England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
(His Honour Judge Murphy: Sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand London WC2 Thursday, 24th January 2002

Thursday, 24th January 2002

1. LORD JUSTICE MUMMERY: I will ask Dyson LJ to give the first judgment.
2. LORD JUSTICE DYSON: The claimant suffered serious brain damage in a road traffic accident on 20th February 1998. It is said on her behalf that she currently has a life expectancy of 46 years. Her affairs are now administered by the Court of Protection. She commenced proceedings against the defendant in 1998. The defendant has admitted liability, but quantum remains in issue.
3. A case management conference was held on 22nd October 2001 by His Honour Judge Murphy QC sitting as a Deputy High Court Judge. The claimant wished to rely on the expert evidence of Mr Hogg dated 19th October 2001. In his report, Mr Hogg states that in his opinion multipliers assessed on the basis of a 2.5% discount rate are unfair for claimants who are awarded large sums of damages which are expected to compensate them for future losses over a long period of time. It is his opinion that in cases such as that of this claimant, the appropriate discount rate for the quantification of future losses is 2%, and not 2.5%, the figure stated by the Lord Chancellor in the Damages (Personal Injury) Order 2001 ("the Order") that was made on 25th June 2001, and to which I shall come shortly. Mr Hogg's report was first disclosed to the defendant at the hearing of the case management conference. The judge made various case management decisions. These included an order that:

"1.Evidence from a Forensic Accountant being necessary, the parties have permission to adduce evidence from Forensic Accountants dealing with the issue of the discount rates to be applied when assessing future loss multipliers."

4. Mr Hogg's report was duly served on the defendant on 22nd October.
5. The defendant had objected to the order permitting forensic accountancy evidence in relation to the discount rate issue on the grounds that the application was too late. It was said that it was wrong to allow evidence on an issue of such great importance and complexity to be admitted so shortly before the trial, which at that time was due to start on 14th November. No objection was taken on 22nd October on the basis that the evidence should not have been admitted because it did not support a case that had real prospects of success that the discount rate should be 2% rather than 2.5%.
6. On 26th October, the claimant served a revised schedule of damages based on a 2% discount rate. The schedule pleads substantial sums under heads which are typical for this type of case, including claims for the cost of future care and for loss of future earnings. On the basis of a 2% discount rate, the total sum claimed is in excess of £3 million. On any view, this is a substantial claim. It was conceded on behalf of the defendant before the judge that it was worth more than £1 million.
7. On 29th October, an application was made to the judge on behalf of the defendant that he should reconsider his decision to permit evidence from expert accountants as to the correct discount rate. But the judge held that, since the order of 22nd October had been drawn up, he had no jurisdiction to reconsider the matter. It is clear, however, that even if he had reconsidered the matter, he would not have reached a different conclusion, since he refused the defendant permission to appeal his earlier decision. He gave these reasons for refusing permission to appeal:

"The claimant asserted that this was an exceptional case for the purposes of the discount rate to be applied. S1(2) of the Act contemplates there being exceptional cases. The difference in damages could be as much as £500,000. I gave permission for the evidence to be heard and permitted the [defendant] reasonable time for obtaining [his] own expert. Overriding principle applies."

8. He adjourned the hearing of the trial of quantum until February 2002. The defendant was later given permission to appeal against the decision of 22nd October by Hale LJ.
9. The Act to which the judge was referring was the Damages Act 1996, which so far as material provides:

"1(1) In determining the rate 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, subject to and in accordance with the rules of court made for the purposes of this section, 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."

10. As I have said, on 25th June 2001 the Lord Chancellor made the Order prescribing a rate of 2.5%. His reasons for selecting that figure were published on 27th June. The following day, an error in calculating the figure for the three year average yield on Index-linked Government Stock ("ILGS") which formed an important part of the Lord Chancellor's decision was brought to his attention. On 22nd July, the Lord Chancellor published fresh reasons for the figure of 2.5% based on the accurate three-year average yield.
11. It is necessary to refer to some passages in the Lord Chancellor's reasons. He said that he had decided to set a single rate to cover all cases:

"It will eliminate scope for uncertainty and argument about the applicable rate. Similarly, I consider it is preferable to have a fixed rate, which promotes certainty and which avoids the complexity and extra costs that a formula would entail."

