Finch v Telstra Super Pty Ltd - High Court decision

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The decision of the High Court of Australia in the case of Finch v Telstra Super Pty Ltd [2010] HCA 36 was handed down on 20 October 2010.  Mr Finch was successful in having the decision of the Court of Appeal of the Supreme Court of Victoria set aside, and the decision of Byrne J in the Supreme Court of Victoria made on 28 November 2008 re-instated. 

The case addresses a number of significant issues concerning claims for benefits from superannuation funds for total and permanent invalidity (TPI) including:

• Whether the term absence from “all active Work” for 6 months was limited to work for the Employer responsible for the relevant superannuation fund.
• Whether the period of absence of 6 months should be assessed as at the date the member leaves his employment, or the date of the Trustee’s determination.
• Determining whether the Applicant was “unlikely ever to engage in any gainful Work”.
• Whether the principles laid down in Karger v Paul [1984] VR 161 should apply to superannuation trusts.
• Whether the decisions required to be made by the Trustee in determining whether the Member was TPI involved the exercise of a discretion.
• Whether the Trustee gave genuine consideration to the Member’s application for a TPI benefit.

The Facts

Alan Finch was born a male but had lived as a female and at the age of 21 underwent surgery to change his gender from male to female.  Mr Finch commenced employment with Telstra in 1992 under the name Helen Finch and was a member of the Telstra Superannuation Fund (the Fund) which is a defined benefit fund.  Mr Finch suffered from psychological difficulties as a consequence of his gender change and took sick leave from Telstra on 30 September 1996 and in October that year resumed living as a male.  He underwent further surgery to reverse the gender change.  He became severely depressed, suffered from adjustment disorder and was sensitive about his appearance.

He returned to work with Telstra in March 1997 under the name Alan Finch and in January 1998 he accepted a redundancy package and ceased employment with Telstra.  Mr Finch provided evidence that his last months at Telstra had been extremely distressing and that it had for him been a hostile environment.  After ceasing work with Telstra he did not work for a period of 12 months.

Mr Finch then worked for short periods for Foxtel (1 month with two weeks sick leave), and part time for Qantas (5 months with 2 weeks sick leave).  The Trustee was provided with information to support Mr Finch’s claim that these two jobs were failed attempts by him at rehabilitation.

Mr Finch had been seeking a TPI benefit from the Telstra Super Fund since 19 May 2000 without success.  Two determinations were made by the Trustee rejecting Mr Finch’s claim.  The basis for rejection was that Mr Finch was not “unlikely ever to engage in gainful work” as required by the second part of the definition of TPI in the Trust Deed.  Mr Finch ultimately challenged the Trustee’s decision in the Supreme Court of Victoria.

Definition of TPI

The relevant TPI definition that Mr Finch had to satisfy was in two parts:

Firstly: The Member had to be “continuously absent from all active Work for a period of at least 6 months” and had been required by the Employer to participate in a rehabilitation programme.

Secondly: The Trustee had to form an opinion based on the information, evidence and advice provided to it by Telstra, and any other information, evidence and advice it considered relevant, that Mr Finch had “ceased to be an Employee and was unlikely ever to engage in any gainful Work” for which he was for the time being reasonably qualified by education, training or experience.

“Work” was defined as meaning “engagement in any business, trade, profession, vocation, calling, occupation or employment”.

The first issue in dispute was whether Mr Finch satisfied the requirement of being continuously absent from “all active Work” for 6 months.

The second issue was whether Mr Finch was unlikely ever to engage in any gainful Work for which he was reasonably qualified by education, training or experience and, in particular, the grounds on which a court can review a trustee’s decision regarding a TPI claim.

Decision of Byrne J, Supreme Court of Victoria

6 Months absence

Mr Finch argued that he had satisfied this requirement by the time the Trustee made its determination on the basis that he had not worked after leaving Telstra in January 1998 for more than 6 months.  The Trustee did not dispute this interpretation at the time of making its determinations to deny payment of the benefit.

