Townsend v. Kroppmanns, 2004 SCC 10, [2004] 1 SCR 315

Townsend v. Kroppmanns, [2004] 1 S.C.R. 315, 2004 SCC 10

Dale Kroppmanns and Allison Muriel Currie                                               Appellants

v.

Pamela Jean Townsend                                                                                 Respondent

Indexed as:  Townsend v. Kroppmanns

Neutral citation:  2004 SCC 10.

File No.:  29345.

Hearing and judgment:  December 2, 2003.

Reasons delivered:  February 19, 2004.

Present:  McLachlin C.J. and Iacobucci, Major, Bastarache, LeBel, Deschamps and Fish JJ.

on appeal from the court of appeal for british columbia

Torts — Damages — Determination of award — Whether rate of return should be taken into account in assessing award — Whether tax gross-up and management fees should be calculated on award established at trial or on figure determined at later date — Law and Equity Act, R.S.B.C. 1996, c. 253, s. 56 — Law and Equity Regulation, B.C. Reg. 352/81.

After assessing damages against the appellants in the respondent’s action arising out of a motor vehicle accident, the trial judge issued supplementary reasons to deal with the tax gross-up and management fees.   By then, the respondent had already received partial payment and spent part of it purchasing a house and paying legal fees.  The trial judge deducted the capital expenditure and the legal fees in calculating management fees and the tax gross-up.  He also reduced the fee award by 50 percent to account for a predicted increased return, assumed to result from the investment counselling for which the management fee award was granted.  In British Columbia, the discount rates are fixed by the Law and Equity Regulation and a four-level classification for calculating management fees is regularly applied by the courts.  The Court of Appeal unanimously held that the evidence did not support the reduction of the award for management fees and that management fees and the tax gross-up were to be calculated in relation to the full amount of damages awarded, without deducting the respondent’s legal fees and the capital investment.

Held:  The appeal should be dismissed.

The higher rate of return on the award attributed to investment counselling should not result in a reduction of  the award.  The statutory discount rates do not take investment costs into consideration and apply in all cases.  Moreover, the fee classification was formulated on the basis that victims do not benefit from advice costs being already built into the statutory discount rate.  Indeed, deducting the difference between the potential rate of return and the statutory rate from the award would defeat the whole purpose of the deeming provisions, which is to render irrelevant any evidence on actual or potential rates of return or inflation.  The effect of the statutory rate and the classification cannot be avoided by claiming a reduction in the fees award.  The legislature made a policy choice which the courts must respect.

The cost of the respondent’s legal fees and house should not be deducted from the amount upon which management fees and tax gross-up are calculated.   This conclusion is supported by three principles involved in assessing damages.  First, since damages are assessed, not calculated, the notional amount assessed for future damages cannot be mixed with actual amounts.  Second, the principle of finality would be undermined if the award were to be adjusted for changing circumstances.  Finally, the plaintiff has property of the award and how he or she chooses to use it is irrelevant.

Cases Cited

Applied:  Andrews v. Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229; referred to:  Mandzuk v. Insurance Corporation of British Columbia, [1988] 2 S.C.R. 650; Arnold v. Teno, [1978] 2 S.C.R. 287; Walker v. The King, [1939] S.C.R. 214.

Statutes and Regulations Cited

Law and Equity Act, R.S.B.C. 1996, c. 253, s. 56 [ad. 1981, c. 10, s. 30].

Law and Equity Regulation, B.C. Reg. 352/81.

Rules of Court, B.C. Reg. 221/90, r. 37(23).

Authors Cited

British Columbia.  Law Reform Commission.  Report on Standardized Assumptions for Calculating Income Tax Gross-up and Management Fees in Assessing Damages.  Vancouver:  The Commission, 1994.

