House of Lords
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Wells (Suing by Her Daughter and Next Friend Susan Smith) v. Wells
Thomas (Suing by His Mother and Next Friend Susan Thomas) v. Brighton Health Authority
AND NEXT FRIEND SUSAN SMITH)
AND NEXT FRIEND SUSAN THOMAS)
LORD LLOYD OF BERWICK
There are before the House appeals in three actions for personal injuries, all raising the same question, namely, the correct method of calculating lump sum damages for the loss of future earnings and the cost of future care. Negligence was admitted in all three cases.
In Wells v. Wells the plaintiff, a part-time nurse, aged nearly 58, was very severely injured in a traffic accident when she was travelling as a passenger in a car driven by her husband. She suffered serious brain damage. As a consequence she is no longer capable of working, or caring for herself or her family. She will require care for the rest of her life. The judge, His Honour Judge Wilcox, awarded her £120,000 for pain and suffering. The total award, including loss of future earnings and cost of future care on a life expectancy of 15 years, came to £1,619,332. The Court of Appeal reduced the figure for pain and suffering to £100,000 and substituted a life expectancy of 10 years 3 months. They arrived at a total of £1,086,959. The main reason for the sharp reduction was that the Court of Appeal took a discount rate of 4
In Thomas v. Brighton Health Authority the plaintiff was six years old at the date of the trial. He sues by his mother and next friend. He was injured before birth by the maladministration of a drug intended to induce labour. He suffers from cerebral palsy, and is very severely physically handicapped. The judge, Collins J., awarded £110,000 for general damages. The total award on a life expectancy to the age of 60 came to £1,307,963. The Court of Appeal reduced the figure to £994,592. The reason was the same as in the case of Wells v. Wells, save that Collins J. took a discount rate of 3 per cent., not 2
In Page v. Sheerness Steel Co. Ltd. the plaintiff, then aged 24, was working in a steel mill alongside a cooling bed when a white-hot steel bar buckled and struck him in the head. It entered the right side of his skull, penetrated his brain and emerged on the left side. A workmate cut the bar short. The plaintiff then pulled the bar out with his own hands. He was conscious throughout. It is hard to imagine how he could still be alive. Dyson J. awarded £80,000 for general damages. The total award, including loss of future earnings to a normal retiring age of 62 and the cost of future care on a normal life expectancy came to £997,345
A number of separate points arise in relation to the individual cases. They would not by themselves have justified leave to appeal. However, the point which is common to all three appeals is of considerable importance, both for the plaintiffs themselves and for the insurance industry in general. It is convenient to deal with that point first.
It was common ground between all parties that the task of the court in assessing damages for personal injuries is to arrive at a lump sum which represents as nearly as possible full compensation for the injury which the plaintiff has suffered. This is not therefore the place to discuss other methods of compensation, such as the structured settlement. By section 2(1) of the Damages Act 1996 a court may make an order for the whole or part of the damages to take the form of periodical payments, provided the parties agree. This was in accordance with the recommendation of the Law Commission Report No. 224 Cm. 2646 "Structured Settlements and Interim and Provisional Damages". I note that the Law Commission recommended that in the absence of agreement there should be no judicial power to impose a structured settlement for the reasons which they set out in paragraphs 3.37-3.53 of their Report.
It is of the nature of a lump sum payment that it may, in respect of future pecuniary loss, prove to be either too little or too much. So far as the multiplier is concerned, the plaintiff may die the next day, or he may live beyond his normal expectation of life. So far as the multiplicand is concerned, the cost of future care may exceed everyone's best estimate. Or a new cure or less expensive form of treatment may be discovered. But these uncertainties do not affect the basic principle. The purpose of the award is to put the plaintiff in the same position, financially, as if he had not been injured. The sum should be calculated as accurately as possible, making just allowance, where this is appropriate, for contingencies. But once the calculation is done, there is no justification for imposing an artificial cap on the multiplier. There is no room for a judicial scaling down. Current awards in the most serious cases may seem high. The present appeals may be taken as examples. But there is no more reason to reduce the awards, if properly calculated, because they seem high than there is to increase the awards because the injuries are very severe.
The approach to the basic calculation of the lump sum has been explained in many cases, but never better than by Stephen J. in the High Court of Australia in Todorovic v. Waller  37 A.L.R. at 498 (see Kemp and Kemp Quantum of Damages vol. 1, para. 7-010), by Lord Pearson in Taylor v. O'Connor  A.C. 115, 140, and by Lord Oliver of Aylmerton in Hodgson v. Trapp  A.C. 807, 826.
The starting-point is the multiplicand, that is to say the annual loss of earnings or the annual cost of care, as the case may be. (I put so-called Smith v. Manchester damages on one side). The medical evidence may be that the need for care will increase or decrease as the years go by, in which case it may be necessary to take different multiplicands for different periods covered by the award. But to simplify the illustration one can take an average annual cost of care of £10,000 on a life expectancy of 20 years. If one assumes a constant value for money, then if the court were to award 20 times £10,000 it is obvious that the plaintiff would be over-compensated. For the £10,000 needed to purchase care in the 20th year should have been earning interest for 19 years. The purpose of the discount is to eliminate this element of over-compensation. The objective is to arrive at a lump sum which by drawing down both interest and capital will provide exactly £10,000 a year for 20 years, and no more. This is known as the annuity approach. It is a simple enough matter to find the answer by reference to standard tables. The higher the assumed return on capital, net of tax, the lower the lump sum. If one assumes a net return of 5 per cent. the discounted figure would be £124,600 instead of £200,000. If one assumes a net return of 3 per cent. the figure would be £148,800.
