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Lord Ackner: My Lords, before my noble and learned friend sits down, can he assist me on one small matter? In the Explanatory and Financial Memorandum, this is stated:

29 Apr 1996 : Column 1410


    "The Bill's only likely effects on public expenditure are that any exercise of the power in clause 1 could affect the size of awards of personal injury damages against government departments".
Clause 1 requires the courts, when determining the sum to be expected from the investment, to take account of such rate of return as may be prescribed. The question on which I seek my noble and learned friend's assistance is this: under Clause 1(3) it is provided that,


    "Before making an order under subsection (1) ... the Lord Chancellor shall consult the Government Actuary and the Treasury".
I can well understand the need to consult the Government Actuary; but why is it necessary to consult the Treasury, which is bound, according to the Explanatory Memorandum, from time to time to have an adverse interest in regard to the fixing of a particular rate at a particular level?

The Lord Chancellor: My Lords, certainly the Treasury may well have an interest of that kind in relation to the effect on damages against Government departments or the guarantee which is provided in respect of those damages. From that point of view, just like insurers and others, they may have an interest in being consulted. The Treasury has other expertise than that, particularly in relation to this forecasting business, which is essentially what lies behind the power in Clause 1.

In my submission, it is right--and it is in accordance with the Law Commission's report--that the Treasury should be consulted; but the consulter, which is the Lord Chancellor in the primary case, will use the results of the consultation appropriately. The Lord Chancellor himself is a prospective defendant. It is just possible that, from time to time, he may be a defendant, but I do not believe that that would be a proper consideration in relation to the setting of this sort of interest in a way that would damage the exercise. This is in accordance with what the Law Commission proposed, and I believe that it is a perfectly reasonable provision, taking into account the fact that it is a consultation only. I believe that your Lordships can rely on the holder of my office to do the consultation properly.

3.35 p.m.

Lord Irvine of Lairg: My Lords, as the noble and learned Lord on the Woolsack has said, this is another Bill to implement recommendations of the Law Commission. It arises out of a report which considered whether the current arrangements for structured settlements in personal injuries litigation needs to be rationalised or extended.

The Bill also deals with two other important issues in personal injury claims: these were considered by the Law Commission. The first is the closing of a gap in the provisional damages regime provided for by Section 32A of the Supreme Court Act 1981 and the second arises because the courts reduce awards made to victims to compensate them for their future loss of net income and the costs of care, in order to take account of the fact that they receive compensation in the form of an immediate lump sum which can be invested. The question is this: what rate of return should the courts

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assume will be achieved by that investment? The deduction which the courts make from compensation to take account of what is called "accelerated payment", has to be matched by an assumption about the rate of return that will be achieved from investment of that sum. If the assumption is of too high a rate, then the victim will have been under-compensated; and if the assumption is of too low a rate, he will have been over-compensated. What is required is rules that offer the best prospect of the assessment turning out right over perhaps many years, during which the real rate of return on the investment will necessarily vary.

I deal first with the parts of the Bill which concern structured settlements. The common sense of the Law Commission proposals on structured settlements is fully accepted by those with practical knowledge of personal injury litigation and we on this side of the House welcome them.

A structured settlement is a fairly new development in this common law jurisdiction--not so new in others. It is a form of damages alternative to the usual lump sum award, which the victim is left to deal with as he chooses. But it is not imposed by the courts: it is agreed voluntarily between the parties. The defendant's insurer reaches a settlement with the plaintiff accident victim under which a damages award is designed to provide periodic payments for life. To fund the arrangement, the insurer purchases an annuity from a life assurance company. The payments are "structured" to meet the plaintiff's needs and are free of tax in his or her hands. A conventional lump sum award, however, when invested, is subject to tax in the usual way.

The development of structured settlements has added another term of art to the world of personal injury claims, but there is no doubt that they are an important step forward in dispute resolution.

Under such a settlement the plaintiff accident victim can be assured of regular index-linked payments for life. Also, the victim--and his or her family--are relieved of the burden of managing a large sum of money combined with the removal of the associated risk of dissipation of the sum, which, sadly, can happen in some cases. Of course, both parties to the settlement may benefit from the tax-exempt status of the payments. The advantages on both sides mean that early settlements are encouraged, with consequent savings in costs and time. There is, therefore, a very real sense in which everyone may gain from a structured settlement where appropriately made.