APPEAL from a judgment of the British Columbia Court of Appeal (2002), 2 B.C.L.R. (4th) 10, 171 B.C.A.C. 11, 280 W.A.C. 11, 12 C.C.L.T. (3d) 88, [2002] B.C.J. No. 1287 (QL), 2002 BCCA 365, allowing an appeal from a decision of the British Columbia Supreme Court, [1998] B.C.J. No. 2447 (QL), and its supplementary reasons regarding damage awards for management fees and tax gross-up, [2000] B.C.J. No. 1352 (QL), 2000 BCSC 964.  Appeal dismissed.

Patrick G. Foy, Q.C., and Robert J. C. Deane, for the appellants.

Joseph J. Arvay, Q.C., and Aaron A. G. Gordon, for the respondent.

The judgment of the Court was delivered by

1                                   Deschamps J. — This appeal deals with issues which are often raised in large personal injury cases.  It concerns management fees and tax gross-up awarded to a victim in a tort case.  More specifically, first, should the award take into account the rate of return by the victim and, second, should the tax gross-up and management fees be calculated on the estimated amount established at the time of the trial or on some other figure likely to become known at a later date.  This Court dismissed the appeal at the conclusion of the hearing, with reasons to follow.  These are the reasons for judgment.

2                                   On December 8, 1990, while walking on a road in the middle of the night, the respondent Townsend was struck by a vehicle owned by the appellant Currie, and driven by the appellant Kroppmanns.  Liability was at issue.  The trial was held in May 1995 and judgment was delivered in July 1995.  The trial judge dismissed the action ([1995] B.C.J. No. 1625 (QL)).  On appeal, liability was apportioned by attributing 55 percent of the fault to Ms. Townsend and 45 percent to Mr. Kroppmanns and Ms. Currie ((1998), 108 B.C.A.C. 23).  The Court of Appeal referred the matter back to the trial judge for assessment of damages.  In October 1998, the damages were assessed at $1,445,000 before apportionment ([1998] B.C.J. No. 2447 (QL)).

3                                   In June 2000, the trial judge issued supplementary reasons to deal with the tax gross-up and management fees ([2000] B.C.J. No. 1352 (QL), 2000 BCSC 964).  By then, the respondent had already received partial payment and spent part of it purchasing a house and paying legal fees.  The trial judge deducted the capital expenditure and the legal fees from the amount used to calculate management fees and tax gross-up.  He also reduced the fee award by 50 percent to account for a predicted increased return, assumed to result from the investment counselling for which the management fee award was granted. 

4                                   The judgment was appealed on many issues, but only two remain.  On those, Finch C.J.B.C. held, for a unanimous court, that the evidence did not support the reduction of the award for management fees ((2002), 2 B.C.L.R. (4th) 10).  He also found that management fees and tax gross-up were to be calculated in relation to the full amount of damages, without deducting the respondent’s legal fees and investment in her home.  The questions will be dealt with in turn, but first some preliminary comments will help in understanding the issues.

5                                   Compensation aims at restoring the victim to the position that person would have been in had no loss been incurred.  Compensation is awarded in the form of a lump sum payment.  The dollar amount received for future costs is actually lower than projected costs because it is assumed that the amount paid will be invested and will earn income before being used for future needs.  The same reasoning applies for loss of future income.  The victim is awarded a lower amount for income than that person would have actually earned at a future date.  In other words, the amounts are discounted to reflect the present value of the expenses incurred or the income earned at a future date, taking inflation adjustments into consideration.  The purpose of the discount rate is thus to insure that victims will be fully compensated but that defendants will not be called on to overpay.  In British Columbia, to avoid courts’ having to hear expert evidence in every case in order to determine the appropriate discount rate, s. 56 of the Law and Equity Act, R.S.B.C. 1996, c. 253, which was added in 1981 (S.B.C. 1981, c. 10, s. 30), authorizes the Chief Justice of the British Columbia Supreme Court to set the discount rate.  Pursuant to the Law and Equity Regulation, B.C. Reg. 352/81, which was adopted pursuant to s. 56 of the Law and Equity Act, the Chief Justice has fixed the discount rate at 2½ percent for future earnings and 3½ percent for future costs.