12. He recognised that the rate would be bound to be applied in a range of different circumstances over a period of time: that was why he set the rate to the nearest half percent. He said that he had decided that he should:

"set a rate which should obtain for the foreseeable future. I consider it would be very detrimental to the reasonable certainty which is necessary to promote the just and efficient resolution of disputes (by settlement as well as by hearing in court) to make frequent changes to the discount rate. Therefore, whilst I will remain ready to review the discount rate whenever I find there is a significant and established change in the relevant real rates of return to be expected, I do not propose to tinker with the rate frequently to take account of every transient shift in market conditions."

13. Later he said:

"Setting a single rate to cover all cases, whilst highly desirable for the reasons given above, has the effect that the discount rate has to cover a wide variety of different cases, and claimants with widely differing personal and financial characteristics. Moreover, as has become clear from the consultation exercise (including responses by expert financial analysts to questions which I posed them), the real rate of return on investments of any character (including investments in Index-Linked Government Securities) involves making assumptions for the future about a wide variety of factors affecting the economy as a whole, including for example the likely rate of inflation. In these circumstances, it is inevitable that any approach to setting a discount rate must be fairly broad-brush. Put shortly, there can be no single `right' answer as to what rate should be set. Since it is in the context of larger awards, intended to cover longer periods, that there is the greatest risk of serious discrepancies between the level of compensation and the actual losses incurred if the discount rate set it not appropriate, I have had this type of award particularly in mind when considering the level at which the discount rate should be set."

14. The Lord Chancellor then explained in some detail why he had alighted on 2.5% rather than any other rate. He took a simple average of ILGS yields at an assumed rate of inflation of 3%, and arrived at an average gross yield of 2.46%. He concluded, therefore, that the net average yield on ILGS as adjusted to take account of tax lies in the range of 2% and 2.5%. Given that the rate was to be set to the nearest 0.5%, the choice lay between 2% and 2.5%. He then explained in detail why he opted for 2.5% rather than 2%. In summary, he gave these reasons: (a) the market in ILGS was at present distorted, so that the prevailing yields were artificially low; (b) the Court of Protection, even in the wake of the decision of the House of Lords in Wells v Wells [1999] 1 AC 345 had continued to invest on behalf of claimants in multi-asset portfolios, such that real rates of return well in excess of 2.5% could be expected; and (c) it was likely that `real' claimants with large awards of compensation would not be advised to invest solely or even primarily in ILGS, but rather in a mixed portfolio.
15. Finally the Lord Chancellor said this:

"Finally, in deciding that a single rate of 2.5% should have been set by me on 25 June 2001, I have borne in mind that it will, of course, remain open for the Courts under section 1(2) of the Damages Act 1996 to adopt a different rate in any particular case if there are exceptional circumstances which justify it in doing so."

16. I turn now to Mr Hogg's report.
17. Mr Hogg referred to the Lord Chancellor's rate of 2.5% and said that the Lord Chancellor had based his reasoning on the average gross redemption yield on ILGS in the previous three years. In section 3 of his report, taking the Lord Chancellor's gross yield figure of 2.46%, he considered the impact of taxation on the claimant's case on the assumption of different levels of award. He arrived at returns net of tax of 1.86%, 1.97% and 2.12% on the basis of awards of £2.75 million, £2 million and £1 million respectively.
18. In section 4, he adapted the gross yield of 2.46% to the claimant's circumstances. The only circumstance that he identified was her 46 year life expectancy. He noted that the Lord Chancellor had given equal weighting to the yields of each of the 12 ILGS stocks that he had taken into account in arriving at his figure of 2.46%, and said that in the case of this claimant the portfolio of ILGS should be weighted towards stocks with the longest maturity dates. He said at paragraph 4.4:

"The weighting adopted by the Lord Chancellor may give a fair result for some claimants but not for those whose damages have to last for long periods. As Mrs Warriner's damages have to last 46 years her portfolio of ILGS would be heavily weighted towards the stocks with the longest maturity dates. I illustrate this in the following table."

19. He then set out a table showing an estimated gross yield of 2.18% for Mrs Warriner over a 46-year period on the basis of what Mr Hogg considered to be more realistic weightings. He increased this to 2.21% to take account of the fact that her claim for loss of earnings was in respect of a shorter period than her claim for care costs. Finally, Mr Hogg took taxation into account and said that she would achieve a net return of 1.63% on an award of 2.75 million invested in ILGS, 1.74% on £2 million and 1.885% on £1 million. He set out his conclusions at section 5. These included:

"5.4In my opinion the method adopted by the Lord Chancellor for arriving at the gross ILGS yield is unfair for claimants whose damages have to last for a long period."

