By David Marshall, Anthony Gold, London


Period piece



Highly touted on their introduction in 2005, periodical payment orders might appear to be something of a damp squib.



Initially there was a brief flurry of activity; Mr Justice Mitting in Godbold v Mahmood [2005] EWHC 1002 [2006] apparently imposed periodical payments for future care just weeks after implementation, although careful investigation reveals that in fact the order was agreed by the parties. There then followed some tremendously important, but frankly mind-numbingly tedious cases sorting out problems over the security of the provider: Thacker v Steeples (6 May 2005, Cox J, unreported, on the Motor Insurers' Bureau) and the combined cases of YM v Gloucestershire Hospital NHS Foundation Trust (on NHS foundation trusts) and Kanu v King's College Hospital NHS Trust (on ordinary NHS trusts that might convert to foundation trust status) [2006] EWHC 820 (QB)).



In the latter case, the several pages of recitals in the precedent order attached to the judgment show how complicated it can be absolutely to guarantee the security of this remedy for catastrophically injured claimants who will have to rely on the stream of payments continuing for perhaps 60 or more years, rather than having their own funds available for investment under their own control.



But why were there not more cases being reported on imposition? And why were so many claims &150; particularly outside the clinical negligence sphere &150; being settled for lump sums? The main reason remained the continuing fudge over full compensation principles in the amendments to the Damages Act 1996. Launching the government's proposals at the time, the then Lord Chancellor, Lord Irvine, said: '[Periodical payment orders] should help ensure that injured people receive the compensation to which they are entitled for so long as it is needed, without the worry of the award running out if they happen to live longer than was expected.' And in the House of Lords on 27 March 2003, Baroness Scotland said: 'It is important that the real value of periodical payments can be preserved over the whole period for which they are payable.' However, by the report stage on 19 May 2003, she was saying: 'We expect that the retail prices index will continue to be the norm and that the court will depart from it only where the particular circumstances of the case make it appropriate.'



This is a continuation of the arguments that have bedevilled conventional lump-sum awards. The retail prices index is the inflation gauge underlying the calculation of the multiplier. However, inflation for the two most significant elements of all future loss claims - loss of earnings and care costs - has been increasing far more than inflation in retail prices, so that the allowance for inflation within the multiplier is inadequate. An attempt to get around this in lump sum awards by seeking adjustments to the multiplicand was given short shrift by the Court of Appeal in Cooke v United Bristol Healthcare NHS Trust [2003] EWCA Civ 137. But the court did accept that the use of a single discount rate will not provide full compensation in individual cases and substantial shortfalls can be expected in the case of severely injured young claimants with normal life expectancy and which can run into millions of pounds. Or, to put it another way, the money will run out years before the claimant dies.



Periodical payment orders were meant to avoid all of this. But, if linked to the retail prices index, the stream of payments will not keep pace with a claimant's needs if the costs of care (which mainly are constituted by carers' wages) and loss of earnings increase more than the index. For example, over the period 1992 to 2004, the retail prices index increased by 35%, while the average earnings index increased by 60%.



Some claimants pleaded their claims for an alternative index. In Flora v Wakom (Heathrow) Limited [2006] EWCA Civ 1103, the defendants, perhaps rather bravely, sought as a preliminary issue to strike out a claim to link the periodical payments order to the average earnings index. The Court of Appeal declined to do so. The Act and the Civil Procedure Rules were plain on their face, giving the court the power to impose an alternative index and the court held that this did not require an 'exceptional' case.



In these circumstances, there was no need to look into what had been said in Parliament, which, in any event was really rather a fudge. Lord Justice Brooke canvassed at length the problems of achieving full compensation through lump sum awards and the opportunity that periodical payment orders gave to avoid this. He said: 'I reject the [defendant's] argument that Parliament must be taken to have intended to provide compensation lower than that which would be awarded through adherence to the 100% principle if a periodical payments order was to be made ... It cannot have been Parliament's purpose to create a scheme which no properly advised claimant would ever wish to use' &150; in other words, if the payments were linked to retail prices index and would not keep pace with wage inflation.