The Trustee argued in the Supreme Court that the 6 months absence from work had to be satisfied by the time Mr Finch left Telstra’s employment on 23 January 1998.  While it accepted there had been periods when he did not engage in active work (including one period that was only 6 days short of 6 months), it argued that none of those periods was a continuous absence from work for 6 months.

Byrne J agreed with Mr Finch that the 6 months’ absence could be satisfied after a member ceased to be employed by Telstra, according to a correct construction of the trust deed.

Review by Court

An exercise of a trustee’s discretion can only be challenged if there was a lack of good faith or real and genuine consideration, if the trustee did not act for a proper purpose or if reasons are given and those reasons are not sound.  These narrow grounds of review were set out in the case of Karger v Paul.  Additionally, a court may infer a breach if the decision is one that no reasonable trustee could make on the material that was before it.

Byrne J determined in the first instance that the Trustee failed to comply with its obligation to give genuine consideration as to whether Mr Finch was unlikely ever to engage in gainful work.  Mr Finch had produced strong medical evidence that supported his claim.  However, the Trustee relied on a letter from Mr Finch’s former managers at Telstra, the fact that Mr Finch had been offered a job with Telstra before ceasing employment and his employment with Foxtel and Qantas, to determine that he was likely to engage in employment in the future.

Byrne J determined that, based on the very strong medical evidence provided, the Trustee should have made further enquiries into three matters:

1.  The circumstances of the Applicant’s last month with Telstra.
2.  The circumstances of his employment after leaving Telstra with Foxtel and Qantas.
3. The statement made by Mr Finch to the Chief Executive Officer of the Trustee of the Fund that his employment with Qantas was “a real job”.

Byrne J applied the Karger v Paul test and concluded that the Trustee had failed to decide the TPI applications in good faith and give genuine consideration due to its failure to further investigate the matter and invite comment from Mr Finch.  Byrne J ordered that the matter be remitted to the Trustee on that basis.

Court of Appeal

The Trustee had accepted that the 6 months absence could be absence from work from Telstra, or anyone else, provided it occurred before Mr Finch left Telstra.  Despite this, the Court of Appeal determined that the 6 months absence had to be absence from work at Telstra.

The Court of Appeal took a different view from that of Byrne J and maintained:

• that Mr Finch did not satisfy the condition in the TPI definition that he must have been absent from active Work for at least 6 months; and
• that condition had to be satisfied as at the day Mr Finch ceased work for Telstra and the absence from work needed to be absence from work at Telstra.

Although there had been 6 months absence by the time the Trustee made its determination, the Court of Appeal did not see this as sufficient.  On that basis the Court of Appeal did not need to give consideration to whether or not Mr Finch was likely to work again, but in any case expressed disagreement with Byrne J’s conclusion on that point.

High Court Decision

In a unanimous decision the High Court set aside the decision of the Court of Appeal. It held that the first condition to meet the TPI definition did not require Mr Finch to be continuously absent from “all active Work” for 6 months before leaving Telstra’s employment.  Mr Finch’s absences from work after he left Telstra’s employment enabled him to satisfy that part of the definition.

The High Court formed this view on the basis that to conclude otherwise would mean that a Member would not be able to cease work because of TPI unless in the opinion of the Trustee the Member had already ceased to be an Employee.  If this were accepted it would mean that there could never be a valid claim for TPI, which would be absurd.

The High Court also indicated that to require that the absence from active work for 6 months must take place before the Member ceased to be an employee is to read words into the clause unnecessarily.  It concluded that a period of absence from work after ceasing to be an employee simply assists in demonstrating that the connection between the disablement and the cessation of work actually existed.

Discretionary Decision

The Court of Appeal treated the decision of the Trustee as to whether Mr Finch was unlikely ever to engage in any gainful work for which he was for the time being reasonably qualified by education, training or experience as a discretionary decision.  Note the following statement by the Court of Appeal:

“The Court has power to set aside the discretionary decision of the Trustee if the relevant discretion was not exercised by the Trustee in good faith, upon real and genuine consideration and in accordance with the purpose for which the discretion was conferred.  However, the mere fact that a Trustee makes an error as to a fact or some other matter, or does not make all enquiries that may have been open to have been made, is not sufficient reason for the Court to set aside a determination that was made in good faith, upon real and genuine consideration, and for a proper purpose.”

