Legal Update: When the discount rate isn't so accommodating

The first significant court decision since Former Justice Secretary Liz Truss reduced the discount rate to -0.75% in March reminds us that the flaws in a negative rate affect both claimant and defendant.

In JR v Sheffield Teaching Hospitals, Mr Justice Davis held that the correct award for the cost of purchasing alternative accommodation suitable for the claimant’s needs was nil.

JR’s current accommodation was not suitable; the parties agreed that a new property should be purchased and adapted. If JR were awarded the full capital cost, he would be left with an asset that would appreciate in value and be realised by his estate on death, generating a windfall and over-compensating him.

The correct approach to avoid over-compensation was provided by the Court of Appeal in Roberts v Johnstone, which awarded a sum equivalent to the loss of income that would be achieved if the capital used to purchase the property were invested in risk-free investments. In Wells v Wells in 1998, the House of Lords endorsed the use of the discount rate as the appropriate rate.

The claimant in JR argued that a positive rate had to be used and suggested 2.5% (equalling more than the capital cost of the property), but the judge rejected that. He accepted that the logic of the discount rate being set at -0.75% was that the claimant could not obtain a real return above inflation from risk-free investment of his award, therefore the appropriate award for the loss of income from capital was nil.

The judge granted the claimant permission to appeal. He also commented that he had no evidence before him to consider any other approach. Legal teams in other cases are no doubt considering whether to seek permission for such evidence. However, the logic of Roberts v Johnstone still fits with the full compensation principle and should be upheld. Ultimately, legislation may be the only answer for those who seek a different approach.

The government consultation, which closed on 11 May, raised fundamental questions about how the power to set the discount rate should be framed. It is curious that responses from claimant bodies support a negative rate, when the claimant in JR argues that for other purposes the rate has to be positive. This is just one of the logic gaps surrounding Truss’s decision.

The balance of claimant and defendant interests, which lies at the heart of the full compensation principle, must be restored. The discount rate should be set by reference to what happens in practice, not against a theoretical construct of 100% investment in index-linked government securities – which no financial adviser would recommend in practice.

The government may need to address ancillary questions such as accommodation costs, but only in a manner consistent with the full compensation principle: allowing the claimant the capital cost of an appreciating asset, or a calculation which has equivalent effect, is not the answer.

Severely injured people deserve full compensation. Implicitly some commentators, including the claimant in JR, argue that no amount of money is enough to put right life-changing injuries. The role of the Lord Chancellor is to balance that perspective with the cost to the public purse and society as a whole, to set a rate which neither under-compensates nor over-compensates.

Parliament will need to find time for primary legislation following the consultation, though it has other obvious immediate distractions. A similar consultation in 2013 simply gathered dust. This time round, that must not happen. Ironically, Liz Truss, as the newly appointed Chief Secretary to the Treasury, is one of those best placed to press for early resolution.

DAC Beachcroft acted for the defendant in JR.