Periodical Payments: Good, Bad or Indifferent?
WILLIAM NORRIS QC
The Caroline Weatherill Memorial Lecture
Friday, 26 October 2007
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Introduction
I have read a number of tributes to Caroline Weatherill in whose memory this lecture
is given. Although I did not know her personally, I was very impressed by the
universally high esteem in which she was held, both as a person and as a lawyer. It is
therefore a great privilege to be invited to give this, the first of what is to be a series of
memorial lectures.
Since Caroline’s practice in England and in the Isle of Man concentrated on the field
of Personal Injury, it seemed appropriate that this first lecture should be on a subject
which is currently of particular interest to Personal Injury practitioners, namely
Periodical Payments. This new regime came into effect on 1st April 2005.
Interpretation of its key provisions has already provided fertile ground for the lawyers
– present company included, I am afraid – and opinions as to the merits of the regime
remain mixed – hence, the title of this talk which, in the best legal tradition, allows me
the opportunity to examine a range of opinions without necessarily having one of my
own.
Background to the New Regime
Let me begin with a little background.
Until the new regime came into force in 2005, compensation for future loss almost
always involved awarding damages in the form of a lump sum. The only exceptions
to that general rule - both of which depended upon the consent of the parties and did
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not lie within the power of the Court – were known as “Periodic Payments” and
“Structured Settlements”.
The power to make awards of damages in respect of future loss upon a periodic basis
was created by Section 2 of the Damages Act 1996. However, as Lord Steyn1 has
observed, that power was, for all practical purposes, a dead letter. It could only
happen if the parties consented and most claimants preferred to control their own
money. In any case, they were unlikely to be very interested in an annual award
which gave no protection against inflation and would be taxable as income. Thus,
Lord Steyn spoke for many when he suggested that the solution was
“relatively straightforward… the Court ought to be given the
power of its own motion to make an award for periodic
payments rather than a lump sum in appropriate cases. Such
a power is perfectly consistent with the principle of full
compensation for pecuniary loss. Except perhaps for the
distaste of Personal Injury lawyers for a change to a familiar
system, I can think of no substantial argument to the
contrary. But judges cannot make the change. Only
Parliament can solve the problem”.
So what I have called the first exception was really no exception at all.
The second exception - and this was a real one – came about with the introduction
and increasing but inconsistent use of Structured Settlements. These first came to the
1 Wells v Wells [1999] 1 AC 345, at 384B
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attention of practitioners in the late 1980s. Where such a settlement was entered into,
what happened was that the defendant would purchase an annuity in the name of the
claimant from an approved insurer. That annuity would usually provide a guaranteed
income. To preserve the value of that annual payment against inflation, there were
sometimes flat annuities but with a guaranteed amount over a minimum number of
years but, more usually, the annuity would be linked to the Retail Prices Index or part
– sometimes all – of the fund would be placed in a “With Profits” fund. In that case,
the income would rise annually according to RPI or, for ‘With Profits’ Funds,
according to the performance of the market in which the fund was invested.
The obvious attractions of a structured settlement from the point of view of the
claimant were that he received a regular and predictable income, was relieved of the
burden of managing his investments2and the income under the structured settlement
was received net of tax and, at least after secondary legislation introduced following
the report of the Master of the Rolls’ Working Party3 in general, the receipt of income
from such an annuity would be unlikely to affect a claimant’s State benefits.
Structured Settlements were usually – but by no means always – dealt with on a “top
down” basis: that is, the parties first calculated what they thought the award would be
worth as a conventional lump sum. They then looked at what income could be
generated from an annuity purchased by a part of that lump sum. That sum was
applied to the “structure”. Occasionally, the more creative and perhaps better
informed and more numerate advisors would take a “bottom up” approach – that is,
they would agree what the claimant needed annually, find the price of an annuity
2 Moreover, as was made clear in Eagle v Chambers [2004] 1 W.L.R. 3081, the costs of active management of a portfolio are not recoverable as a head of claim within a lump sum award. 3 Of which the author was a member.
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which would meet that loss and then dispose of that part of the future loss by the
purchase of an annuity in that amount. What proportion that represented of the
overall lump sum award then became irrelevant: that element of future loss was
simply taken out of the calculation.
In practice, the biggest attraction to claimants was that the payments would continue
for life. That was of vital importance because the predominant concern of those who
are seriously injured, and/or of those who care or are responsible for such people, is
that they want to be assured that the money will not run out if, in fact, they live longer
than the doctors expect. In the case of the profoundly disabled child, the concern of
the parents is, quite understandably, about what will happen when they are no longer
around to take responsibility. And it must be appreciated that these concerns were not
simply expressions of false hope. On the contrary, improvements in life expectancy in
the UK population, in general, and amongst those with cerebral palsy, or suffering
major head injuries, tetraplegia or paraplegia in particular have improved very
substantially in the last quarter of a century. Whether the rates continue to improve
over the next century is not so clear, at least if the dire warnings about an increasingly
obese population are to be taken seriously.