20. On behalf of the defendant, Mr Leighton Williams QC submits that the judge should not have allowed the claimant to adduce the evidence of Mr Hogg on the discount rate issue because (a) the application for permission to admit it was too late and (b) the claimant has not in any event raised a prima facie case for a rate of 2% rather than 2.5%. Counsel did not develop his first ground. The decision of the judge was an exercise of discretion in case management. It is common ground that this court will not interfere with the exercise of case management powers unless it is shown that the decision that is challenged was plainly wrong. In my judgment, this decision was not plainly wrong on the grounds that the application was too late. I say no more about the first ground of appeal.
21. I turn to the substantive ground that was developed by Mr Leighton Williams. He submits that it is not open to the claimant to seek to show by means of the evidence of Mr Hogg that the Lord Chancellor has fixed a rate that is "wrong" or "unfair". The rate of 2.5% is now law, and must be applied until and unless it is changed, subject only to showing that this rate is not appropriate in the case in question under section 1(2) of the Act. The present case, where it is said that the claimant has a life expectancy of 46 years, is not unusual and is typical of cases that the Lord Chancellor had "particularly in mind" when setting the rate at 2.5%. A central purpose of having a fixed rate for all types of cases is to achieve certainty. It is only in a very exceptional case that a different rate should be adopted.
22. Mr Leighton Williams refers to Warren and Northern General Hospital Trust [2000] 1 WLR 1404. That was a case decided after Wells v Wells [1999] 1 AC 345 (in which the House of Lords had laid down the guideline rate of 3%), but before the Lord Chancellor set the rate at 2.5%. In Warren, the claimant contended that damages should be assessed on the basis of a discount rate of 2% rather than 3% in accordance with Wells. The argument was that the discount rate should be reduced to counteract the effect of the higher rate tax on the award. The Court of Appeal rejected the argument. Stuart-Smith LJ gave the judgment of the court. At paragraph 13 of the judgment he said:

"The need for certainty to facilitate settlements coupled with the undesirability of extensive evidence from accountants, actuaries or economists with a view to persuading the courts to change the discount rate, militates strongly against any court seeking to do so before the Lord Chancellor has acted under the Act of 1996."

23. At paragraph 17 he said that in Wells, the House of Lords came down firmly in favour of an overall rate of 3% "save in very exceptional cases", and that this must mean that funds which fall within 0.5% of the norm of 3% should not be regarded as exceptional, let alone very exceptional. The court rejected the argument that the fact that the claim was in excess of £3 million made it exceptional so as to justify a departure from the 3% norm.
24. Although Warren was decided before the Lord Chancellor prescribed the 2.5% rate, Mr Leighton Williams relies on it as showing that there is nothing exceptional about the present case, and that there is no real prospect that the trial judge would award damages on the basis of a discount rate other than 2.5%. Accordingly, the judge was in error in making the order permitting evidence to be adduced by forensic accountants.
25. Mr Leighton Williams criticises Mr Hogg for failing to take into account all of the reasons given by the Lord Chancellor for prescribing the rate of 2.5%; in particular, he makes the point that Mr Hogg focused exclusively on the Lord Chancellor's reference to the average gross yield of 2.46% without also recognising that the Lord Chancellor took a number of other factors into account in arriving at his rate of 2.5%. He also submits that Mr Hogg has not identified any features of the present case which make it one to which section 1(2) of the Act should apply.
26. On behalf of the claimant, Miss Cox QC submits that the decision that is challenged on this appeal is a case management decision, and that the court should only interfere with it if satisfied that the judge was plainly wrong. She says that the question of whether the discount rate should be 2% or 2.5% is one that should be determined by the judge at trial after hearing expert evidence. Mr Hogg has raised at least a prima facie case for 2% on the facts of the present case. The difference between an award on the basis of 2% and an award on the basis of 2.5% is very substantial.
27. She submits that section 1(2) of the Act does not require the claimant to show that there are exceptional circumstances which justify a lower rate than 2.5%. All that the claimant has to show is that a lower rate is "more appropriate in the case in question". The claimant does not attack the rate chosen by the Lord Chancellor. He does, however, say that a lower rate is more appropriate by reason of the particular circumstances of the case. These are the combination of a long life expectancy and a claim for damages in excess of £3 million. She submits that Mr Hogg's report raises a prima facie case, or a case that has a real prospect of success, and that the particular circumstances of the claimant's case make it more appropriate to use a rate of 2% than 2.5%. It is at least arguable that the claimant will not receive full and just compensation if her award is based on the 2.5% rate. It would be wrong in principle to prevent the trial judge from hearing evidence and a full argument on the point.

