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
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      While therefore I agree with the Court of Appeal that in calculating the lump sum courts are entitled to assume that the plaintiff will behave prudently, I do not agree that what is prudent for the ordinary investor is necessarily prudent for the plaintiff. Indeed the opposite may be the case. What the prudent plaintiff needs is an investment which will bring him the income he requires without the risks inherent in the equity market; which brings us back to I.L.G.S.

      There are currently 11 stocks available, issued at various dates between July 1981 and September 1992, and maturing at various dates between 2001 and 2030. They are criticised by Mr. Leighton Williams on a number of investment grounds.

      First it is said that if index-linked stocks are sold before maturity they will suffer like other securities from the vagaries of the market. True. But it misses the point. The assumption is that the stocks will not be sold before maturity. For it is to be assumed that stocks will be purchased with maturity dates which match the plaintiff's future needs over the period covered by the award. Since the plaintiff will be holding all the stocks to maturity, there is no risk (or minimum risk) of him having to sell before maturity at depressed prices.

      Secondly, it is said that there are gaps in the maturity dates. Thus there is no stock maturing in 2002, 2005, 2007, 2008 or 2010. Nor is there any stock maturing later than 2030. As for the gaps, they may be filled by new issues. According to the Debt Management Report for 1998-1999 issued by H.M. Treasury, the authorities are committed to a minimum annual level of 2.5 billion index-linked stock in 1998-1999 and for the foreseeable future thereafter; and the aim is to maintain liquidity "in all maturity areas across the curve". But even if gaps remain, there is no problem. The plaintiff will be assumed to purchase enough stock maturing in 2001 to cover his needs for that year as well as 2002. And so on.

      As for the period after 2030, again there is no reason to suppose that there will not be further issues. But even if there are not, the plaintiff knows that he will have an inflation-proof lump sum at that date which will reflect his needs for the rest of his life more accurately than any other available investment. Mr. Owen put it well during argument: the court now has at its disposal a tool for calculating damages which enables it to assume a stable currency until at least 2030.

      Thirdly, it was pointed out that the inflation-proofing of I.L.G.S. is based on movements in the retail price index, whereas nursing costs have, historically, risen faster than the R.P.I. This may be true. But it is hardly a point which helps the defendants. If account were to be taken of this factor it would be an argument for rounding up the lump sum rather than rounding down.

The Court of Protection

      I have left to last the argument on which the defendants placed the greatest reliance, and which weighed heavily with the Court of Appeal. Two of the three plaintiffs are patients. Their affairs are being administered by the Court of Protection. One of the witnesses called for the defence was Mr. Bruce Denman, who is in charge of the investment branch of the Public Trust Office dealing with Court of Protection cases. His evidence was that in the case of a long term investment for an individual patient the portfolio would consist of about 70 per cent. U.K. equities with the balance in gilts and cash. The Court of Appeal said that they were "strongly influenced" by the policy of the Court of Protection.

      But in the case of short term investment (five years or under) the policy of the Court of Protection is very different. The Fact Sheet published by the Court of Protection shows that in such a case "very little risk is acceptable." Equities should be excluded altogether. This corresponds with the expert evidence in the present case, and with Mr. Coonan's concession. What is not explained in the policy statement is why risk is any more acceptable in the long-term than in the short term. I can understand an argument that in the case of a long term fund the equities will have had time to recover after a fall such as occurred in 1972 and October 1987. But as already explained it may by then be too late. The gilts may have been sold and the cash may all have been spent.

      In the end it comes back to the question of risk. Ex hypothesi equities are riskier than gilts. That is the very reason why the return on equities is likely to be greater. The plaintiffs say that they are not obliged to bear that extra risk for the benefit of the defendants. Others like them, with fixed outgoings at stated intervals, take the same view as to prudent investment policy. So the plaintiffs are not alone. Thus Mr. Prevett's evidence was that, since index-linked stocks have been available, it has become the general practice for closed pension funds to be invested in I.L.G.S., so as to be sure of being able to meet their liabilities as they fall due. I would not be surprised to find others in the same position, but on a smaller scale, taking the same view, such as school governors investing a prepaid fees fund. The Court of Appeal rejected this part of Mr. Prevett's evidence, but without giving any very satisfactory reason, other than the need for an investment which affords some flexibility in view of the inevitable uncertainty in estimating the multiplicand. I agree, of course, that there is bound to be some uncertainty in fixing the multiplicand. But that does not seem to me to be a good reason for introducing an unnecessary uncertainty in fixing the multiplier. Two wrongs may make a right. But they are just as likely to make a double wrong.

