Judgment - Page v. Sheerness Steel Company Limited
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

(back to preceding text)

      The approach that allowance should not be made for inflation in assessing future loss was based on the view that prudent investment of the capital sum awarded would protect the plaintiff against the effects of inflation. In Taylor v. O'Connor at page 142H, Lord Pearson said:

     "Certainly it is right to have regard to the prospect of continuing inflation as an important factor in the situation, but I do not think a mere increase in the multiplier is a suitable method for protecting against inflation, though it achieves something. I think protection against inflation is to be sought by investment policy, and the lump sum of damages should be assessed on the basis that it will be invested with the aim of obtaining some capital appreciation to offset the probable rise in the cost of living."

      And in Cookson v. Knowles [1979] A.C. 556, 571H, Lord Diplock said:

     "Inflation is taken care of in a rough and ready way by the higher rates of interest obtainable as one of the consequences of it and no other practical basis of calculation has been suggested that is capable of dealing with so conjectural a factor with greater precision."

      See also per Lord Fraser of Tullybelton at page 577C.

      The principal submission advanced in this appeal on behalf of the appellants is that the issue for the first time in 1981 by the Government of Index-Linked Government Securities (I.L.G.S.) has changed the economic background against which the courts assess damages for future loss. If a plaintiff invests the damages awarded to him in I.L.G.S. the interest paid to him each year will rise in accordance with the Retail Price Index as will the payment made on maturity. Therefore the appellants contend that the court should now fix the multiplier by reference to the net return of about 3 per cent. per annum on I.L.G.S. rather than by following the conventional approach of taking a multiplier by reference to a net return of 4 to 5 per cent. per annum from a mixed basket of equities and gilts. Such an approach has the consequence, as shown in the present cases, of increasing the multiplier with a resultant very large increase in the damages.

      The appellants advanced two principal arguments in support of their submission. The first is that fixing the multiplier by reference to the return on I.L.G.S. ensures with much greater precision that over the years ahead the plaintiff will receive the annual sum which he requires to pay for nursing costs and to compensate him for the wages which he would have received. The second submission is that an assessment of damages based on the return on I.L.G.S. protects the plaintiff against the risks inherent in investment in equities, such risks being much greater than the risks in investing in I.L.G.S. These arguments on behalf of the appellants mirror the arguments succinctly stated in the introduction to the 1984 Report of the Working Party chaired by Sir Michael Ogden Q.C. at page 8:

     "The Working Party concluded that the following arguments could not be faulted. The Courts seek to put the wage earner, or, if he has been killed, his dependant, into the same financial position as if the accident had not happened. Investment policy, however prudent, involves risks and it is not difficult to draw up a list of blue chip equities or reliable unit trusts which have performed poorly and, in some cases, disastrously. Index-Linked Government Stocks eliminate the risk. Whereas, in the past, a Plaintiff has had to speculate in the form of prudent investment by buying equities, or a 'basket' of equities and gilts or a selection of unit trusts, he need speculate no longer if he buys Index-Linked Government Stock. If the loss is, say, £5,000 per annum, he can be awarded damages which, if invested in such stocks, will provide him with almost exactly that sum in real terms."

      These arguments were accepted by the judges in the High Court who tried the respective actions, and in the case of Mr. Page [1996] P.I.G.R. 26, 36 Dyson J. stated:

     "In summary therefore, the advantages of calculating the discount rate on the basis of the I.L.G.S. are that inflation is taken care of precisely and not in a rough and ready way, and the net return is the actual net return on investments rather than a net return that it is assumed by the court is enjoyed on notional prudent investments made at a time of stable currency."

      The approach adopted by this House in Lim's case and the cases preceding it was influenced to a large extent by the recognition that at those times, when I.L.G.S. did not exist, there was no way in which a court could, with accuracy, estimate the rate of inflation in future years and make an assessment of the allowance which should be made for it in the assessment of damages. In Cookson v. Knowles at page 571H, after stating that: "Inflation is taken care of in a rough and ready way by the higher rates of interest obtainable as one of the consequences of it" Lord Diplock concluded that statement by saying: "and no other practical basis of calculation has been suggested that is capable of dealing with so conjectural a factor with greater precision." And in Lim's case at page 193E, Lord Scarman said:

     "An attempt to build into [lump sum compensation] a protection against future inflation is seeking after a perfection which is beyond the inherent limitations of the system."

      Moreover the speeches in those cases made it clear that the House was not laying down that allowance should not be made for inflation as a principle of law which would continue to govern cases for all time. In Cookson v. Knowles at page 574A, Lord Salmon stated:

     "There is one matter that I should like to emphasise, namely that in my view it is impossible to lay down any principles of law which would govern the assessment of damages for all time. We can only lay down broad guidelines for assessing damages in cases where the facts are similar to those of the instant case and where economic factors remain similar to those now prevailing."