One of the main issues considered by the Law Commission was the need to clear away certain obstacles to the tax exemption of the periodic payments made to a victim under a structured settlement. That was dealt with in the Finance Act 1995 and in the Finance Bill. The insurance life office may now make the periodic payments directly to the plaintiff victim, whereas previously, in order to be tax free, such payments had to be made indirectly through the defendant insurer. The Bill now before your Lordships seeks to implement the remaining recommendations on structured settlements in the Law Commission report.

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I repeat that reaching a structured settlement is for the parties involved, and for them alone. Therefore, although the Bill introduces measures that will facilitate the reaching of effective structured settlements, it still preserves their voluntary character. As the noble and learned Lord said, the courts are not given the power to impose such a settlement. The Law Commission considered such a proposal, only to reject it after consultation. We, too, think that the imposition of structured settlements by the courts is not the way forward. Structured settlements should result from free negotiation and agreement between the parties. A judicial power of imposition would be inconsistent with that approach.

A very important part of the structured settlement provisions of the Bill concerns the protection provided for a victim who is receiving payments under a settlement should the life assurance company be liquidated. The noble and learned Lord drew attention to that. Clauses 4 and 5 extend the provisions of the Policyholders Protection Act 1975 so that victims with a structured settlement are given 100 per cent. protection of their annuity policy. The protection of victims must be a priority. It is right in principle, and in practice it is necessary, for the successful development of structured settlements.

Another essential victim protection measure in the Bill is the power given to the relevant departmental Minister to guarantee structured settlements agreed by public sector bodies--for example, National Health Service trusts or Ministry of Defence bodies. That is dealt with in Clause 6. When a public body enters into a structured settlement, the payments made under it are "self-funded" by the public body, rather than being funded by the purchase of an annuity policy in the market. That is cost effective, but the quid pro quo for the benefit to the public purse must be that the Crown is obliged to guarantee the payments under the settlement. It could not be right that a victim suffering the misfortune of injury at the hands of a public body, as distinct from a private defendant, should be under any disadvantage.

The final provision implementing a Law Commission proposal on structured settlements comes in Clause 2, which expressly empowers the courts to make an order in a personal injuries action for damages, in whole or in part, to be paid periodically where the parties agree. That is non-contentious. It ensures that there is no ambiguity about the courts' power to order structured settlements where the parties consent.

I turn now to the other issues dealt with in the Bill. One issue which has been the subject of much recent argument in the courts is the appropriate investment rate to be used in discounting a lump sum to take account of the "accelerated payment" element in compensation for future pecuniary loss. The discount reflects the fact that the money is available to the plaintiff sooner than it would otherwise have been had he been able to continue earning, so allowing the plaintiff to earn a return on it. There has been a general assumption by the courts that they should use an investment rate of between 4 and 5 per cent. so as to make the appropriate discount. However, there is gathering concern that the real rate of

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return on investments is significantly lower than 4 to 5 per cent. so that victims are being under-compensated.

The percentage figure of 4 to 5 per cent. is taken to have been laid down by a 1979 decision of your Lordships' House in its judicial capacity. The figure may--although even that is questionable--have been right for its time, but should not, I would suggest, be regarded by the courts as an invariable prescription for all time. That issue comes before the Court of Appeal later this year.

If it is the fact that victims are being under-compensated because the investment rate of 4 to 5 per cent. is too high today, so that the discount made is too great, that is unacceptable. It is imperative that compensation is accurately assessed so that future income loss, and care expenses, are adequately covered.

When the Law Commission looked at this issue, it recommended, as the noble and learned Lord mentioned, that the courts be required to take into account the net return on an index-linked government security, known as an ILGS, but permitting departure from that rate where it can be shown that a different rate would be more appropriate in the individual case.

That proposal is sensible, subject to one qualification, to which I draw attention. The application of the ILGS rate is likely to be an accurate measure of the real return on an investment where the risk is minimal. A requirement that the courts must take into account that rate also meets the need for legal certainty and avoids the significant costs involved where both sides seek to reply on expert witnesses--they cost money--to establish the appropriate rate. The Law Commission received only a few representations setting out why it might be necessary for a court to depart from that rate in any individual case. In the light of that, I wonder whether the Law Commission has not defined too widely the circumstances when a different rate might be applied. If such circumstances are widely defined, that will be an invitation to the parties to present costly expert evidence.

Clause 1 of the Bill is designed to implement the Law Commission proposal. Subsection (2) applies the commission formula for departure from the prescribed rate. I ask the question, therefore: might not the usual "save in exceptional circumstances" formula be preferable? We shall return to that matter in Committee.

