Damages (Personal Injury) Order 2017

Lord Keen of Elie Excerpts

Tuesday 18th July 2017 Lords Chamber

[Lord Hunt of Wirral (Con)]

My Lords, in declaring my interests, as set out in the register, I join my noble friend Lord Faulks in very much supporting the points made by my noble friend Lord Hodgson of Astley Abbotts, and congratulate him on giving us this opportunity to reflect on the present situation and to look to Ministers expeditiously to resolve this problem. Noble Lords will know that I wear a number of hats in debates in this House, but I speak today as a common lawyer—that is to say, a lawyer who works within the common law. I have had the privilege to practise as a common lawyer since 1968. The assessment of damages for personal injuries has always been a function of the common law. To lapse momentarily into Latin, the founding concept that I was always taught of the law of damages is restitutio in integrum—restoring the claimant as nearly as possible to the financial position in which he or she would have been had the damage or injury not occurred.

For a seriously injured individual, it may be thought next to impossible to put a price on how that is to be delivered, so the law of damages has developed a series of principles designed to deliver a fair outcome—fair, of course, to the injured claimant, but fair also to the person paying those damages. The civil law of damages in this context is never punitive, only compensatory, and we must remember that. The principle is that of full compensation, which is to say neither undercompensation nor overcompensation. It is also known as the 100% compensation principle, which exists to ensure that the claimant, the injured party, is compensated fairly by the person paying the damages.

If there is undercompensation, then the claimant is not fairly compensated. Equally, it is not fair to the defendant if the claimant is overcompensated. As has been said in this evening’s debate, the payment may be made by the Government on behalf of the National Health Service or by an insurer, but it is ultimately funded by insurance premiums or taxes paid by everyone. If the claimant is overcompensated, then he or she is placed in a better financial position than if the injury had not occurred, and the defendant is paying something over and above the amount that is proper and fair compensation.

The discount rate is a vital part of the process of assessing how much compensation is fair. In this respect, it is just like any other component of the sophisticated methods by which lawyers and the courts assess as accurately as possible what a claimant’s losses are and will be for the future. The discount rate is simply a device by which a claimant receiving a lump sum for damages has that sum adjusted to reflect the fact that losses for a period of future years are being paid fully in advance. If that rate, which is set by the Lord Chancellor, is too low, then the claimant will be overcompensated. If it is too high, they will be undercompensated. It is vital that the discount rate should be set at a rate which allows the vital principle of 100% compensation to be achieved: no less, no more. That is not a controversial principle. Indeed, the principle is central to the proper function of the common law.

I was heartened to learn that the Economic Secretary to the Treasury, Stephen Barclay, speaking at a conference on 27 June, stated that the Government intend to keep true to the 100% compensation principle and will put the statutory process for setting the rate,

“on the firmest possible footing in future, so we have a better and fairer system for claimants and defendants”.

In essence this is a question of fairness for everyone involved. When does the Minister expect to publish the Government’s official response to the consultation earlier this year, which I am confident will fully embody the words of his colleague, the Economic Secretary to the Treasury?

[The Advocate-General for Scotland (Lord Keen of Elie) (Con)]

My Lords, I thank my noble friend Lord Hodgson for tabling the Motion on this important topic. I welcome the valuable contributions that he and other noble Lords have made.

As has been observed, the discount rate to be taken into account by the court in determining the rate of return to be expected from the investment of a lump sum award of damages for future pecuniary loss caused by a personal injury is set for England and Wales by the Lord Chancellor under Section 1 of the Damages Act 1996. This is colloquially referred to sometimes as the Ogden rate as in practice it is applied through the actuarial tables published by the working group originally set up by the late Sir Michael Ogden.

As noble Lords have observed, the rate plays a key role in underpinning one of the core principles governing the law of damages. Claimants who have suffered injury as a result of another person’s negligence must be compensated fully for their loss, and should be placed—as far as is possible in financial terms—in the position that they would have been in but for the injury. This is known as the principle of full compensation or the 100% rule. Under this principle, the aim of an award of damages is therefore to compensate claimants fully, but not to overcompensate them or undercompensate them.

To fulfil that aim, where damages are awarded for future pecuniary loss—such as future loss of earnings or the care costs that are going to be incurred—in the form of a lump sum, the award is, and must be, adjusted to take account of the benefit to the claimant of being able to invest the money before the loss or expense in respect of which it is awarded has actually occurred. The discount rate is the factor applied to the award to make this adjustment so that it represents the expected rate of return. The court, of course, has a power to apply a different rate but, as my noble friend Lord Hodgson noted, it has almost always applied the prescribed rate in these circumstances.

The Damages Act 1996 does not specify when the rate should be reviewed. However, the Lord Chancellor is under a continuing duty to ensure that it is not set at an inappropriate level. The rate was set in 2001 on a certain basis. Thereafter, there was consultation on the legal framework for setting the rate. Indeed, in 2013, a consultation was carried through but reached no consensus as to any changes or proposed changes to the legal framework for setting the discount rate. So, as at 2013, the coalition Government, of whom the noble Baroness, Lady Kramer, was a member, took no steps to deal with what she referred to as a preposterous state of affairs. Indeed, it was not at that time a preposterous state of affairs.