6                                   The same underlying rationale guides the attribution of management fees and tax gross-up.  The law aims at ensuring that the value of the amounts awarded to victims is maintained over time.  In tort law, victims of personal injuries are awarded management fees when their ability to manage the amount they receive is impaired as a result of the tortious conduct.  The purpose of this segment of the award is to ensure that amounts related to future needs are not exhausted prematurely due to the inability of the victims to manage their affairs.  Depending on the needs of the victims, more or less extensive help is required.  The assessment is made on a case-by-case basis: Mandzuk v. Insurance Corporation of British Columbia, [1988] 2 S.C.R. 650.  In the same vein, since the earnings on the capital awarded are subject to income tax, an amount called tax gross-up is awarded to ensure that the amount will not be eroded by the tax liability.

7                                   With this background information, the appellants’ arguments will be easier to deal with.

I.     Reduction of Management Fees

8                                   The appellants argue, first, that the statutory discount rates take into consideration some investment costs and, second, that when an allowance for investment counselling is made, one can expect the rate of return to be higher than that otherwise achieved, which is a benefit both the victim and the defendants should share.  In their view, the reduction of 50 percent ordered by the trial judge was appropriate.

9                                   The first part of the appellants’ argument is not consonant with the development of the law in British Columbia.  As mentioned above, the s. 56 of the Law and Equity Act was added in 1981 to obviate the need to resort to expert evidence on discount rates.  Pursuant to the regulation of the Chief Justice, these rates have been in force since 1981.  They apply in all cases, no matter how impaired the victim is and do not take into account whether management fees are awarded or not.  The adoption of the statutory discount rates postdates the judgment of this Court in Arnold v. Teno, [1978] 2 S.C.R. 287, in which the award of management fees was approved.  The legislature is presumed to have known the law concerning management fees when it adopted the Law and Equity Act: Walker v. The King, [1939] S.C.R. 214, at p. 220 (per Duff C.J.) and to have known that courts award management fees according to a calculation that is distinct from the discount rate.  As no exception is made for cases where management fees are awarded, the two distinct calculations are upheld.  Discount rates and management fees are two complementary but distinct components of the calculation of the final award.

10                               Moreover, the appellants’ argument is not compatible with the implicit basis of the recommendations in the Report on Standardized Assumptions for Calculating Income Tax Gross-up and Management Fees in Assessing Damages of the Law Reform Commission of British Columbia (the “Commission”). These recommendations provide for a four-level classification (at p. 52), to which courts of British Columbia have referred:

Level 1 –    The plaintiff requires only a single session of investment advice and the preparation of an investment plan at the beginning of the period the award is to cover.

Level 2 –    The plaintiff will require an initial investment plan and a review of the investment plan approximately every five years throughout the duration of the award.

Level 3 –    The plaintiff will need management services in relation to custody of the fund and accounting for investments on a continuous basis.

Level 4 –    The plaintiff will require full investment management services on a continuous basis, including custody of the fund, accounting, and discretionary responsibility for making and carrying out investment decisions.  Such a plaintiff is likely to be mentally incapacitated or otherwise incapable of managing personal financial affairs.

11                               It seems apparent that Level 1 fees cover a very limited involvement from the investment advisor.  If the cost of any advice was already included in the discount rate, one would expect that at least the limited advice provided for by Level 1 would be covered.  It must then be inferred that the fee classification was formulated on the basis that victims did not benefit from advice costs being already built into the statutory discount rate.

