New South Wales Supreme Court CITATION : Hexiva Pty Limited & ors v Lederer & ors (2) [2007] NSWSC 49 HEARING DATE(S) : 20 December 2006 JUDGMENT DATE : 8 February 2007 JURISDICTION : Equity Division JUDGMENT OF : Brereton J DECISION : Damages allowed as interest calculated at historical market rate established by evidence for cash deposits until payment. Thereafter, statutory interest at prescribed rate allowed on damages. CATCHWORDS : INTEREST – award of interest as damages – interest rate – relevance of prescribed rate for interest on judgment debts - where on evidence market rate is significantly lower than prescribed rate for interest on judgment debts – whether statutory interest allowable on damages calculated as interest – held, it is. LEGISLATION CITED : (NSW) Civil Procedure Act 2005, s 100 (NSW) Uniform Civil Procedure Rules 2005 (NSW), r 36.7 Bushwall Properties Limited v Vortex Properties Limited [1975] 2 All ER 214; [1975] 1 WLR 1649 Eugenie Holdings Pty Ltd v Stratford (NSWSC, 12 November 1991, Giles J, BC9101436 Harvey v Rogers (1983) 32 SASR 247 Hobartville Stud Pty Limited v Union Insurance Co Limited (1991) 25 NSWLR 358 Hungerfords v Walker (1989) 171 CLR 125 CASES CITED : Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390 McBeath v Sheldon (1993) Aust Tort Reports 81-208 Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd & McAuley (1991) 58 SASR 184 R W Miller & Co Pty Ltd v The Ship Patris, [1975] 1 NSWLR 704 Serisier Investments Pty Ltd v English [1989] 1 QdR 678 Sheldon v McBeath (1993) Aust Tort Reports 81-209 Hexiva Pty Ltd (first plaintiff) Robert Wechsler (second plaintiff) PARTIES : Katie Wechsler (third plaintiff) Hexiva Pty Ltd as Trustee Katie Wechsler Family Trust (fourth plaintiff) Paul Lederer, Richard Slazenger & Douglas Hamilton as Executors & Trustees of the late Andrew Lederer (first defendant) Michael Du Maurier (second defendant) FILE NUMBER(S) : SC 2626/00 COUNSEL : Mr Sahade (plaintiffs) Mr Hodgson (second defendant) SOLICITORS : Oliveri Legal Pty Limited (plaintiffs) PricewaterhouseCoopers Legal (second defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRERETON J Thursday 8 February 2007 2626/00 Hexiva Pty Limited & Ors v Lederer & Ors JUDGMENT 1 HIS HONOUR: In a judgment delivered on 30 October 2006 [Hexiva Pty Ltd v Lederer [2006] NSWSC 1129] ("my principal judgment"), with which this judgment should be read, I concluded that the Fiala Estate was liable to pay Hexiva damages for breach of Mrs Fiala's contractual obligation to use her best endeavours to pay the debt referred to in the December 1994 agreement, by instalments constituted by what was left available to her from each distribution to her of her share in the profits of the George Street Partnership and the Lederer-Fiala Partnership, as and when she received such distributions, after provision for payment of her taxes and about $50,000 per year for her own purposes. On 3 November 2006, Short Minutes were brought in to give effect to that judgment, and I made orders, relevantly as follows: 1. Declare that in breach of the December 1994 agreement, Mrs Fiala from February 1995 failed to use her best endeavours to pay the debt as required by the agreement, by instalments constituted by what was left available to her from each distribution to her of her share in the profits of the two partnerships, as and when she received such distribution, after provision for payment of her taxes and about $50,000 per year for her own purposes. 2. Order that an inquiry be held as to the amount of the damages which Hexiva has suffered by reason of the breach referred to in order 1. 3. Give judgment that the Fiala Estate pay to Hexiva the amount certified upon such inquiry. 4. Order that until further order the inquiry proceed before me. 2 On the inquiry as to damages, all parties accepted that the loss for which Hexiva is entitled to be compensated is the loss of use of the difference between the payments which Mrs Fiala ought to have made (as set out in my principal judgment at [55]) and the (later) payments which she and her estate actually made (as set out at [56]). Both parties adopted as their starting point the schedule in the principal judgment (at [55]), as to what payments Mrs Fiala using her best endeavours to do so could have made and when. As the judgment takes effect from 3 November 2006, when it was given, that is the appropriate date to which damages should be assessed. 3 Hexiva contends that its damages amount to $376,754.42 (as at 1 November 2006), being interest calculated at the rates prescribed by the rules of court for unpaid judgment debts, from the date on which each payment could and should have been made until the payment was made, and then on the outstanding balance of interest from 16 May 2001 (when all the principal was paid) until 1 November 2006. The Fiala Estate, on the other hand, while it does not dispute the calculations which produce that result, contends that Hexiva's damages should be calculated as interest at the (significantly lower) historical rate obtained from the Reserve Bank of Australia for retail deposit and investment rates for cash management accounts for amounts of $50,000 or more until the principal was paid in full on 16 May 2001 (which amounts to $105,004.09), and thereafter statutory interest at the prescribed rates until judgment (a further $52,763.84), producing a total of $157,767.93 as at 1 November 2006. 