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.