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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> LUKE WARREN v. NORTHERN GENERAL HOSPITAL TRUST [2000] EWCA Civ 100 (4th April, 2000)
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Cite as: [2000] EWCA Civ 100
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LUKE WARREN v. NORTHERN GENERAL HOSPITAL TRUST [2000] EWCA Civ 100 (4th April, 2000)
Case No: QBENF 2000/0100/A2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QBD (Mr Robert Smith QC
sitting as a Deputy Judge of the High Court)
Royal Courts of Justice
Strand, London, WC2A 2LL
Tuesday 4 April 2000
LORD JUSTICE STUART-SMITH
LORD JUSTICE MUMMERY
and
LORD JUSTICE TUCKEY
LUKE WARREN |
Appellant | |
- and - |
||
NORTHERN GENERAL HOSPITAL TRUST |
Respondent |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
-------------------------------
Stephen Irwin QC & Robin Oppenheim (instructed by Messrs Irwin Michell for the Appellant)
Philip Havers QC & Mary O'Rourke (instructed by Messrs Trowers Hamlins for the Respondent)
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE STUART-SMITH:
Introduction
1. This is the judgment of the court. The appeal raises the question whether the court should alter the discount rate, set by the House of Lords in Wells v Wells [1999] 1 AC 345 (judgment delivered on 16 July 1998), at 3%, and if so to what new rate. A further question also arises whether the impact of taxation on the fund is such that, even if the general rate is not altered, it should be in this case.
The facts
2. Luke Warren was born on 14 November 1991 at the Northern General Hospital in Sheffield. Unfortunately there was inappropriate delay when foetal distress became evident. In the result he suffered severe post natal asphyxia which resulted in very severe disability due to cerebral palsy. On 25 February 1999 the defendants admitted liability to compensate the claimant. The trial on quantum was heard by Mr Robert Smith QC, sitting as a deputy judge of the High Court. On 26 January 2000 he gave judgment for the claimant for a total sum of £3.1 million. Of that sum £135,000 was in respect of pain, suffering and loss of amenity. The amount in respect of that is the subject of an appeal heard by the Court of Appeal consisting of five judges, and has now been increased to £175,000.
3. The major elements to the award were the cost of future care, increased recurring costs resulting from the disability and loss of future earnings. It is unnecessary for the purpose of this appeal to break these elements down. The judge found that the fund for investment to take care of these future expenses and lost income was £2.5 million.
4. The claimant's expectation of life was until the age of 55, leaving 47 years unexpired for the future post-trial. Taking a discount rate of 3.0% the judge applied the appropriate Ogden table multiplier to the various multiplicands for future loss of earnings and costs of care. The judge rejected the submission made on behalf of the claimant that he could and should reduce the discount rate because of the change in economic circumstances since the decision in Wells v Wells. He concluded that although the average gross yield of Index Linked Government Securities (ILGS) over the three year period to trial was 2.8% (with a net yield of 2.5%) as compared with the average gross yield of 3.53% (net 3.0%) at the time of Wells v Wells, he was precluded by the decision of their Lordships in that case from reconsidering the rate prior to the Lord Chancellor setting a new rate under the Damages Act 1996; secondly he held that even if he was not so precluded, he would not alter it.
The Appeal
5. By his appeal the claimant challenges the judge's decision on both these points. Further, by an amendment to the grounds of appeal it is contended that the incidence of tax requires an uplift in the multiplier or lower discount rate in order to provide just compensation to the claimant.
Wells v Wells
6. The Court of Appeal held that courts should continue to apply discount rates of 4 to 5 % for the calculation of future loss and expenditure which had been the rate consistently applied by the courts since Mallett v McMonagle [1970] AC 166. This being the net rate of return from prudent investment of a fund. The House of Lords allowed the claimants' appeals in the three linked cases. Their Lordships held:
".....that the purpose of an award of damages in tort was to make good to the injured plaintiff, so far as money could do so, the loss that he had suffered as a result of the wrong done to him; that in awarding damages in the form of a lump sum the court had to calculate as best it could the sum that would be adequate, by drawing down both capital and income, to provide periodical sums equal to the plaintiff's estimated loss over the period during which that loss was likely to continue; that the injured plaintiff was not in the same position as an ordinary prudent investor and was entitled to the greater security and certainty achieved by investment in index-linked government securities, in respect of which the current net discount rate was 3 %."
The Damages Act 1996
7. Section 1 of this Act provides:
"(1) In determining the return to be expected from the investment of a sum awarded as damages for future pecuniary loss in an action for personal injury the court shall,......take into account such rate of return (if any) as may from time to time be prescribed by an order made by the Lord Chancellor.