      And in Lim's case at page 193E, after stating that the law appeared to be settled that, save in exceptional cases, the risk of inflation should not be brought into account in the assessment of damages for future loss, Lord Scarman said:

     "It is perhaps incorrect to call this rule a rule of law. It is better described as a sensible rule of practice, a matter of common sense."

      Therefore, in the changed circumstances where damages can now be invested in I.L.G.S. which will protect against future inflation, I consider that it is open to this House to consider whether the approach adopted in earlier cases should now be changed and the multiplier should be fixed by reference to the return on I.L.G.S.

      The argument now advanced on behalf of the appellants is, in essence, the same as the argument succinctly stated in paragraph 2.28 of the Report of the Law Commission No. 224 issued in July 1994:

     "We share the views of the majority of those who responded to us, that a practice of discounting by reference to returns on I.L.G.S. would be preferable to the present arbitrary presumption. The 4-5 per cent. discount which emerged from the case law was established at a time when I.L.G.S. did not exist. I.L.G.S. now constitute the best evidence of the real return on any investment where the risk element is minimal, because they take account of inflation, rather than attempt to predict it as conventional investments do. Capital is redeemed under I.L.G.S. at par and index-linked to the change in the Retail Price Index (R.P.I.) since issue. Income remains constant in real terms, rising with increases in the R.P.I. There is no premium available for risk because there is no risk."

      This is a powerful argument, and I turn to consider the submissions advanced against it by the respondents.

      One of those submissions is that in assessing damages, the court should assume that the plaintiff will invest the damages prudently and that, when he receives a large sum, the plaintiff will take competent investment advice and that advice will be that it would be prudent to invest in a mixed basket of equities and gilts. Closely linked to this submission is the further submission that the court must hold a fair balance between the plaintiff and the defendant, and that the plaintiff is entitled to no better protection against inflation than others who have to rely on capital for future support and who seek to protect themselves against inflation by investing in equities.

      These submissions were accepted by the Court of Appeal and were the grounds on which the appeals of the defendants were allowed: see [1997] 1 W.L.R. 652, 675H, 677A. Support for these submissions and for the grounds of the Court of Appeal's decision is to be found in the speech of Lord Scarman in Lim's case (cited by the Court of Appeal) where he said at pp. 193G and 194A:

     "as Lord Pearson said in Taylor v. O'Connor, at p. 143, inflation is best left to be dealt with by investment policy. It is not unrealistic in modern social conditions, nor is it unjust, to assume that the recipient of a large capital sum by way of damages will take advice as to its investment and use. Thirdly, it is inherent in a system of compensation by way of a lump sum immediately payable, and, I would think, just, that the sum be calculated at current money values, leaving the recipient in the same position as others, who have to rely on capital for their support to face the future."

     ". . .the victims of tort who receive a lump sum award are entitled to no better protection against inflation than others who have to rely on capital for their future support. To attempt such protection would be to put them into a privileged position at the expense of the tortfeasor, and so to impose upon him an excessive burden, which might go far beyond compensation for loss."

      My Lords, I consider that the introduction of I.L.G.S. providing an income which is protected against inflation has changed the problem which Lord Scarman was addressing in Lim's case and that the passages from his judgment cited above should not prevent your Lordships from holding that it is now appropriate to make allowance for the risk of future inflation by fixing the multiplier by reference to the rate of return on I.L.G.S. I think the reality is that the appellants in the present cases are not in the same position as other persons who have to rely on capital for future support. Unlike the great majority of persons who invest their capital, it is vital for the appellants that they receive constant and costly nursing care for the remainder of their lives and that they should be able to pay for it, and any fall in income or depreciation in the capital value of their investments will affect them much more severely than persons in better health who depend on their investments for support. Moreover, a plaintiff who claims damages for loss of future earnings should, in my opinion, not be placed in the same position as a person who relies on capital for his future support. Such a plaintiff, but for the injuries which have taken away his earning capacity, would have been better protected against inflation by the rise in his wages in future years than the person who has to rely on a sound investment policy to protect him in the years ahead. In Livingstone v. Rawyards Coal Co., 5 App.Cas. 25, 39, Lord Blackburn stated:

     "where any injury is to be compensated by damages, in settling the sum of money to be given for reparation or 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 for which he is now getting his compensation or reparation."

      I consider that an award assessed by reference to the index-linked return on I.L.G.S. will give protection against inflation closer to the protection which would have been given by the rise in the plaintiff's wages, and will give better effect to the principle stated by Lord Blackburn, than will an award assessed by reference to the return on equities.

      Moreover I think that a plaintiff, as gravely injured as these appellants, who seeks advice as to the investment of his damages is entitled to receive guidance as to the degree of risk involved in investing in I.L.G.S. as compared to investing in equities, and having regard to the necessity of ensuring that income and capital will always be available to pay for his nursing costs, I consider that a plaintiff who decides to invest his damages in I.L.G.S. by reason of the reduced risk could not be said to be investing in a manner which was imprudent or unreasonable.

