FOX SOUND AND ELECTRONICS PTY LTD v MELLIOS SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, PRIESTLEY and SHELLER JJA 6 June 1995, 26 June 1995 [1995] NSWCA 153 WORKERS COMPENSATION — weekly payments — post injury agreement with employer loss of earnings — s66 — permanent back injury — application of statutory formula whether award too high In March 1990 the respondent, Con Mellios sustained injuries to his back in the course of his employment with the appellant, Fox Sound and Electronics Pty Ltd. By a document signed on 2 July 1990, the appellant agreed to provide the financial assistance necessary to sustain the respondent's full salary, while the respondent was waiting for compensation payments, on the understanding that the money was to be recovered in due course. S40 of the Workers Compensation Act 1987 (WCA) provided that the weekly payment of compensation to a worker in respect of partial incapacity for work was not to exceed the difference between the amount the worker probably would have been earning but for the injury and the weekly amount the worker was earning or was able to earn after the injury. His Honour found that the respondent's probable weekly earnings but for his injury were $580. He considered that the amount which represented the payment for the value of the work the respondent was performing after the injury was only $380; JD Ludowici v Cutri (1992) 26 NSWLR 580 distinguished. Any amount above $380 received by the respondent his Honour treated as money the appellant had lent him. He used the difference of $200 per week to calculate weekly payments of compensation to be made under s40(1) of the WCA. The appellant challenged this conclusion on the basis that the money the respondent received after his injury from the company represented earnings. Thompson v Armstrong and Royse Pty Ltd (1950) 81 CLR 858 at 623 per Kitto J referred to. Held: There is no basis to challenge his Honour's finding that there was a contract of loan and that to the extent to which payments had been made by the appellant to the respondent of the $200 per week, representing the difference between his probable earnings but for the injury and his actual earnings, these amounts were paid by way of loan and were presumably recoverable. (per Mahoney JA) The agreement of 2 July 1990 should not be accepted as establishing what the respondent was able to earn for the purposes of s40 of the WCA. The appellant also challenged his Honour's application of the statutory formula in s66 of the WCA. In applying the formula his Honour did not say first that he found that the severity of the impairment indicated that the respondent should be awarded an amount which was three quarters of that awarded for a most extreme case and then fix 45 as the reasonably proportionate percentage. This criticism was no more than textual and is unfounded. The appellant further claimed that three-quarters of a most extreme case was so high as to be outside the range appropriate to the respondent's injury. In light of the medical reports and the evidence of the parties, his Honour did not err in the assessment made under s66. ORDER Appeal dismissed with costs. Mahoney JA I agree with the judgment of Sheller JA. 2 UNREPORTED JUDGMENTS In relation to the agreement of 2 July 1990 upon which the appellant placed reliance, I am of opinion that the agreement did not constitute a simple agreement as to the wages to be paid for work done within the entitlement of s40 of the Workers Compensation Act 1987. The payments to be made to the worker pursuant to the agreement were payments "to cover annual remuneration shortfalls for work time lost because of his back injury and...". I do not think that the agreement, though relevant, should be accepted as establishing what the worker is able to earn for the purposes of s40. The appeal should be dismissed with costs. Priestley JA I agree with Sheller JA. Sheller JA INTRODUCTION The appellant, Fox Sound and Electronics Pty Ltd, appeals from a decision of Manser CCJ of 18 May 1993. His Honour made an award in favour of the respondent, Con Mellios, in which he ordered the appellant to pay the respondent, on the basis of partial incapacity, weekly compensation at various rates from 4 July 1990 and continuing. He further ordered the appellant to pay the respondent $40,747.50 in respect of permanent impairment of his back. The appeal is against those parts of his Honour's award. The respondent was born on 21 September 1942 in Greece. He came to Australia at about the age of 11 and trained in mechanics and electronics completing trade courses. In 1974 or 1975 he entered into an arrangement with his brother Aristotle, whereby they worked in and eventually took over a business known as Fox Sound and Electronics. In about 1979 or 1980 the appellant was incorporated and the respondent and his brother became its directors and shareholders. Thereafter the respondent and his brother were working directors in the company. The respondent's "wages" consisted of weekly payments and a lump sum at the end of each financial year. Aristotle was paid in the same way. The appellant's business was installing public address systems in New South Wales and interstate. Woolworths was its biggest customer. The appellant designed the layout of the systems, determined what components should be installed, installed the cable and equipment, tested the equipment and maintained the equipment in case of a breakdown or failure. Although contractors were employed from time to time, for the most part the respondent and his brother did the work. For a period before the accident giving rise to this claim a nephew, George Mellios, assisted them. On 22 March 1990 the respondent suffered an injury to his back in the course of his employment. For the purposes