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Published 26 May 2017
The recent change in the discount rate from 2.5% to -0.75% will have many consequences, not only through the need for reserves to be increased to reflect the increase in multipliers for future loss claims. A consequence, which may not have been intended or anticipated, is the impact of the change on claims for accommodation, known as Roberts v Johnstone claims; this question was the subject of the judgment of Mr Justice William Davis in JR v Sheffield Teaching Hospitals NHS Trust, handed down on 25 May 2017.
As a result of negligence in the course of his birth, JR suffered injuries causing cerebral palsy and significant cognitive impairment. Whilst liability was not disputed and some heads of loss were agreed, the Court was required to assess the level of damages payable for a number of heads of future loss, including the cost of care and of special accommodation.
The principle of 'full compensation' requires compensation to be fair, reasonable and just to both claimant and defendant, putting the claimant in the position he would have been in but for the defendant's negligence whilst not over-compensating him.
Like many severely injured claimants, JR's accommodation, the family home which he shared with his parents and elder sibling, was not suitable for his needs. The parties agreed that a new property needed to be purchased and adapted, for which the claimant would use some of his award of damages. If the claimant were to be awarded the full capital cost of his special accommodation, he would be left with an asset which would likely have appreciated in value and which would be realised by his estate on death, thus overcompensating the claimant and generating a windfall for the estate.
The solution to this conundrum of over-compensation was provided by the Court of Appeal in Roberts v Johnstone, where the decision was to award a sum equivalent to the loss of income which would be achieved if the capital used to purchase the property had been invested in risk-free investments. This has seen the courts award damages since 2001 based on that notional loss of investment income at 2.5%, in line with the discount rate.
On 20 March 2017, the discount rate was reduced from 2.5% to -0.75% and therefore the yield on risk-free investments is now viewed as being a negative return. How does this affect a claim for the loss of return on risk-free investment which, but for the need to purchase a property, the claimant would (notionally) have achieved?
JR is the first case to come before the Courts where the impact of the new discount rate on the approach to accommodation claims was specifically addressed. The claimant argued that there had to be a positive rate used and suggested 2.5%, but the judge assessed that this would result in an award of more than the capital cost of the property and so rejected that argument. In doing so he noted that the logic of the discount rate being set at -0.75% was that the claimant could not obtain a real return above inflation from risk free investment of his award; therefore the appropriate award for the loss of income from his capital (the Roberts v Johnstone approach) was nil.
The defendant argued that the claimant could use the capitalised value of his loss of earnings claim, which exceeded the capital sum required. Their argument was supported by the analysis in McGregor on Damages at 38.204, that the setting of a negative discount rate would lead to a nil award. Whilst the judge noted the support from various quarters for the law in this area to be revisited and a "fair and proper solution…be found", he concluded that he was not in a position to do that and was obliged to make a nil award.
The judge commented that he had no evidence in front of him to consider any other approach. It is also worth noting that this 24 year old claimant has a life expectancy to age 70: the problem posed by the new discount rate becomes much more acute in a case involving short life expectancy and we may expect to see claimants seeking to produce evidence to support an alternative approach in such cases, as long as the courts permit such evidence to be introduced. Ultimately any solution in this area may need the Government to intervene.
The judge granted the claimant permission to appeal his decision on the accommodation point and recommended that the appeal be expedited. Even with expedition, it would take some time for the Court of Appeal's original decision in Roberts v Johnstone to be overturned: technically this could only be done by the Supreme Court and it is notable that in Wells v Wells, the House of Lords endorsed the description of Roberts v Johnstone as "an elegant solution". As no evidence was put before the judge in JR as to an alternative approach, it may not be the best case for claimants to test the point.
Whilst the judge acknowledged that a proper solution to the accommodation conundrum is needed, as things stand the change in the discount rate leads to a nil award. The discount rate is the subject of a government consultation, which closed on 11 May 2017, and further developments in this area should be expected.
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