There were, therefore, good reasons why Structured Settlements were attractive to
claimants but there were the same or similar reasons for preferring a lump sum which,
as we shall see, still exist in relation to an award of Periodical Payments. Of course,
there were lawyers who preferred a lump sum settlement just because that was the
system they knew, that was the way they did their sums and they were fearful of
change. Equally, there were clients who were quite capable of making up their own
minds as to the most attractive form of settlement, especially as it became
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increasingly common – as it was by the late 1990s – for expert financial advice to be
sought by the parties in the major claims.
My experience, and I think this is shared by most other practitioners, is that what was
almost always decisive could be narrowed down to one or two factors. First, some
form of annuity was always going to be attractive if there was a real dispute on life
expectancy, particularly if there was any concern that it might be resolved in the
defendant’s favour. Second, the claimant needed to know the rate of return which a
particular annuity could guarantee or was likely to produce: he would compare that
with the income he might obtain by investing a lump sum. At one time, when the
annuity market was particularly buoyant, there were rates of return approaching ten
percent. Obviously, such rates were particularly attractive to a claimant, but they also
had attractions for defendants. It was by no means unusual, from time to time during
the 1990s, for a defendant to discover that the application of a lump sum for the
benefit of the claimant on the annuities market generated such an attractive rate of
return that the insurer was then able to settle the case for a net outlay that was actually
less than if he had paid over a single lump sum in damages and the claimant was still
better off.
But those good days did not last long. When the annuity market declined, as it did
from time to time in the 1990s and as it has done since probably around 2003,
Structured Settlements became less popular and cases, again, tended to settle on a
lump sum basis. Courts did very little to police these different approaches to
litigation. Of course, unless the claimant in a particular case lacked capacity, how the
parties settled their claims is and was entirely their own business. But even in the
case of claimants without capacity, the general experience was that if the judge was
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satisfied that the claimant had been properly advised, both by his lawyers and, where
appropriate, by a financial expert, they would not intervene if approval was sought of
a lump sum award.
Full Compensation: The 100% Principle
Those then were the two acknowledged exceptions to the traditional lump sum
approach. But it is important to remember that whether future loss is compensated by
some form of annual payment – under structured settlement or a periodical payment –
or by an award of a lump sum, each method has the same object of seeking to achieve
full compensation for the injured person’s actual loss.
Commentators regularly trace this “full compensation” principle back to the well
known statement by Lord Blackburn in Livingstone v Rawyards Coal Company4,
dealing with an appeal to the House of Lords from Scotland, where he said that:
“In settling the sum of money to be given for reparation of
damages, you should as nearly as possible get at that sum of
money which will put the party who has been injured, or who
has suffered, in the same position as he would have been in if
he had not sustained the wrong”.
But if that is the object, achieving it has never proved entirely straightforward.
4 (1880) 5 Ap. Cas. 25. Lord Blackburn’s words have been cited in almost every major PI case in the last 3 years, whether at first instance or on appeal.
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It is also worth remembering that until the late 1960s it was perfectly common for
courts to award a single, global sum by way of compensation for all personal injuries
and loss, past and future alike. The global sum comprising that award would often be
calculated without even ascribing a particular figure to a particular head of loss. As
late as 1967, the Court of Appeal felt able to say - with a straight face5- that itemised
awards were “exceptional”. It was not until Jefford v Gee6 that one could say with
confidence that the tide had turned in favour of an increasingly scientific approach.
However, the road to a scientific or accurate calculation of loss has been a bumpy
one. As late as the early 1990s, many of us knew judges or practitioners who were
almost equally oblivious to the meaning, value and application of actuarial tables.
Indeed, it was thought necessary for the Damages Act 1996 to provide specifically
that the Ogden Tables, as they had become known, were thereafter admissible
evidence without formal proof to support the calculation of future loss. And the object
of the actuarial multiplier, when applied to the multiplicand representing the annual
loss, is to produce a sum which, sensibly invested, provides the necessary level of
income throughout the period – such as the claimant’s life – over which the loss will
be suffered.
Even when the judges got the hang of the Ogden Tables, many still felt that their
powers were emasculated unless they could also apply some sort of instinctive
“judicial” discount to those actuarial multipliers. Incredible though it may seem, it
was even argued on behalf of the defendants in Wells v Wells in the House of Lords7
5 In Watson v Powles [1968] 1 Q.B. 596. 6 [1970] 2 Q.B. 130 7 [1999] 1 AC 345
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that there was still a proper place for such discounts. But as Lord Lloyd made clear in
that case,
“The [actuarial] tables should be regarded as the starting
point rather than a check. A Judge should be slow to depart
from the relevant actuarial multiplier on impressionistic
grounds, or by reference to a ‘spread of multipliers in
comparable cases’, especially where the multipliers were
fixed before actuarial tables were widely used”.