Lord Justice Brooke also rejected the trust's arguments that links to an index other than retail price were not 'affordable' saying that Parliament would have said so if that was what it intended 'and to be willing to incur the accompanying political odium for doing so'.



The House of Lords rejected the defendant's application for permission to appeal just before the end of last year. As Lord Justice Brooke said in Flora: 'There will be a number of trials at which the expert evidence on each side can be thoroughly tested. A group of appeals will then be brought to this court to enable it to give definitive guidance in the light of the findings of fact made by a number of trial judges.'



In November 2006, in the case of A v B NHS Trust [2006] EWHC 1178 (QB), the claimant did not seek periodical payments, contending for a lump sum on the basis that periodical payments linked to the retail prices index would lead to a shortfall.



The annual sums for future care awarded for various periods ranged from £136,000 annually to £188,000 annually. The defendant trust wanted the judge to order periodical payments for future care linked to the retail prices index. Mr Justice Lloyd Jones refused saying: 'I consider that it is most unlikely that periodical payments linked to RPI will meet the future care costs in this case. On the contrary, I consider that there is a very strong probability that divergence between RPI and the actual cost of the provision of care will result in a massive shortfall in provision. By contrast, I consider that there is, realistically, a good prospect of meeting actual care costs from the lump sum award.' Albeit, of course, this is by relying on an investment strategy involving equities rather than just index-linked gilts.



Also in November 2006, Mrs Justice Swift ruled in Thompstone v Tameside & Glossop Acute Services NHS Trust [2006] EWHC 2904 (QB) in which she dismissed the defendant trust's arguments for retail prices index on the 'distributive justice' principles, finding that they were in effect a reshaping of the 'affordability' arguments rejected by Lord Justice Brooke in Flora. She was scathing about the quality of evidence on this subject from the trust in any event.



She went on to consider various possible indexes. The principle was to ensure 'as far as is possible, that the real value of the annual payments is retained over the whole period for which the payments will be payable'. The retail prices index was 'reliable and authoritative' but 'the past data shows that the RPI has not kept pace with growth in average carers' earnings'. But because the average earnings index was an aggregate measure and its use would tend to over-compensate, that index 'will not necessarily be a reliable and accurate indicator of the growth in carers' earnings and that it would not, therefore, be a suitable alternative to the RPI'.



However, the judge was attracted to the 'Annual Survey of Hours and Earnings: Occupational Earnings for Care Assistants and Home Carers' (ASHE 6115) and ordered that 'the amount of payments to vary by reference to the 75th percentile of ASHE occupational group 6115, published by the ONS [Office for National Statistics], or to any equivalent or comparable occupational group that from time to time may replace the ASHE occupational group 6115 as the appropriate occupational group for home carers'.



Most of the reported cases (other than Flora) have involved NHS trusts. As, following YM/Kanu, they are in effect secure bodies, they can be ordered to pay periodical payments linked to any appropriate index.



The position is more complicated with insurers. Under financial services legislation (which derives from an EU directive, so it cannot easily be varied), insurers are required to close-match long-term liabilities and, because no such products are currently available to them on the market, an annuity cannot be offered on an earnings-linked basis.



However, they could purchase an annuity linked to the retail prices index plus a fixed percentage (for example, 2%), on the basis that historically this is approximately the amount by which the average earnings index has outperformed the retail prices index. Insurers would no doubt argue that this risks over-compensating the claimant.



But surely Parliament would not have legislated to allow for full compensation for victims of the state, while not doing so for victims of insured defendants? No doubt, many ingenious solutions to this problem will soon be tested in court, unless such claims are settled to avoid judicial determination.



In a significant case for future care, it is necessary to consider the issue of indexation and prepare appropriate evidence. This will include expert evidence from independent financial advisors, actuaries and labour economists.