4 The fundamental difference is one of principle, not calculation, namely whether interest should be calculated, as Hexiva contends, at the court judgment rates, or, as the Fiala Estate contends, at the historical cash management market rates. 5 (NSW) Civil Procedure Act 2005, s 100, relevantly provides as follows: 100. Interest up to judgment (1) In proceedings for the recovery of money (including any debt or damages or the value of any goods), the court may include interest in the amount for which judgment is given, the interest to be calculated at such rate as the court thinks fit: (a) on the whole or any part of the money, and (b) for the whole or any part of the period from the time the cause of action arose until the time the judgment takes effect. (2) In proceedings for the recovery of a debt or damages in which payment of the whole or a part of the debt or damages has been made after the proceedings commenced but before, or without, judgment being given, the court may include interest in the amount for which judgment is given, the interest to be calculated at such rate as the court thinks fit: (a) on the whole or any part of the money paid, and (b) for the whole or any part of the period from the time the cause of action arose until the time the money was paid. (3) This section: (a) does not authorise the giving of interest on any interest awarded under this section, and (b) does not authorise the giving of interest on a debt in respect of any period for which interest is payable as of right, whether by virtue of an agreement or otherwise, and (c) does not authorise the giving of interest in any proceedings for the recovery of money in which the amount claimed is less than such amount as may be prescribed by the uniform rules, and (d) does not affect the damages recoverable for the dishonour of a bill of exchange. … 6 Under s 100(2), interest may be awarded on moneys paid after proceedings are commenced but before judgment [Victorian Work Cover Authority v Esso Australia Limited (2001) 207 CLR 520]. Otherwise, the section does not authorise the awarding of interest on sums paid before proceedings are commenced. 7 The effect of the statutory provision is that pre-judgment interest can be awarded on a claim for damages, whereas at common law interest could not be claimed on damages since there was no entitlement to the sum until judgment. But apart from the statutory provision, interest is recoverable as damages for late payment of a debt [Hungerfords v Walker (1989) 171 CLR 125]. As I explained in my principal judgment (at [4] and [41]), the claim pursued at the final hearing was in substance a claim for damages in the nature of interest for late payment of the principal debt, which had been sued for in the originating process, but the outstanding balance of which was paid in full at a relatively early stage, on 17 May 2001. However, in form it was brought as a claim for statutory pre-judgment interest. 8 Accordingly, in this case, an award of interest can be supported either by reference to s 100(2), or as damages. At least where the principal claim is for a debt as distinct from for damages, there is no conceptual difference between a claim for interest as damages, and a claim for statutory pre-judgment interest; the purpose of interest as damages and statutory pre-judgment interest is the same. Like interest as damages for late payment, statutory pre-judgment interest is also compensation for being kept out of the moneys recovered. As I sought to explain in my principal judgment (at [70]-[71]), the basis for an award of statutory pre-judgment interest is the defendant has had the benefit of not paying the money and the plaintiff the detriment of not having it, in a case of a debt which was quantified and which the defendant ought to have paid, as distinct from an unascertained liability for unliquidated damages [Bennett v Jones [1977] 2 NSWLR 355, 368–70; General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd [1975] 1 WLR 819, 836 (Lord Wilberforce), 841 (Lord Salmon)], as the defendant, rather than the plaintiff, obtains the time value of the money, unless an award of interest is made, and to fail to make an award of interest would confer an unwarranted enrichment on the defendant, by permitting it to retain the benefit of its having failed to pay when it ought to have done so. 9 However, courts have apparently adopted a far more stringent approach to what is required to prove a claim for interest as damages, than to claims for statutory pre-judgment interest. Whereas the cases on statutory pre-judgment interest suggest that loss from late payment will be assumed, the cases in