12                               The second part of the appellants’ argument, which seeks to compare the potential rate of return with the statutory rate, defeats the whole purpose of the deeming provision.  The statutory discount rate is mandatory and renders irrelevant any evidence on actual or potential rates of return or inflation.  In order to entertain the appellants’ approach, courts would have to enquire into the potential rates of return and inflation with the assistance of expert actuarial evidence, compare it with the statutory rate to determine whether the victim is likely to achieve a higher rate than the one provided for by the statute, and then apportion any perceived overpayment between the victim and the defendant.  This kind of inquiry is exactly the one that the legislature allowed the parties to avoid by adopting a mandatory deeming provision.  With the deeming provision, parties no longer need to adduce evidence on rate of return.  Assessment of management fees should not be an indirect and incidental means of reverting to costly complex evidence.

13                               The four-level classification of the Commission seems to be guided by the same preoccupations (Report on Standardized Assumptions, at p. 51):

Much court time could nevertheless be saved if the amount of the fee could be readily linked to the amount and duration of the award for future loss, without the need for re-inventing the wheel through evidence and argument in each case.

14                               The goal sought by the Commission was obviously to simplify the evidence and reduce court costs.  It would therefore be counter-intuitive to allow a party to proceed exactly in the way sought to be avoided by admitting evidence regarding the rate of return likely to be earned with the assistance of investment advice.

15                               In this case, both parties appear to have agreed before the Court of Appeal that an extension of Level 4 value is not inappropriate.  In my view, it is not now open to the appellants to seek to avoid the effect of the statutory rate nor the use of the classification recommended by the Commission by claiming a reduction in the fees award.

16                               A policy choice was made by the legislature to allow the parties to avoid the hurdles of evidence on rate of return.  In addition to enhancing trial efficiency and saving valuable court time, it is likely that the important concerns of consistency in compensation awards and fairness to victims also motivated the imposition of a deemed rate. The Court must respect this policy choice and refrain from mixing deemed return with potential return achieved.  Therefore, not only is the appellants’ argument lacking an evidentiary basis as found by the Court of Appeal, but it is also unfounded in law.  I now turn to the second question.

II.    Basis for Calculation of the Management Fees and Tax Gross-up

17                               The appellants argue that the amount on which tax gross-up and management fees should be calculated is the amount that is closest to the actual amount the victim will eventually invest.  As a consequence, deduction should be made for known expenses in order to identify the income-producing fund actually available.

18                               In fixing the award of damages in a tort action, courts rely on many principles. Three of them are of particular relevance to this case. First, there is the principle that damages are assessed and not calculated. The second principle is finality, according to which courts award a one-time lump sum of damages. Finally, the third principle is that the plaintiff has property over the award.  I will examine each of these principles and explain how they affect the disposition of this case.

19                               First, damages are assessed and not calculated.  Since it is impossible to calculate the exact amount of money that will be needed in the future, courts have to rely on actuarial evidence: Andrews v. Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229, at pp. 236‑37.   Actuarial evidence is itself based on experience and not on individual circumstances.  Future costs and loss of future earnings are amounts that are estimated because, by definition, they are not yet incurred or earned.  Although this hypothesis may seek to simulate reality, it remains notional.  Courts can only provide the victim with an adequate amount to cover the loss caused by the defendant.  There is no assurance that the amount will cover the actual costs of care that become incurred nor is the defendant guaranteed that he or she is not disbursing more than the strict minimum that becomes necessary to cover the victim’s loss.  In assessing damages, courts do not take into consideration what victims actually do with the award.  The fact that the respondent here had to wait for almost five years before management fees were assessed creates an atypical situation, but these exceptional circumstances should not justify a departure of the usual rules. Notional amounts cannot be mixed with actual amounts when assessing future damages.

20                               Secondly, damages are awarded in a lump sum in order to respect the principle of finality: Andrews, supra, at p. 236.  According to this principle, there has to be a clean break between the parties.  It would be inconsistent with the principle of finality to authorize repeatedly revisiting the amount assessed as full and fair compensation at trial whenever new evidence became available.  During the prospective period for which damages are awarded, the hypothesis may prove overly pessimistic for a period but overstated for another period.  The award should not be reassessed every time reality reveals a discrepancy with the forecast.  Therefore, monitoring the respondent’s use of the award or adjusting it with her changing circumstances would create more uncertainty than the present rule, would undermine the purpose of the statutory discount rate, and would improperly interfere with the third principle of damages relevant to this case. 

