On 16 July 1998 the Lords of Appeal handed down an opinion in three personal injury cases involving the issue of the calculation of lump sum damages for loss of future earnings and the cost of future care¹. In the three cases, Page v. Sheerness Steel Co. Ltd., Wells v. Wells, Thomas v. Brighton Health Authority, (referred to as the Wells v. Wells cases) the liability was not contested but there had been trials on the quantum of damages in the lower courts.

The Court of Appeal had in each case reduced the damages for loss of earnings and the costs of future care by between 30% and 35% from that awarded by the trial court. In each case, the lower court had used a net rate of return of between 2.5% and 3% derived from Index Linked Government Securities ("I.L.G.S.") to calculate the appropriate multiplier to determine the award. The Court of Appeal had substituted a traditional rate of 4.5%, substantially reducing the multipliers and thus the awards. The House of Lords allowed the appeals and largely reinstated the judgments of the trial courts.

The decisions are likely to have a dramatic effect on future awards in the United Kingdom and will most probably lead to higher insurance rates². The principle effect of the decisions was to reduce the net rate of return used in computing the multiplier applied to loss of earnings or future care costs from 4%-5% to 3% and to ban arbitrary caps on the multiplier for contingencies where there is an agreed life expectancy. The result will be to increase judgments in cases of severe injuries from 25% to as much as 40% of the amounts previously awarded.

A multiplier is used in UK and Hong Kong personal injury law to determine the equivalent lump sum amount to compensate an accident victim for both loss of earnings and future care costs. It is applied to an annual, recurring cost or lost income stream and is often calculated using financial tables. There are various factors which have been considered in discussions of appropriate multipliers which were mentioned in the House of Lords decisions.

The factor which is always taken into account in fixing a multiplier is the discount applied to future payments to determine their present value. This computation is made since a lump sum settlement will be earning interest throughout the assumed life span or earning period so that not to discount the settlement amount would over compensate the victim. This is a pure financial computation dependent only on the applicable net rate of return and the number of years over which the payments are assumed to continue³. For example, if a seven year old victim was estimated to have an average life expectancy of living until 60 years of age, the present value of the stream of 53 annual payments of $1 would be 20 (20.07 rounded down) at a net rate of return of 4.5% or 26 (26.37 rounded down) at 3%. In other words, the higher the rate of return, the lower the multiplier. If the annual costs were shown to be $500,000, the award for future care would be $10,000,000 or $ 13,000,000 respectively.

Central to the calculation of a multiplier, is the determination of the appropriate rate of return for investments suitable for a typical victim. If safe investments yielding 4.5% after inflation were available then the use of that rate to calculate multpliers would produce lower awards. Conversely, the House of Lords found that 3% was a more appropriate rate of return for the type of investments which would be made to fund the care of a severely injured person since such a person could not necessarily ride out the ups and downs of equity investments.

The courts have often grappled with the additional element of mortality, disability or other unknown contingency during the period of care or earnings and often have further reduced the multiplier ostensibly to take the possibility into account that the victim may die or, in the case of a lost earnings computation, become disabled prior to the end of the period⁴. This approach may be flawed for two reasons. In the case of lost earnings, the lowered life expectancy may be the direct result of the injuries sought to be compensated so that any discount for contingencies should not exceed that appropriate for an average person of the victim's age and prior health, not affected by the injuries resulting from the accident. Tables have been produced and used in some cases which combine the financial discount and the risk of normal mortality⁶. In the computation of life long care costs, as pointed out by Lord Lloyd of Berwick, the care cost multiplier should not be reduced where there was an agreed life expectancy since, " .. in the case of life expectancy, the contingency can work in either direction. The plaintiff may exceed his normal expectation of life or he may fall short of it."⁷

The tables and formulae used to calculate present value assume that the stream of costs or earnings is constant, that is, there is no cost or earnings inflation. Any adjustment for inflation has traditionally been reflected in the net rate of return applied to the care costs. In the earlier jurisprudence, the rule was that inflation should not be taken into account⁸. Beginning with Cookson v. Knowles [1979] A.C. 556, it was recognised that a plaintiff would be under compensated unless the rate of return used made allowance for future inflation. This principle has now been firmly entrenched in the Wells v. Wells cases where Lord Lloyd of Berwick said as follows:

"The difficulty arises because, contrary to the assumption made above, money does not retain its value. How is the court to ensure that the plaintiff receives the money he will need to purchase the care he needs as the years go by despite the impact of inflation?"⁹

In the Wells v. Wells cases, the method of adjusting for inflation chosen was to use the rate of return of I.L.G.S., which are protected against inflation, as the appropriate rate of return used in calculating the multiplier.

The life care multiplier differs from the loss of earnings multiplier in that the actual life expectancy of the victim is used even though this may be less than his life expectancy had the accident not occurred. On the other hand, as pointed out above, there should be no discount for 'contingencies' or 'vicissitudes of life' beyond the agreed or proven life expectancy¹⁰. Assuming the life expectancy can be determined, the only remaining question is the rate of return appropriate for an investment by a severely injured victim.

The distinctive feature of the loss of earnings multiplier is that, within limits, the retirement age is fixed so that any contingencies such as normal mortality, risk of disability, or adverse economic conditions can only operate to reduce the earning lost as a result of the injuries. It may then be appropriate to use actuarial tables such as the Ogden Tables to determine the effect of such factors on an average individual of the same age and sex as the victim at the time of the accident. Of course, the average life span and earnings of a similarly situated individual, not having suffered the injury is used for this calculation.