of this appeal the details do not matter. The pain steadily increased and for a time he was not able to perform any work. It is not entirely clear when he returned to work but, after he had done so, on 2 July 1990 the respondent and his brother as directors of the appellant signed a handwritten document in the nature of an agreement between the appellant and the respondent. The terms of that agreement are important to this appeal. The document was as follows: "Due to already delayed Compensation Payments for expenses and current notification of the dispute lodged by the G.I.O. with the Senior Commissioner of the WorkCover Authority on Claim No 027/A1541677. We have taken into consideration and discussed the effects of the back injury obtained by Con Mellios during work on the 22nd of March 1990 with a particular aim of providing the financial assistance necessary to sustain his full salary. URJ FOX SOUND AND ELECTRONICS PTY LTD v MELLIOS (Sheller JA) 3 We the Company directors have reached agreement that during his illness, the Company will sustain and pay all entitlements of annual remuneration which would normally be due to Con Mellios by advanced salary until such time as he has fully recovered or such time as we can come to a more informed decision regarding his situation. Such advanced salary to Con Mellios is to cover annual remuneration short falls for work time lost because of his back injury and on the understanding that such money is to be recovered from Con Mellios in due course." From 2 July 1990 the appellant paid the respondent his pre-injury rate of remuneration up until the date of the hearing. That rate was the same rate as his brother, Aristotle, received. FINDINGS Manser CCJ found: (a) that after his return to work, the respondent did other than installation work except on one or two occasions; (b) that before the respondent's injury much of the administrative work was done by Aristotle and nothing had really changed thereafter; the respondent was more a technical person who amongst other things maintained and continued to maintain the appellant's vehicles; (c) that clearly the worker was no longer able to do some things of a physical nature which he did before his injury. His Honour said: "There seems to be no challenge to the view that the applicant has a profound disability." He suffered from a serious restriction upon his capacity to work especially to do the work he was doing before 22 March 1990. Section 40 In the form it took at the relevant time s40 of the Workers Compensation Act 1987 (the Act) provided as follows: "(1) The weekly payment of compensation to an injured worker in respect of any period of partial incapacity for work shall be an amount not exceeding the difference between - (a) the weekly amount which the worker would probably have been earning as a worker but for the injury and had the worker continued to be employed in the same or some comparable employment (but not exceeding [a stipulated amount]); and (b) the average weekly amount which the worker is earning, or is able to earn in some suitable employment, from time to time after the injury (but not exceeding [a stipulated amount]), but shall bear such relation to the amount of that difference as may appear proper in the circumstances of the case." LOSS OF EARNING POWER A great deal of the argument before Manser CCJ was about the approach which should be adopted to determine the respondent's loss of earning power. Particular reference was made to JD Ludowici v Cutri (1992) 26 NSWLR 580 in which this Court held that, where the worker is earning, the average weekly amount produced thereby is normally to be taken as the para(b) component of the s40 (1) equation. "It is only otherwise where the decision maker concludes that the worker is able to earn more than that sum in some suitable employment. Then, but then only, is a notional sum taken into account."; 593A per Kirby P. In the present case the evidence was that the respondent received approximately $35,000 per annum or $700 per week. The components of these amounts are not clearly identified but his Honour found that the respondent's 4 UNREPORTED JUDGMENTS probable weekly earnings, but for his injury, were, at all relevant times, $580. I can proceed on the basis that, if the weekly amount which the respondent was receiving from the appellant should be treated as an amount he was "earning' within the para(b), it was no less than the weekly amount which his Honour found the respondent would probably have been earning under para(a). Accordingly there would be no difference to attract a payment of compensation under s40 (1) of the Act. However his Honour came to the conclusion that the respondent was earning the sum of only $380 per week. This amount he fixed by reference to what would have been paid to someone who performed the sorts of work that the respondent was performing, being essentially clerical and some processing work, together with the odd service call and the occasional installation job. The difference of $200 per week was the amount on which his Honour calculated the weekly payments of compensation. His Honour felt able to distinguish the Court's decision in Cutri. He said: "In a case like this, where an agreement exists to supplement the worker's earnings by what is in effect a loan, it cannot be said, it seems to me, that the worker is 'earning' the amount which represents the payment for the value of the work that he is performing, plus the supplement given by the employer. This is so because the worker would not, in that case, be 'earning' the full amount; he would be earning the lesser amount and had the benefit of the extra payment." His Honour treated any amount received by the respondent above $380 per week as money the appellant had lent him. APPEAL