Flora v Wakom (Heathrow) Ltd: Indexation of periodical payments - is the RPI the only method?
Flora v Wakom (Heathrow) Ltd: Indexation of periodical payments - is the RPI the only method?
Flora v Wakom (Heathrow) Ltd [2006] EWCA Civ 1103Summary
Not necessarily, but watch this space.
Background
As is well-known to personal injury practitioners by now, the 2005 amendments to the Damages Act 1996 make it necessary for the court to consider in all personal injury cases involving damages for future pecuniary loss whether to make an order for periodical payments. Future inflation is catered for by a provision in the order that the amount of the payment shall vary by reference to the retail prices index (section 2(8)), unless the court disapplies or modifies this provision (section 2(9)).
In Flora, C’s future care needs have been valued at between £18,000 and £27,000. His advisors are seeking to use s.2(9) to disapply RPI indexation and to use instead an index based on increases in wages, such as the Average Earnings Index. This is on the premise that care costs are largely driven by the wages of those who do the caring, wages have historically increased faster than inflation, and that the real value of C’s future care award would be eroded by wages increasing faster than general inflation, leading to significant under-compensation in the long term.
D’s position is that s.2(9) should only be used in exceptional circumstances, which are not found in C’s case. So D applied to strike out those parts of C’s statement of case which contend for another index than RPI and to exclude the expert evidence that C wishes to call to show that another index would be more suitable.
The result
The application failed at first instance and on appeal. There is much to encourage claimants in the Court of Appeal’s judgment.
The Court of Appeal held that there was nothing in the wording of the statute which provided that the power to use s.2(9) depended on there being “exceptional circumstances”. On the contrary, the Court of Appeal said, the Act contained no indication that Parliament intended to depart from the well-known principle that compensation should be as near as possible to that required to put the injured party back in his pre-accident position.
D drew the analogy with selecting the appropriate discount rate for calculating lump sum future losses. The Lord Chancellor’s selection of 2.5% as the discount rate can be displaced in theory, but the decision in Cooke v United Bristol Healthcare NHS Trust [2004] 1 WLR 251 effectively rendered this a dead letter. However, the Court of Appeal said that the award of a lump sum for future pecuniary losses is entirely different in character to an award for periodical payments compensating for such loss. In the first, the House of Lords in Wells v Wells and thereafter the Lord Chancellor when setting the discount rate had to guess the future and hope that prudent investment by the claimant would enable him to benefit fully from the award for the whole of the period it was designed to cover. In the second, the risk is taken away from the claimant: the award provides appropriate compensation and the appropriate index will protect him from future inflation. The problems infecting the operation of the first should not be allowed to infect the operation of the other, said Brooke LJ.
Matters such as whether there are or would be suitable close-matching securities to enable an annuity provider to provide AEI indexation, or whether continuity of payment was reasonably secure by some other means, were (said the Court of Appeal) best left to trial – or, rather, a number of trials at which the expert evidence on each side could be thoroughly tested, with appeals thereafter to give definitive guidance in the light of findings of fact. Thereafter, “the armies of experts will then be able to strike their tents and return to the offices or academic groves from which they came”, said Brooke LJ (who was on the point of retirement himself!)
The future
There are some strong hints in Brooke LJ’s judgment (with which Potter P and Moore-Bick LJ agreed without elaboration) that the Court of Appeal should lean against a construction of the Damages Act that unnecessarily restricted the use of indices other than the RPI. He said that there was considerable force in C’s submission that a narrow interpretation of s.2(9) would risk rendering the new statutory scheme a dead letter. At least with lump sums, a claimant can always invest cleverly and try to beat the discount rate on which his award is based – with periodical payments, a claimant would not be able to do this but would be stuck with a level of compensation that would be eroded if wage inflation continued to exceed price inflation and the more likely it would be that he would be “seriously under-compensated as the years wear on.” There was no evidence that this was Parliament’s purpose, he said, and this interpretative path should be avoided if there is “any other that is reasonably open to us.”
So, the next stage will be for some cases to get to trial with experts on both sides lined up to give evidence as to which index is best. The result is by no means a foregone conclusion on the facts, since the evidence upon which C seeks to base the use of a different index has yet to be tested at trial. For example, it has been argued that indices based on NHS wages are distorted by high pay scale earners (executives and senior staff) and so should not be taken as representative of increases in carers’ wages. Similarly, there are arguments that the difference between increases in carers’ wages and inflation is reducing, such that the RPI would not be an inappropriate index for the future, and / or that any past differences cannot reasonably be projected into the future. Will insurers retaliate and suggest that that are other areas where costs could reasonably expected to rise slower than RPI or even fall – e.g. technological equipment, or aids and appliances?
We must wait and see how long it will be before some test cases fight, without one side or other blinking first rather than risk defeat. The prospect of AEI-based indices for large care claims, which are often a very large bulk of future loss claims, may worry some defendants sufficiently to enable claimants to get a better settlement overall.