Flora v Wakom, periodical payments and indexation: the story continues?
Flora v Wakom, periodical payments and indexation: the story continues?
This article follows on from a previous casenote on the Court of Appeal decision in Flora v Wakom (Heathrow) Ltd [2006] EWCA Civ 1103, to which reference should be made for a fuller introduction. Suffice it to say for now that the Damages Act gives the court power to award periodical payments (PPs) that vary by reference to the retail prices index (RPI) but the court can disapply or modify this provision. Claimants hope that that power can be used to link PPs to other indices, which it is thought will lead to higher future increases. In Flora, a defendant failed in its attempt to strike out those part of C’s statement of case that contended for variation using an alternative index, the Average Earnings Index (AEI). The Court of Appeal said that there should be some test cases to sort out the facts, and then the Court of Appeal could give guidance on the principles.We await judgment from the first trial post-Flora, which took place in Liverpool recently, but in the meantime we have two High Court decisions that possibly point to the way that the continuing story will end – in claimants’ favour.
Redhead v Rawcliffe [2006] EWHC 2695 (QB)
In this case, Keith J had to assess the damages due to a young man, who had been knocked down by the defendant’s car when he was 8 years old. Liability had been compromised at 95%. C, now 19 years old, suffered moderate brain injury but still had some prospect of employment albeit at low level. Both sides agreed that C needed considerable care for the rest of his life (and he had normal life expectancy). The award for future care was in the region of £1.5m.
The trial was held in March and June 2006 (the adjournment being because of illness of a witness). Flora was not on the horizon in March 2006. The case was opened by C’s counsel on the basis that that this was just the sort of case for PPs to be awarded. However, as the bulk of the award for future loss was for payments for carers and support workers, C’s advisors feared that indexation by reference to RPI would under-compensate C if (as in the past) wages increased by more than RPI. So C’s advisors’ first choice was for PPs linked to the AEI, not the RPI. If the damages could not be linked to the AEI, then the second choice was for a lump sum.
By June 2006, it was known that the Court of Appeal was going to hear Flora and so the judge was asked to consider the award on a lump sum basis, rather than attempt to pre-empt their Lordships’ decision, and to leave it to the parties to decide what to do next. It is unclear from the judgment whether the parties are positioning themselves to be one of the post-Flora trials.
If, however, C just wants a lump sum and not PPs, it is highly probable that C will be allowed to have a lump sum without the judge being called upon to decide the issue. This is because of the decision reached in the following case.
A v B Hospitals NHS Trust [2006] EWHC 2833 (Admin)
A few days after judgment was handed down in Redhead, Lloyd Jones J gave judgment in this case – although quite why the transcript says that he was sitting in the Administrative Court for a PI claim is unclear. A suffered catastrophic injuries at birth. Liability was admitted. The future care award in A had been calculated by the judge on a previous occasion at £4m, on a lump sum basis, with all other damages on a lump sum basis being agreed at £2.5m.
The difference between the parties was whether to have a lump sum or PPs. A wanted a lump sum; B wanted A to be given PPs. A further hearing was held to sort out the issue.
Evidence was given as to the historical divergence between the RPI and the AEI for employment generally. RPI has only exceeded AEI in three years out of the last 36 years. The average real growth of the AEI has been 1.9% higher than RPI over the last 36 years and also over the last 10 years. There was also evidence of wage inflation in more relevant occupations: the NHS pay cost index from 1994 to 2003 increased annually on average by 2.5% over RPI; Crossroads care attendants’ wages between 1992 and 2006 increased annually by an average of 0.7% over RPI. Lloyd Jones J said that the NHS and Crossroads figures gave a fairer indication of the likely future cost of employment carers than the AEI. He approached the matter on the basis that the appropriate future projection for increase in carers’ wages would be 1.7% higher than RPI. Given that A had an agreed life expectancy of 42.5 years, if PPs were awarded but limited to RPI increases, there would then be a shortfall of £29,000 by year 10, £193,000 by year 27 and £347,000 by year 36. The shortfall in PPs would become apparent from the first anniversary of the award and would thereafter become entrenched even if RPI and actual increases in care costs came more into line thereafter. The potential difficulties for A’s advisors (legal and financial) can easily be seen.
Nevertheless, B argued that A should be given PPs, saying A could make up the shortfall from investment returns on the lump sum awarded for all other damages. The judge did not think that this was an adequate answer. Some of the other damages were already “ear-marked” for other purposes, such as buying a suitable property to meet A’s lifetime needs, which had been agreed at £850,000 but would in fact probably cost over £1.2m. There was not, in fact, a huge amount of money left for investing to attempt to make good the shortfall.
Furthermore, the judge said that there was, on the evidence, a very good prospect that investment returns on a full lump sum award would go further than would PPs to meet the actual costs of care by achieving net growth above inflation to meet the projected costs. A’s family in fact said that they accepted that their preferred option involved a greater degree of capital risk by investing a large lump sum to achieve growth to match increases in earnings, rather than have PPs linked to RPI.
B also argued that there was a benefit to the NHS if it was allowed to pay through an annual stream of income rather than in a lump sum. The judge said that this was a legitimate consideration, not an impermissible argument about affordability.
However, despite B’s endeavours, Lloyd Jones J concluded overall that a lump sum would best meet A’s future care needs since there was a very strong possibility that divergence between RPI and actual care costs would result “in a massive shortfall of provision”.
Conclusion?
A v B Hospitals NHS Trust shows that it will be very difficult for a defendant to force a claimant to take a form of award (be that PPs or lump sum) against his wishes. This is hardly surprising. However, more importantly, it also shows judicial acceptance of the scale of the problem caused by past (and therefore potential future) wage inflation in the care sector. One can easily imagine that similar evidence will be given in post-Flora trials where claimants are actually seeking indexation other than by use of the RPI, rather than (as in this case) using such arguments to press for lump sums instead of PPs. And so, this case may also point the way that these trials will be decided. If claimants are only given a choice between RPI indexation and lump sums, then claimants can hardly do other than choose lump sums particularly in cases with large claims for future care – which, one would have thought, would be the cases most suitable for PPs. Instead of avoiding investment risks and the fear that the money will run out, claimants would have to choose the lump sum investment route to avoid wage inflation problems. Periodical payments would then have failed to be the real improvement in compensation that many hoped that they would be. The Court of Appeal in Flora having refused to shut the door on non-RPI indexation arguments, it is hard to see that they will countenance wholesale under-compensation of claimants when the test cases get to them on appeal.