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

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“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