ROBERTS -v- JOHNSTONE AFTER THE CHANGE IN DISCOUNT RATE: A HIGH COURT DECISION

The recent change in the discount rate was covered on this blog.  One issue that arose was how the courts were going to treat the Roberts -v- Johnstone approach to accommodation claims.  It was not practical to use a multiplier that was a minus figure. In JR -v- Sheffield Teaching Hospitals NHS Foundation Trust [2017] EWHC 1245 (QB) Mr Justice Davis decided that the multiplier in these circumstances should be zero.

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THE CASE

The judge was assessing certain elements of the claim for damages of a severely disabled child. One issue that arose was the correct approach to accommodation following the recent change in the discount rate.

THE JUDGMENT ON THE ROBERTS -v- JOHNSTONE POINT

    1. It is not in dispute that JR’s current accommodation – a three bedroomed bungalow which he occupies along with his parents and his elder sibling – is wholly unsuited to his needs. It is agreed that a new property must be purchased and that adaptations to that property will be required. There are issues in relation to cost to which I shall return. Some of the accommodation costs issues will be affected by my findings in relation to care requirements and the nature and extent of therapy required by JR so I shall postpone any consideration of the detail of the accommodation claim until I have made those findings.
    2. What I must deal with at this stage is the effect of the recent change in the discount rate on the long-established Roberts v Johnstone approach to recovery of the cost of alternative accommodation. I begin with the case of George v Pinnock [1973] 1 W.L.R. 118 in which consideration was first given at an appellate level to the question of accommodation costs. In that case the claimant had sustained very significant neurological injuries. She was confined to a wheelchair and required substantial care for everyday living. By the time of the trial she had moved to a bungalow which was suitable for her needs. The capital cost of the bungalow was £12,000, a sum which had been met by the defendant’s insurers on account of the award of damages which would follow in due course. The trial judge made no separate award for accommodation and made no reference to it in his judgment. The Court of Appeal with the agreement of the parties agreed to deal with the issue rather than to remit the case for a further hearing. Orr LJ dealt with the matter as follows:
“For the plaintiff it has been contended, in the first place, that she should receive as additional damages either the whole or some part of the capital cost of acquiring the bungalow, since it was acquired to meet the particular needs arising from the accident. But this argument, in my judgment, has no foundation. The plaintiff still has the capital in question in the form of the bungalow.
An alternative argument advanced was, however, that as a result of the particular needs arising from her injuries, the plaintiff has been involved in greater annual expenses of accommodation than she would have incurred if the accident had not happened. In my judgment, this argument is well founded, and I do not think it makes any difference for this purpose whether the matter is considered in terms of a loss of income from the capital expended on the bungalow or in terms of annual mortgage interest which would have been payable if capital to buy the bungalow had not been available. The plaintiff is, in my judgment, entitled to be compensated to the extent that this loss of income or notional outlay by way of mortgage interest exceeds what the cost of her accommodation would have been but for the accident. She would also, in my judgment, have been entitled to claim the expenses of a move to a new home imposed by her condition and the expense of any new items of furniture required because of that condition, but there was no evidence before the judge under either of those headings. As to the increased cost of accommodation, if any, it was, as I have said, agreed that we should make the best estimate we could on the available material, and the matter can only be approached on a broad basis.”
Orr LJ assessed the damages recoverable in the sum of £3,000. This was in addition to care costs and loss of earnings. The assessment took into account the loss of investment income arising from the purchase of the bungalow, expenses which would have been incurred irrespective of the accident and tax liability. Other than identifying what needed to be taken into account, the judgment of Orr LJ provided no arithmetical basis for the eventual award.
    1. In Roberts v Johnstone [1989] Q.B. 878 the Court of Appeal reviewed the application of George v Pinnock where the trial judge did not attempt to evaluate the annual cost whether by way of lost income or mortgage payments. The court expressly approved the proposition that damages for accommodation costs should not represent the full capital value of the asset since that would remain intact at the claimant’s death and thereby represent a windfall to the claimant’s estate. Consideration was given to using the annual mortgage interest to reach the appropriate figure. However, given the mortgage interest rate at that time (just over 9% taking into account tax relief) this would have led to recovery of a sum in excess of the capital value of the house. Therefore, the court in Roberts v Johnstone turned to consider the lost income by reference to return in risk-free investment. Giving the judgment of the court Stocker LJ at 892G-893B said:
“It seems to us, however, that where the capital asset in respect of which the cost is incurred consists of house property, inflation and risk element are secured by the rising value of such property particularly in desirable residential areas, and thus the rate of 2 per cent. would appear to be more appropriate than that of 7 per cent. or 9.1 per cent., which represents the actual cost of a mortgage loan for such a property.
We are reinforced in this view by the fact that in reality in this case the purchase was financed by a capital sum paid on account on behalf of the defendants by way of interim payments, and thus it may be appropriate to consider the annual cost in terms of lost income and investment, since the sum expended on the house would not be available to produce income. A tax-free yield of 2 per cent. in risk-free investment would not be a wholly unacceptable one. Mr. McGregor, for the plaintiff, objects that if a rate of 2 per cent. is adopted then the multiplier of 16 would be far too low and a substantially higher multiplier should be adopted, resulting in much the same anomaly. For our part we would reject this argument, since the object of the calculation is to avoid leaving in the hands of the plaintiff’s estate a capital asset not eroded by the passage of time; damages in such cases are notionally intended to be such as will exhaust the fund contemporaneously with the termination of the plaintiff’s life expectancy.”
    1. This approach has been adopted since 1989. The 2% figure identified by Stocker LJ subsequently increased to 2.5% but otherwise many hundreds if not thousands of cases of this kind have been valued using the loss of income formula. It has come under attack as leading to injustice in some cases. The difficulties involved were described by Tomlinson LJ in Manna v Central Manchester University Hospitals NHS Foundation Trust[2017] EWCA Civ 12. The facts in Manna are no relevance to the issue under consideration. Rather, it is the generality of the discussion which is useful. Tomlinson LJ said this:
“Damages in cases of this sort are notionally intended to provide a fund which will both meet the claimant’s life-time needs and be exhausted contemporaneously with the termination of the claimant’s life expectancy. Roberts v Johnstone prescribes that the claimant should, in respect of the cost of accommodation, be compensated for the notional loss of investment income on the capital cost incurred in buying a suitable property. The resulting sum awarded will be wholly insufficient to purchase a property, but the theory is that the shortfall and thus the balance of the actual funds required in order to purchase a suitable property can be found in, or borrowed from, the awards made under other heads of damage such as pain, suffering and loss of amenity, loss of earnings, capitalised awards for therapy and other costs. See generally per Swift J in Whiten v St George’s Healthcare NHS Trust [2011] EWHC 2066 QB at paragraph 411. In order to reflect the notional loss of investment income a tax free yield on risk-free investment was assessed at 2% in Roberts v Johnstone, although the rate now conventionally applied in the calculation is 2.5%. The theory here is that where the capital asset in respect of which the cost is incurred consists of residential property, the inflation and risk element are secured by the rising value of such property, particularly in desirable residential areas. When the calculation is concerned with the principal home it is conventional and consistent with the underlying theory to apply the lifetime multiplier appropriate to the claimant’s life expectancy.
The exercise in which the court is thus engaged is in modern conditions increasingly artificial. The assumption underlying the approach is that the claimant will be able to fund the capital acquisition out of the sums awarded under rubrics other than accommodation. But in modern times residential property prices have increased rapidly while general awards for pain, suffering and loss of amenity have remained at their traditional levels. Whilst Peter is no doubt robbed to pay Paul, it must often be the case that the accommodation assessed by the court as suitable is simply not purchased. A further problem confronts the claimant with immediate and pressing needs but a relatively short life expectancy. The adoption of the appropriate multiplier in his case, when allied to the 2.5% notional return upon investment, will lead to a relatively modest award and a large shortfall between it and the cost of acquiring the property which is acknowledged to be required to meet the claimant’s needs during his admittedly short life expectancy. A similar problem confronts the claimant who establishes less than 100% liability in the defendant, as here, where the award is only for 50% of the sums regarded as necessary to meet the Claimant’s reasonable needs……..
Whilst the Roberts v Johnstone approach is designed to avoid conferring a windfall upon a claimant’s estate, it gives rise to other anomalies. Thus in many instances of adapted accommodation in cases of this sort there is potentially a windfall for the claimant in the event of the death of his parent carers, since he is likely to be left with a home which is larger than necessary for his own requirements……one could mitigate those effects by adopting a different multiplier for that part of the cost which represents the provision of family accommodation over and above that required for the disabled claimant, but there has been little enthusiasm for such a solution.”