In 2015, an expert panel advised with regard to the matter of the rate. But in all these circumstances, when it came to 2016 and the beginning of 2017, the then Lord Chancellor had an existing duty to address the adequacy or otherwise of the discount rate. That was her legal obligation. In the light of that duty, she announced on 27 February this year that the rate should be changed from 2.5% to minus 0.75% with effect from 20 March 2017. I note that the Scottish Government made the same change to the discount rate about a week later on 28 March 2017. The then Lord Chancellor also undertook to review the framework under which the rate is set to ensure that it should remain fit for purpose in the future. The consultation paper she promised was published on 30 March. It sought views on a range of issues, including what principles should guide how the rate is set; whether the existing methodology is appropriate for the future; whether the power to set the rate should remain with the Lord Chancellor or move elsewhere, possibly to an expert panel; whether more frequent reviews would improve predictability and certainty for all parties—a point raised by a number of noble Lords—and whether further steps should be taken to encourage the use of periodical payments orders instead of lump sums, a point touched on by the noble Lord, Lord Beecham.

Underlying the consultation was the wish of the Government to make sure that the way the rate is set is put on the firmest possible footing in future, so that we have a better and fairer system for claimants and defendants, and, in so doing, keeping true to the 100% principle—namely, that claimants are paid no more but no less than they should be. The consultation closed on 11 May and the Ministry of Justice is currently analysing the 135 responses received, which, as might be anticipated, reflect a broad range of opinion as much as they reflect a broad range of interests. This requires considerable care and thoroughness, as many of the responses are highly complex and contain detailed technical information on investment returns and investor behaviour, something the noble Baroness, Lady Kramer, pointed out could be quite diverse and divergent in particular circumstances.

It is not for me to anticipate the outcome of the consideration of the consultation, but I seek to assure my noble friend and other noble Lords who have spoken in the debate that an announcement of the Government’s conclusions will be made at the earliest possible opportunity. Of course, the interests of all parties concerned will be considered, and there will be an impact assessment.

My noble friend’s Motion is, however, directed at the change of rate rather than the outcome of the consultation. His argument is that the then Lord Chancellor should not have set the rate at a time when she had decided that a further consultation exercise was to take place on how the rate should be set in the future. I venture that this argument is not well founded. As I have explained, the Lord Chancellor is under a continuing duty to ensure that the rate is set at an appropriate level. This means that once the then Lord Chancellor reached her decision on what the appropriate rate should be, she was legally obliged to put that decision into effect. The option of delaying setting the rate until the outcome of the planned consultation was known was simply not available to her.

My noble friend’s regret that the then Lord Chancellor carried out her duty is therefore, I respectfully suggest, misplaced. The then Lord Chancellor acted correctly both in changing the rate and in initiating a consultation on whether there is a better or fairer way for it to be set in future. Had the Lord Chancellor adopted the approach proposed by my noble friend and delayed a change in the rate until a consultation—and no doubt any consequent change in the law—had been complete, she would have knowingly maintained an inappropriate rate for what might have been a considerable period of time. That would have been in breach of her legal obligation with respect to the setting of the rate.

Consequently, the approach taken by the Lord Chancellor was correct in law. In these circumstances therefore, the Government cannot support my noble friend’s Motion, and I hope that he will feel able to withdraw it in light of the explanation I have sought to give on behalf of the Government.

[Lord Hodgson of Astley Abbotts]

My Lords, the hour is late so I will be brief. I thank all noble Lords who have spoken in support of this regret Motion: the noble Baroness, Lady Kramer, for her forthright support; I think I got half or maybe two-thirds of a loaf—I am not quite sure but I will settle for half—out of the noble Lord, Lord Beecham; and I thank my noble friends Lord Faulks and Lord Hunt for their support. They speak from a position of a great deal more expertise than I will ever have.

Of course awards need to be fair, and I do not argue at all with the first arm of the Wells v Wells judgment, that it must not undercompensate or overcompensate; it must be fair. As my noble friend Lord Faulks mentioned, there was this sensation around that this is an attempt by insurance companies to boost their profits. If we leave that aside, over the next five years there will be £6 billion less in the National Health Service, which would have been used for looking after patients and carrying out the essential work that the NHS does, as a result of this decision and as provided for in the recent budget development.

I appreciated my noble and learned friend’s teaching on recent developments as regards the setting of the discount rate. His defence of the then Lord Chancellor was stout in the extreme. It is extraordinary that in 2017 the then Lord Chancellor suddenly felt that she had a duty when her predecessors in all the years since 2001 apparently thought that they did not. However, he made a good fist of quite a tricky brief—although I know that, as an expert barrister, he will be long used to and practised in that.

I am pleased to hear that there have been 135 responses to the consultation and that the Government are analysing them. I thought I got a slight Nelsonian wink that we might expect some developments in this area. I hope very much that that assumption is correct, as we have to deal with this running sore. However, we can take it no further this evening, and I beg leave to withdraw my Motion.