There is one significant difference between Clause 1 as drafted and the Law Commission proposal: Clause 1 would leave the prescribed rate to be determined by the Lord Chancellor, by statutory instrument, after consulting the Government Actuary and the Treasury, as has already been said. Presumably, this discretion is necessary to ensure flexibility over time in defining the appropriate ILGS rate. However, we have a concern that that discretionary power is too widely defined, leaving the Lord Chancellor of the day free to depart completely from the recommended ILGS rate if he so chooses. We shall be inviting discussion and consideration of that point by appropriate amendment in Committee.

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Of course, a new prescribed investment rate, in line with the ILGS rate, will tend to mean higher personal injury awards. That in turn may mean higher insurance premiums. However, the justice of the case clearly speaks in favour of the change. The majority of personal injury claims are of modest proportions. The adoption of the new rate will have a limited effect on those. Where the impact may be significant is on the very large claims--for example, serious industrial injury claims--but that is precisely where it is so imperative to ensure that there is substantial compensation to meet the needs of that class of case.

One further change recommended by the Law Commission and implemented in the Bill closes an anomalous gap in the provisional damages regime for personal injury claims under Section 32A of the Supreme Court Act 1981. As the noble and learned Lord has said, the intended effect of Clause 3 is to ensure that, if provisional damages are awarded to a plaintiff victim on the basis that he or she has a right to apply for further damages if a particular disease or deterioration in health occurs in the future, but in the event he or she dies from the original injuries, then the dependants of the deceased can still claim under the Fatal Accidents Act 1976 in respect of losses not already covered by the original award. That proposal is clearly just and will receive the full support of this side of the House.

In short, we on this side of the House welcome the Damages Bill. It is essentially a non-contentious Bill for which the Law Commission should be applauded. The main issue which we think will need attention in Committee is the application by the courts of the investment rate which is recommended by the Law Commission as the most appropriate rate to use to reduce awards for future financial loss so as to take account of the accelerated payments. We believe that the House will wish to consider whether the noble and learned Lord, in setting the prescribed rate, is given too much discretion to depart from the recommended rate; that is, the rate of return on index-linked government securities. Also, we believe that the circumstances in which the courts might depart from that prescribed rate are too widely defined. We will invite the consideration of your Lordships to those questions by way of appropriate amendments in Committee.

3.41 p.m.

Lord Meston: My Lords, I thank the noble and learned Lord the Lord Chancellor for his introduction of this short, useful Bill. Clause 1 is designed to remove some of the uncertainty from the capitalisation of future pecuniary loss. That is often a substantial element in personal injuries damages awards, so that a small fractional difference in the rate of return which is assumed by the court or by the lawyers in their negotiations can mean many thousands of pounds more or less in the damages which are awarded. Assessments of future losses have become highly sophisticated, having to take into account a great number of contingencies and permutations, apart from the question of the appropriate multiplier. Therefore, anything which

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reduces the uncertainty, reduces the cost of litigation and assists settlement without prolonged proceedings is helpful. To that extent, the Bill is welcome.

But, as the noble Lord, Lord Irvine of Lairg, said, at present the law is in an acute state of uncertainty. In so far as there are guidelines from the higher courts as to the appropriate rate of return they are not applied consistently, such that practitioners have difficulty in advising properly as to settlement and as to the likely outcome. Some judges apply what is seen to be the conventional 4.5 per cent. net return, while others have been persuaded to apply a net return of 3 per cent. Like the noble Lord, Lord Irvine, I understand that a number of these cases are subject to appeals to the Court of Appeal to be heard in June. Meanwhile, cases are being settled on the basis of "splitting the difference" or are being adjourned, at least in respect of the multiplier.

To some extent, the differing decisions of the courts can be explained by the way in which individual judges in particular cases have been persuaded by actuarial evidence and argument. Leaving aside the old joke about the ability of two different actuaries to provide three different answers, actuaries will often argue, perfectly reasonably, that different net returns are justified in different cases, even if they may be decided only months apart. However, one cannot help feeling that they are gazing, however skilfully, into a crystal ball which remains more opaque than is helpful.

The Bill therefore is welcome in allowing for a prescribed rate of return, but it still allows for some flexibility. The court is required only to take the prescribed rate into account and not to apply it come what may. Clause 1(2), to which the noble Lord, Lord Irvine, referred, allows the court to be persuaded that another rate is more appropriate. However, it is inescapable that what is a desirable flexibility in the view of one person is undesirable uncertainty in the view of someone else.