The appellant challenged this conclusion. It relied upon the following dictum of Kitto J in Thompson v Armstrong and Royse Pty Ltd (1950) 81 CLR 585 at 623: "....it is true to say, in a case of partial incapacity, that wages and compensation are mutually exclusive, not in the sense that the receipt of wages necessarily proves capacity for work and therefore negatives a right to be paid compensation, but in the sense that post injury wages reduce the amount of compensation payable because the weekly compensation must not exceed the difference between the worker's average weekly earnings before the injury and his average weekly earnings after the injury." The appellant conceded that money it lent to the respondent to tide him over while he was awaiting compensation would not be brought in as part of the calculation under s40 (1). Thus the question resolved into one whether the money the respondent received after his injury from the company was in whole or in part a loan or wholly represented earnings that is to say something gained by service or labour or which he was entitled to receive under a subsisting contract of employment. EVIDENCE Before returning to consider the terms of the agreement some reference needs to be made to the evidence. In examination in chief the respondent was asked about a conversation with his brother and a question he put as to how long "can you support me?". His brother replied: "Well, until such time as your case comes through the insurance company and we get some insurance money back". After that the agreement was signed. The respondent gave the following evidence about the period thereafter: "Q. Mr Mellios, since the time of that agreement have you continued to be paid a weekly amount. A. From the company? Q. Yes. A. Yes. URJ FOX SOUND AND ELECTRONICS PTY LTD v MELLIOS (Sheller JA) 5 Q. Have you continued to receive a lump sum amount at the end of each financial year. A. Yes. Q. Are you and Aristotle Mellios receiving the same amounts. A. Yes. Q. That agreement, was that written in your hand or your brother's hand. A. In my brother's hand. Q. Have you repaid any moneys to the company since the time of that agreement. A. Not to date. Q. So far as you are concerned when will you be, if at all, repaying moneys. A. I estimate it in approximately another 6 months, possibly at the end of this financial year. Q. What moneys are you repaying. MR MORRIS I am sorry, he said he was not repaying any money. HIS HONOUR Yes, he said he has not made any to date. MR CATSANOS Q. What moneys do you intend to repay. A. As - the bulk of it, I hope, or as much of it as I can. I may have to rediscuss the whole issue with my brother and just see - calculate how much money is owing and how much time I might need to pay it. Q. What criteria will you use to calculate how much money is owing. A. The criteria we will use is the actual productive work that I'm actually worth to the company since payments stopped from the insurance company. Q. Do you remember the question. A. Yes. What you were wanting to know is how we base our estimates on what I owe the company, would that be correct? Our estimates will be based on the amount of productive work that I have been able to do for the company rather than the amount of hours that I've actually spent in the office, if you like. Q. Well, once you have ascertained the amount of productive hours that you have actually done for the company what will you do then. A. We will come up with a figure of x-amount of dollars. Q. And what will that represent. A. It will represent money that has been paid to me for work that I haven't done. HIS HONOUR Right, well, I think I understand that formula, but just so that we get it on the record, Mr Catsanos, does that mean that they will deduct from the amount which has been paid to the applicant pursuant to this agreement the amount which represents payment for the productive work that he has done and the balance will be the amount that he repays, is that as I understand it? MR CATSANOS Q. That is as I understand it. A. Yes, I think his Honour put it a lot better than I could. Q. Have you kept a record of the hours that you have actually worked since July 1990. A. I kept track of records of roughly how much productive work I'm doing at intervals, if you like. Q. Since July 1990 to the present time have you worked full time or part time. A. Theoretically speaking full time, I go into the office and although I go in late by choice I finish late, but I might be in the office for 10 hours but my productive work may only be 4 hours. Q. What do you mean by that. A. Well, by that I mean, can I bring you a typical example, a recent one? 6 UNREPORTED JUDGMENTS Q. If you feel you need to. A. One of the vehicles looked like having to go on interstate trip to do - or not interstate, cover a job to do some work, so apart from taking whatever service calls I could which were basically the easier ones, like a faulty microphone or a faulty amplifier, something where I didn't have to lift ladders, climb up the ceiling, under the floor, under a checkout or something, I undertook to do a complete check on this particular vehicle. Now, off memory I think I had the vehicle off the road for about 6, 7 hours but I spent an hour on it. I went to lie down for about an hour, I went back to it for another hour. I don't recall exactly just what sequence it was but if I felt that I was getting to a stage where I was getting so sore that I was going to bugger myself right up I would take a break and have a decent rest. There were beds in the house so I could in fact lie down quite comfortably, and I'd go back to the job. So in that sense I spent 6 hours doing a job that I would normally do in 1 and a half, maybe 2 hours, prior to the accident. Q. Has there been