The current Ministry of Justice consultation into the legal framework for setting the personal injury Discount Rate is an issue of critical importance to all those dealing with personal injury claims both in the UK and internationally.

Any reduction to the Discount Rate will have a significant impact on damages, particularly in the high value claims which already attract multi-million pound awards.

Latest consultation

The current Discount Rate of 2.5 per cent was set by the then Lord Chancellor in 2001 using his powers under s.1 Damages Act 1996. The latest consultation paper seeks views on two subjects relating to the setting of the Discount Rate under s.1:

  • Whether the legal parameters defining how the rate is set should be changed
  • Whether there is a case for encouraging the use of periodical payment orders instead of lump sum payments

This follows the earlier consultation that closed in October 2012 on the methodology to be used in setting the personal injury Discount Rate.

Recent court decisions

The recent strong line shown by courts in the UK against efforts by claimants to argue that the current Discount Rate should not be applied to their cases is welcome. Other recent cases, this time in Guernsey and Hong Kong, demonstrate that the Discount Rate is a global issue.

Both the High Court in England and Wales, and the Inner House of the Court of Session (the Scottish court of appeal), have recently rejected arguments that the change in economic circumstances since the rate was last set in 2001 could justify such a move.

Section 1(2) of the Damages Act 1996 allows the court to set a different rate if any party to a case shows that it is more appropriate. However, both the High Court in England and Wales, and the Inner House of the Court of Session (the Scottish court of appeal) have recently rejected arguments that the change in economic circumstances since the rate was last set in 2001 could justify such a move.

In the High Court in Harries v Stevenson [2012], Mr Justice Morgan said a change in economic forces was not enough to trigger this:

"Whilst the current prescribed rate remains unchanged, it is not appropriate for a court in an individual case to consider whether to adopt a different rate, just because it is said that economic forces today differ from those in 2001. If that is thought to be unfair to claimants, the justification is that it is desirable as a matter of policy for the amount of the discount rate to be prescribed and fixed rather than it should be the subject of evidence and argument in some, perhaps, many cases which do not possess exceptional features."

Lord Carloway, in the Scottish case of Tortolano v Ogilvie Construction Ltd [2013], came to the same conclusion:

"A pursuer [claimant] might argue that a different rate is 'more appropriate' without adverse reference to the validity of the prescribed rate. However, the substance of the pursuer's arguments cannot be construed as anything other than an attack on the prescribed rate itself. Put shortly, the pursuer contends that there is no longer an evidential basis for that rate he court cannot and should not entertain it in this type of process in the face of Parliament’s clearly stated intention … If the pursuer wishes to have the rate changed, he should do so through the political process or by way of judicial review."

International perspective

Helmot v Simon was a personal injury claim brought in Guernsey, where there is no statutory Discount Rate. In 2012 the Privy Court dismissed an appeal against a decision of the Guernsey Court of Appeal. The Court of Appeal had increased the claimant’s damages to approximately £14m, on the basis of discount rates of minus 1.5 per cent for earnings related losses and 0.5% for other future losses. These rates were based on evidence on the net return on index-linked gilts.

By way of example, a future care claim of an 18 year old man assessed at £100,000 per annum when applying a 2.5 per cent discount would produce a lump sum award for this head of loss of £3,252,000 (multiplier: 32.52). With a Discount Rate of minus 0.5 per cent this increases the claim to £5,822,000 (multiplier: 58.22): an increase of £2,570,000. When applied to a portfolio of 100 catastrophic injury cases the potential increase in global reserves is staggering.

The Discount Rate in Hong Kong has previously been set at 4.5 per cent. A ruling in February 2013 - involving two conjoined cases - saw the Hong Kong High Court reduce it and also vary the rate depending on whether the claimant has needs for up to five years (new rate of minus 0.5 per cent), up to 10 years (1 per cent), and more than 10 years (2.5 per cent).

This means that in Hong Kong multipliers will increase significantly for younger claimants with longer future needs. For claimants with shorter future needs, although the Discount Rate is now negative, the shorter period of time over which the loss accrues may mean that the total damages in a particular case will not increase substantially.

Implications

It is positive that the courts in the UK are not allowing a change to the Discount Rate by the back door. The appropriate process for such an important decision is the one being undertaken by the Government. There is extensive evidence to consider, and contrary to the views of the claimant lobby, the Government recognises the rate may actually be too low.

The rest of the common law world faces similar issues and is watching closely what is happening in England and accordingly it is vital the right decision is made. Both the outcome of the consultations and the final decision made by the Lord Chancellor on the Discount Rate are awaited with interest.