As happens in cases at present, under the Bill defendants and their insurers will argue that in reality a well-advised plaintiff with a large award is unlikely to stick rigidly to index-linked government stocks when, at very little risk, a higher rate of return can be obtained in a wider range of investment. The plaintiff's side will argue that he or she needs certainty and minimum risk.

The plaintiff's actual life span cannot be predicted. Costs of care may rise with future developments in technology, and, as was pointed out by one of the learned judges who considered one of the recent cases, there is a circular argument. The object of the exercise is to provide the injured plaintiff with an adequate sum to meet future loss. If the court assumes a higher rate, the plaintiff will be obliged to invest on such a basis to avoid his or her money running out. The rate of return is inevitably related to the risk. The court cannot tell an individual how to invest, but the court should not be expected to impose unnecessary risk. It should allow any apparent acceptable risk to be covered by the size of the award. It has to be remembered in these cases that the award is something which has often to last the injured plaintiff for the rest of his or her natural life.

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So Clause 1(2), by retaining a discretion to deviate from the assumed rate, means that the uncertainty will not disappear altogether. It remains to be seen, if that clause stays in the form in which it is presently drafted, whether defendants will try to take advantage of it and require the calling of evidence as to investments. Actuaries will still be required in the larger, more complex, cases. I look forward to the debate in Committee which has been promised by the noble Lord, Lord Irvine of Lairg, on whether the balance between Clause 1(1) and Clause 1(2) has been struck correctly.

I can but hope that the last sentence of the financial memorandum to the Bill is intended to strike an optimistic rather than a pessimistic note when it says:


    "Any exercise of the power in clause 1 could affect the size of personal injury awards against defendants generally, with consequential effect on insurance premiums".

One other matter which is worth considering in this area is that certainty and guidance in the field of personal injury awards have an impact on other areas of law where similar calculations have to be carried out. Family lawyers grapple with the same problem, although there are differences of approach. Family lawyers have led the field in calling for an industry standard, although family lawyers tend to expect divorcees to live in a less risk-free environment.

I should like to ask the noble and learned Lord some questions about Clause 1(3). Does he expect to carry out other consultations, apart from consultation with the Government Actuary and the Treasury? Does he envisage prescribed orders, producing a rate based on index-linked government stock? As I understand it, that was the proposal of the Law Commission. However, during the opening speech of the noble and learned Lord the Lord Chancellor reference was made to alternative indicators, by which I think he meant indicators which are alternatives to the ILGS rates. I believe that certainty in this area at an early stage is desirable.

One looks at Clause 8(2) for an indication that the Act will come into force two months after its passage. However, I understood the noble and learned Lord to indicate that the orders under Clause 1 would not come into force then but at a later undefined date. I would be grateful, as I believe practitioners would be, for an indication of the likely timetable, particularly as appeals are said to be pending. It may be helpful to know whether the Government intend to await the outcome of those appeals before deciding what order, if any, is to be made under Clause 1.

A related question, which I know concerns practitioners, is the commencement of the Civil Evidence Act 1995, to which the noble and learned Lord referred. Is it intended that that Act should be brought into force at the same time as this legislation, if enacted, or when an order is made under Clause 1? When is it expected that the 1995 Act will be brought into force?

I turn briefly to Clause 2 and the question of periodical payments. This proposal goes back to the Pearson Report of 1978. It was said of that report that it ran for 1,100 pages and managed to mention the word "actuary" only once. Awards of damages by way of periodical payments have advantages. They

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have advantages for the defendant who is anxious not to over-compensate a plaintiff who may die younger than expected, or where there is a risk of misuse of money. They have advantages for the plaintiff who wants the reassurance of a certain stream of income. It has also been said that judges and actuaries are not astrologers. Therefore, a lump sum award can never exactly estimate loss. Accordingly, structured settlements in particular and periodical payments in general are a welcome advance in the law. But it leads me to wonder whether the power sought under Clause 2 is confined to structured settlements or can be applied, as the provision seems to suggest, to damages in a finite sum in the conventional sense. If a finite sum of damages accrues interest and periodical payments are ordered by consent, questions will arise as to who should hold the remaining sums and whether, and at whose expense, tax is attracted. A further question on Clause 2 is whether periodical payment orders are expected to be variable or the order will allow for variation as to either rate or duration if that is thought appropriate by the parties. I believe that that has been deliberately omitted from the Bill. I simply question the thinking behind that omission. Having said that, one recognises in the passage of this Bill the risk of over-complication of damages awards as a result of trying to compensate too precisely.