Achieving accuracy
Clearly, one of the obvious shortcomings of the lump sum calculation is not just that
future loss is assessed at the date of trial and inevitably involves guesswork as to what
are likely to be the claimant’s needs in the future, but, more particularly, it is bound to
be inaccurate because it depends on making a judgment as to the claimant’s life when
setting the multiplier, particularly for those losses which are likely to continue for the
rest of his or her life. For all future losses, therefore, it is inevitable that the award
will either be too much or too little because one can almost guarantee that the
claimant will live less long or longer than the theoretical date that might derive from
the life tables: even for an award in respect of loss of earnings, say, to a 50 year old to
cover the years to age 65 or for care for someone who is likely to live to the age of 80,
there is the risk of over-compensation should that person die sooner. For the badly
injured 18 year old, with a normal life expectancy reduced only by, say, 10%, the risk
of error is much greater.
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The other problem, given that the assessment of future losses is made at the date of
trial, is to preserve the value of the award over the relevant period. A discount rate of
2.5% is 2.5% after tax and inflation measured by reference to RPI8 . If – as is
generally acknowledged to have happened with regard to care costs – actual costs
have risen at a faster rate then there is a clear risk of under-compensation with an
RPI–based discount rate at that level.
If there are cases where there has been over-compensation for either reason, I have to
say that I think they must be very rare. On the other hand, few of us have any very
clear idea whether lump sum awards have in fact led to under-compensation and, if
so, whether that is as true of the more recent awards over the last few years as it may
be of the older awards. At least in the last 10 years, probably because of an
increasingly scientific approach to the bases of calculation and because the courts
have been more inclined to embrace the “100% principle” and judges are less alarmed
by the enormity of the sums awarded, the levels of awards have been much greater.
Whether they will provide sufficiently for a claimant’s needs in the long term is
uncertain. Equally, few of us actually know whether, in practice, claimants really do
institute and maintain the elaborate care regimes for which their experts have argued
so persuasively. It would also be wrong to assume that even the older – apparently
very much more modest – lump sum awards have necessarily led to under-
compensation. Master Lush, Master of the Court of Protection, in a paper in 20069,
gave the example of the award of £229,000 as a lump sum in the case of Lim Po Choo
8 It also assumes the fund is invested at the beginning of the multiplier period and exhausted at its end. 9 Originally delivered to the London Common Law & Commercial Bar Association’s seminar on 19 April 2005, but updated: “Damages for Personal Injury: why some claimants prefer a conventional lump sum to periodical payments”.
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v Camden and Islington Area Health Authority10, Dr Lim Po Choo suffered
devastating injuries as a result of a minor gynaecological operation which went wrong
in 1973. Master Lush’s records show that her nursing fees are £65,000 per annum
and have been more or less the equivalent sum for the last 30 odd years. Her
investments, which have been actively managed throughout that period, are currently
worth £1,379,000.
On the other hand, there are, as Master Lush also notes, cases where the fund has
been diminished in value or even exhausted. In such cases, the claimant necessarily
falls back on the State, which of course already provides for those who do not have
successful compensation claims.
In short, despite increasing obedience to the 100% principle and now the developing
use of periodical payments, nobody really knows whether recent awards will prove
sufficient. It is time, I suggest, for some new research given that what there is very
outdated, such as the paper for which the Law Commission was responsible –
“Personal Injury Compensation: How Much is Enough?”11 published in 1994.
The Arguments in Favour of Periodical Payments
This desire for full and more accurate compensation forms the key rationale for the
periodical payments regime and for giving the court the power to impose such an
award upon a defendant who, at least in the current financial markets, will usually be
reluctant to agree to settlement on that basis. That reluctance arises for the
10 [1979] 1 QB 196, [1980] AC 174. 11 (1994) Law Com No. 225.
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understandable reason that it is, at present, far more costly to purchase the annuity to
cover an annual loss than it would be to settle the same loss calculated on the
conventional lump sum basis. I can give you a vivid example from one of my own
current cases. The claimant is an 18 year old boy with a slight reduction in his life
expectancy of around 5 years. The multiplier based on a discount rate of 2.5% in
Ogden Table 1 would be 31. The annual cost of the – relatively limited – care and
support he needs is £20,000. On a lump sum basis the award under this head would be
£620,000. The annuity quotes in July 2007 were as follows: for an annual income of
£20,000 for life increasing according to RPI - £961,000, the equivalent of applying a
multiplier of 48: for RPI + 1% - £1,300,000: for RPI + 2% - £1,900,00012 .