      As for the Court of Protection's current policy, it may be that they feel obliged to invest in equities so long as the sums available for investment are calculated on the basis of a 4.5 per cent. return. In spite of the risks, it may be the only way of making the money go round. But it does not tell us how large the fund should have been in the first place. In a letter written since the decision of the Court of Appeal Mr. Bruce Denman records the advice given by the Lord Chancellor's Honorary Investment Advisory Committee to the Master of the Court of Protection in the event of awards being calculated by reference to the return on I.L.G.S. The advice is given in guarded terms. He should "seriously consider" a minimum-risk index-linked portfolio. The master has accepted this advice. It is at least clear, therefore, that the present policy is not set in stone.

Recommendations

      I turn next to the commentators and textbook writers. It was the Working Party under the chairmanship of Sir Michael Ogden Q.C. which blazed the trail. In the introduction to the first edition of the Actuarial Tables published in 1984, Sir Michael Ogden refers to the then recent introduction of index-linked government stocks in 1981. They had already become an established part of the investment market. Sir Michael describes the advantages of I.L.G.S. in the following paragraph, at p. 8:

     "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 risks. 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."

      In the second edition published in 1994 Sir Michael Ogden repeats the views expressed in the introduction to the first edition:

     "However, there are now available index-linked government stocks and it is accordingly no longer necessary to speculate about either the future rates of inflation or the real rate of return obtainable on an investment. The redemption value and dividends of these stocks are adjusted from time to time so as to maintain the real value of the stock in the face of inflation. The current rates of interest on such stocks are published daily in the Financial Times and hitherto have fallen into the range of about 2.5 per cent. to 4.5 per cent. gross."

A little later he says:

     ". . . the return on such index-linked government stocks is the most accurate reflection of the real rate of interest available to plaintiffs seeking the prudent investment of awards. . . ."

      The third edition of the Ogden Tables was published in April 1998, after the decision of the Court of Appeal in the present case, but before the hearing in the House. Sir Michael anticipates a fourth edition when the decision of the House is made known, and when the Lord Chancellor has had an opportunity to fix the rate of return under section 1 of the Damages Act 1996. Sir Michael will then be able, as he says, to retire from the task which he was first asked to undertake 15 years ago, and which he has performed with such conspicuous success.

      The Court of Appeal expressed their concern at departing from the recommendation of the Ogden Working Party but added that the Working Party suffered from the disadvantage that the membership did not include any accountants or investment advisers. The plaintiffs challenged the truth of that observation; but in any event I would not regard it as weakening the force of the Working Party's recommendation.

      In between the first and second editions of the Ogden Tables, the Law Commission published Consultation Paper No. 125 on Structured Settlements and Interim and Provisional Damages, to which there was a large response from a variety of sources, including investment advisers. The consultation paper led to Law Commission Report No. 224 (1994) (Cm. 2646). The following passages are relevant:

     "2.25 . . . Our provisional view was that courts should make more use of information from the financial markets in discounting lump sums to take account of the fact that they are paid today. One way of doing this would be to enable courts to refer to the rate of return on I.L.G.S. as a means of establishing an appropriate rate of discount. The purpose of this would be to obtain the best reflection of market opinion as to what real interest rates will be in future. The question upon which we sought the views of consultees was whether it would be reasonable to use the return on I.L.G.S. as a guide to the appropriate discount.

     "2.26 Almost two-thirds of those who responded to this question supported the use of the I.L.G.S. rates to determine more accurate discounts. These consultees agreed that the assumption of a 4 to 5 per cent. rate of return over time is crude and inflexible and can lead to over- or under-compensation and hence to injustice. . . .

     "2.28 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 to 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."

      This is a very strong recommendation indeed. Once again the Court of Appeal expressed concern at departing from such a recommendation, but commented that the recommendation was based on implicit assumptions as to the objective to be achieved, which they did not accept.