Conclusion

28. In Wells the House of Lords laid down a guideline discount rate of 3% that was to be applied generally until the Lord Chancellor prescribed a rate pursuant to section 1(1) of the Act. Their Lordships recognised that a single rate was a somewhat rough and ready instrument, but they embraced it on policy grounds. These grounds were that the certainty of such a rate was desirable, would facilitate settlements, and result in saving the expense of expert evidence at trial: see per Lord Lloyd of Berwick at 373, and per Lord Steyn who said at page 388:

"My Lords, until the Lord Chancellor takes action under his statutory powers it is essential that there should be a firm and workable principle. It should be general and simple in order to enable settlement negotiations and litigation to be conducted with the benefit of a reasonable decree of predictability of the likely outcome of a case. While acknowledging an element of arbitrariness in any figure, I am content to adopt about 3 per cent as the best present net figure. For my part I would derive that rate from the net average return index-linked government securities over the past three years. 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. The effect of the decision of the House on the discount rate, together with the availability of the Ogden tables, should be to eliminate the need in future to call actuaries, accountants and economists in such cases."

29. At page 397 H, Lord Clyde said:

"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."

30. Finally, at page 404 G, Lord Hutton 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 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."

31. These policy considerations were articulated and applied by this court in Warren, as has already been seen. In that case, the court interpreted Wells as saying that the overall rate of 3% should be applied save in "very exceptional cases".
32. The same policy considerations informed the Lord Chancellor's decision choose the single rate of 2.5%. This is clear from the passages that I have already quoted from his Reasons published on 27th July 2001. It is also clear that, in arriving at the figure of 2.5%, he took into account the fact that it remains open to the court under section 1(2) of the Act to adopt a different rate if there are "exceptional circumstances which justify it in doing so". These policy considerations are no less important since the Lord Chancellor prescribed the 2.5% rate on 25th June 2001 than they were before.
33. We are told that this is the first time that this court has had to consider the Act, and that guidance is needed as to the meaning of "more appropriate in the case in question" in section 1(2). The phrase "more appropriate", if considered in isolation, is open-textured. It prompts the question: by what criteria is the court to judge whether a different rate of return is more appropriate in the case in question? But the phrase must be interpreted in its proper context, which is that the Lord Chancellor has prescribed a rate pursuant to section 1(1) and has given very detailed reasons explaining what factors he took into account in arriving at the rate that he has prescribed. I would hold that in deciding whether a different rate is more appropriate in the case in question, the court must have regard to those reasons. If the case in question falls into a category that the Lord Chancellor did not take into account and/or there are special features of the case which (a) are material to the choice of rate of return and (b) are shown from an examination of the Lord Chancellor's reasons not to have been taken into account, then a different rate of return may be "more appropriate".
34. Miss Cox criticises the Lord Chancellor for using the phrase "exceptional circumstances" at the end of his reasons when referring to section 1(2) of the Act. So did Lord Brennan in the debate in the House of Lords on 29th November 2001 when an opposition motion that the order be revoked and a rate of 2% be substituted was rejected. It is true that the phase "exceptional circumstances" does not appear in the Act. But in my judgment the Lord Chancellor must have meant by "exceptional circumstances" no more than special circumstances not taken into account by him in fixing the rate of 2.5%. If "exceptional circumstances" is understood in that way, the phase is, in my view, a helpful explanation of the meaning of the subsection.
35. If section 1(2) is interpreted in this way, it is likely that it will be in comparatively few cases that section 1(2) will be successfully invoked, at any rate as long as the 2.5% rate and the Lord Chancellor's reasons for it continue to apply. The construction that I have given to section 1(2) seems to me to accord with and promote the policy considerations to which I have already referred. A generous and open-ended interpretation of section 1(2) would undermine the policy that was clearly articulated by Lord Chancellor in his reasons, and by the courts before that.
36. I turn now to consider whether the report of Mr Hogg raises a case that has a real prospect of success of showing that a lower rate than 2.5% is more appropriate in this case.
37. Miss Cox relies on the fact that the claimant has a life expectancy of 46 years and that the sum claimed was in excess of £3 million. In my view, these circumstances are not sufficient, even arguably, to justify applying a discount rate of 2% rather than 2.5%. I note in passing that in Warren the claimant had a life expectancy of 47 years and the sum awarded at trial on the basis of the 3% rate was £3.1 million. The court rejected the argument that the case was exceptional such that, on application of the principles stated in Wells, a rate lower than 3% should be adopted. In Warren, it was argued (as before us) that, unless a lower rate was taken, the claimant would be under compensated and suffer injustice. The response of the court was that prudent investment of a very large fund could take care of all but the most exceptional circumstances.