It must also be recognised that not all advocates or supporters of the new regime were
necessarily motivated by altruism. For example, few doubt that the prime mover
behind the Courts Act 2003, by which this provision was introduced, was the
Treasury. Anybody who believes that the Treasury liked the idea of settling awards
of damages by annual payments rather than by substantial lump sums because of a
philanthropic concern for the welfare of claimants, as opposed to the state of its
accounts, probably also believes in fairies.
Quite simply, the Treasury pressed for the new provision because making such
awards on an annual basis suited its special accounting interests. A recent expression
of exactly the same policy is the case of A v B Hospitals NHS Trust13 where the
claimant wanted a lump sum, but the defendants insisted on an award of Periodical
12 One cannot purchase an annuity linked to a different index such as the Annual Survey of Hours and Earnings (ASHE) or the Average Earnings Index (AEI) for a number of reasons including the impact of the Close Matching Regulations governing the products that life insurers can offer. These have to be matched by stocks such as Index Linked Governments Stocks – the “link” in question being to RPI. 13 [2006] EWHC 2833 (Admin)
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Payments – but only so long as the award was linked to the RPI. That provided the
lawyers with an early foray into the arguments about indexation for future loss, to
which we shall turn in a moment.
Another reason for the Treasury, and perhaps the insurance market to an extent, to
favour the new regime was a concern that, if the Court could only compensate by
lump sum awards, and they were potentially going to cause under-compensation,
there might well be pressure on the Government to change the discount rate of 2.5%
which had been set by the Lord Chancellor in 2001. I have already commented that
there were powerful arguments that the discount rate at that level – at least by 2003 –
would result in under-compensation. Nevertheless, the Court of Appeal ruled in
Cooke v United Bristol Healthcare14 that the rate could not change until the Lord
Chancellor said so. The consequence was that there were political pressures15 which
led some to expect that the discount rate might well be reduced, perhaps to 2%,
perhaps even to 1.5%. That would undoubtedly have made lump sum awards
significantly more expensive, because multipliers would have been increased.
The other reason why the insurance industry felt able to support the new regime was
because, at the time when the matter was debated in Parliament in early 2003, the
state of the annuities market was such that it was expected that the difference between
an award of Periodical Payments and one by way of a lump sum would be
insignificant – that it would be “cost neutral”: that is, the anticipation was that the
cost of funding £20,000 per annum for the care of the young man in our earlier
example, as a lump sum calculated on the multiplier/multiplicand basis, would not be
14 [2003] EWCA Civ 1370 15 Not least from the Government’s own Actuary, Christopher Daykin.
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very significantly different from the cost of an annuity providing an equivalent
income.
Implementation
Royal assent was given to the relevant provision on 20th November 2003. However,
implementation was delayed – and occurred rather suddenly – on 1st April 2005. The
provision gives the Court the power
“to order Periodical Payments in all cases where orders or
settlements have not been made before 1st April [2005]. The
power to order variable Periodical Payments will apply only
to proceedings… issued on or after 1st April [2005].”
The Act does not simply leave it to the parties to do what they choose. The court16
may (a) order that the damages are wholly or partly to take the form of Periodical
Payments; and (b) shall consider whether to make that order. The Practice Direction
is in a similar vein. PD 41.6 says that the Court
“shall consider and indicate to the parties as soon as
practicable whether Periodical Payments or a lump sum is
likely to be the more appropriate form for all parts of an
award of damages”.
PD 41.6.4A and 6.7 provide that
16 What is now Section 2(1) of the Damages Act 1996
15
“the Court must be satisfied that the parties have considered
whether the damages should wholly or partly take the form of
Periodical Payments.”
How Periodical Payments are funded
If damages are to be paid by way of Periodical Payments then, in practice, this is
achieved is in one of two ways. Either the defendant/insurer can purchase an annuity
from an approved provider, that is, a Life Insurer. But the problem is that only
annuities that will be available will be RPI linked or RPI + a percentage (say 1 or 2%)
as a proxy for a more generous index than the RPI17. Alternatively, the insurer or
defendant can (if qualifying as a secure provider himself18) choose to “self fund” – or
he may have no choice if the Court insists on a more generous index than RPI (such
as ASHE 6115). In that case, given that the only annuities available will be RPI or
RPI plus, if the Court is not satisfied that either is equivalent to the more accurate
index, the only solution will be to self-fund19.
But not all defendants or insurers will qualify as secure providers entitled so to do.
And many will not want to. Self funding has always been an attractive option from
the point of view of the Treasury and it was thought that it might also be attractive to
insurers who have advantage of managing their own money and can avoid paying
huge sums in a particular year. In practice, few insurers have done so.