In reaching this conclusion the Court of Appeal relied on Karger v Paul[1].  The High Court found that this was not correct and the determination by the Trustee did not involve the exercise of a discretion but was a determination to be made on a factual basis.  It required the Trustee to form two opinions:

• whether a Member had ceased to be an employee; and
•  whether the Member was unlikely ever to engage in gainful work.

In forming those opinions there were factors to be examined and judgements to be made.  However, forming an opinion was not a matter of discretionary power but “an ingredient in the performance of the trust duty”.

The High Court also considered the public significance of superannuation and Government policy to encourage people to save to fund their own retirement and to make it compulsory for employers to contribute the superannuation guarantee contribution.  It concluded:

“As the public significance of superannuation and the close attention paid to it through statutory regulation support the conclusion that the decisions of superannuation trustees are not likely to be largely immunised from judicial control without clear contrary language in the relevant trust documents.  Decisions like those which the Trustee made in this case are not discretionary decisions in the sense used in Karger v Paul.”

Superannuation Trust

Even though TPI decisions are not discretionary, superannuation fund trustees are still required to make some discretionary decisions (e.g. distribution of death benefits).  The High Court considered whether the traditional limitations in Karger v Paul apply to those decisions of superannuation fund trustees that are discretionary.

The High Court stated that different criteria apply to the operation of a superannuation fund from those that would apply to discretionary decisions made by a Trustee under a non superannuation trust.  This is because of the differences in the trusts, including the fact that employer sponsored superannuation is part of an employee’s remuneration and membership in the Employer’s superannuation fund may be compulsory.

It is therefore something that an employee receives in return for their work and their contributions and should be regarded as “deferred pay”.  The High Court rejected the Trustee’s argument that the TPI benefit involved in part an element of bounty on this basis and instead saw superannuation as the method of attracting labour.

Duty of Enquiry

The crucial question for the High Court was whether the reasons of the Court of Appeal for rejecting the conclusion of Byrne J that the Trustee had not given genuine consideration, was sound.  In considering this question the High court found that there was nothing to suggest that the Trustee undertook any consideration of Mr Finch’s claim that the work at Foxtel and Qantas was a failed rehabilitation effort.  It could see no reason for the Court of Appeal to reject “these uncontradicted assertions” by Mr Finch other than the mere fact of his employment with Foxtel and Qantas, and the statement he allegedly made to the Chief Executive Officer of the Fund that the Qantas employment was “a real job”. 

The High Court disagreed with the Court of Appeal’s position on Byrne J’s reasoning and supported Byrne J’s conclusion that the Trustee failed to decide the matter in good faith and by giving genuine consideration to it.

Byrne J in his judgment said the Trustee:

“viewed the question as, in effect, a contest between the opinions of the doctors and the actual observed experience of [the Applicant] in the work place with Telstra and thereafter.  The difficulty which I have with the determinations is that [the Trustee] appeared to be very ready to accept the evidence as to the Claimant’s work experience without any or very much enquiry as to its true nature and to reject the very strong evidence of the doctors to the contrary.”

While not suggesting that the Trustee acted in bad faith, Byrne J held that the Trustee had failed to give the matter genuine consideration having failed to pursue sufficient enquiries, and that there had been a want of good faith.  This lead to the submission by the Trustee to the High Court that Byrne J had misunderstood the Karger v Paul test concerning “good faith and genuine consideration”.  This reflects the view taken by some superannuation fund trustees that they are not required to make reasonable and relevant enquires, but that it is the duty of claimants to prove their case.  The High Court did not accept that Byrne J had misunderstood the Karger v Paul test, and accepted Byrne J’s view that the Trustee had failed in its duty to make enquiries in three ways:

Employment with Telstra

It made no enquiry about the last month of the Applicant’s employment with Telstra, not even investigating any record of absences from work or reasons for those absences, although it had sought this information from Foxtel and Qantas.  It merely accepted the statements of the Telstra Managers. The Trustee should have made further enquiry concerning Mr Finch’s claim that the working environment was hostile, his previously secure and relatively prestigious position had been downgraded and become insecure and this had lead him to terminate his employment with Telstra by accepting voluntary redundancy.