      On behalf of the first and third respondents it was also submitted that there should not be a departure from the conventional approach to the multiplier based on an assumed return of 4 to 5 per cent. per annum because a plaintiff is under a duty to act reasonably and to mitigate his loss. This duty extended to prudent investment of his damages, and prudent investment required an investment in a mixed basket of equities and gilts. I have already given my reasons for not accepting the submission that it is imprudent for a gravely injured plaintiff to invest in I.L.G.S. to ensure the payment for future nursing care. I further consider that the concept of mitigation of damages does not apply to the investment of the damages after they have been awarded by the court. The duty to mitigate applies at an earlier stage in the process when the trial judge assesses what the damage suffered by the plaintiff has been and whether the plaintiff could reasonably have reduced the extent of his damage. But once the judge has assessed the damage his duty is to award full compensation. In the present cases there is nothing that the appellants could do to reduce the extent of the nursing care that they will require in the future or to reduce the amount of the loss they will suffer from the extinction of their future earning capacity.

      The respondents further relied on the point that the Court of Protection had not followed the policy of investing in I.L.G.S. and that its approach had been to invest in a portfolio comprising a substantial proportion of equities. But I consider that this point is of little weight because the investment of damages in the past by the Court of Protection has been made on the basis of the courts assuming a rate of 4 to 5 per cent. and what the Court of Protection may do in the future is uncertain. I also consider that there is little weight in the argument that I.L.G.S. may not be available for the full period during which a plaintiff must receive an income. I think it is most unlikely that I.L.G.S. will not continue to be issued. Accordingly I have reached the conclusion that under the present principles which govern the assessment of compensation and having regard to the availability of I.L.G.S., the appellants are entitled to compensation assessed by taking a discount rate based on the return on I.L.G.S. The return on I.L.G.S. fluctuates but the schedules of the month end returns during the past three years show a net average return of about 3 per cent. Therefore I consider that this rate should be adopted as the rate to arrive at the multiplier in the present cases in place of the conventional discount rate of 4.5 per cent. applied by the Court of Appeal.

      Accordingly I would uphold the judgments of Dyson J. and Collins J. in the cases of Mr. Page and James Thomas in taking a discount rate of 3 per cent. In the case of Mrs. Wells, where it appears that His Honour Judge Wilcox took a discount rate of about 2.5 per cent., I would alter the discount rate to 3 per cent.

      I further consider that in order to promote and facilitate settlements and to simplify the assessment of damages in actions which come on for trial the rate of 3 per cent. taken by this House in the present appeals should be applied in other cases notwithstanding fluctuations in the return on I.L.G.S. until the Lord Chancellor prescribes a different rate pursuant to his power under section 1 of the Damages Act 1996 or unless there is a very considerable change in economic circumstances. There is support for this course in the judgment of the High Court of Australia in Todovoric v. Waller (150) C.L.R. 402 where Gibbs C.J. and Wilson J. stated at page 423:

     "In strictness perhaps this court should not declare the rate at which discounts should be effected, but should leave that to the discretion of the courts of trial, as was done in Hawkins v. Lindsley (71.) However, it is most desirable that awards of damages should be predictable, so that settlements may be facilitated, and the task of the courts eased. Moreover, while general economic circumstances remain as they are, there is no compelling reason why one judge should select a discount rate different from that selected by another. In the interest of securing uniformity throughout Australia this court should therefore do what it has held that a Supreme Court of one State may not do, and that is to make an arbitrary ruling regarding interest rates of general application.

     "We consider that in future the courts in Australia, in States where the question is not governed by statute, should, in assessing damages, arrive at the present value of a future loss by discounting at a fixed rate which will be applied in all cases and which will in itself reflect the effect of notional tax on notional income from the invested fund."

      I would make no alteration in the discount rate for higher rates of tax save that, as Lord Oliver of Aylmerton stated in Hodgson v. Trapp at page 835B, it would be open to plaintiffs in very exceptional cases to contend that a higher multiplier should be taken.

      The consequence of the present judgments of this House will be a very substantial rise in the level of awards to plaintiffs who by reason of the negligence of others sustain very grave injuries requiring nursing care in future years and causing a loss of future earning capacity, and there will be resultant increases in insurance premiums. But under the present principles of law governing the assessment of damages which provide that injured persons should receive full compensation plaintiffs are entitled to such increased awards. If the law is to be changed it can only be done by Parliament which, unlike the judges, is in a position to balance the many social, financial and economic factors which would have to be considered if such a change were contemplated.

      In respect of the other individual points arising in the three cases I am in agreement with the speech of my noble and learned friend Lord Lloyd of Berwick, which I have had the advantage of reading in draft.


Lords Parliament Commons Search Contact Us Index

© Parliamentary copyright 1998
Prepared 16 July 1998