which interest is claimed as damages for deprivation of money suggest that the plaintiff bears the onus of establishing the loss, which is not presumed to arise from the mere withholding of money [Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd & McAuley (1991) 58 SASR 184 (FC); Hobartville Stud Pty Ltd v Union Insurance Co Limited (1991) 25 NSWLR 358, 363-4 (Giles J); Walker v FAI Insurance Limited [1991] TasR 258; (1991) 6 ANZ Ins Cas ¶61-081, 77,279 (Wright J); Eugenie Holdings Pty Ltd v Stratford (NSWSC, 12 November 1991, Giles J, BC9101436); McBeath v Sheldon (1993) Aust Tort Reports ¶81-208 (Giles J); affirmed Sheldon v McBeath (1993) Aust Tort Reports ¶81-209 (NSWCA); State Bank of NSW Limited v Yee (1994) 33 NSWLR 618, 636]. In Hobartville Stud Pty Limited v Union Insurance Co Limited (1991) 25 NSWLR 358 Giles J (as his Honour then was) held that the determination of a claim for damages for loss of use of money required investigation of the facts underlying the claim and that the court cannot simply award interest as damages without such investigation (at 363-364): In my view the plaintiff's submission misconceives the nature of damages for loss of use of money. The references to general damages do not invoke an assessment analogous to the award of damages for pain and suffering: they distinguish damages within the first limb of Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145 from damages within the second limb. It still remains necessary to undertake a factual investigation into the loss suffered through being held out of the money. At the end of the day it may be determined that market rates of interest are the appropriate measure of the loss, but that is not necessarily so. Whether the plaintiff would have made a profit from the use of the money withheld from it, and the amount of the profit, must be determined on the evidence, and there is not an automatic allowance of interest upon the money withheld. Apart from being required by principle, this is in accordance with what was done in Hungerfords v Walker at first instance and in the Full Court (see at 133-137), the approach of the Full Court being endorsed by the majority in the High Court (see at 148-151). In the High Court, Mason CJ and Wilson J referred (at 151) to "… an examination, based on facts and inferences arising from inadequate materials, directed to the ascertainment of the loss suffered personally by the respondents", and Brennan J and Deane J referred (at 152) to the assessment of compensation for loss of use of money by reference to (among other things) the rates of interest paid upon borrowings which would probably have been avoided, retired or offset but for the overpayments of which the respondents complained. These and other passages demonstrate that the plaintiff's loss and its quantum are to be found as a fact and assessed on the evidence, not assumed from the withholding of the money and automatically assessed by the application of current market rates of interest. 10 Hobartville involved an application for leave to amend a claim to add one for damages for the loss of use of money at a late stage, in which the plaintiff contended that no further hearing was required, having tendered a letter setting out term deposit rates over the relevant period, but the defendant indicated that it wished to investigate the financial affairs of the plaintiff and cross-examine witnesses to show that there was no loss, or that if there was it should be measured in some way other than commercial rates of interest. It was in that context that Giles J made the observations referred to above about the need for such a claim to be proved. In the present case, there has been an inquiry as to damages and such evidence as the parties wish to tender on that subject has been tendered. 11 Typically those cases involved claims for interest in excess of what would be recoverable as statutory prejudgment interest. In Hobartville, the claim was for interest as damages, over and above the interest recoverable under (CTH) Insurance Contracts Act 1984, s 57(3), which was allowed in any event. In McBeath v Sheldon, the plaintiff recovered statutory pre-judgment interest, Giles J referring to the observation of Samuels JA in Bennett v Jones (at 381) to the effect that it was important that awards of interest be approached "in a broad and practical way, without striving for theoretical satisfaction in a field which ought primarily to be governed by pragmatic solutions", and that "It would be no service to the expeditious decision of cases of this kind if a great deal of time were spent in contriving sophisticated answers to queries which can be adequately and fairly dealt with by realistic approximations". 