Wells v Wells (Page v Sheerness Steel Co Plc, Thomas v Brighton Health Authority)

The appropriate discount rate for calculating lump-sum damages for future pecuniary loss should reflect the return on low-risk, inflation-protected investments rather than a conventional 4–5% assumed return on a mixed equities/gilts portfolio. Courts should, for the purposes of calculating multipliers, assume a prudent plaintiff will adopt a low‑risk, index‑linked government stock strategy where that most accurately secures real future needs. Where life expectancy is agreed, the whole‑life multiplier should not be arbitrarily reduced by a further broad contingency discount. The Lordships recommended a guideline net rate of 3% pending any rate prescribed under Damages Act 1996 section 1.

These conjoined appeals concerned the correct method of calculating lump‑sum awards for future loss (future earnings and future cost of care) in catastrophic personal injury cases. Each case involved a judge at first instance who adopted a low net discount rate based on index‑linked government securities (I.L.G.S.). The Court of Appeal reverted to the traditional 4–5% approach based on assumed investment in a mixed equities/gilts portfolio and reduced awards. The House of Lords was asked whether the conventional 4–5% discount remains appropriate given the availability of I.L.G.S., and whether courts may further reduce whole‑life multipliers despite an agreed life expectancy. The principal common issues were (a) choice of discount rate and investment assumption for the multiplier and (b) scope for applying a separate contingency reduction to an agreed whole‑life multiplier. The House allowed the appeals on the main points and gave guidance on rates and methodology, remitting the cases for recalculation where necessary.

1. Disposition: The House allowed the appeals and restored or adjusted the first‑instance awards where appropriate, holding that the discount rate for calculating lump‑sum damages should be assessed by reference to the return on index‑linked government securities (I.L.G.S.), with a guideline net rate of 3% to be used pending any prescription under Damages Act 1996 section 1. (Per Lord Lloyd of Berwick (leading), Lord Steyn, Lord Hope, Lord Clyde and Lord Hutton.)
2. Primary reasoning (per Lord Lloyd of Berwick, leading):
   • The aim of a lump‑sum award for future pecuniary loss is to secure, as nearly as possible, the real annual sums the plaintiff will need in future years.
   • I.L.G.S. offer an essentially inflation‑protected, government‑backed return and so provide the best available market evidence of a low‑risk real return for funding future needs.
   • It is improper to assume that plaintiffs must (or will) accept the higher short‑term risk of equities merely to equalise burdens between plaintiff and defendant; plaintiffs who must meet essential, continuing care needs are not ordinary investors and may prudently avoid equity risk.
   • Accordingly the conventional 4–5% bracket (based on equities assumptions) can no longer be treated as universally appropriate.
3. Guideline rate and application:
   • The majority endorsed a guideline net rate of about 3% (net of standard tax allowances) as an appropriate working figure to derive multipliers until the Lord Chancellor prescribes a rate under Damages Act 1996 section 1. (See speeches of Lord Lloyd, Lord Steyn, Lord Hope and Lord Hutton.)
   • The House applied that approach to the three appeals, restoring or recalculating multipliers where the Court of Appeal had reduced them on the basis of a 4–5% assumption.
4. Whole‑life multiplier and contingency discounts:
   • Where life expectancy is an agreed factual assumption, the court should not apply an additional broad percentage reduction to the whole‑life multiplier merely as a generic contingency discount. Such a reduction risks under‑compensating plaintiffs with agreed expectations. (Per Lord Lloyd and Lord Hope.)
5. Practical and ancillary points:
   • The Ogden tables and Law Commission/working‑party recommendations favour the I.L.G.S.‑based approach and are entitled to weight.
   • The Court of Protection practice and pension fund practices do not bind the court; they are matters of investment administration and may change if a lower discount is adopted.Damages Act 1996 section 1 gives the Lord Chancellor power to prescribe rates and should be used in due course.
6. Orders:
   • Appeals allowed on the principal points. Awards to be recalculated using the guideline net rate of 3% (subject to case‑specific tax adjustments and other factual matters noted by the trial judges) and remitted as necessary for re‑computation.

1. Court of Appeal: Each first‑instance award was reduced by the Court of Appeal which applied a conventional discount rate (about 4–4.5%), producing substantially lower lump‑sum awards. See the judgments reported at [1997] 1 WLR 652 (Court of Appeal).
2. House of Lords: Allowed the appeals and directed recalculation applying an I.L.G.S.‑based guideline net rate of 3%, pending any Lord Chancellor prescription under Damages Act 1996 section 1.