38. One of the factors taken into account by the Lord Chancellor in arriving at a rate of 2.5% was that prudent investment by the Court of Protection would enable a rate of return at or above 2.5% to be achieved comfortably. Of greater importance is the fact that, as has been seen from one of the passages that I have quoted earlier, the Lord Chancellor was alive to the very point that Miss Cox makes, namely that it is in the context of larger awards intended to cover longer periods that there is the greatest risk of serious discrepancies between the level of compensation and the actual losses incurred if the discount rate set is not appropriate. The Lord Chancellor said in terms that he had this type of award "particularly in mind" when considering the level at which the discount rate should be set.
39. Miss Cox makes the valid point that the Lord Chancellor does not say what he meant by "larger awards intended to cover longer periods". How large? How long? But claims by claimants with life expectancies of between 30 and 50 years are by no means uncommon, nor are claims in the range of £2 to £3 million. I cannot accept that claims of this kind were not included in the category which the Lord Chancellor had particularly in mind when setting the rate at 2.5%. In my judgment Mr Hogg has not identified any special features of this case which take it outside the classes of case that the Lord Chancellor took into account when fixing the rate. In truth, it seems to me that, despite Miss Cox's disavowal, Mr Hogg's report is, on analysis, more a criticism of the Lord Chancellor's rate itself. It is noteworthy that on Mr Hogg's approach, the net return for the claimant even if her award were no more than £1 million would be below 2% and would, in his view, justify invoking section 1(2).
40. To summarise, therefore, I consider that there is nothing in the particular facts of this that makes it more appropriate to apply a lower rate than 2.5%. I would allow the appeal on this basis. It is true that this involves interfering with a case management decision. But the argument before the judge was limited to the delay point, although he made reference to section 1(2) in his judgment. Of particular significance is the fact that he was not shown the Lord Chancellor's reasons, and did not have the benefit of the detailed submissions that were made by counsel in this court.
41. LORD JUSTICE LATHAM: I agree. In this area certainty is extremely important. It enables cases to be settled with confidence, and it produces fairness as between litigants.
42. Prior to the making of the order by the Lord Chancellor under the Damages Act 1996, the court applied the conventional discount rate (for many years 4.5% and latterly 3%) across the board, save in exceptional circumstances: see Wells v Wells and Warren v Northern General Hospital Trust. Nothing in the Act suggests to me that it was Parliament's intention that this general policy should in any way be diluted. That, indeed, is clearly the view of the Lord Chancellor, as set out in the reasons that he gave. In that I consider him to have been correct.
43. It is against that policy background, therefore, that the words in section 1(2) fall to be construed. The phrase "more appropriate", as explained by Dyson LJ, has to be read in conjunction with the reasons given by the Lord Chancellor for choosing the particular rate of return that he has. It follows that it is difficult to see how a case falling squarely within the category of case envisaged by the Lord Chancellor, in which he has given a reasoned justification for the prescribed rate, could be said to be one in relation to which that prescribed rate is inappropriate in the absence of special features.
44. Turning to the present appeal, it is clear that the judge's decision was made without the benefit of the Lord Chancellor's reasons. We are, therefore, entitled to consider afresh the appropriate order to make. Although the court should always be careful when seeking to restrict the ambit of evidence, it can and should do so if there is no real prospect of the evidence having any effect on the issues to be tried. The evidence of Mr Hogg raises no special features which take this case outside the category of those in receipt of large awards specifically referred to by the Lord Chancellor in his reasons, as explained by Dyson LJ. The Lord Chancellor explains fully why he considered that the 2.5% rate of return is appropriate for them, and refers to the fact that proper advice is likely to result in a wider spread of investment than solely in index-linked stock. The Lord Chancellor, as already explained, indeed went further in his reasons for prescribing the rate of 2.5% than merely his calculation based upon the rate of return from index-linked stock. Mr Hogg's report makes no reference to those matters and does not seek to deal with them in any way.
45. It follows, in my judgment, that there is no material before the court to suggest that 2.5% is inappropriate. It follows that the report of Mr Hogg would have no effect on the issue before the court.
46. Accordingly would allow the appeal.
47. LORD JUSTICE MUMMERY: I agree with both judgment. The appeal is allowed.
Order: Appeal allowed. We order that the respondent pay the costs of the appeal and that those costs be set off against the amount of damages awarded. Public funding assessment of the respondent's costs.