17 A solution which is acceptable under the financial regulatory regime, as Baroness Scotland acknowledged during the Parliamentary debate in 2003 18 See sections 2(3) and (4) of the Damages Act 2006 19 I know of one case in which it is suggested that the insurer might purchase the RPI annuity and maintain a running account so that it can provide annually for any shortfall between the income from the RPI annuity and what income would be received indexed to ASHE 6115.
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Preference versus Need
The parties’ “preferences” are specified as relevant factors to be taken into account in
the practice direction, but it is the claimant’s needs which are decisive20.
To date, courts have generally been prepared to support the parties’ preferences as to
whether a case should be disposed of by a lump sum or by Periodical Payments. But
it is not an entirely consistent picture. In Godbold v Mahmood21 the parties were keen
on a lump sum disposal, but were very much at odds as to the appropriate multiplier
because there was an issue as to the Claimant’s life expectancy. Mr Justice Mitting,
on 20th April 2005, insisted that there should be a periodical payment, linked to the
RPI. More recently, in Sarwar v Ali22 the Claimant, who was of full capacity,
participated in a trial which was to be one of the test cases on indexation23 but
changed his “preference” after the evidence was complete. Lloyd-Jones J noted the
Claimant now preferred a lump sum for three reasons: the first was to bring the
litigation to an end and to avoid becoming involved in an appeal process. The second
was because the issue of life expectancy had been resolved in his favour and the third
was because he wanted “more control over his life”. The judge considered that the
expert evidence that the claimant himself had called during the course of the case
created a compelling argument in favour of the award of Periodical Payments,
particularly as regards the cost of care, case management and loss of earnings, and he
ruled accordingly.
20 See PD 41.7 21 [2005] EWHC 1002 22 [2007] EWHC 1255 23 and also covered very many other issues.
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More recently still, in Burton v Kingsbury24, Flaux J dealt with a case in which –
perhaps unusually25- the defendant argued that the award should be Periodical
Payments and the claimant expressed a strong preference for a lump sum. Flaux J
respected the claimant’s preference but only to a very limited extent. He did not
“propose to order Periodical Payments generally” but he did do so with regard to the
cost of future care and case management26. He expressed the view that “such an
award, if indexed properly, will best protect the claimant in respect of his likely needs
in the future”. He also felt that such an order would best suit the way in which he
intended to deal with the issue between the parties about how far account should be
taken of the possibility/probability that some/much/all of the claimant’s care might be
funded by the State27.
Notwithstanding those two last examples28, it remains, in my experience, very
unusual indeed for a judge to insist on Periodical Payments if the claimant is of full
capacity and wants a lump sum. Of course, the court has no power to impose a
Periodical Payments order if the parties have settled the case before it comes to trial
or judgement, unless the claimant lacks capacity and the judge has to approve any
settlement. In a case where the claimant does lack capacity, the court is not only
required to adopt a more paternalistic role but is long since accustomed to so doing.
Here the position may be very different. But again, judicial attitudes vary. Master
Lush, in the paper to which I referred earlier, made it clear that he was generally
24 [2007] EWHC 209 1 (QB) 25 One can speculate about the Defendant’s real motivation in making this submission, but that is probably a matter for another day. 26 See paragraph 88 of the Judgment. 27 The Judge acceded to the Defendant’s proposed arrangement with regard to the State funding issue, (paragraph 108 – 110 of the Judgment) which may explain why the Defendant’s lawyers made the submission they did with regard to Periodical Payments. 28 Interestingly, from judges who did not themselves practice in the field – but whose judgments nevertheless make very impressive reading.
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inclined to follow a claimant’s preferences so long as he was confident that that
claimant had been properly advised. He noted29that “in 70% of the higher value cases
coming into the Court of Protection, claimants, their families and their legal and
financial advisors, when given the choice, would prefer to settle on a conventional
lump sum basis, and they usually have sound reasons for doing so. These reasons are
not simply financial, but extend across a much broader range of considerations –
medical, social, cultural, rights-based and personal – and are more holistic insofar
as they treat the claimant as a member of a family rather than in isolation”.
How popular have Periodical Payments become?
When the new power was introduced, there was a wide divergence of opinion as to
how popular such awards would be. The Guidance issued by the Department of
Constitutional Affairs (as it then was) was upbeat:
“Ministers expressed the hope that the use of Periodical
Payments in appropriate personal injury cases will become
the norm.”
Other commentators thought that such awards would only ever be made in
exceptional cases: Lord Steyn might have anticipated that that was explicable only
because of practitioners’ distaste for a new system arising out of their familiarity with
the old one. But the fact remains that many claimants, as we have seen from Master
Lush’s experience, which is consistent with my own, have nevertheless preferred the
29 In his conclusion at page 16.
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traditional, lump sum approach. It may, therefore, be convenient at this juncture to
consider the pros and cons from the claimant’s point of view.
