By Charles Foster
The Lord Chancellor recently announced that the discount rate under the Damages Act 1996 would be decreased from 2.5% to minus 0.75%. This sounds dull. In fact it is financially tectonic, and raises some important ethical questions.
In the law of tort, damages are intended to put a claimant in the position that she would have been in had the tort not occurred. A claimant who, as result of negligence on the part of a defendant, suffers personal injury, will be entitled to, inter alia, damages representing future loss of earnings, the future cost of care and, often, private medical and other treatment.
Where damages are awarded as a lump sum, there is a risk of over-compensating a claimant. Suppose that the claimant is 10 years old at the time of the award, and will live for 70 years, and the future care costs are £1000 a year for life. Should the sum awarded be £1000 x 70 years = £70,000? (70, here, is what lawyers call the ‘multiplier’). It depends on the assumption one makes about what the claimant will do with the lump sum. If she invests it in equities that give her (say) an annual 5% return, £70,000 would over-compensate her.
In the case of Wells v Wells1, the House of Lords decided that, to avoid the risk of under-compensation, claimants should be treated as risk-averse investors. It should be assumed, said the House, that the discount rate should be fixed by reference to the return on index-linked gilts – Government securities. The rate was 2.5% from 2001 until February of this year. The reasons for the change to minus 0.75% are here. Read More »Damages and communitarianism
