Warren v Northern General Hospital NHS Trust (No 2)

The 3% discount rate prescribed judicially for future pecuniary loss remained applicable until the Lord Chancellor prescribed a rate under Damages Act 1996. A fall in the yield from index-linked government securities did not alone amount to the marked change in economic circumstances required to reopen the rate.

Taxation ordinarily forms part of the imponderables accommodated by the conventional assessment of damages. It does not justify a separate increase in a multiplier or reduction in the discount rate unless evidence establishes a very exceptional case. A fund whose net return remains within 0.5% of the 3% norm is not very exceptional. Where a large fund will be prudently invested to obtain returns above those from index-linked securities, taxation does not establish undercompensation.

The claimant suffered severe cerebral palsy following delay in responding to foetal distress at birth. Liability was admitted. Mr Robert Smith QC, sitting as a deputy judge of the High Court, awarded £3.1 million, including a £2.5 million fund for future expenditure and lost income. He applied a 3% discount rate.

The claimant appealed against the refusal to reduce that rate. He relied on the fall in yields from index-linked government securities since Wells v Wells [1999] 1 AC 345. He also argued that taxation of a fund of this size required a lower rate or an increased multiplier. The issues were whether the Court of Appeal could alter the general rate before action by the Lord Chancellor under Damages Act 1996, and whether either economic change or taxation justified an adjustment.

Appeal dismissed. Stuart-Smith LJ delivered the judgment of the court.

1. The House of Lords in Wells v Wells [1999] 1 AC 345 had fixed a net discount rate of 3% and intended it to operate until the Lord Chancellor prescribed a rate under section 1 of the Damages Act 1996. The intended duration and means of alteration formed part of the House's guidelines. Even if those matters were not strictly part of the decision, the Court of Appeal was not free to depart from the clearly expressed opinion of the majority.

2. Alternatively, the reduction in yields from index-linked government securities did not alone amount to a marked or very considerable change in economic circumstances. Their yields were known to fluctuate when Wells was decided. Certainty facilitated settlements and avoided extensive economic and actuarial evidence. Those considerations strongly opposed judicial revision before the Lord Chancellor acted.

3. Hodgson v Trapp [1989] 1 AC 807 established that taxation ordinarily did not justify a specific addition to a multiplier. Tax was one of the imponderables accommodated by the conventional assessment. A special allowance remained possible only in a very exceptional case established by evidence. That reasoning had been expressly approved in Wells.

4. The range of net returns shown by the evidence did not establish such a case. The House had adopted an overall rate of 3%, subject only to very exceptional cases. Funds producing net returns within 0.5% of that norm could not be regarded as exceptional merely because of their size or resulting tax burden.

5. The evidence also showed no injustice or undercompensation. A claimant remained free to invest an award prudently in a mixture of assets rather than solely in index-linked securities. This claimant's fund would be managed by the Court of Protection, whose established investment policy for large, long-term funds included substantial equity investment capable of producing a higher net return.

The appeal was dismissed with costs, to be set off against the costs and damages awarded to the claimant.

1. Court of Appeal: Dismissed the claimant's appeal and upheld use of the 3% discount rate. Costs were ordered to be set off against the claimant's costs and damages.
2. High Court: Mr Robert Smith QC, sitting as a deputy judge, awarded £3.1 million. He applied the 3% rate and rejected both the contention that Wells v Wells permitted reconsideration before action under the Damages Act 1996 and the proposed alteration on the facts.