I would give the following reasons why a claimant might be attracted by a periodical
payment. First, as we have already seen, he need not worry about the money running
out should he live longer than expected. If the award is made for life30 it will last so
long as he lives. Second, the payments will be secure: where an insurer or a
defendant purchases an annuity to meet the obligation for Periodical Payments, the
liability to make those payments due under the Court Order is discharged and passes
to the Life Office and is protected under the Financial Services Compensation
Scheme. Equally, if the payments are funded by the defendant, then so long as the
defendant qualifies as a secure provider, the payment is secure31.
A third good reason would be that the claimant is relieved of the burden (and
expense) of managing the investments. Fourth, he may continue to receive State
benefits32. Fifth, an order can be made providing for monies to be paid to dependants
post death; and sixth, if a devout Muslim, he avoids the impact of the charitable
obligations arising under Shari’a law.
One might expect those preferences to arise only with regard to the larger cases but it
is not necessarily so. It is not difficult to imagine that a claimant with, say, a five year
loss of earnings from age 60 to 65 in the sum of £15,000 per annum might prefer to
30 It need not be: it can be made for some lesser period, such as loss of earnings to age 65. 31 Section 2(3) of the Damages Act 2006 provides that “Court may not make an order for Periodical Payments unless satisfied that the continuity of payments under the order is reasonably secure”. That means private Defendants, some medical defence organisations, foreign insurers and certain others cannot self fund. 32 Though this is itself a controversial issue, at least if such benefits are not means tested.
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have a secure annual income for that period, without any worries, rather than
managing his own lump sum.
There are a number of reasons why claimants might have good reasons not to want
Periodical Payments. I will concentrate on the three main ones.
The first reason concerns the indexation debate. It was understood by – I believe –
almost everyone, at least until Sir Michael Turner said otherwise in Flora v Wakom33
that the annual value of the payments would be preserved by linking such payments
to the Retail Prices Index34 save in an exceptional case. Indeed, this was a reason
regularly given to judges on approval hearings as justification for settlement on a
lump sum basis35. This was particularly true where a claimant had a big annual loss
and a relatively long life expectancy. The concern was that the claimant did not wish
to be tied into an investment vehicle that would lead to him being under-compensated
if, for example, the costs of nursing care in the future were likely to increase at a
faster rate than the RPI.
Whether an RPI links constitutes full compensation is one thing. Whether Parliament
intended that courts should have the power to provide a different link in the
unexceptional case is another matter entirely.
On the face of it, the statutory provision and the Practice Direction seemed to be
clear. Section 2(8) provides that:
33 A decision upheld by the Court of Appeal. [2006] EWCA Civ 1103. 34 Godbold v Mahmood is as good an example as any. 35 An example would be the claimant’s preference as explained and endorsed by Lloyd-Jones J in A v B Hospitals NHS Trust [2006] EWHC 1178, 2833.
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“An order for Periodical Payments shall be treated as
providing for the amount of payments to vary by reference to
the Retail Prices Index… at such times and in such manner
as may be determined by or in accordance with the Civil
Procedure Rules”.
And as CPR 41.8(1) provides that:
“… the amount of payments shall vary annually by reference
to the RPI unless the Court orders otherwise under s2(9)…”.
That seemed clear enough to most of us - which brings us to Flora v Wakom36. In
that case, the Court was persuaded that Section 2(9) which provides that “an order for
Periodical Payments may include provision – (a) disapplying sub-section (8); or (b)
modifying the effect of sub-section (8)” was intended – for practical purposes – to give
the courts a free hand to select the most accurate choice of index.
There are those37 who remain entirely clear that what Parliament intended was that
there should be an RPI link save in an exceptional case. An obvious example of an
exceptional case would be a claimant who was going to live overseas. In such a case,
it would be inappropriate to have his or her annual care costs linked to the UK RPI.
That this was Parliament’s intention was, some might say, made plain in the
Parliamentary debate, the Regulatory Impact Assessment and in the DCA Guidance.
It might also seem to follow inevitably from the fact that insurers were encouraged to
36 [2006] EWCA Civ 1103. 37 Present company included.
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support the new regime on the basis that the cost to them was likely to be neutral. As
Baroness Scotland explained to the House of Lords, it would probably be so because
they would be able to purchase annuities to discharge their obligations. But the very
fact that it was envisaged that an insurer could purchase an annuity meant that
Parliament must have had an RPI link in mind because the only annuities that you can
purchase are… RPI linked annuities.