      There is a sustained criticism of the Court of Appeal's decision in Kemp and Kemp: The Quantum of Damages vol. 1, para. 6-003/9-6-003/13, and in David Kemp Q.C.'s article in 1997 L.Q.R. vol. 113 at p. 195. I have derived much assistance from Mr. Kemp's commentary, for which I am grateful.

      In the current edition of McGregor on Damages, 16th ed. (1997), Mr. Harvey McGregor Q.C. hazarded a guess that the House would endorse a rate somewhat less than the Court of Appeal's 4.5 per cent. but would not adopt the I.L.G.S. rate. In Mr. McGregor's view that would have been the right solution, because he regarded it as highly unlikely that a plaintiff with substantial damages would invest it all in I.L.G.S. He would be more likely to accept investment advice, and end up with a portfolio largely of equities. This would lead to over-compensation, if equities continue their upward progression.

      For reasons which I have already given I would not agree with this approach. The suggestion that plaintiffs with a substantial award of damages are likely to invest in a portfolio consisting largely of equities is not supported by the research carried out for the Law Commission: see their Report No. 225 para. 10.2. In any event what an individual does with his damages is a matter for him. If he invests in equities, he may be lucky and end up by being over-compensated. But the question is whether his damages should be calculated on the basis that he is obliged to invest in equities.

      Apart from McGregor on Damages, we were not referred to any other commentary or textbook which disagrees with the recommendations of the Ogden Working Party and the Law Commission.

The authorities

      I turn last to see whether the approach which I favour is inhibited by any previous decision of the House. Early cases, such as Taylor v. O'Connor [1971] A.C. 115, are not of any real assistance, since they were decided before the advent of I.L.G.S., the collapse of the equity market in 1972, and the rapid inflation which lasted until the end of that decade. By the time Cookson v. Knowles [1979] A.C. 556 was decided the theory that one could protect an award of damages against inflation by investing in equities had been exploded. If protection was to be had at all, it was by the higher rates of interest available on fixed interest securities.

      Wright v. British Railways Board [1983] 2 A.C. 773 is an important authority, although not directly in point on the present issue. The question in that case was what is the appropriate rate of interest to award on general damages for the period between the date of service of the writ and the date of judgment. The Court of Appeal in Birkett v. Hayes [1982] 1 W.L.R. 816 had awarded 2 per cent. The House declined to interfere with that rate. Lord Diplock's speech is important for a number of reasons. It was the first and, so far as I know, the only occasion on which he has expressed himself on the subject of I.L.G.S. He pointed out, at p. 783, that the "rate of interest accepted by investors in index-linked government securities should provide a broad indication of what is the appropriate rate of interest to be awarded" for non-pecuniary loss. It provided "powerful confirmation" for the rate of 2 per cent. adopted by the Court of Appeal in Birkett v. Hayes.

      Lord Diplock's use of I.L.G.S. in Wright v. British Railways Board convinces me that if I.L.G.S. had existed at the time of Cookson v. Knowles Lord Diplock would have been the first to see that they provided the answer for which he was looking.

      Wright v. British Railways Board is also important because of Lord Diplock's observation, at p. 784, that guidelines as to the rate of interest for economic and non-economic loss should be simple to apply, and broad enough to allow for the special features of individual cases. Such guidelines are not to be regarded as rules of law or even rules of practice. They set no binding precedent, and can be altered as circumstances alter. It follows that a new approach to setting the appropriate discount rate, differing from that adopted in Mallett v. McMonagle and Cookson v. Knowles, does not have to be justified under the 1966 Practice Statement. Lord Salmon made the same point in Cookson v. Knowles at p. 574.

      Mr. Leighton Williams rightly relied on Lim Poh Choo v. Camden and Islington Area Health Authority [1980] A.C. 174. It is the strongest authority in his favour. At p. 193, Lord Scarman acknowledged the wisdom of Lord Reid's dictum in Taylor v. O'Connor that it would be unrealistic to ignore inflation in calculating lump sum damages for future loss. He nevertheless held that it was "the better course" to disregard inflation in the great majority of cases. Among the reasons he gave was that it was inherent in any lump sum system of compensation, and just, that the sum be calculated at current market values, leaving plaintiffs in the same position as others who have to rely on capital for their support. To attempt to protect them against inflation "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."

 
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