Tomlinson LJ went on to describe the Roberts v Johnstone approach as “imperfect but pragmatic”. The figure of 2.5% referred to in Manna was in line with the discount rate set in 2001 by the Lord Chancellor pursuant to the Damages Act 1996 as representing what was then a three year average of real yields on Index Linked Gilts. That figure was taken as the benchmark of risk-free investment. The approach disadvantaged some claimants particularly in cases of a short life expectancy. Often, the claimant with the short life expectancy would be the claimant with the greatest need for special accommodation. Yet for such a claimant 2.5% of the capital cost taken with a lifetime multiplier would come nowhere near the actual cost of the accommodation. Moreover, given a short life expectancy the capitalised value of the loss of earnings would not provide a fund to make up the difference.
    1. In February of this year the Lord Chancellor exercised her power to revise the personal injury discount rate. In a statement dated 27 February 2017 she concluded that the rate should be based on the same formula as applied in 2001. She stated that the consequence of using this formula in the current environment was that the discount rate was to be -0.75%. Her statement did not provide her detailed reasons for setting the rate at this level. It has had the result of increasing dramatically the multipliers in cases such as the present. For instance, in relation to JR the multiplier for loss of earnings now is effectively double that which it would have been 12 months ago.
    2. The Defendant argues that the conclusion which must be taken from the Lord Chancellor’s statement is that there is at present no ability to obtain any positive return on a capital fund based on risk-free investment. This means that there is no need to compensate JR for the loss of that return. In the past the notion was that the sum expended on a house otherwise would have earned an income. This was the basis of the Roberts v Johnstone formula. That basis now has no foundation. The one type of investment which will continue to yield a return in the long term is real property. The Defendant’s argument is that the cost of the accommodation can be borrowed (to use the language of Manna and Whiten) from the capitalised loss of earnings figure. Though I shall deal with the precise cost hereafter, the cost of suitable accommodation for JR will between £700,00 and £1 million. I shall assume for these purposes that the cost will be £900,000. The so-called loan in that sum notionally will be repaid to JR’s estate at his death. Indeed, it is likely that the property will have appreciated in value. On the figures in this case JR will still be able to purchase a suitable house or bungalow. His capitalised loss of earnings figure alone will be in excess of £1 million. Put another way the Defendant argues that the negative yield on Interest Linked Gilts means that the Roberts v Johnstone formula results in a negative sum for accommodation costs. Whilst the Defendant does not ask for credit to be given for this negative sum, it is argued that the proper approach is to allow a zero figure for the cost of accommodation. Applying Wells v Wells JR has suffered no loss by investing in the capital cost of accommodation from his other capital funds. No income would have been earned on those funds and the value of the capital will be preserved in the value of the property.
    3. On behalf of JR it is submitted that Roberts v Johnstone was a pragmatic solution to the problem of providing accommodation to those who needed it. It is argued that the decision remains binding and that the percentage set by the Court of Appeal was “arbitrary”. The former proposition is obviously correct. I do not accept the latter submission. The judgment of Stocker LJ is clear. 2% represented what was then the rate of return on risk-free investment. That is confirmed by the speech of Lord Lloyd of Beswick in Wells v Wells [1999] AQ.C. 345 at 380/381. The difficulty facing JR is that applying the rationale of Roberts v Johnstone in the current climate results in a nil award for the capital cost of accommodation. This consequence is discussed in the current edition of McGregor on Damages at 38.204.
It is high time that the Roberts v Johnstone problem was tackled and a fair and proper solution found and adopted. The Law Commission looked into the matter some time ago but found it too difficult to formulate an acceptable solution and so recommended that the Roberts v Johnstone method be retained. The Ogden Working Party is fully aware that the law needs to be righted and has it in mind to investigate the issue in the near future. What could trigger action on this front is a further reduction in the discount rate, the possibility of which, as we have seen, is very much in the air. It is true that, as the discount rate lowers, the multipliers increase, but an examination of the figures in the tables in Ogden shows that the increases in the multipliers do not come anywhere near to balancing, or off-setting the effect of, the fall in the discount rate. Ironically the injured party will get more for care but less for special accommodation. Indeed should the discount rate move into the negative, which is highly unlikely but did happen in the Guernsey case in the Privy Council of Helmot v Simon, the Roberts v Johnstone method becomes unworkable; it would produce a nil award.