(2) Subsection (1) above shall not however prevent the court taking a different rate of return into account if any party to the proceedings shows that it is more appropriate in the case in question."
8. It seems clear that once the Lord Chancellor sets a rate, or one or more rates, the courts will apply that to the generality of cases, subject to the power of the court in a particular case, for good reason applying a different rate.
9. The Lord Chancellor has not yet set a rate under the Act. But he has issued a consultation paper, by coincidence two or three days before this appeal was heard. The paper calls for responses by 31 May 2000. It is said that it is the Government's intention to set a rate before the summer recess.
Can the court set a rate different from 3.0 %?
10. All their Lordships in Wells v Wells considered that the appropriate rate was 3%, although Lord Lloyd of Berwick would have preferred a bracket. Three members of the House of Lords clearly stated that the rate should not be altered until the Lord Chancellor set a rate under the Act (Lord Lloyd at p376A, Lord Hope of Craighead at p393F and Lord Clyde at p397F). What Lord Clyde said was:
"......what rate should be adopted at least for the immediate future, pending a reconsideration of the problem by the Lord Chancellor. In that regard there are clear advantages in the recognition of a single formula which can be universally adopted for the calculation of recurring losses and expenses over any future tract of time. While simplicity may carry with it the risk of imprecision that risk should be offset by the advantage of saving the time and expense which might otherwise be spent in the necessity for elaborate inquiry with expert witnesses. A conventional formula may seem artificial but now that detailed calculations and tables founded on reasonably reliable bases are available full advantage ought to be taken of them. The certainty of the result should produce economies in achieving agreement and settlement which should outweigh any rough edges of imprecision. Of course such a formula should not be seen as set in stone. It can serve as a general guide, open to modification and adjustment to meet the demands of particular cases. I would favour a rate at the present time of 3 % net."
11. Mr Irwin QC, on behalf of the Appellant, submitted that in that passage Lord Clyde was not saying that the rate should be 3 % until the Lord Chancellor set a rate. That submission is too subtle for us. Mr Irwin further submitted that these statements were not necessary for the decision and not binding. We do not agree. The House clearly considered it was part of their decision to lay down guidelines. It is part of the guideline to say for how long it should operate or how it should be altered. Even if it was not part of the decision, we do not feel free to depart from an opinion so clearly expressed by the majority of the House.
12. Mr Irwin relies on the speeches of Lord Steyn and Lord Hutton. At p388E the former said:
"While this figure of about 3 per cent should not be regarded as immutable, I would suggest that only a marked change in economic circumstances should entitle any party to reopen the debate in advance of a decision by the Lord Chancellor."
Lord Hutton at p404H said:
"I further consider that in order to promote and facilitate settlements and to simplify the assessment of damages in actions which come on for trial the rate of 3 per cent taken by this House in the present appeals should be applied in other cases notwithstanding fluctuations in the return on ILGS until the Lord Chancellor prescribes a different rate pursuant to his power under section 1 of the Damages Act 1996 or unless there is a very considerable change in economic circumstances."
Mr Irwin submits that the substantial drop in the gross return from 3.53% at the time of Wells v Wells to 2.84% at the time of trial on ILGS is just such a very considerable change in economic circumstances. He seeks to reinforce this submission by comparing the monthly, yearly and three-yearly averages in the gross rate between that prevailing at the time of Wells v Wells to that in February 2000, being the last month for which the figures are available. They are as follows:
Monthly Monthly Yearly 3 yearly average
Wells v Wells 2.85% 3.28% 3.53%
Feb. 2000 1.91% 1.93% 2.58%
13. Mr Irwin further submitted that the view of the majority that there should be no change until the Lord Chancellor sets a new rate was predicated on the assumption that the Lord Chancellor would set a rate in the near future. But we can find nothing in the speeches to support this view. Even if we are wrong, and it is open to this court to change the rate, we agree with Mr Havers QC for the respondents, that the reduction in the ILGS return rate alone is not a sufficient change of economic circumstances to justify a change in the discount rate before the Lord Chancellor sets a rate. If that is what Lord Steyn and Lord Hutton contemplated, they could easily have said so, and they did not. All members of the House were aware that the ILGS rate was liable to fluctuate; indeed it had already shown discernible decline at the time of that hearing. The need for certainty to facilitate settlements coupled with the undesirability of extensive evidence from accountants, actuaries or economists with a view to persuading courts to change the discount rate, militates strongly against any court seeking to do so before the Lord Chancellor has acted under the 1996 Act.
