Discount or windfall? The cost of future accommodation

In cases where a pursuer has been severely injured, the pursuer can be left in a situation where their accommodation is no longer suitable for their needs. They may need an additional award to allow them to purchase suitable accommodation.

The judgment in the eagerly awaited case of Swift v Carpenter [2020] EWCA Civ 1295 confirms a new approach to calculating accommodation claims.

In Swift the claimant suffered a left below knee amputation, as well as injury to her right leg, following a road traffic accident in 2013. Suitable accommodation was said to be £900,000 more expensive than her pre-injury property.

The question is – how do awards for accommodation square with the principle that awards of damages should not overcompensate but should put a pursuer back to the position that they would have been in but for the accident? This arises because property traditionally increases in value over time whereas other awards typically depreciate. The effect of this approach is that if the court were to award the full capital sum, the pursuer's estate would receive a windfall at the time of their death.

The solution to the problem found by the Court of Appeal in Roberts v Johnstone [1989] QB 878 was based on calculating future accommodation costs by providing compensation for the loss of the use of capital used to purchase a more expensive property.

To achieve an appropriate award would require a calculation of:

capital difference between new and existing property x discount rate x the appropriate lifetime multiplier.

This worked whilst the discount rate remained positive. It was controversial for pursuers, however, because in practice it meant that most claimants would require to use funds from other heads of claim in order to purchase the property they needed.

Pre-2017, when the discount rate was at 2.5%, the Swift award would have been £900,000 x 2.5% x 26.54 = £567,150.

Nil awards

However, once the discount rate became –0.75% in 2017, the Roberts calculation necessarily resulted in a negative award.

The Swift award would have been £900,000 x –0.75 x 55.02 = –£371,385 and therefore nil in 2017, or £900,000 x –0.25 x 48.34 = –£108,765 and therefore nil in 2019.

In JR v Sheffield Teaching Hospitals NHS Trust [2017] EWHC 1245 (QB), the court concluded that, applying Roberts, the appropriate award was nil. The matter was appealed, but settled before being heard by the Court of Appeal. In Swift the issue was considered again. Applying the Roberts approach at first instance, the claimant’s award for accommodation was nil.

The appeal

The matter was appealed by the claimant and heard by the Court of Appeal between 23 and 25 June 2020. Judgment was issued on 9 October. The court unanimously allowed the appeal.

The appellant submitted that the court could and should revisit Roberts; and that the primary objective must be to compensate claimants, and enable them to acquire the special accommodation that the court has determined they reasonably need. Whilst a windfall might be undesirable, there were viable solutions. Citing Knauer v Ministry of Justice [2016] AC 908, the appellant founded on the following passage:

“It is the aim of an award of damages in the law of tort, so far as is possible, to place the person who has been harmed by the wrongful acts of another in the position in which he or she would have been had the harm not been done: full compensation, no more but certainly no less. Of course, there are some harms which no amount of money can properly redress… there are also harms which it is difficult to assess, especially for those which will be suffered in the future, but the principle of full compensation is clear.”

The appellant drew to the court's attention the unsophisticated approach to the calculation of future losses used by the courts in the 1970s and 80s, in particular the move away in subsequent supreme court cases from an intuitive form of calculation and towards a model that favours full compensation. The respondent argued that the court was bound by the decision in Roberts, which could not be challenged in the Court of Appeal.

Changed conditions

The lead judgment by Lord Justice Irwin held that the decision in Roberts was authoritative guidance given in specific conditions prevailing at that time. In the context of modern property prices and a negative discount rate, the formula in Roberts no longer achieved a fair and reasonable compensation for an injured claimant. Irwin LJ considered that:

“it cannot be regarded as full, fair or reasonable compensation to award nil damages in respect of a large established need, on the basis that, if all the relevant predictions hold good over many decades to come, there will arise a windfall to a claimant's estate. Nor is it fair or reasonable compensation to follow the Roberts v Johnstone approach on the basis that if all the same predictions hold good, there will in addition be in existence a suitable market to enable a claimant, by then elderly or aged, to release equity at a reasonable cost and without unacceptable disruption”.

That said, it remained necessary to have regard to the principle of fair and reasonable compensation, whilst avoiding overcompensation in the form of a windfall to the claimant's estate.

To that end, the solution arrived at involves awarding the full additional capital cost of the difference between the value of the old and new accommodation, less the value of the interest that the compensator would have in the property if it was to revert to the compensator on death (“the reversionary interest”). After hearing from experts, the court considered a reversionary interest of 5% to be appropriate.

The new calculation of damages in Swift is therefore:

Damages = (new property – existing property) – reversionary interest

In other words: capital difference between new and existing property – (the capital difference x 5% reversionary interest to the negative power of the appropriate life expectancy), or £900,000 – (£900,000 x 1.05^-45.43) = £801,913.

A substantial caveat to Swift is that the court accepted that its “guidance should not be regarded as a straitjacket to be applied rigidly and universally”. It was specifically recognised that in cases where the life expectancy is short, different considerations and arguments could be applied. However, “for longer lives, during conditions of negative or low positive discount rates, and subject to particular circumstances, this guidance should be regarded as enduring”.

Quite what was meant by “low positive discount rates”, examples of “particular circumstances”, or how cases involving short life expectancy should be approached, was not expanded upon.

Our analysis

Swift enables pursuers again to receive awards in order to meet their accommodation needs. Those awards continue to be discounted, to avoid the pursuer's estate receiving a windfall.

It is clear, however, that the approach favoured by the Court of Appeal will not be appropriate in every case, particularly cases involving short life expectancy. It is readily foreseeable that the matter will require to be revisited should discount rates go beyond “low positive”.

It seems unlikely that we have reached the end of litigation about accommodation claims, or perhaps even the end of Swift. However, the thorough and reasoned approach taken by Irwin LJ may make it a difficult decision for the Supreme Court to interfere with in any substantial way.

Nevertheless, the return of awards for pursuers and at a significantly higher rate than under Roberts will be welcome.