will not have been regular. But it seems to me that whatever the overall experience in relation to goods and services generally, nothing better in general than a speculation can be made as to the cost in the future of particular goods and services. There is no more room, in my opinion, in the determination of an award of damages, for acting upon a speculation than there is for doing so in the determination of liability. Solid proof, on the basis of probability, is required of all the elements which can properly be reflected in the award. Consequently, in my opinion, evidence which does no more than provide ground for speculation as to the future cost of the required goods and services is inadmissible.

The question might also be approached in another way. Let it be supposed that although there are many imponderables involved, the long course of the history of money warrants the conclusion that it is probable that over a substantial period of time the purchasing power of money will decline and the cost of goods and services will in general increase. Yet it seems to me it could not be assumed that that decline over such period would probably be as much as three per cent per annum. As I have said, I do not think that such an assumed state of affairs would justify the conclusion that the cost of the required goods and services will increase to that or some such extent. But, even if that rate of increase in the cost of the particular goods and services were assumed, the rate of return on the investment of the money awarded by way of damages could very well exceed that rate of increase in their costs: or, if the amount of those damages had been directly based upon a capitalisation at a usual percentage, the actual rate of return upon the amount awarded might well exceed that percentage by the assumed rate of increase in the cost of the particular goods and services. To attempt to establish the probable increases over a substantial period of time of the cost of the particular goods and services and to compare that increase with the probable beneficial use of the money awarded as damages is in any case, in my opinion, far too sophisticated an exercise to be performed in the trial of action for personal injuries. Such a trial does not call for a scientific calculation but for broad estimates resulting from informed judgment.

In my opinion, therefore, the factor of probably increasing cost of such goods and services should in general be ignored when the assessment is made of the fair and reasonable sum to compensate for the need to purchase such goods and services in the future. Where sound and precise evidence can be given as to the probable rate of increase in cost of some specific item becoming greater than the probable rate of benefit by the use of the capital sums to be awarded, the matter may possibly be different; though as at present advised I should consider such a possibility remote. In general the tribunal of fact, in my opinion, should ignore the question of the probable increase in cost of goods and services the purchase of which the injuries have made necessary.

Thus, in the result I am of opinion that neither in relation to compensation for the loss of earning capacity, nor in relation to compensation for the necessity to make expenditures in the future because of injuries received should changes in the purchasing power of money in the future be considered when a judgment is being formed as to the proper global sum to award by way of damages for personal injuries. It follows that, in my opinion, the generalised evidence proffered in the instant case ought not to have been admitted.

Before parting with the case, I would observe that the trial judge in the portion of his reasons for judgment which I have quoted included as an element in his assessment the circumstance that any income which the appellant would receive from the investment of the amount of the verdict, or of some part of it, would be subject in his hands to income tax. No point was taken by the respondent about this aspect of the trial judge's verdict either before the Full Court or before this Court. Consequently, I do not intend to express any view with respect to the propriety of including such an element in the assessment of general damages for personal injuries. No doubt, present existing authority would require that the injured person's net earnings after deduction of income tax be regarded when an estimate is being made of his former earning capacity (British Transport Commission v  Gourley). ^[F14] But the reasons for this conclusion are not relevant to the question whether the liability of the income of the investment of the amount to be awarded should be an aggrandizing factor in the assessment of that award. That is a separate matter and would need careful consideration, to which some of the reasons which have been expressed by me in this case would, in my opinion, be relevant.

In my opinion, the appeal should be dismissed.