But this is all water under the bridge. If the Court of Appeal feels its job is to re-write
a statute, the better to give effect to the underlying policy behind the introduction of a
new provision, then who am I to say that theirs is not an enlightened approach, if
novel? Whether that is what the courts, rather than Parliament, should be doing may
be a different question. And there can be no doubt that this is what the Court of
Appeal did in Flora. Brooke LJ38used the Explanatory Notes to the Courts Act as the
basis for interpreting the meaning of the new provisions. Brooke LJ quoted
paragraph 354 of the Explanatory Notes to the effect that Section 2(8) and 2(9) were
there “to ensure that the real value of Periodical Payments is preserved over the
whole period for which they are payable”. Brooke LJ justified the whole approach of
the Court of Appeal by saying that the fundamental policy behind the Act of making
Periodical Payments attractive would be frustrated if the courts were not allowed a
wide discretion in their choice of index under those provisions. As he said39, it would
otherwise be a “very real danger that this new statutory scheme would …
(otherwise)… be rendered to a great extent a dead letter”.
38 Paragraphs 14 and 18 of his Judgment. 39 At paragraph 34.
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Unsurprisingly, once the statutory brake was taken off, the lawyers (present company
again included, I am afraid) got to work arguing about the choice of index.
Essentially, the debate came down to whether one should stick with RPI because it
was indeed fair and accurate, or should look at RPI plus a certain percentage –
perhaps 1% or 2% - or whether one should go for a more specific index such as
ASHE40 or AEI. The ASHE survey, which is available in aggregated and
disaggregated forms, has prevailed in the cases in which the issue has been litigated to
date - such as Sarwar v Ali, Thompstone v Tameside and others.
The author should say no more about that at the moment, because the Thompstone
group of appeals are due to be heard in the Court of Appeal in November this year. In
any case, you may as well wait to hear what the Court of Appeal actually does rather
than listen to me saying what I think it should or will do.
But we are looking at the indexation debate in the context of the parties’ preferences.
I turn to the other reasons.
The second main reason why claimants have preferred and may continue to prefer a
lump sum is that they and their families do like control of their money. They like
flexibility: they like to be able to manage their own care regime creatively, perhaps
spending rather less than the full annual cost on the basis of which their case has been
argued. Quite understandably, they like to have a little in hand for a rainy day. That
may be contrary to the principle of full and accurate compensation, but it is
undoubtedly what happens. Indeed, even if the claimant does go down the Periodical
40 Annual Survey of Hours and Earnings, published by the Office for National Statistics on the basis of official statistics.
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Payments route, he will always want to have a significant contingency fund for just
those reasons. In some cases, it is even possible to imagine how a claimant might
wish to have what might by some be seen as the best of both worlds. For example, he
might seek to have a Periodical Payments award kick-in after five years, capitalising
the loss from now to year five as a lump sum. Or he might invite the Court to start
the Periodical Payment in year 19 of the 20 years that the doctors have agreed he will
live41.
The third main reason is a practical one: if there is any significant element of
contributory negligence, experience is that claimants are less likely to be interested in
the Periodical Payments.
Other, perhaps less important, reasons include the fact that a lump sum provides
finality and avoids any kind of continuing relationship with the defendant, and a
claimant may like there to be a substantial windfall for relatives if he were to die. All
of these are reasons that we have already seen referred to by Master Lush.
Defendants have been almost all consistent in their attitude. We saw that the NHSLA
was a qualified enthusiast for the new regime: it supported it – but only if it was an
RPI index that prevailed. No doubt it will deploy its arguments founded on the
concept of “distributive justice” in the appeals shortly to be heard in Thompstone v
Tameside and Glossop42. We shall see what the Court of Appeal makes of them.
41 This is not necessarily as disadvantageous to defendants as it might seem. In the first place, the lump sum covering the period until the Periodical Payments start will cost the defendant a lot less than an annuity to cover the same period. Secondly, there is quite a buoyant market in deferred annuities: but none of this argument has yet been ventilated in court to the author’s knowledge. 42 [2006] EWHC 2904.
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However, almost all the insurers that I have come across have either been neutral or
firmly against disposing of a case by way of Periodical Payments43. As we have seen,
this apparent shift in the attitude of the insurance industry to the new regime is largely
the result of the changing state of the annuities market on the real cost to the insurer
especially if unwilling or unable to self fund.
There are other, perhaps more subtle reasons. For example, reserving is extremely
difficult, reinsurance poses its own special problems and few insurers wish to have
any active management of the funds as is necessary for insurers who do self fund.
Is The New System More Accurate?
An important question is whether the new regime likely to achieve the objects of
accuracy and simplicity which were expected of it. I’m afraid that, to a significant
extent, the answer is in the negative.
In the first place, arguments about life expectancy are not eliminated. They simply
have become rather less important. That is because it is overwhelmingly unlikely that
any claimant is going to want to take all his future losses as Periodical Payments.