work since the accident that you have not been able to do. A. Yes, quite a bit." In cross examination the respondent said that the agreement was made up so that he could cover his own financial situation, irrespective of whether the insurance company paid. "If I had received any money up to date from the insurance company, I would have made the first down payment on the repayment of this agreement." Aristotle also gave evidence. He said that from the start the respondent and he agreed to share equally in wages. "In other words we received the same amount and we agreed that to keep us in operation without having to borrow large sums of money, we would only give ourselves a nominal figure per week and at the end of the financial year then we would compensate for the loss." This compensation was by way of a lump sum. To a certain extent it was affected by the profit the appellant made in the year. Asked about the receipt of dividends he said: "In past years we did but I can't recall them being of any huge amounts of anything like that." Asked if he had to employ his brother as an employee for the work he did after the accident what he would pay him he said approximately $350 per week. If not obliged to pay him a minimum wage that would be reduced to about $180 - $200 per week. He said that the respondent approached him about how he was going to support himself while he was waiting for compensation payments. However he had to think also of himself and how the respondent was going to pay the appellant back. "It was in my mind that when the workers compensation payments were made, they would go to Con and Con would repay the company whatever amount was owing...My main objective in this letter was to make sure that the money advanced to Con would be paid back to the company." He gave the following evidence in cross examination: "Q. As you understand your agreement with Mr Mellios, if you're successful in these proceedings, in receiving payments of weekly money, that will be paid into the company accounts is that right so as to offset the past arrangements, so it can fit in with your understanding with him, is that right. A. Well I would have - would have expected him to do that himself anyway to pay the balance that was owing to the company. I wouldn't expect all the company - all the amounts to be paid into the company of course - I'm not after a major profit out of Con. Q. But as you understand your understanding of him, as reflected by this agreement, payments of workers compensation whatever he gets through the weekly benefit will be paid into the company to satisfy the balance - to return the balance is that right. A. Portion of it yes. URJ FOX SOUND AND ELECTRONICS PTY LTD v MELLIOS (Sheller JA) 7 Q. What portion. A. Well I don't know you' re getting me into a situation here where - how can I answer this. I mean I can work out how much Con owes the company on a basis of let's say 50 - 60 per cent or whatever and say to him well, I have paid him for so many weeks your full wages, and that is the balance you owe the company now. That's the only way I can work it out." THE JULY AGREEMENT The agreement of 2 July 1990 states that its particular aim is to provide the financial assistance necessary to sustain the respondent's full salary. This, in the context that the appellant would continue to employ the respondent, suggests making up the difference between what he was earning or able to earn from the appellant after the accident and what he would have earned from the appellant but for the injury. Consistent with this stated aim, the directors agree that "during his illness" the company will sustain and pay all entitlements of annual remuneration which would normally be due to the respondent by advanced salary until such time as he has fully recovered or such time as we can come to a more informed decision regarding his situation. I think this can fairly be construed as an agreement to pay an amount which consists in part of earnings and in part of sustenance. The agreement goes on to say that such advanced salary is to cover annual remuneration short falls "for work time lost because of his back injury". This suggests payments for periods when ordinarily he should have been working but was not able to work because of his back injury. Finally the agreement expresses the understanding that such moneys are to be recovered from the respondent "in due course". Probably this means on demand when the respondent has fully recovered or a more informed decision can be reached about his situation. CONCLUSION Although the first paragraph of the agreement refers to delayed compensation and a dispute with the Government Insurance Office, the duration of payments and the time for repayment is not expressly related to the receipt of compensation payments from the insurer. However if compensation payments are received, the amount the appellant agreed to pay would be reduced accordingly. The aim of the agreement is to provide the financial assistance necessary to sustain the full salary. Moreover I would be inclined to think to that extent, moneys already paid could be recovered. If that is right, the contract may be correctly described, in part at least, as a contract of loan of money being a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise, express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest. See generally Chitty on Contracts, 27th ed, Specific Contracts, vol 2, 36-202. However that may be, I am satisfied that part of the moneys received were not moneys received by the respondent in return for his service or labour or under a subsisting contract of employment. If the respondent had been or become totally incapable of performing any work for the appellant he would have been entitled under the agreement to an amount