FLORA: SPREADING GOOD NEWS FOR EXPERTS IN THE DISCOUNT RATE DEBATE

In personal injury (and fatal accident) litigation a long war has been waged as to what is the appropriate discount rate (i.e. how much credit a claimant must give for the likely return he will make on a capital lump sum representing future annual payments should he invest it) for calculating the multiplier for future heads of loss. The lower the discount rate the higher the multiplier and the higher the overall award. An example should make this clear. If the claimant will lose £10,000 of earnings each year over 10 years, it would overcompensate him to pay him £100,000 as a lump sum now, since, if he invested a lump sum, he could get a sufficient return (after inflation and income tax) to pay himself £10,000 per annum (in today’s money) from a smaller lump sum. If the assumed rate of return on such a nominal investment is 4½%, the relevant multiplier over 10 years is 8.09 whereas if it is 2½% the multiplier is 8.86[1]. These seemingly small differences can make a very large difference when the multiplicand is in tens or hundreds of thousands of pounds.

Thirty years ago the size of the multiplier was a fertile area for dispute. In big money cases the parties would frequently call expert accountants, economists or actuaries to give evidence as to how large the multiplier(s) should be. In June 2001 Parliament intervened and put a stop to all this. The discount rate for personal injury and fatal accidents cases was set (and continues to be set) at 2½% per annum[2] (broadly the rate of return on index-linked government stock[3]).

The claimant side of the personal injury industry has argued that setting one rate for all heads of future loss is unfair since experience shows that the cost of providing paid carers has tended to increase much faster than the rate of inflation (in fact, broadly in line with the average increase in earnings) and that this should be taken into account by the courts adopting a lower discount rate for future care claims (by exercising the statutory power to depart from the Lord Chancellor’s prescribed discount rate “if any party to the proceedings shows that [a different discount rate] is more appropriate in the case in question”[4]). In the past, attempts to run this argument have failed. The courts have prevented the admission of expert accountancy and actuarial evidence in support of these arguments on the basis that a departure from the prescribed rate would cause uncertainty and make it more difficult to settle personal injury claims[5].

In April 2005 amendments to s. 2 of the Damages Act 1996 came into force[6]. For the first time the courts were given the power to order that heads of future loss in personal injury and fatal accident cases must be met by periodic payments (even where the parties disagree) rather than a lump sum. It is expressly provided that the amount of such periodic payments shall vary in accordance with the retail prices index[7] but that the court may disapply or modify this[8].

Rather boldly, the Defendant side of the personal injury industry has argued that this change in the law should have no effect on practice (other than in perhaps, extreme cases) and that, in general, the 2½% discount rate should continue to govern the calculation of the multiplier for all heads of future loss, even in periodic payment cases. In July 2006 the Court of Appeal, in Flora v Wakom (Heathrow) Limited[9],  gave this argument short-shrift. The defendant’s argument (if accepted) would render the new ss. 2(8) & 2(9) a dead letter it was held. Practice must now change. Expert evidence may now be admitted to show that, for example, the cost of paid carers, or the cost of a particular medical treatment has increased, and is expected to continue to increase, in line with the average earnings index (or any other relevant index) rather than the (lower) retail price index (with a view to supporting the argument that the RPI figure should be modified upwards). This change is practice is likely to be relatively short-lived. In response to counsel’s submission that this would lead to a plethora of expert evidence from accountants, actuaries and economists being adduced in many high value personal injury and fatal accidents case, the Court of Appeal said:

“We are now dealing with a different statutory provision and, if the experience of the past is any useful guide, it is likely that there will be a number of trials at which the expert evidence on each side can be thoroughly tested. A group of appeals will then be brought to this court to enable it to give definitive guidance in the light of the findings of fact made by a number of trial judges. The armies of experts will then be able to strike their tents and return to the offices or academic groves from which they came.”[10]

The first of these trials has now taken place. In Lee Thompstone v Tameside & Glossop Acute Services NHS Trust[11], a platoon of experts (two actuaries, a forensic accountant and experts the fields of labour economics, financial advice and pay-research) gave evidence about the relative merits of adopting the retail prices index (“RPI”), the average earnings index (“AEI”), the median earnings level index of the Annual Survey of Hours and Earnings (“ASHE”) or the occupational earnings for care assistants and home carers index (“ASHE group 6115”). Swift J. held that using RPI would significantly under-compensate the claimant (a 7 year old spastic quadraplegic with cerebral palsy). On the other hand, using AEI and ASHE would significantly over-compensate the claimant. The judge held that “indexation by reference to ASHE 6115 would provide a reasonable and accurate indicator of the growth of the earnings of carers of the type to be employed by the claimant”.

Commentary. We are heading for a period of uncertainty in big money personal injury cases. Both sides will deploy batteries of experts to fight their corner not only in cases concerning future care costs (as in Thompstone) but also in cases concerning other heads of future loss, such as transport costs and housing costs. Only a definitive decision of the Court of Appeal dealing with all heads of future loss will cause these armies of experts to strike their tents and return to their offices or academic groves. Even then, one can expect bold use of expert evidence to be made to argue that a particular case is in some way exceptional and that the CA’s guidance should be departed from. Moreover, a few years down the line, it is easy to envisage a fresh battery of experts being deployed to argue that changes in the pattern of, for example, carers’ earnings means that the so-called ‘definitive’ decision of the Court of Appeal is out of date and that a different index should be used. In the short term, the major beneficiaries will be experts in labour economics, actuarial work and forensic accountancy. In the long term, it seems likely that claimants will benefit from higher awards than would be made under the conventional 2½ % discount rate.

MARK  JAMES

Mark James is a barrister at 1 Temple Gardens, Temple, London, EC4Y 9BB and the author (with Tristram Hodgkinson) of ‘Expert Evidence: Law and Practice’ (2^nd ed.)(2007).