Employment with Foxtel and Qantas

Byrne J accepted the fact that Mr Finch had held a job for a month with Foxtel and for 5 months with Qantas.  However, in this case, Mr Finch had provided substantial material to support his claim that these periods of work were merely a rehabilitative effort to return to the workforce.  He also pointed out that he was absent from Foxtel for 2 weeks of the month in that position and that his position with Qantas was only part-time, in contrast to his full-time position with Telstra.  Had that been accepted by the Trustee, this impediment would have been overcome.

While accepting that such an assessment was up to the Trustee to make, Byrne J was of a view that it had put that material aside, in preference for a conclusion that this employment, although it had failed in each case, showed Mr Finch was likely to engage in employment in the future and could therefore not satisfy the definition of TPI.

“Real Job” conversation

The Trustee had placed a great deal of weight on the statement made to its Chief Executive Officer by Mr Finch that the Qantas job was “a real job”.  The statement was significant as the principle issue at that point had been whether the Trustee treated this as a contest between Mr Finch’s employment at Qantas being a rehabilitation attempt or a real job.

The Trustee had not made Mr Finch or his legal advisors aware of the information it had been given on the conversation between him and Chief Executive officer nor had it requested his response.  This was despite the fact that the rejection of Mr Finch’s claim appeared to have been substantively based on that information.  Accordingly, Mr Finch had no opportunity to deny making the statement or clarify its intended meaning.

The Chief Executive Officer in passing on this information to the Trustee had acted as a witness and then proceeded to participate in the actual evaluation and interpretation of his own evidence.  It was Byrne J’s view that as a minimum, Mr Finch should have at least been invited to comment on this evidence and that the Trustee should have investigated this information further.

Status of Karger v Paul

Mr Finch had argued that the High Court should hold that the principles stated in Karger v Paul do not apply to superannuation trusts, at least in relation to substantial matters like claims for TPI benefits.  This was on the basis that those principles are too narrow and too difficult to satisfy concerning superannuation trusts, and do not adequately protect the interests of beneficiaries in having the decisions of trustees properly controlled.

Therefore, it was argued that the decision of a superannuation fund trustee should be set aside if it were not “fair and reasonable” in the same way that the Superannuation Complaints Tribunal is able to deal with Trustee decisions.

The High Court held that it was not necessary to evaluate the merits as to how far the Karger v Paul principles applied, or whether other principles should be adopted.  This was because the case could be resolved by accepting Byrne J’s reasoning in favour of Mr Finch as being sound, and the Court of Appeal’s criticism of that judgment being unsuccessful.  The High Court stated:

“To offer answers to wider questions which might arise in disputes different from the present where it is not necessary to do so would have an unsettling effect on the law which may not be beneficial.”

Therefore the High Court did not take advantage of the opportunity to determine this matter which has been the subject of so many cases.  However, it did qualify the Karger v Paul principles as they apply to superannuation funds by stating that superannuation fund trustees making a discretionary decision are subject to a higher duty to inform themselves than other trustees.  If the consideration is not properly informed, it will not be genuine.

The High Court states that the duty of Trustees to properly inform themselves is more intense in superannuation trusts than in trusts of the Karger v Paul type (i.e. discretionary trusts).  This was based on the importance to beneficiaries of superannuation trusts who are entitled to benefits to have those benefits paid.  In the case of Mr Finch the High Court recognised that his claim for a TPI benefit was to support him for the rest of his life.  It was dependent upon the Trustee forming an opinion about the likelihood that he would ever be able to engage in gainful work again and was not a mere discretionary decision.