The impact of taxation
14. Should the discount rate be lowered or the multiplier increased to take account of the impact of taxation on the award to the appellant? This matter was considered by the House of Lords in Hodgson v Trapp [1989] 1 AC 807. In that case the trial judge had assessed the multiplier for assessing the cost of future care and loss of earnings at 13 and 11 respectively, which he increased to 14 and 12 to take account of taxation, following the decision of the Court of Appeal in Thomas v Wignall [1987] QB 1098. On appeal direct to the House of Lords under the leapfrog machinery of section 12 of the Administration of Justice Act 1969, the House overruled Thomas v Wignall and disallowed the additional year on the multiplier. Lord Oliver of Aylmerton, with whose speech the other members of the House agreed, drew attention to the appellant's answer to the plaintiff's submission in that case which was that it rested upon:
"the unproven and unprovable assumptions first, that the current tax regime will either remain unchanged or will be altered to the disadvantage of the respondent as tax payer and secondly, that the effect of higher rate tax is not in any event capable of being counteracted by careful investment policy. Future taxation, the appellant's argue, is as much an imponderable as future inflation' (p829H)."
At p833B:
"There are, I think, four considerations which have to be borne in mind at the outset. First and foremost is the fact that the exercise upon which the court has to embark is one which is inherently unscientific and in which expert evidence can be of only the most limited assistance. Average life expectations can be actuarially ascertained, but to assess the probabilities of future political, economic and fiscal policies requires not the services of an actuary or an accountant but those of a prophet. Secondly, the question is not whether the impact of taxation is a factor legitimately to be taken into account at all but to what extent, if at all, it is right to treat it as a separate, individual and independent consideration which justifies the making of additional provision conditioned not by the loss sustained but by the way in which the provision made for that loss is assumed to be dealt with by the recipient. Thirdly, what the court is concerned with is the adequacy of a fund of damages specially designed to meet the loss of future earnings and the cost of future care. It cannot, I think, be right in assessing the adequacy of that fund to take into account what the plaintiff may choose to do with other resources at his command, including any sums which he may receive by way of compensation for other loss or injury. If he chooses, for instance, to retain other sums awarded to him, for example, loss of amenity or pain and suffering, and to supplement his income by investing them so as, incidentally, to put himself into a higher tax bracket, that cannot, in my judgment, constitute a legitimate ground for increasing the compensatory fund for loss of future earnings and future care. That fund must, in my judgment, be treated as a fund on its own for the purpose of assessing its adequacy. Fourthly, it must not be assumed that there is only one way in which the plaintiff can deal with the award and there has, I think, to be borne in mind Lord Diplock's analysis of the underlying basis of the method by which the multiplier is selected. In practice, of course, the probability is that the plaintiff who receives a high award will treat the fund as a capital fund to be retained and invested in the most advantageous way. But the award has been calculated by reference to the cost of purchasing an appropriate annuity; and since the fund is at his complete disposal it is open to the plaintiff actually so to apply it either in whole or in part. If that were done, the capital proportion of each annual payment, calculated by dividing the cost of the annuity by the life expectation of the annuitant at the date of purchase, would be free from tax and the balance alone would be taxable. It is, I suppose, conceivable that that proportion could attract tax at the higher rate but it would require a very large annuity before a significant additional fiscal burden was attracted."
Finally, at p835B he said:
"Both in Cookson v Knowles [1979] AC 556 and in Lim's case [1980] AC 174 this House was prepared to envisage that there might be very exceptional cases, where it could be positively shown by evidence that justice required it, in which special allowance might have to be made for inflation and, inferentially, for tax. Such cases are not, I suppose, impossible, although for my part I do not find it easy to envisage circumstances in which evidence could satisfactorily establish that which is inherently uncertain. It would, I think, be extremely undesirable that trials of personal injury cases should be encumbered with evidence from actuaries and accountants directed to demonstrating the unprovable as scientific fact for the purposes of an exercise which is, in its very nature, incapable of being scientific. Moreover, I cannot think that such evidence would in the end be of any real assistance to the trial judge in making his assessment. Tax is merely one of the many imponderables that are taken care of in the conventional method of assessing damages. There may, I suppose, be cases - although, again, I cannot for my part readily imagine one arising in an exercise in its nature imprecise - where the considerations pointing to the selection of one of two possible multipliers are so finely balanced that the future incidence of taxation may be taken into account as one, but only one, of the factors which might properly tip the balance in favour of selecting the higher rate rather than the lower, but the course sanctioned in Thomas v Wignall [1987] QB 1098 of making a specific addition on account of this factor alone is, in my judgment, as incorrect as would be a specific addition to cover the risk of future inflation."
