Following recent changes to the Civil Procedure Rules, John Mitchell reports on the court's new power to order periodical payments for damages rather than the traditional approach of a lump sum

Damages for future loss of income and care expenses arising from personal injury or death have normally meant the award of a lump sum quantifying the estimated loss. This has now changed.


Section 2 of the Damages Act 1996 (as amended) allows courts to order periodical payments instead of a lump sum if, in all the circumstances of the case, this best meets the claimant's needs regardless of whether the parties consent. Part 41 of the Civil Procedure Rules 1998 (CPR) has been amended and a new practice direction 41B has been introduced to deal with the changes, which apply to all cases that had not been finalised before 1 April 2005 regardless of when the accident occurred or the claim commenced.


The new power is already being exercised. In Walton v Calderdale Healthcare NHS Trust [2005] EWHC 1053 (QB); [2005] All ER (D) 370 (May), Mr Justice Silber ordered the defendant to make payments of £50,548 a year on account of the claimant's future care costs. The claimant was 19 years old with a life expectancy of about 70 years and a financial adviser was concerned about the risk that a conventional lump sum would run out.


The traditional approach, based on assumptions about the future, had several disadvantages. Assumptions about the life expectancy of an individual claimant are uncertain. Inevitably, too much or too little is awarded. Investment also carries risks. As a result, claimants may face financial insecurity.


Before ordering periodical payments, the court will need to be satisfied about two things. First, by reason of CPR rule 41.7 and practice direction 41B, paragraph 1, it has to answer the question: having regard to all the circumstances of the case, including the preference of both parties and the scale of the annual payments, is the award the best way of meeting the claimant's needs? Second, the court has to be satisfied that the continuity of payment is 'reasonably secure' (section 2(3)).


For the purposes of the section, a payment is reasonably secure if protected by a guarantee given under the Act, or it is protected by a scheme under section 213 of the Financial Services and Markets Act 2000, or its source is a government or health service body (section 2(4)). The court may order an alternative method of funding that it considers reasonably secure, provided the three defined methods are not possible (or there are good reasons justifying an alternative method) and it is satisfied that the proposed method can be maintained for the duration of the award and will meet the level of funding ordered (CPR rule 41.9, practice direction 41B, paragraph 3).


The new procedure makes it clear that the possibility of periodical payments must be considered from an early stage. Either party may state in its statement of case whether it considers that payments may be appropriate (CPR rule 41.5(1)). In keeping with the philosophy that periodical payments are not necessarily to be dependent on the wishes of the parties, the court is required to play an active role.


CPR rule 41.6 states that the court 'shall consider and indicate to the parties as soon as is practicable whether periodical payments or a lump sum is likely to be the more appropriate form for an award of damages'. In addition, the court may, at any time, order a party to file a statement providing relevant particulars of the circumstances that would justify an order being made (CPR rule 41.5(2)).


Any statements filed by the claimant must also state what financial advice, if any, the claimant has received. If funding by an alternative method is proposed, the statements must deal with the circumstances that would justify an order being made. Although there is currently no procedural requirement to do so, both parties should address the issue of periodical payments when filing allocation questionnaires in a multi-track case and should expect the matter to be raised in case management conferences, if not before.


An order for periodical payments may be varied by reference to the retail prices index at such times as may be ordered, or in accordance with the CPR (section 2(8)). The Damages (Variation of Payments) Order 2004 also permits payments to be varied in specified circumstances. The court may make a variable order where there is proved, or admitted, to be a chance that at some time in the future the claimant will develop a serious disease or suffer a serious deterioration as a result of the act which gave rise to the cause of action, or will enjoy a significant improvement in his physical or mental condition. Other than this, the only variation that is possible is an alteration of the method by which payments are made - and this will require the consent of the court (section 2(7)).


The right to receive periodical payments cannot be assigned or charged without the approval of a court, which will require 'special circumstances' making such an assignment necessary (section 2(6). The factors to which the court will have to have regard include whether the capitalised value of the assignment or charge represents value for money and whether the assignment is in the claimant's best interests, taking into account whether these interests can be met in some other way and how the claimant will be financially supported (practice direction 41, paragraph 4).


Unlike income received from investing a lump sum awarded in respect of future loss, periodical payments are exempt from income tax (section 329AA of the Income and Corporation Taxes Act 1988 (as amended)).


However, the exemption applies only to payments made to the claimant. If they continue for the benefit of dependants after the claimant's death, the exemption is lost. The treatment of periodical payments under the criteria for assessing social security and other welfare benefits is more complex.


Broadly speaking, damages for special needs, such as care costs, are excluded from the claimant's assessed income, but periodical payments in respect of lost income are not. CPR rule 41.8 requires periodical payment orders to state the separate annual amounts awarded for both categories. The same distinction applies if the claimant becomes insolvent. An income payments order can be made for payments in respect of loss of earnings, but not in respect of care and medical costs.


Do not overlook the changes to part 36 of the CPR. CPR rule 36.2A(5) requires offers to settle a future loss on the basis of periodical payments to state the amount and duration of the periodical payments and to provide details of how they are to be funded and whether they are to be index-linked.


District Judge John Mitchell sits at Bow County Court