In a recent interlocutory application, the Personal Injuries Judge granted leave to three severely injured plaintiffs to adduce economic evidence to test whether the discount rate of 4.5% still remains valid in the calculation of future losses in personal injury awards.

Since the Court of Appeal ruling in the case of Chan Pui Ki v Leung On 2 HKC 565 in 1996, Hong Kong courts have been adopting the so-called "conventional approach" of applying a discount rate of 4.5% to the payouts in personal injury cases. The discount rate was arrived at on the assumption that the returns gained in investments exceed the rate of inflation by 4.5%. Accordingly, the lump sum payouts have to be discounted by this rate so that the plaintiffs would not be making a profit out of the awards.

However, with the changing economic environment, this conventional approach is seen to be outdated and inappropriate. It is argued that historical data shows that returns on investments over the past decade barely cover the rate of inflation. In such circumstances, with a discounting factor of 4.5%, the injured plaintiffs are not properly and fully compensated.

The recent Privy Council decision in Simon v Helmot [2012] UKPC 5 re-examined the methodology adopted in the assessment of the multipliers and arrived at a negative discount rate of 1.5% for earnings-related losses, and 0.5% for non-earnings related losses. The assessment was made with reference to the available economic evidence. This judgment, although not binding on Hong Kong courts, certainly has persuasive force.

The Court of First Instance in Hong Kong has now been persuaded that there is sufficient evidence in support of the substantial change in the economic landscape since the Chan Pui Ki decision. By permitting the filing of economic evidence, which includes the economic data for the past 10 years and the rate of returns on low-risk financial products and the MPF, the Court appears to be paving the way for a possible repeal of Chan Pui Ki.

Comment

The discount rate has a significant impact on personal injury awards, in particular for those who are seriously injured. Given the low investment returns in recent years, there is a high possibility the courts will allow a reduction in the discount rate, sooner or later, resulting in higher awards across the board. Insurers should be prepared for this outcome.