15. This passage was expressly approved in Wells v Wells, (see per Lord Steyn at p388G, Lord Hope at p393E and Lord Hutton at p405D). Mr Irwin submitted that Lord Oliver cannot have contemplated under the old conventional method of assessing future loss and cost of care awards of the magnitude which are now possible following Wells v Wells. That may be so; but it must have been clear to the House of Lords in Wells that as a result of their decision awards in excess of £3 million are likely to be much more frequent. We were told in the course of argument that awards at about this level were running at about the rate of 50 per year in the Health Service alone. Mr Irwin submitted that awards of £2.5 million were still rare, and were therefore to be regarded as exceptional within Lord Oliver's statement.
16. This aspect of the case does not seem to have attracted much attention in the court below. But so that this court could appreciate the impact of taxation on awards, we permitted further evidence to be adduced by both sides' accountancy experts. What has been most helpful is a table prepared by Mr Peter Dickerson, the respondent's accountant. This shows the impact of taxation on various levels of funds from £50,000 to £3,500,000 at a gross average return rate on ILGS of 3.53%, the rate at the time of Wells v Wells. The assumption is that there is no other taxable income save from the fund. As is apparent from the table with funds up to £100,000 no tax is payable, so the claimant receives the gross rate. Furthermore if one rounds up or down to the nearest 0.5%, as was suggested in Wells v Wells to be appropriate, funds between £500,000 and £2.5 million fall within the net rate of 3%. Taking 3% as the norm, funds under £100,000 are 17.66% better off, funds of £3.5 million are 11.16% worse off, though of course in actual cash terms the difference is more substantial; at £100,000 the claimant is about £7000 better off, while at £2.75 million he is about £100,000 worse off.
Portfolio 3.53%
£ %
50,000 3.530
100,000 3.530
250,000 3.441
500,000 3.233
750,000 3.142
1,000,000 3.092
1,250,000 3.044
1,500,000 2.978
1,750,000 2.916
2,000,000 2.862
2,250,000 2.816
2,500,000 2.776
2,750,000 2.742
3,000,000 2.713
3,250,000 2.687
3,500,000 2.665
17. Although the logic of these figures might support Lord Lloyd's view that there should be a bracket for the discount rate, for example 3.5% for funds up to £100,000, to 2.5% for those over £3.5. million, the House of Lords came down firmly in favour of an overall rate of 3%, save in very exceptional cases. This must mean as it seems to us that funds which fall within 0.5% of the norm of 3% should not be regarded as exceptional, let alone very exceptional. The chart does not go above £3.5 million, so we do not know where the 2.5% net return applies. Certainly the logic of the appellant's argument in this case must be that funds under £100,000 are also very exceptional, so that a higher discount rate should be applied to them. That is not, we think, what the House envisaged in Wells v Wells.
The Court of Protection
18. Mr Irwin submitted that unless account was taken of tax in a case of this magnitude, the claimant would be undercompensated and suffer injustice. The decision in Wells v Wells required the discount rate to be calculated on the basis of the return or ILGS; if it is invested in ILGS, the claimant will be undercompensated. But the House of Lords made it plain that while 3% net was the basis of calculation, the claimant could do what he or she liked with the award. There can be little doubt that with a very large award designed to pay an annuity over a long period, prudent investment in a mixture of equities and gilts can provide a higher net return. This is what Lord Oliver envisaged in Hodgson v Trapp as a way of dealing with higher rate taxation save in very exceptional circumstances. By endorsing what Lord Oliver said, it seems to us that their Lordships in Wells v Wells envisaged that in such cases prudent investment of a very large fund could take care of all but the most exceptional cases. But the matter goes further than that in this case, since this fund is managed by the Court of Protection. Indeed the judge awarded the not inconsiderable sum of £185,581.00 in respect of costs and management fees of the Court of Protection.
19. At the time of Wells v Wells the investment policy of the Court of Protection for long term investments was 70% of the fund in equities and the balance in gilts and cash. In the case of short term investment (five years and under) the policy was different, in that equities were excluded altogether. The evidence of Mr Dickerson, which was not before the judge, but which was admitted by agreement as was further evidence from Mr Hogg, is that for portfolios of £50,000 to £100,000 the Court of Protection now recommend at least 15% or 20% gilts or Special Account for funds in this range. The investment policy for larger funds remains the same. Where it is known to the court that a responsible and prudent investor such as the Court of Protection will in fact invest so as to provide a return higher than that on ILGS, we see no reason to think that the claimant is undercompensated or is treated unjustly simply because the award is not topped up to take account of the incidence which tax will have on a fund larger than £1.25-£1.5 million (the point at which on the whole the net return approximates to 3%).
20. For these reasons this appeal will be dismissed.
(Order does not form part of the approved Judgment)
© 2000 Crown Copyright