On behalf of JR it is submitted that “the approach in George v Pinnock should be followed and the court should assess accommodation by reference to a multiplicand based upon a positive percentage”. The percentage suggested is 2.5% i.e. the current conventional rate for the Roberts v Johnstone formula. To avoid a windfall benefit the sum recovered should be capped at the capital cost of the accommodation to be purchased. Yet this would not avoid a windfall to JR’s estate. The estate would include the total value of the property. Moreover, the value of the property almost certainly will have appreciated significantly.
  1. In Manna the approach in Roberts v Johnstone was described as “imperfect but pragmatic”. Were an annual figure of 2.5% of the value of the proposed accommodation to be subject to the current life multiplier, that description could no longer apply. The meaning of pragmatic is practical or realistic. There is nothing realistic about providing someone in JR’s position with the capital value of a house which he will retain as part of his estate.
  2. I consider that the editor of McGregor was quite correct when he opined that a fair and proper solution should be found to the conundrum of providing a claimant with the means to purchase special accommodation. He also was correct when he suggested that a negative discount rate would mean that the approach in Roberts v Johnstone would lead to a nil award. But I am not in a position to find “the fair and proper solution” to the problem as a whole. I am faced simply with the case of this Claimant. In his case maintaining the conventional approach would provide him with the full capital cost of the accommodation, something which clearly would be wrong. I have no evidence which would enable me to consider some other approach. For instance, given the current cost of borrowing, it might have been possible to say that the interest element on an appropriate mortgage (say £600,000 as the cost of a property less the amount of general damages) over a 25 year term would provide a reasonable figure, the cost of annual mortgage interest being the alternative method of assessment suggested in George v Pinnock. It was rejected in Roberts v Johnstone because the rate of mortgage interest at that time was so high that an award on that basis would result in full recovery of the capital cost of the accommodation. That is no longer the case. However, I have no evidential basis for using such a calculation and none was put forward. In other cases prior to the change in the discount rate it has been suggested that a defendant could take a reversionary interest in the property purchased in which event providing the full capital cost would not involve any windfall benefit; rather it would simply provide the claimant with the accommodation he needs for his lifetime. This solution (so it is said) would remove the imperfection inherent in Roberts v Johnstone. It certainly is superficially attractive. But no such solution was proposed here and again I have no evidence which allows me to adopt it.
  3. In JR’s case I am satisfied that applying the Roberts v Johnstone approach, which I am bound to do, leads to a nil award in relation to the cost of special accommodation. I have to consider the return on a risk free investment as representing JR’s loss. The only evidence available to me, namely the discount rate based on Interest Linked Gilts, shows that no return is possible on a risk free investment. This position may not persist. It may change very quickly. Were it to do so, a positive investment return may once again become available. But I have no evidence as to likely trends. Thus, I can proceed only the basis of the position as it is currently.
  4. On behalf of JR it was submitted that the Defendant’s argument required him to use capitalised sums in respect of loss of earnings when to do so would deprive him of monies intended to recompense him for a quite different loss. The Defendant’s argument meant that JR would not recover his full loss as per Wells v Wells. This submission ignores the long accepted consequence of the Roberts v Johnstone approach as described by Tomlinson LJ in Manna. JR in the long run will recover his full loss because his estate will have the benefit of the full value of the accommodation. JR also argued that a nil award under Roberts v Johnstone would leave some claimants with no prospect at all of obtaining special accommodation which they ought to have. An example was given of a double amputee living in an upstairs flat whose earning capacity remained intact and whose care and other needs were limited. Such a claimant would have only modest capitalised sums against which to borrow (to use the Whiten terminology) and would be unable to purchase something which was vital to him and which was a loss resulting from the breach of duty. This example only serves to emphasise the need to find a proper solution to the accommodation conundrum. It does not provide a basis for allowing JR’s claim for the capital cost of special accommodation.”

 

THE ACCOMMODATION CLAIM

It is important to note that this not mean that the accommodation claim was zero. £840,000 was awarded under this head of damages. This included the costs of conversion to his needs, increased running costs (for life), and relocation costs.

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