The indexation of periodical payments

This article concerns the judgment of the Court of Appeal in Tameside and Glossop NHS Trust v Thompstone [2008] EWCA Civ 5. I shall refer to this as Thompstone, although it involved four different cases on appeal. At first instance, John Grace QC and I appeared for John Corbett; on appeal, we again appeared for John Corbett and we, together with Robin Oppenheim QC, also represented a Claimant who was referred to as ‘RH’. All of the appeal cases had arisen from clinical negligence claims, although the issue of periodical payments will arise in any case which discloses a substantial claim involving long-term costs of care and case management.

The function of periodical payments

The ‘lump sum’ system of multipliers and multiplicands depends on the court deciding the Claimant's life expectancy. This is not a reliable process. Claimants may be awarded multimillion pound damages and die years younger than expected, with obvious injustice to the Defendant. On the other hand, the Claimant may exceed the life expectancy, in which case the damages will not provide adequately for the need.

The Damages Act 1996 was amended by the Courts Act 2003 so as to give the Court the power to order the imposition of periodical payments in an appropriate case, irrespective of the wishes of the parties. The amendments mean that the Court may bypass the difficulties of life expectancy by (if necessary) forcing the parties to resolve issues by means of annual payments.

Often, however, the parties will agree to periodical payments at least for future care and case management costs. In Corbett v South Yorkshire Health Authority [2007] LS Law Medical 430, HH Judge Bullimore approved a capital settlement of just over £1.6 million for everything except the care and case management issues. There were arguments about what those annual costs would be and there was then a separate argument (which formed part of the Thompstone appeals) as to indexation.

What is indexation and why does it matter?

If payments are made on a regular annual basis, they must be increased to take account of inflation. The key question is therefore how that inflation is to be calculated and, specifically, by what index the annual payments shall be increased.

The relevant parts of the Damages Act are sections 2(8) and 2(9), which read as follows:

2(8) An order for periodical payments shall be treated as providing for the amount of payments to vary by reference to the retail prices index (within the meaning of section 833(2) of the Income and Corporation Taxes Act 1988) at such times, and in such a manner as may be determined by or in accordance with Civil Procedure Rules.

2(9) But an order for periodical payments may include provision

(a) disapplying subsection (8), or

(b) modifying the effect of subsection (8).

The Retail Price Index (RPI) involves a notional ‘basket’ of things which households buy and the focus is primarily on the cost of goods such as, food, fuel and consumer durables. Only a very small percentage of the RPI is concerned with the costs of services. Conversely, earnings indices do not include the costs of goods, but measure what people earn. Over the last 30 years, the costs of labour (of all kinds) have risen more than twice as fast as the costs of goods. This is why such things as cars and televisions have become (comparatively) cheaper, whereas the costs of labour (such as the price of school fees, legal services or restaurant meals) have become comparatively more expensive.

Claims for people who have catastrophic injuries will usually involve lifelong care needs. These needs can only be met by the constant attention of carers, whose hourly rates will depend on the wages that they can command in the wider economy. It is obviously important for the Claimant to be able to continue to buy the care that is needed and so the periodical payment needs to keep pace with those rising care costs.

The annual difference between the costs of goods and the costs of labour has (historically) been between 2–3% since 1945. Suppose that this differential is maintained over the next 40 years and that you are representing a Claimant with a 40-year life expectancy and an annual care claim of £100,000. The value of the ‘indexation argument’ (namely the differential between indexation according to earnings versus RPI) would be worth more than £2 million in today's money. That is why this apparently abstruse point has generated substantial litigation and a recent Court of Appeal decision.

There can be no certainty that the next 40 years will be the same as the last 40 years. To some extent, it is certain that they will be different. But, the expectation (of both Claimants and Defendants) is that earnings will probably continue to rise faster than goods, with obvious consequences for the costs of the indexation of periodical payments.

The argument in Flora v Wakom

The first reported case on this topic was Flora v Wakom [2006] EWCA Civ 1103. The claim was pleaded on the basis that the court should award periodical payments uprated by reference to an appropriate earnings index and the Claimant sought to adduce the evidence of a labour economist (Dr Victoria Wass). The Defendant made an application to strike out the applications on the grounds that section 2(9) of the Damages Act only permitted departure from the RPI in exceptional circumstances, which did not apply to Flora.

Both Sir Michael Turner at first instance and the Court of Appeal rejected the Defendant's submissions. In paragraph 33 of his judgment, Brooke LJ concluded that there should be a number of cases, which would come before the Court of Appeal so that the issue of indexation could be fully ventilated and argued.

The cases which were conjoined and heard in November 2007 (Tameside and Glossop NHS Trust v Thompstone) form the group envisaged by Brooke LJ.

The cases involved four young Claimants, all of whom had lifelong care needs caused by their cognitive and physical disabilities. In all of the cases, liability had been admitted and the issue on appeal was whether periodical payments to meet the future costs of care and case management should be uprated by reference to the RPI or by reference to a suitable earnings index.

In all four cases, the first instance judges had decided that the appropriate measure for indexation was the Annual Survey of Hours and Earnings (ASHE). This is an annual survey published by the Office of National Statistics and it is a sample of the actual earnings of employees. The survey disaggregates its data into different classifications, one of which is ‘6115’–dealing with care assistants and home carers.

ASHE 6115 is not an index, but the Claimants argued that the weighted average of the Claimant's cost of care should be matched to the appropriate percentile of ASHE 6115. Thereafter, the cost of the care would be tracked uprate by reference to that percentile.

Following the first instance decisions, all four judges gave permission to the Defendants to appeal to the Court of Appeal so that the indexation issues could be fully argued and determined.