The decision of the Court of Appeal in Chan Pui Ki v. Leung On, Kowloon Motor Co. (1933) Ltd¹¹. represents the state of the law in Hong Kong prior to the decision in the Wells v. Wells cases. In Chan Pui Ki, the Court of Appeal rejected the approach taken in the court below to determine loss of earnings where expert evidence was introduced to support a net rate of return in the order of 1.2% resulting in a multiplier of 34 reduced to 30 for 'contingencies'. The net rate of return of 1.2% had been determined as follows: 15.9% average return for a mixed bag of equities and bonds less 0.7% for a more conservative strategy less 12.5% for payroll inflation less 1.2% for management fees. The Court of Appeal, after commenting that the adjustments appeared arbitrary and would result in a battle of experts, substituted the traditional 4.5% rate of return and then discounted the resulting multiplier for 'contingencies'. Interestingly, in Chan Pui Ki Litton J. cites and discusses the lower court decisions in the three Wells v. Wells cases which had been relied upon by Cheung J. in the court below. The Court of Appeal disapproved of the decisions in these cases and reduced the award of the lower court for lost earnings by 45%. This is of course a result very similar to that of the Court of Appeal in the UK. Prominent in the reasoning of the Court of Appeal was a reaction against the use of actuarial and financial experts whose testimony had been admitted in the court below.

As noted above, the Wells v. Wells cases relied heavily on the existence of Index Linked Government Securities ("I.L.G.S."). I.L.G.S. are available in the United Kingdom, are readily traded and quoted daily and offer a unique combination of safety and protection from price inflation by being government bonds which are indexed to the consumer price index. Although their average yield (2.5% to 3.5%) is less that may be achieved with a portfolio of equities and gilts, they offer total safety when held to maturity and eliminate the risk of inflation.

Unfortunately, I.L.G.S. are not available in Hong Kong dollars at this time. Nevertheless, the adoption of these instruments by the English courts as the measure of the appropriate net rate of return for a lump sum damage award, is highly likely to result in a revision of the multipliers used in calculating Hong Kong personal injury awards. The essential issue raised in the House of Lords cases was whether a plaintiff was required to bear the risks of market fluctuations in the equities markets and price inflation. Lord Lloyd pointed out that the victim of serious personal injury did not have the luxury of timing his disposals of investment assets to the ups and downs of the business cycles. He should invest conservatively but also be protected from inflation. I.L.G.S. is merely the investment vehicle which most closely approximates this ideal and average rates of return from I.L.G.S. are used in calculating the multiplier.

The same concerns apply in a personal injury case in Hong Kong. The victim should not be required to invest in equities which, if anyone had forgotten, can and do regularly decline in value¹². Furthermore, a victim whose lost income and future care costs is measured in Hong Kong dollars, is entitled to be protected against inflation. The rate of return of I.L.G.S. is a good starting point in addressing these two objectives. The additional risk of the Hong Kong dollar against the Pound can be easily approximated by the cost of a number of traded currency swap and hedge contracts. Thus the appropriate net rate of return can be calculated by applying a small adjustment to reflect the Hong Kong dollar risk to the I.L.G.S. rate of return.

Of course, the House of Lords decisions in the Wells v. Wells cases, coming after the transfer of sovereignty of Hong Kong to the PRC, are not binding on the Courts of Hong Kong which now has its own Court of Final Appeal. These decisions should be highly persuasive for the following reasons:

• the reasoning of the House of Lords is sound and produces equitable and predictable awards which are capable of economic justification.
• the entire approach of the Hong Kong courts to personal injury litigation is heavily influenced by UK case law and procedure. To break with these precedents at this time would be highly disruptive and unsettling.
• The new awards are, if anything, more easy to calculate without expert assistance than the older system which had various discounts and caps for 'contingencies'. The new system simply uses a flat 3% instead of 4.5% to 5% to compute the multiplier and eliminates, in the case of future care costs, the discounts for 'contingencies'.
  

©John Beukema 1998
Littlewoods Solicitors
Suite 1501 HongkongBank Building
673 Nathan Road
Kowloon, Hong Kong

¹ Page v. Sheerness Steel Co. Ltd., Wells v. Wells, Thomas v. Brighton Health Authority, http://www.parliament.the-stationary-office.co.uk/pa/ld199798/ldjudgmt/jd9807/page01.htm.

² See Premiums to Rise After New Ruling on Damages, The Telegraph, 17 July 1998; See also NHS Hit by Damages Ruling, The Telegraph, 21 October 1998.

³ The computation is purely financial because the element of life expectancy, e.g. mortality, has generally been determined separately based on medical evidence. The multiplier then becomes the present value of an annuity value of 1 for the remaining life expectancy based on a specified net rate of return. This can be determined using financial tables, a general spreadsheet such as Excel or from a mathematical formula.

⁴ This figure seems to have been derived at a time when gilts were yielding 14% and inflation was running at 10%, very different from the situation today. See Law Commission Report No 224 September 1994.

⁵ Chan Pui Ki v. Leung On The Kowloon Motor Bus Co. Ltd, [1995] C.A. No. 265 at 15

⁶ Actuarial Tables with Explanatory Notes for use in Personal Injury and Fatal Accident Cases often referred to as the "Ogden Tables" .

⁷ Wells v. Wells cases at p 5.

⁸ Young v. Percival, [1975] 1 W.L.R. 17.

⁹ Wells v. Wells, op cit at p. 2.

¹⁰ Wells v. Wells, op. cit at p 5

¹¹ Civil Appeals, 1995, No. 263.

¹² The Hang Seng Index declined 55% from 1 July 1997 to September 1, 1998.