The same point can be put the other way round. £200,000 invested at 5 per cent. will produce £10,000 a year for 20 years. But there would still be £200,000 left at the end.
So far there is no problem. The difficulty arises because, contrary to the assumption made above, money does not retain its value. How is the court to ensure that the plaintiff receives the money he will need to purchase the care he needs as the years go by despite the impact of inflation? In the past the courts have solved this problem by assuming that the plaintiff can take care of future inflation in a rough and ready way by investing the lump sum sensibly in a mixed "basket" of equities and gilts. But the advent of the index-linked government stock (they were first issued in 1981) has provided an alternative. The return of income and capital on index-linked government stock ("I.L.G.S.") is fully protected against inflation. Thus the purchaser of £100 of I.L.G.S. with a maturity date of 2020 knows that his investment will then be worth £100 plus x per cent. of £100, where x represents the percentage increase in the retail price index between the date of issue and the date of maturity (or, more accurately, eight months before the two dates). Of course if the plaintiff were to invest his £100 in equities it might then be worth much more. But it might also be worth less. The virtue of I.L.G.S. is that it provides a risk-free investment.
The first-instance judges in these appeals have broken with the past. They have each assumed for the purpose of the calculation that the plaintiffs will go into the market, and purchase the required amount of I.L.G.S. so as to provide for his or her future needs with the minimum risk of their damages being eroded by inflation. How the plaintiffs will in fact invest their damages is, of course, irrelevant. That is a question for them. It cannot affect the calculation. The question for decision therefore is whether the judges were right to assume that the plaintiffs would invest in I.L.G.S. with a low average net return of 2
Mr. Leighton Williams Q.C. and Mr. Coonan Q.C. for the defendants pointed out that those who receive large awards are likely to be given professional investment advice. All but one of the accountants called as experts at the three trials gave as their opinion that lump sum awards should be invested in a mixed portfolio of 70 per cent. equities and 30 per cent. gilts. This is what the ordinary prudent investor would do. For experience shows that equities provide the best long-term security. Thus Mr. Topping, the accountant called on behalf of the defendant in Wells v. Wells, produced a table which showed the real rate of return on equities to 31 December 1992 on an investment made on 1 January in each year from 1973 to 1992. In only two of those years has the return been less than 4
The point is put well in the following passages from the judgment of the Court of Appeal  1 W.L.R. 652, 677.
Mr. Leighton Williams went so far as to argue that it was the plaintiff's duty to invest in equities in order to mitigate his damage.
But the matter is not quite so simple as that. It now appears that Mr. Topping's figures, which are reproduced in the Court of Appeal's judgment, and are an important link in the chain of reasoning, are misleading. Mr. Topping has failed to observe that his figures are extracted from a table in the B.Z.W. Equity-Gilt Study in which all the income is assumed to be reinvested. But in the case of these plaintiffs the income is, ex hypothesi, assumed to be spent year by year. Unfortunately Mr. Purchas and his experts failed to spot this error at the trial, although it seems obvious enough now. So Mr. Topping was not cross-examined on the point.
Mr. Purchas sought to fill in the gap by producing tables from the updated B.Z.W. (now Barclays Capital Equity-Gilt Study), showing the net real return on equities without reinvesting the income. He hoped to demonstrate that the real return on equities is little, if anything, above the return on I.L.G.S., especially if one takes into account the difference in the cost of investment advice, which might amount to as much as 1 per cent. per annum. But Mr. Leighton Williams and his experts were unable to agree Mr. Purchas's figures. So I say no more about them, save that the difference between the two sides does not appear to be all that great. On Mr. Purchas's figures the average annual return net of tax on a 20-year investment in equities over the period 1960-1997, without reinvesting the income, was 3
The inability of the experts to reach agreement on the figures is not, in the end, of great consequence. For the problem with equities lies elsewhere. Granted that a substantial proportion of equities is the best long- term investment for the ordinary prudent investor, the question is whether the same is true for these plaintiffs. The ordinary investor may be presumed to have enough to live on. He can meet his day-to-day requirements. If the equity market suffers a catastrophic fall, as it did in 1972, he has no immediate need to sell. He can abide his time, and wait until the equity market eventually recovers.
The plaintiffs are not in the same happy position. They are not "ordinary investors" in the sense that they can wait for long-term recovery, remembering that it was not until 1989 that equity prices regained their old pre-1972 level in real terms. For they need the income, and a portion of their capital, every year to meet their current cost of care. A plaintiff who invested the whole of his award in equities in 1972 would have found that their real value had fallen by 41 per cent. in 1973 and by a further 62 per cent. in 1974. The real value of the income on his equities had also fallen.
So it does not follow that a prudent investment for the ordinary investor is a prudent investment for the plaintiffs. Equities may well prove the best long-term investment. But their volatility over the short term creates a serious risk. This risk was well understood by the experts. Indeed Mr. Coonan conceded that if you are investing so as to meet a plaintiff's needs over a period of five years, or even 10 years, it would be foolish to invest in equities. But that concession, properly made as it was on the evidence, is fatal to the defendants' case. For as Mr. Purchas pointed out in reply, every long period starts with a short period. If there is a substantial fall in equities in the first five or 10 years, during which the plaintiff will have had to call on part of his capital to meet his needs, and will have had to realise that part of his capital in a depressed market, the depleted fund may never recover.