Those that are not will have to be capitalised as lump sums. And if we have to
calculate a lump sum, we need a multiplier, and a multiplier means we need to decide
on life expectancy.
Secondly, the annual amount, whether it is to be paid yearly, quarterly or whenever,
has still to be set at the date of trial. That means one has to decide today what are 43 Certainly the NHSLA in A v B and the Defendant in Burton v Kingsbury are exceptions, for reasons that we have already considered.
26
likely to be the Claimant’s care needs in ten years’ time or at the various future stages
when the change in payment will occur. Typical examples would be the age of 18,
the end of full time education, or ages like 50 and 65 when there may be an increasing
need for care. It must be axiomatic that the assessment today of the cost of providing
for a need which will arise in the future involves guesswork and, in that sense, is a
very blunt instrument. Our typical claimant is not going to suddenly need two carers
at night at the age of 50, whereas he only needed one the day before. The change will
occur very much more gradually and so the reality is that the annual award as a
Periodical Payment will either be too little at age 49 or too much at age 50.
These inherent inflexibilities are as much – on one view, even more of – a feature of
the new regime than they were of the old. The only way to achieve greater accuracy
would be to allow the annual award to be varied according to a claimant’s change of
circumstances.
That was what some argued should be allowed under the new regime. However, it is
entirely clear that the variation provision44has only very limited application.
In the first place, the original order or agreement must provide for it45; and second,
only a single application is allowed by either side. Moreover, according to the
Explanatory Notes, it will only be allowed where there is a “significant medical
deterioration or improvement in the Claimant’s condition which can be foreseen at
the time of the original order and where the Court provides for the possibility of
variation in that order”.
44 Introduced by the Damages (Variation of Periodical Payments) Order 2005. 45 Article 2.
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In reality, this is a provision which is going to have little or no practical value. If a
claimant does suddenly find that although his condition has not changed significantly,
but nevertheless he now needs two carers rather than one, he will not be able to rely
even upon this substantial change in his circumstances to justify a fresh application.
And, of course, the converse is true: if the defendant discovers that the claimant can
manage perfectly well with support from a Swedish au pair instead46, he will not be
able to return to Court and argue that he is being over-compensated.
One possible way of achieving greater accuracy under the new regime would be by an
increased use of interim awards, that is, periodical payments on an interim basis47.
But this is controversial: will a Court be persuaded to deal with the 25 year old
claimant’s care needs on the basis of an interim award of periodical payments and a
final determination in, say 12 years time when his actual needs are clearer? Or will a
court say that this is contrary to the whole culture of final determination sooner rather
than later and constitutes variation by reference to a change in circumstances by the
back door? I suspect we shall see before too long.
The Future
If the defendants’ appeals in Thompstone & Ors succeed and if RPI were to emerge as
the only appropriate index save for the very exceptional case, then there is no doubt
that the attractions of awards of Periodical Payments will be limited, at least for the
bigger cases, particularly where there is a life expectancy of more than a few years.
46 There is anecdotal evidence of such a case in real life. 47 See section 2A(5) of the Damages Act 1996.
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If, on the other hand, the claimants prevail, periodical payments will have significant
attractions, not least as a useful form of protected investment with a generous return.
ASHE 6115 is likely to be the first choice of index for things like care and other
indices will be chosen as appropriate for other losses – the AEI for earnings, for
example.
This may lead to further arguments as to what is or should be the right index for the
particular heads but, in time, the likelihood is that typical patterns will emerge and
that neither side will retain the enthusiasm to argue or re-argue about indices too
often. Whether any particular index will actually preserve the value of the claimant’s
money over time depends on how the individual index performs relative to the actual
cost or value of the particular loss, as regards earnings, care, transport, equipment,
accommodation or any other area of typical loss.
But whatever powers the Court may have with regard to indices, there will always be
claimants with a strong preference for the flexibility and other attractions of a lump
sum. I am sure that a preference for a lump sum will be the norm for the smaller
cases. For the larger cases, only time will tell. The future will in part be determined
by the attitude of claimants and claimants’ organisations, in part by the lawyers and
judges and in part by the state of the financial markets.
My conclusion is that the new regime has a fundamentally important role to play
particularly where there is any real issue about life expectancy. Periodical payments
will, at the very least, always represent a valuable alternative to a lump sum
calculation.
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But whilst there may be greater benefits for the claimant, the new system is hardly
more accurate than the old one. If accuracy is what is meant by “full compensation”
and if that is the real object and basis of compensation, it can only be achieved by
providing the Court with a power to vary when the claimant’s circumstances have
changed and it can be demonstrated that the award is either too small or too big.
But the day when courts are allowed that degree of flexibility are, I think, some way
off.
WILLIAM NORRIS QC
26th October 2007
39 Essex Street
London WC2R 3AT