I turn briefly to the other provisions of the Bill. Clause 3 is a welcome, commonsense provision. I believe that it needs little consideration by your Lordships' House. Clause 4 is also welcome. It gives further recognition to the structured settlement. As I understand it, Clause 6 puts on a statutory footing the assurances that are now normally given by the appropriate Minister in public sector settlements. The only question I raise relates to Clause 6(5), which provides:


    "A guarantee under this section shall be given on such terms as the Minister concerned may determine".
What terms are envisaged in the provision of such a guarantee? An early revelation of what lies behind that subsection would be welcome.

With those observations, I join in welcoming this Bill.

3.55 p.m.

The Earl of Balfour: My Lords, your Lordships will note that Clause 8 subsection (2) provides that Clause 3 does not extend to Scotland. Clause 3 deals with provisional damages in fatal accident claims. That seems to me to be a very important factor. I apologise to my noble and learned friend the Lord Chancellor that I have not notified him of this question in advance. I am rather intrigued as to why Clause 3 of this important Bill does not apply to Scotland.

3.56 p.m.

The Lord Chancellor: My Lords, I deal first with the last question. My understanding is that the present law of Scotland accords with the provision in this Bill. When I addressed your Lordships at the outset I said that

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it was very similar to the position that already existed in Scotland and no corresponding clarification of Scots law was needed. I hope that that satisfactorily answers the noble Earl's short question.

I turn to the other matters that have been raised. I believe that the most important point relates to the power in Clause 1. At present, my intention is to await the Court of Appeal decisions before I come to a conclusion upon this matter. Your Lordships will appreciate that this is a delicate area. The damages awarded will relate to an incident that has taken place in the past, and very often to cover that has been arranged in the past. It is one thing for courts to make decisions which are retrospective, which courts nearly always do. Most of the jurisdiction of the courts is in respect of matters that have happened, and they make decisions which have effect in the past. Very often, the decision is based only on what has taken place in the past. There are other types of jurisdiction; for example, the answering of questions, which are not hypothetical, as to the meaning of documents. There is a danger of interference with existing situations if the exercise of the power in Clause 1 produces something different from what the court regards as right in the circumstances of the case. The clause intends to confer power on the Lord Chancellor to determine the right rate in the generality of cases on the basis of the law as it has developed. What the Court of Appeal may have to say in relation to the cases that are presently before it will be extremely helpful in determining the correct approach to that matter.

It has been said that the further the Clause 3 exception extends, the more difficult it is to achieve certainty. On the other hand, there is a great variety of cases. I do not believe that it is wise to restrict too much the exceptions. This is a matter that we shall discuss in Committee in view of the promise that the noble Lord, Lord Irvine of Lairg, has made to table suitable amendments. I emphasise the character of the amendments that have been promised. The situation is difficult and we shall have a chance to discuss it. As the noble Lord, Lord Meston, said, it is, in a sense, gazing into a crystal ball because it is in the nature of a forecast. The Lord Chancellor, given this power, is attempting to help the courts to make that forecast. That is a difficult operation.

As regards consultation, I certainly intend to consult widely about the matter. Your Lordships will see the list of people whom the Law Commission consulted. Many of them will have an interest in helping the Lord Chancellor to come to the right answer on this matter.

The noble Lord, Lord Meston, referred to family lawyers being in the lead of this area of development. Unfortunately, the Bill will not be likely to give them direct help, although it may give them some kind of indirect help. We have tried to help them more directly in recent times. The date on which I would expect to exercise this power would be after the Court of Appeal has discussed the cases which are presently before it.

The only other matter that I need to mention is the terms of the guarantee in relation to Clause 6. Those are matters for discussion in relation to the particular circumstances of the case. We are concerned to give

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undoubted power to the Secretary of State to make such guarantees. That is the issue that has been raised so far. There may be a question about whether a Secretary of State has power to give a guarantee. The whole issue is consensual, as has been pointed out by myself and others. It is not a power in the court to force such a structured settlement on the parties; the parties must agree to it. The guarantee will be part of that agreement and the terms will be as are determined between the guarantor and the two parties to the original agreement.

I am grateful for the welcome that the Bill has been given. It is an important Bill and I hope that your Lordships will be able to give it adequate scrutiny at the same time as giving it a reasonably speedy passage. I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.


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