Righting a wrong by reversionary interest in Swift v Carpenter: a welcome and comprehensive reformulation of the law

Posted: 09/10/2020

Personal injury specialists Warren Collins and Louise Taylor reflect on today’s landmark Court of Appeal judgment in Swift v Carpenter.

Roberts v Johnstone

The purpose of damages in personal injury cases is to put the injured accident victim back into the (financial) position he/she would have been in had the accident not taken place. For catastrophically injured claimants, it is often the case that their pre-accident housing is now wholly unsuitable: by reason of accessibility and/or space. A wheelchair dependent claimant may find it difficult (if not impossible) to get into and around their pre-accident home and the most profoundly injured may need extra space for therapy, equipment and live-in carer accommodation.

To most injured claimants, the law has to date been counter-intuitive. Before the accident, for example, a claimant lived in a house worth £200,000. By reason of their catastrophic injuries, they now require a house worth £600,000; and so surely the claim for accommodation is (the difference) of £400,000. Unfortunately, this was not the approach taken by the House of Lords (as it then was – now the Supreme Court) in Roberts v Johnstone in 1989.

Given that it has long been established law that damages are intended to last the claimant’s life-time and not beyond, the House of Lords in the 1989 decision took the view that the most appropriate way of calculating the lifetime loss would be to calculate the difference in costs of the pre and post- accident home, multiply it by the prevailing discount rate and then apply the lifetime multiplier for the claimant. That inevitably produced an unsatisfactory result, even with a positive discount rate, as the resulting claim would leave a shortfall far below the sum needed for the claimant to move. If the claimant wished to purchase a house (different rules apply to rent), the only option was to “borrow” from other heads of the claim to make up the shortfall.

The negative discount rate

This unsatisfactory position became worse in 2017 when the discount rate (which is intended to balance the competing factors of expected returns on investments with expected RPI inflation) to be applied to claims for future losses went into the negative (initially -0.75% but now -0.25%). A negative discount rate assumes that inflation will outstrip returns on investments and so the future loss multiplier has to be greater than the number of years into the future in order to ensure that the claimant is not undercompensated.

An unintended consequence of a negative discount rate has meant that an application of the Roberts v Johnstone formula results in no accommodation claim whatsoever for catastrophically accident injured claimants who need alternative accommodation by reason of injuries sustained.

Swift v Carpenter

This was precisely the position in Swift v Carpenter when it reached trial in the High Court (Queens Bench Division) in August 2018. Here, Ms Swift (the claimant) had a high value personal injury claim arising out of a 2013 road traffic accident. Liability was admitted and the claim proceeded on quantum (the value of the claim) only. The claimant suffered a below knee amputation as a consequence of her injuries. While the judge found that the claimant needed a house that was £900,000 more than the value of the house she would have needed had the accident not occurred, she was bound by Roberts v Johnstone and consequently made an award for accommodation of precisely nil….. nothing…. zero! The judge recognised that this was a most unsatisfactory result and gave the claimant permission to appeal to the Court of Appeal.

After a couple of delays, a false start and adjournment for further evidence, followed by the outbreak of Covid-19 and hence a virtual hearing in June 2020, the Court of Appeal has today handed down its judgment.

Judgment in a nutshell

• The court unanimously agreed that the Roberts v Johnstone formula fails to achieve fair and reasonable compensation for the claimant, worsened by the application of a negative discount rate.
• The court was not bound to follow Roberts v Johnstone.
• The court expressed the need to balance the competing interests of fair and reasonable compensation with the need to avoid a windfall for the claimant, whilst emphasising that the former is the primary consideration and should not be superseded by latter secondary corollary consideration.
• The court rejected the respondent’s cash-flow approach, which it considered impracticable in a fluctuating and unpredictable market (illustrated by the impact of Covid-19 on the present case).
• The court determined a workable approach to the conundrum as follows:
  • calculate the difference in cost between the house the claimant now needs and the cost of the house the claimant has (or would have had) had the accident not occurred;
  • deduct from that sum, the value of the notional reversionary interest in the increased value of the claimant’s home calculated by reference to the claimant’s predicted life expectancy using a +5% discount rate.

Commentary

An eagerly awaited judgment by personal injury lawyers on both sides of the fence, Swift v Carpenter provides some much-needed clarification on the law, by setting out a clear and coherent method for calculating accommodation claims, even if some are not pleased with the results such a calculation produces.

The starting point for all three judges was a recognition of the wholly unsatisfactory nature of the law as it stood when applying Roberts v Johnstone, and in particular how this position had been exacerbated to an untenable position following the negative discount rate.

This was summarised by Lord Justice Irwin LJ who gave the lead judgment:

“In my view, 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.”

After determining that it was not bound to follow Roberts v Johnstone, the court then considered the respondent’s cash flow approach, which in short was to use a significant amount of actuarial analysis and predictions of future house price growth to contend that the claimant was unlikely to suffer any loss and therefore that a nil award was appropriate (and to avoid a windfall for the claimant).

The court highlighted the “fundamental difficulties” with the models advanced by the respondent where their “proposed cash flow model is a hypothetical calculation based on a very large number of assumptions and modelling hypotheses” and that such assumptions are “uncertain and reliant on expert judgement”.

Davies LJ also highlighted that Covid-19 had illustrated the uncertainty of the figures when relying on “assumptions and figures which, even in the course of this appellate process, have required amendment by reason of the Covid-19 pandemic”.

Where the appeal and judgment was delayed by Covid-19, which has led to cases not being settled, such a finding may be considered a silver lining for claimant lawyers.

Beyond a recognition of the unreliable and overly complex approach taken by the respondent, Irwin LJ also commented on the illogical basis upon which the respondent’s whole approach was formulated:

“I recognise the need to avoid a windfall to the claimant’s estate, if that can be achieved without prejudice to the cardinal principle of fair and reasonable compensation. But to withhold all damages for the purpose of avoiding an eventual windfall seems to me to put a secondary principle before a primary principle: to put the cart before the horse. It is a valid comment that the respondent’s approach taken to its logical conclusion, would result in not merely no award but a demand for a deduction from the claimant’s damages awarded under other heads, to reflect the full value of the windfall to the estate which they predict. Of course, the respondent (no doubt wisely) has not argued to that end, but that does not alter the end point of the logic which they have advanced to support a nil award [emphasis added].”

In his concluding summary, Irwin LJ considered the two competing objectives before the court:

• “a claimant injured by the fault of another is entitled to fair and reasonable, but not excessive, compensation”;
• “as a corollary of that fundamental principle, in relation to the head of claim with which we are concerned, the award of damages should seek so far as possible to avoid a “windfall” to a claimant, or more realistically to his or her estate”.

Taking those competing objectives into account, the court determined that the most appropriate method was to apply a market valuation to the reversionary interest, which was put at 5%. The additional capital sum less the reversionary interest is taken to be the claimant’s net life interest in the property.

Conclusion

Some much needed clarity on the law in this area is welcomed.

While some may say that this is a favourable result for the claimant, others may consider if the judgment has simply put the horse (proper compensation) back before the cart (avoiding a windfall) whilst at the same time setting out a clear method by which to calculate accommodation claims.

It remains to be seen if an appeal to the Supreme Court will follow.

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