Law Report: Damages assumed to be prudently invested

LAW REPORT: 13 November 1996

Wells v Wells; Thomas v Brighton Health Authority; Page v Sheerness Steel Co plc; Court of Appeal (Lord Justice Hirst, Lord Justice Auld, Lord Justice Thorpe) 23 October 1996

In assessing the amount by which a lump sum award of special damages for personal injuries, to cover loss of earnings and the cost of care over many years in the future, should be discounted to reflect the return obtainable from investing that lump sum, the court should assume the yield was that to be expected from prudent investment, namely 4 to 5 per cent per annum, rather than that from index-linked government securities at only 3 per cent.

The Court of Appeal allowed appeals against quantum by the defendants in three personal injury cases in which liability was admitted.

In the first, Judge Wilcox, sitting as a deputy High Court judge on 13 June 1995, had awarded Thelma Wells pounds 1.619m in damages against her husband, Derek Wells, following a road accident in which he was the driver. That award was reduced to pounds 1.086m.

In the second, Mr Justice Collins on 7 November 1995 had awarded James Thomas, who was born with cerebral palsy following maladministration of a drug to his mother during labour, damages of pounds 1.285m against Brighton Health Authority. That award was reduced to a sum to be determined later.

In the third, Mr Justice Dyson on 4 December 1995 had awarded Kelvin Page pounds 906,000 against his former employer, Sheerness Steel Co plc, following an accident at work in which he suffered brain damage. That award was reduced to pounds 626,000.

John Leighton Williams QC, Richard Methuen (Linda Y. Oliver, Worthing; Lawrence Graham) for Mr Wells and Sheerness Steel; Kieran Coonan QC, Christina Lambert (Hempsons) for Brighton HA; Christopher Purchas QC, George Gadney (Waterson Hicks) for Mrs Wells; C. Purchas QC, Matthias Kelly (Russell Jones & Walker) for Page; Robert Owen QC, Philip Havers QC (Compton Carr) for Thomas.

Lord Justice Hirst said that in these three cases the multi- plier applied to the annual amount assessed for future losses and expenses (the multiplicand) had been set by reference to the expected three per cent return on index-linked government securities (ILGS), rather than the conventional rate of 4 to 5 per cent, with the result that the multiplier was significantly higher and the damages greatly increased. In other cases judges were still adhering to the conventional guidelines, so there was uncertainty as to the result to be expected in such cases.

The basic rule, which had stood for over a century, was that damages were to be assessed on the basis that their fundamental purpose was to achieve as nearly as possible full compensation to the plaintiff for the injuries sustained.

The assumption in cases involving large awards was that the plaintiff would seek advice as to the ways in which the money could best be managed, and that there would be a normal spread of investments. A discount rate of 4 to 5 per cent had become established.

In 1994 a working party chaired by Sir Michael Ogden QC issued a report entitled Actuarial Tables with explanatory notes for use in personal injury and fatal accidents cases. Its recommendation that the ILGS discount rate be adopted instead of the conventional rate was supported by the Law Commission in its report (No 224) Structured Settlements and Interim and Provisional Damages.

The advantages of ILGS were that the return was certain, interest and capital were protected against inflation, and the future was protected as securely as possible. Equities by contrast were risky and the return variable.

Their Lordships rejected the plaintiffs' arguments (i) that an awards should be fixed on the basis that a plaintiff was entitled to invest it at minimum risk, and (ii) that the correct approach was not whether it would be prudent to invest in equities, but whether investing in ILGS would achieve the necessary object with the greatest precision.

The existing guidelines were still valid and their Lordships were not persuaded that a case had been made out for the courts of their own motion to adopt ILGS in their place. The present discount rate of 4 to 5 per cent should continue to apply.

Paul Magrath, Barrister