The Guiding Principles of Management Fees: Contemporary Trends in British Columbia Litigation.
By: Tiffany Tsang and David M. Giroday
An award for management fees, when justified, can be granted by the court to compensate a plaintiff for the cost of hiring an investment manager to handle the investment of their damages award in a personal injury matter. These are more often awarded where the plaintiff has limited investment experience and in instances where a plaintiff receives a sizeable award. In such circumstances, a consideration of management fees by the court and counsel may be necessary.
In recent years, decisions out of the British Columbia Supreme Court have resulted in a line of case law where minimal awards were granted for management fees. As is indicated in the case of Riding-Brown v. Jenkins 2015 BCSC 1751, where $10,000 was awarded for management of a $1.2-million-dollar award, and Best v. Thomas 2014 BCSC 2487, where $25,000 was awarded for management of a $2.7-million-dollar award, even when the plaintiff receives a sizeable judgment the court may only grant a minimal management fee award. Ultimately, the necessity for and the size of these awards will be determined on a case-by-case basis that is driven by an assessment of the plaintiff’s unique life circumstance. As such, the amount of the award will largely be determined by the individual needs of the plaintiff in that particular case.
In appraising and awarding management fees the court will consider factors including:
These factors, coupled with the guiding legal principles and case law on management fee awards, provide insight into how the courts shall assess and consider these awards.
Guiding Legal Principles and Application by the Court
The Supreme Court of Canada’s decision in Mandzuk v Insurance Corporation of British Columbia  2 S.C.R. 650, establishes the guiding principles that the courts should follow in assessing awards for managements fees. In this case, the Supreme Court of Canada held that a mentally unimpaired quadriplegic lacked the education and ability to invest his future loss award in a way that would allow him to achieve the requisite rate of return. Mr. Justice Dickson, writing for the Court, held that:
2 We are all of the opinion that the appeal should be dismissed. The issue in this appeal is whether or not in serious personal injury cases an amount for an investment counselling fee should be awarded to the plaintiff. This is essentially a question of fact in each case. The only principle that appears to be applicable is that the defendant must take the plaintiff as he finds him, including his state of intelligence. Whether this is low by reason of the injuries complained of or its natural state, a management fee or an investment counselling fee should be awarded if the plaintiff’s level of intelligence is such that he is either unable to manage his affairs or lacks the acumen to invest funds awarded for future care so as to produce the requisite rate of return.
As further articulated by the Supreme Court of Canada, there are three criteria which must be satisfied for the award of management fees:
The Law Reform Commission of British Columbia’s, Report on Standardized Assumptions for Calculating Income Tax and Gross-Up and Management Fees in Assessing Damages (Vancouver: Ministry of Attorney General, 1994) recommended a four level classification for management advice or services when awarding management fees.
|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 their financial affairs.
Factors to Consider
Evidence may be adduced by plaintiff counsel that suggests that the projected rate of market returns will be lower over a period of time following the award, justifying the need for an award for management fees. This assessment is made in consideration of the need to maximize compounding interest on the principle amount before the award begins to be dissipated to pay for the plaintiff’s cost of living, care and other expenses. As such, management fees may only be needed to cover the initial period after the plaintiff receives their award and may not be needed in perpetuity or on an ongoing basis.
In the British Columbia Supreme Court case of Cikojevic v. Timms, 2012 BCSC 1688, the court found that investment management assistance would only be necessary for fifteen years. This conclusion was reached based on the evidence presented, which suggested that a lower than expected return on traditional asset classes were projected for the next five to seven years, the plaintiff’s investment portfolio would shift to more passive investment strategies when the plaintiff was older and the first fifteen years were the critical period to ensure appropriate compounding.
122 Of course, as noted during the hearing, markets fluctuate. The market has always exposed investors to a full range and mix of anxieties and optimism, all at the same time. However, relying on strategies such as taking the longer view and expecting the market eventually to run to the positive side does not address the plaintiff’s specific needs now.
123 Her investments must pay for her care needs as well as produce income for support. The plaintiff needs a chance to re-invest and accrue earned income in excess of her youthful needs and see some benefit from compounding, else her Trust fund will sink too soon.
124 I conceive my primary duty is to ensure the plaintiff’s award is protected from dissipation and erosion to the extent the evidence requires, and I have the means at hand to do so. Given the evidence heard, I agree the 3.5% discount rate appears to be unrealistic. But as it is fixed at 3.5% at the moment, this leaves the logical choices either of authorizing Mr. Blakmer to retain the services of an external investment manager for the period of timenecessary to meet the plaintiff’s needs, or of exposing her to the vagaries, the latter of which the law does not permit.
In assessing these awards, it has been suggested by defence counsel that the court must consider the prospect that the financial manager may produce a higher investment return than would be needed to simply keep pace with inflation. As propositioned by the Supreme Court of Canada in Townsend v Kroppmanns, 2004 SCC 10, the excess rate of return ought not to be at the expense of the defendant. This would warrant a discount of the management fee that is awarded to the plaintiff, referred to as the “discounted rate.”