representing what, but for his injury, would have been his entitlements of annual remuneration. The agreement is not conditioned upon his continuing to do work. Indeed it is designed to cover short falls for periods when he is not working because of his back injury. The agreement may assume the continuance of a contract of employment but it also assumes that the respondent would not in the circumstances be entitled under the 8 UNREPORTED JUDGMENTS contract of employment to the full remuneration referred to. In short, the agreement is there to make up for money that the respondent is not earning. It may be that the agreement was not adhered to or varied by the conduct of the parties. Both the respondent and Aristotle anticipated repayment by the respondent to the appellant of some money in some circumstances. His Honour found that there was a contract of loan and that to the extent to which payments had been made by the appellant to the respondent of the $200 per week, representing the difference between his probable earnings but for the injury and his actual earnings, these amounts were paid by way of loan and, presumably, were recoverable. This finding was open to his Honour on the evidence and I would not disturb it. In addition I am not satisfied that to the extent of that difference the amounts received should be treated as money the respondent was earning". I would reject this part of the appeal. S66 AWARD His Honour said that so far as the respondent's claim under s66 was concerned "T have had regard [to] the whole of the medical evidence and [his] own evidence, and find when I compare him with a most extreme case, that he falls within the range of 0 to 60 per cent, at the level of 45 per cent. That is, he is three-quarters of a most extreme case. The amount prescribed by s66 (1) at the time of the worker's injury was the sum of $90,550. Consequently, the applicant is to be paid 45 per cent of the sum of $90,550. This is the course that I have always adopted and it is the course which I understand Jones Bros Bus Company Ltd v Baker, (1992) 26 NSWLR 322, requires me to do; a one step exercise, and as Clarke JA said in that case, the amount which the applicant gets is the amount determined by his position on the scale 0 to 60." The appellant levelled criticism at the way his Honour applied the statutory formula. It relied on the following passage from the judgment of Clarke JA in Jones Bros Bus Company Ltd at 341-2: "Where a claim is made under s66 of the Workers Compensation Act 1987 (the Act) in respect of the permanent impairment of the back the combined effect of s66 and Note (a) to the Table is such that if the applicant's impairment is found to constitute 'a most extreme case' he or she will be entitled to 60 per cent of the sum set out in s66 (1) (called the maximum percentage). In other cases, that is, in cases in which the impairment of the applicant's back does not constitute a most extreme case, the applicant will be entitled to that percentage of the sum set out in s66 (1) which is reasonably proportionate to the maximum percentage. The expression 'reasonably proportionate' identifies the broad nature of the inquiry. The court is not concerned to undertake the highly artificial, and possibly meaningless, task of identifying a percentage degree of impairment. Once it determines that the subject impairment does not represent 'a most extreme case' it is concerned to determine what percentage of the sum set out in s66 (1) should, in the light of the severity of the impairment, be regarded as reasonably proportionate to the maximum percentage. If, for instance, it concluded that the severity of the impairment indicated that the applicant should be awarded an amount about half that awarded for 'a most extreme case' it would fix 30 per cent as the reasonably proportionate percentage. Obviously, what percentage should be awarded in any particular case would depend upon the trial judge's evaluation of the severity of the impairment and its proportional relationship with 'a most extreme case'. It should be emphasised, however, that the percentage to be URJ FOX SOUND AND ELECTRONICS PTY LTD v MELLIOS (Sheller JA) 9 awarded must be reasonably proportionate to the maximum percentage awarded for 'a most extreme case' and that it is not open to a court to disregard that instruction and to award a particular sum simply as a matter of discretion." Applying this formula the only criticism seems to be that his Honour did not say first that he found that the severity of the impairment indicated that the respondent should be awarded an amount which was three-quarters of that awarded for a most extreme case and then fix 45 per cent as the reasonably proportionate percentage. This criticism seems to be no more than textual and is unfounded. However the appellant said that three-quarters of a most extreme case was so high as to be outside the range appropriate to the respondent's back injury. The respondent took us to passages in the evidence which amply support his Honour's conclusion, unchallenged at the hearing that the respondent had a profound disability. Part of the evidence was about the pain that the respondent suffered. The appellant pointed out that compensation for pain and suffering fell within s67 of the Act. However having looked at the medical reports to which we were referred and the passages in the evidence of both the respondent and his brother I am not persuaded that his Honour erred in the assessment he made under s66. I would reject this part of the appeal. In my opinion the appeal should be dismissed with costs. Counsel for the appellant: CRR Hoeben Solicitors for the appellant: Dunhill Madden Butler Counsel for the respondent: JW Catsanos Solicitors for the respondent: Cutler Hughes and Harris