12 In my view, therefore, the apparent difference in the courts' approach to the two types of claim for interest is explicable on the basis that, while loss will be presumed from deprivation of money due, so as to justify an award of simple interest from when the money became due until it is paid, proof of loss will be required where a plaintiff seeks to recover compensation for losses arising from the deprivation of money in excess of simple interest from the time when payment ought to have been made. 13 This case is in the former category. In addition, Dr Weschler has deposed that had Mrs Fiala made timely payments the moneys would have been used to further Hexiva's real estate investments, in particular the acquisition of properties in Derby Street, Silverwater. Moreover, on 22 June 1994, Dr Weschler had sent a letter to Mr Vickers in which he wrote inter alia: 1. The logic fails as it assumes that our investment strategy lies with the cash management funds. On the contrary it is our demonstrated intent to purchase real estate to the limit of our borrowing capacity. The imposition of this loan through, I contend, the negligence of others denies us that opportunity. … 8. Our ability to invest in real estate is severely prejudiced by the denial of the use of our cash resources. … 14 I accept that Hexiva suffered damage from the delay in payment by Mrs Fiala and her estate of the debt. It is a reasonable and proper inference that, had it had available to it the moneys which ought to have been paid in a timely manner, Hexiva would have applied them either to reduction of its borrowings, or by way of investment which would have generated a return. That is sufficient to justify the award of simple interest. Moreover, the evidence establishes that Hexiva was engaged in investment, in particular in real property. 15 While I can infer that there was some loss, its precise quantification is more difficult. While the argument tended to focus on whether the claim was one for statutory interest or one for interest as damages, the essential issue – which arises however the claim is characterised - is, what is the appropriate interest rate. 16 The prescribed rates for interest on judgment debts do not apply, at least directly, to prejudgment interest under s 100: they are prescribed only for the purposes of Civil Procedure Act, s 101, which relates to interest after judgment [CPA, s 101(7), (NSW) Uniform Civil Procedure Rules 2005, r 36.7]. Where no rate is prescribed for pre-judgment interest, the starting point is the average commercial rate for the relevant period [Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97, 103]. However, even though they have no statutory force in respect of claims for prejudgment interest under s 100, there is a conventional practice of adopting the rates prescribed for post judgment interest, without the necessity for calling specific evidence, in the absence of reason to do otherwise [Smallacombe v Lockyer Investment Co, 574; R W Miller & Co Pty Ltd v The Ship Patris [1975] 1 NSWLR 704]. In The Ship Patris, Sheppard J, exercising the admiralty jurisdiction of the court which always had power independently of statute to award interest, held (at 718) that the (then) judgment rate of 10% bore sufficient relation to commercial reality – being below the then bank overdraft rate but higher than the rate obtainable for money on short term investment account – to be adopted as a basis for uniformity, and that in ordinary circumstances interest should be awarded - both in the commercial list and in the admiralty division - at that rate, so as to indicate that there was a settled practice in relation to the question of interest. In Smith v In Shoppe Pty Limited [1976] 2 NSWLR 175, Holland J, giving weight to the desirability of generally applying a uniform rate in cases before the court, thought that the then court rate of 10% on judgments was not so far out of keeping with the commercial reality as to persuade him to decline to apply it for the prejudgment period. In Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390, the Court of Appeal considered that the commercial rates prescribed under then Supreme Court Rules Part 40 r 7 were an appropriate basis for prejudgment interest. 17 These proceedings were instituted on 27 May 2000, but not served on the Fiala Estate until late January 2001. When they were commenced, the outstanding balance of the principal debt was $475,000, which was paid by the Fiala Estate to Hexiva on 17 May 2001. Any claim for statutory interest would be covered by s 100(2), and would be limited to a principal sum of $475,000 for the period from the time the cause of action arose "until the time the money was paid", namely 17 May 2001. Because of sub-s (2), interest could be claimed only the moneys outstanding when proceedings were commenced, not those which had been paid at an earlier point. Hexiva's calculation is flawed, for the purposes of s 100(2), because it includes a component (totalling $14,548.91) in respect of the payments that were made before proceedings were commenced. And because of sub-s (3)(a), interest on the sum so calculated from 16 May 2001 to judgment would not be authorised. If founded on s 100(2), Hexiva's entitlement calculated at the rate prescribed for judgment debts would be $236,203.93. 