Ultimately, the onus is on the plaintiff to adduce evidence that the management services required to provide a rate of return are equal to the discounted rate. This was affirmed by the British Columbia Court of Appeal in Bystedt (Guardian Ad Litem of) v. Hay, 2007 BCCA 84.
13 It appeared likely from the evidence in this case that some better rate of return than that mandated by the required discount rate would likely be achieved by the investment manager whom the judge found to be appropriately retained by the plaintiff to furnish investment advice and to manage the funds. Both counsel had adduced evidence that perhaps was more directed to what that excess rate of return might be rather than what management services would be required to return a rate that would achieve the necessary results, having regard to the mandated discount rate. It was for that reason that counsel for the appellant suggested in argument that it might be necessary to return the matter to the learned trial judge for reassessment in light of new evidence, conforming to the approach mandated by the Supreme Court of Canada in Townsend.
As with much litigation, the facts of each case largely determine the appropriate remedy. In Pestano (Litigation Guardian of) v. Wong, 2017 BCSC 1666 it was affirmed that the assessment of management fee awards is by and large a fact driven analysis that requires an assessment of the plaintiff’s life circumstance. It was held that the plaintiff’s mental disabilities and diminished mental capacity warranted a large management fee award in this instance. This was further compounded by the plaintiff’s family situation, as it was unlikely that the plaintiff’s guardian had the requisite skill, knowledge or experience to effectively manage the settlement fund without professional assistance.
17 The defendant acknowledges that neither the plaintiff nor his parents are in a position to manage the settlement funds themselves. This was a reasonable concession. The plaintiff’s mother is clearly overwhelmed by the tremendous challenges she faces caring for a child who awakens with seizures several times a night. The father is currently the primary caregiver for the family’s other two children, while maintaining a full-time job. There was no evidence that either have the expertise or experience to manage a sum of this size.
18 Hence the real question is not whether the plaintiff needs paid investment management assistance, rather, it is what level of assistance is required.
When the court is unsatisfied that the plaintiff has proven that a management fee award is needed to ensure that the award fully compensates them, then the court shall be inclined to only provide a nominal management fee. As held by Justice Adair in Turner v. Dione 2018 BCSC 1075:
10 The plaintiff is a thoughtful and mature woman now in her late 20s. There is no evidence that, despite struggles with math and science, she has ever, either before or after the accident, had any problems managing money responsibly. There is no evidence that, since the judgment was released at the end of October 2017, she has struggled in any way to decide what to do with her award. I find that she is capable of making rational decisions about her financial future with the occasional assistance of a financial advisor and with the benefit of the complementary services that are available to bank customers. I conclude, therefore, that only a modest award is justified, and I award $15,000 for management fees.
In personal injury cases, the individual’s capability and experience in managing their own financial affairs is a relevant consideration and arguably the most pertinent factor in assessing the appropriate size of any management fee award. That being said, even in circumstances where it has been found that an individual is incapable of managing their own financial affairs, the circumstances may on occasion justify a minimal management fee award. In Wong (Litigation Guardian of) v. Towns 2015 BCSC 1333 the court awarded $5,000 for management fees despite holding that that the plaintiff lacked the capacity to manage her own financial or health care needs.
136 Dr. Kiraly and Dr. Chow both agree that Mrs. Wong is unable to manage her own medical and financial affairs as a result of the cognitive deficits she has developed due to the accident-related injuries. Dr. Kiraly recommended a financial power of attorney and a health care proxy decision-maker who would make decisions about her medical treatment in the future. It is clear, based on the expert opinion evidence of Dr. Kiraly, that the dementia symptoms exhibited by Mrs. Wong are permanent and will worsen over time. Thus I find that the loss of the ability to manage her financial interests and her medical condition was foreseeable and a direct result of the injuries caused by the accident.
137 It is common for family members to make financial, as well as medical, decisions for their aging parents through a power of attorney. However, family members do not necessarily have the training and expertise to make financial and medical decisions. Awarding a management fee to cover the cost of seeking such advice is thus reasonable in the circumstances.
138 In my view, a reasonable management fee for the purpose of seeking financial and medical guidance for Mrs. Wong is $5,000.
Although the plaintiff in this case suffered from dementia and acute onset psychosis, which required supervision and home care, it was still held that only a minimal award was appropriate. This was largely driven by a consideration of the familial support she had and their ability to assist in these decisions through a power of attorney arrangement. Given the age of the plaintiff and her deteriorating condition any financial planning would only be needed for what remained of her life, perhaps the primary rationale for the negligible management fee award that the court granted in this instance.
As indicated by these guiding legal principles, an award for management fees will ultimately be determined by the application of these factors to the unique life circumstance of each plaintiff. While recent British Columbia Supreme Court decisions indicate that the courts are becoming less inclined to award large sums under this head of damage, there will certainly be instances where large awards for management fees may be necessary. This will ultimately turn on the plaintiff’s ability to manage their own finances, their life circumstances and market forces that may effect the rate of return on investments.
We look forward to further guidance and clarification from the courts on the assessment of management fees in the future.