It required an assessment of the information and evidence and professional advice the Trustee considered relevant, combined with a duty on that Trustee to make that assessment.  Failure by the Trustee to seek relevant information to resolve conflicting material as occurred in this case was viewed by the High Court as not only constituting a breach of duty but also being reviewable as a lack of genuine consideration under the Karger v Paul principles.

The High Court determined that there was a high duty on the Trustee to make enquiries for information, evidence and advice it considered relevant and that the existence of that duty is in a more intense form than that which existed under the Karger v Paul principles and supports that Byrne J’s decision was the correct outcome.

Beneficial Interest

There was also one small comment by the High Court that warrants attention.  The Court confirmed that Mr Finch did have a beneficial interest in the Fund.  Numerous academic articles have addressed this question; with many concluding that members of superannuation funds have no more than a mere expectation.  This statement by the High Court shows that the Court considers that the Fund was not a discretionary trust, as potential beneficiaries of discretionary trusts do not have a beneficial interest in the fund.  The nature of the fund is not to be confused with the issue whether the TPI decision was a discretionary decision.

This issue deserves closer scrutiny that is beyond the scope of this paper, as those with a beneficial interest in a trust have certain rights.  For instance, under the common law, a person with a beneficial interest in a fund is entitled to certain information that is not available to potential beneficiaries of discretionary trusts.

High Court Orders

The High Court set aside the decision of the Court of Appeal and reinstated the decision of Byrne J.  Although Mr Finch had argued for the Court not to remit the matter to the Trustee for a final determination, the High Court did not accept those arguments.  This was on the basis that there was no bad faith by the Trustee, but merely a failure to observe due process by giving genuine consideration to the matter.  In those circumstances, the matter must be remitted to the Trustee for final determination.

Consequences of the Decision

It is unfortunate that the High Court did not take the opportunity to address the issues around the Karger v Paul principles and their application to superannuation trusts.  However, what is clear from the decision is that determinations as to whether a Member is or is not TPI are questions of fact, and do not involve the exercise of discretionary powers.  Consequently the application of the Karger v Paul principles do not apply.

This is significant.  Decisions of superannuation fund trustees to reject TPI claims can now be challenged on much wider grounds as the narrow grounds of review in Karger v Paul only apply to discretionary decisions.  Claimants will not be faced with such a high hurdle when bringing a TPI claim before a court.  It could result in more members deciding to issue proceedings for TPI claims in a court, rather than the Superannuation Complaints Tribunal where legal fees cannot be awarded.

The reasoning of the High Court makes it clear that the duty of superannuation fund trustees to conduct enquiries goes way beyond the approach taken by many trustees in dealing with claims of this type.  Many trustees currently adopt the approach that it is the responsibility of the member to establish his or her case and undertake little enquiry themselves.  However, the Finch case effectively imposes on the trustee a duty to conduct a reasonable level of investigation and analysis.  It will not be good enough to simply take statements made by individuals at face value, particularly where they are adverse to the Member without further investigation.

It also confirms the need for procedural fairness in ensuring that Members are made aware of evidence that is adverse to them and are given an opportunity to respond to that evidence.

Although the case is based on the particular wording of the trust deed, the approach of the High Court on the review issue imposes that higher duty on all superannuation fund trustees, irrespective of their deed.

With respect to the date when a 6 month period of absence from work applies, to avoid ambiguity trustees should review the definition of total and permanent disablement in their trust deeds and insurance policies to ensure that the date on which the 6 month period ends (as well as when it begins) is clearly stated.

Trustees should review their claims procedures in light of this decision and ensure that they are sufficiently robust to meet their duty to give properly informed consideration to members’ claims.

The writer would like to acknowledge the insight into this case provided by Marita Wall, one of the barristers representing Mr Finch.

Contact Details:

Jenny Willcocks
Partner, Melbourne
Superannuation & Financial Services
T: +61 (0)3 9321 9909
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