18 But while as a matter of practice the court is often guided in the award of pre-judgment interest by the prescribed rate, that is always subject to evidence, and even in respect of post-judgment interest, [CPA, s 101(2)], and more so prejudgment [CPA, s 100(1), (2)], evidence may show that another rate is appropriate. Although the calling of accountants and other experts to give evidence on applicable rates of interest in every case, or even frequently, has been discouraged [Serisier Investments Pty Ltd v English [1989] 1 QdR 678; Smallacombe v Lockyer, 575; Wheeler v Page (1982) 31 SASR 1, 7], it must be permissible to a party to call evidence to show that in particular circumstances a rate other than the statutory post-judgment rate is appropriate. 19 The only evidence on market interest rates is that tendered by the Fiala Estate, which establishes that the market rate on cash deposits was significantly lower than that prescribed by the rules. In distinction from The Patris, the prescribed rate – which includes an additional incentive element to encourage judgment debtors to pay promptly – does not appear to be in keeping with commercial reality during the relevant period. 20 The evidence does not show that Hexiva had any borrowings that it might have repaid, let alone what rates of interest it was paying and might have saved on them. Although the evidence suggests that Hexiva would have made further investments in real estate, it does not enable me to ascertain the likely return on any such investment. In my view, Hexiva has not proved that it would have derived a return at a better than market rate. The market rate on cash investments is indicative of the additional return Hexiva might have derived had the moneys been paid in a timely manner and invested. 21 Mr Sahade, for Hexiva, submitted that the historical market rate should not be applied, first because to do so would assume that the court rate was not fair, and secondly because to do so would reward non-timely payment, because the court rates would apply after judgment, had judgment been given earlier. However, The Ship Patris and the cases that follow it show that the conventional adoption of the judgment rate is founded upon evidence showing that it is a fair proxy for the average commercial rate. Even post-judgment, but more so pre-judgment, application of the court's rates is always subject to evidence. The contrary has been established in this case. Moreover, the court rate contains an incentive element to encourage judgment debtors to pay, and where interest is claimed as a measure of damages, there is less reason for inclusion of such an incentive element. There is more powerful reason for the adoption of an interest rate that includes an incentive element after proceedings are commenced, and a fortiori after judgment, when the obligation to make the payment has been resolved. 22 In my view, Hexiva has not established that it would have derived a return greater than the market rate evidenced by the Reserve Bank figures, which in my opinion, on the available evidence, provide the best indication of the loss Hexiva has suffered from deprivation of the moneys that the Fiala Estate ought to have paid it. Accordingly, and conformably with Mr Hayward's calculations, Hexiva's damages up to 16 May 2001, when the last of the outstanding principal was paid, amount to $105,004.09. 23 Although s 100 does not authorise the award of interest on interest, it does authorise the award of interest on damages (including where those damages are calculated as interest). The prohibition in s 100(3)(a) against awarding interest on interest does not apply where the judgment is really an award of damages, even though the amount is calculated by reference to interest that the plaintiffs may either have paid or forgone, so that where there is an award of interest as damages, and the plaintiff has been kept out of those damages pending trial, statutory interest may be awarded [Bushwall Properties Limited v Vortex Properties Limited [1975] 2 All ER 214; [1975] 1 WLR 1649, 1660; Harvey v Rogers (1983) 32 SASR 247]. 24 There is no reason why interest should not be allowed at Supreme Court rates from 17 May 2001 to judgment, and the Fiala Estate conceded as much. The award of interest at the higher rate prescribed for interest on judgment debts is more appropriate from that date, not long after the proceedings were served, since the "incentive element" becomes a more significant consideration after commencement of proceedings. That amounts to $52,763.84 to 1 November 2006, and $25.8914 daily thereafter, totalling as at 3 November 2006 the sum of $52,815.62. 25 Accordingly, I assess damages at $105,004.09. I allow interest on damages from 17 May 2001 to judgment at court rates, amounting to $52,815.62. 26 I certify that the amount of damages that the Fiala Estate is to pay under the judgment given on 3 November 2006 is $157,819.71. For more abundant caution, I direct that the judgment take effect from 3 November 2006. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.