21                               This final and most important principle is that the plaintiff has property of the award.  The plaintiff is free to do whatever he or she wants with the sum of money awarded:  Andrews, supra, at pp. 246‑47.  On this issue, I am in complete agreement with the reasons delivered by Finch C.J.B.C. in the Court of Appeal.  He held that it is not relevant to inquire into how the plaintiff chooses to spend the amounts recovered for the assessment of damages for management fees and tax gross-up.  Consequently, management fees and tax gross-up are to be assessed based on the first assessment of damages and not according to the amount available for investment as eventually found at some indeterminate future date.  In other words, the appropriate basis for calculation is the one determined at trial, without considering what happens thereafter.  It is improper for a trial judge to consider what the plaintiff does with awarded damages.  As Dickson J., as he then was, wrote in Andrews, supra, at pp. 246‑47:

It is not for the Court to conjecture upon how a plaintiff will spend the amount awarded to him. There is always the possibility that the victim will not invest his award wisely but will dissipate it. That is not something which ought to be allowed to affect a consideration of the proper basis of compensation within a fault-based system. The plaintiff is free to do with that sum of money as he likes.

22                               This is the principle which the Court of Appeal applied in the case at bar (at paras. 58‑59):

In my respectful view, how the plaintiff may choose to spend the amounts recovered on her claim for damages is not relevant to the assessment of damages for management fees and tax gross-up. . . .

. . . How or when the plaintiff may choose to spend her damages after judgment has been given has never been a concern the courts would consider in making damage awards. The awards for management fees and tax gross-up are designed to ensure that the damages assessed for future losses are adequate. The actual expenditure of damages after recovery is not relevant to that assessment.

23                               In the case at bar, the victim chose to pay her legal fees and buy a house.  There is no principled reason why these expenses should be deducted from the award for costs of future care rather than assuming that other sources can bear the cost. This is particularly important in the case of damages awarded for costs of future care. This head of damages is aimed at ensuring an adequate level of care to a person injured as a result of tortious conduct.  To reduce those damages would defeat the very purpose of ensuring decent care and full compensation to a victim.  Even if it was demonstrated that legal fees were paid with the future costs award because no other funds were available, such a deduction would be irrelevant and inadmissible.  The goal of compensation is to provide the plaintiff with the means to be placed in the position she would have been in had the defendant not committed a tort against her.  The plaintiff’s future actions do not alter the court’s duty to meet this objective. 

24                               Moreover, an impecunious person should not be penalized for using part of the damages to accord with his or her priorities.  On the reasoning advanced by the appellants, a victim in a position to pay his or her legal fees with personal money would always receive the amount required for tax gross-up and management fees whereas an impecunious person would always receive a reduced amount.  This distinction is repugnant to the law. The damages are part of the plaintiff’s assets as much as any other sum of money.  As a matter of fairness, every victim must be compensated on the same basis and no distinction should be made between a plaintiff who can pay out of savings and a plaintiff who has to resort to the damages awarded to pay legal fees.

25                               In light of the above, the appellants’ arguments cannot be accepted.  No reduction of the management fees is allowed and the amounts spent by the respondent on her legal fees and for the purchase of a house should not be deducted from the amount upon which management fees and tax gross-up are calculated. 

III.    Conclusion

26                               Accordingly, as was decided from the bench on December 2, 2003, the appeal is dismissed.  In accordance with rule 37(23) of the Rules of Court, B.C. Reg. 221/90, as amended, the respondent is awarded costs up until the date of the formal offer in 1994 and double costs from that date.

Appeal dismissed with costs.

Solicitors for the appellants:  Borden Ladner Gervais, Vancouver.

Solicitors for the respondent:  Gordon & Velletta, Victoria.