The Appellants' submissions – ‘exceptional circumstances’

The Appellants submitted that the indexation of periodical payments by reference to the RPI should only be permitted by the Court in ‘exceptional circumstances’. The Defendants contended that RPI was the default index and that the Court should not depart from that unless an exceptional reason was demonstrated.

Further, the Defendants argued that if periodical payments were uprated by anything other than the RPI, this would be an attack on the discount rate which would be inconsistent with Warren v Northern General Hospital [2000] 1 WLR 1404 and Warriner v Warriner [2002] 1 WLR 1703, in which the Claimants had unsuccessfully argued that the discount rate should be reduced to reflect the fact that care costs rose faster than RPI inflation.

In Thompstone, the Court of Appeal held that periodical payments required a different approach from the discount rate applied in multiplier/multiplicand awards. In his leading judgment at paragraphs 33 ff., Waller LJ cited the judgment of Brooke LJ in Flora with approval. The key passages are as follows:

… When setting the appropriate discount rate in the context of a lump sum award, the House of Lords or the Lord Chancellor had to guess the future and to hope that prudent investment policy would enable a seriously injured Claimant to benefit fully from the award for the whole of the period for which it was designed to provide him/her with appropriate compensation.

A periodical payments order is quite different. The risk is taken away from the Claimant. The award will provide him or her year by year with appropriate compensation, and the use of an appropriate index will protect him/her from the effects of future inflation. If he or she dies early the Defendants will benefit because payments will then cease. It is unnecessary in the context of this statutory scheme to make the kind of guesses that were needed in the context of setting a discount rate. The fact that these two quite different mechanisms now sit side by side in the same Act of Parliament does not in my judgment mean that the problems that infected the operation of the one should be allowed to infect the operation of the other.

‘Modification’

The Appellants in Thompstone then argued that the use of ASHE 6115 amounted not to a ‘modification’ of the RPI, but to a wholesale substitution. The Court of Appeal held that they were bound by the finding in Flora (in which that contention had been rejected) and also they expressed the view that they were against the Appellants on the point since the modification was not to the index but to the application of section 2(8) of the Damages Act.

The Appellants' submissions – ‘distributive justice’

The fourth issue raised by the Appellants concerned the question of distributive justice, which involved the assertion that if the periodical payments were indexed by reference to earnings, the costs to the National Health Service (and, potentially, other Defendants) would be unduly high. Waller LJ also rejected the Appellants' submissions. In paragraph 47 of his judgment, he observed that:

… ‘distributive justice’ is not a principle of English law recently adopted so as to allow free rein to ignore basic principles long established. It may come into play when considering whether it is fair, just and reasonable to hold that a duty of care is owed (as in Frost and Rees) or in considering a public policy question such as damages for the birth of a healthy child (as in McFarlane). It is perhaps also understandable how it plays some part in considering the essentially judgemental question of whether the level of general damages should be increased (as in Heil), but this is all a far cry from seeking to influence the calculation of actual financial loss where the 100% recovery principle is fundamental. Once liability is established and once financial loss is being assessed, it is ‘corrective justice’ and not distributive justice with which the court should be concerned.

‘The legal burden of proof’

The Defendant Appellants argued that the Claimants must discharge a legal burden of proof in order to persuade the Court to depart from the RPI. Waller LJ (paragraph 52) commented that ‘In our view … the point was always bad’. He emphasized that the court was given an inquisitorial role by the Damages Act and that it was entirely appropriate for the judges to have chosen between the variety of indices which had been considered. See, for example, the judgment of Swift J in Thompstone [2006] EWHC 2904 (QB).

Criticisms of ASHE 6115

The Court of Appeal was asked to consider submissions about the suitability and accuracy of ASHE 6115. The attacks upon ASHE 6115 involved assertions that it over-stated wages and/or that it was not an ‘index’ which provided a suitable means for uprating periodical payments and/or that the figures derived from ASHE 6115 were prone to volatility and/or reclassification and/or distortion.

In paragraph 73 of his judgment, Waller LJ noted that the submissions about the shortcomings of ASHE 6115 were expressed as matters of law – in which case they failed in limine because of Flora. However, in view of the nature of the appeal, the Court did deal substantively with the Appellants' objections to ASHE 6115.

In so doing, the Court found against the Appellants on all their submissions and at paragraph 98 of his judgment, Waller LJ expressly approved the conclusions of Mackay J in RH v United Bristol Healthcare NHS Trust [2007] EWHC 1441 who made the following comments at paragraph 87 of his own judgment:

… I regard (ASHE) 6115 as the most accurate match to the target expenditure; it is of undoubted authority, coming from the ONS; it is statistically reliable as all agree, with tight CVs; it is freely accessible, albeit with a time lag problem which I believe can be overcome; it is consistent over time past, although it does not go back beyond 1997, not a serious flaw in my view; it is reproducible in future.

Practical points

The Court of Appeal noted that the amendments to the 1996 Damages Act created a new power and gave a new responsibility to the court – namely whether and in what circumstances to order the imposition of a periodical payment. Two particular points are of importance to practitioners:

Only exceptionally will it be appropriate for Defendants to commission and present evidence from an independent financial adviser. Provided that the Claimant persuades the court that his preference for (or against) periodical payments for all or part of the award are reasonable, it is not appropriate for the Defendant to attempt to gainsay that.

If, unusually, the issue of periodical payments is to be decided by a judge who has not been invited to approve settlement of wider issues, it may be appropriate that any advice which may have been given to the judge approving settlement should be redacted and disclosed to the Defendant and to the judge who is asked to decide issues relating to periodical payments.

Conclusions

The Court now has wide powers to impose periodical payments. The recent Thompstone decisions give help and guidance on the mechanisms available and confirm that where the Claimant has long-term care needs, it will be appropriate to uprate payments by reference to an apposite earnings index.