[2015] SC (Bda) 37 Civ (22 June 2015) In The Supreme Court of Bermuda CIVIL JURISDICTION 2008: No. 311 BETWEEN: DENNIKA WARREN Plaintiff -v- TINEE HARVEY Defendant 2012: No. 6 KATE THOMSON Plaintiff -v- JAMES THOMSON 1st Defendant -and- COLONIAL INSURANCE COMPANY LIMITED 2nd Defendant 2014:139 ARGUS INSURANCE COMPANY LTD Plaintiff -v- SOMERS ISLES INSURANCE COMPANY LTD First Defendant -and- HAROLD TALBOT Second Defendant RULING (ASSESSING DISCOUNT RATE FOR FUTURE LOSS) (in Court)1 Date of hearing: June 1-2, 2015 Date of Ruling: June 22, 2015 Mr. Jai Pachai, Wakefield Quin Limited, for the claimants in Civil Jurisdiction 2008: No.311 (“Warren”) and Civil Jurisdiction 2014: No. 139 (“Talbot”) Mr. Paul Harshaw, Canterbury Law Limited, for the claimant in Civil Jurisdiction 2012: No. 6 (“Thomson”) Mr. Craig Rothwell, Cox Hallett & Wilkinson Limited, for the Defendants’ Insurer, Colonial Insurance Company Limited, in Warren and Thomson (“Colonial”) Mrs. Lauren Sadler-Best, Trott & Duncan Limited, for the 1st Defendant in Talbot 1 This judgment was circulated to counsel without a hearing. 2 Introductory 1. The present Ruling follows upon a continuation of adjourned trials for the assessment of damages in the three captioned matters in which the following Orders were made: (a) On November 25, 2014 in relation to the Talbot claim, I ruled that, as far as loss of future earnings was concerned, unless the claimant filed an expert report in accordance within 35 days (or such longer time as may be directed ), he would be awarded $26,533.97 x 12.70 = $336,981.42 (applying a discount rate of 3%); (b) on January 9, 2015 in the Warren matter, I awarded the claimant $138,123.09 in respect of a loss of future earnings, applying a discount rate of 3% and subject to her right to apply within 35 days for leave to adduce expert evidence in support of a lower rate; and (c) on January 19 2015, in light of the common issues identified in the earlier cases, it was directed that expert accounting and economics evidence in relation to the appropriate discount rate for future damages in all three matters could be adduced at a single hearing. 2. When claimants in personal injuries cases are awarded a lump sum in respect of future loss, the need has historically arisen to adjust the award to take into account the commercial reality that a lump sum prudently invested over the term of the assessment period could well result in a benefit greater than the amount of compensation the claimant is properly entitled to receive. That compensation for future loss is generally assessed on the basis of annual earnings and, where applicable, annual medical or other expenses attributable to the relevant injury. The assessment task crucially entails identifying the amount of compensation due (the multiplicand) and the number of years to which the award relates (the multiplier). For many years the Bermudian courts have relied on the English Ogden Tables which set out the appropriate multipliers for claimants of different ages and various potential award periods, together with a range of adjustment rates (expressed as a percentage) from which courts or litigants can choose to suit the justice of their particular case. Following English 1970’s vintage case law, the adjustment rate has been between 4 and 5%. 3. Because until recent years market conditions have always justified assuming a positive adjustment rate based on projected investment returns the application of which serves to reduce or lower the applicable multiplier and the size of the future loss award, that adjustment rate is popularly referred to as the ‘discount rate’. Although the 2008 global financial crisis created a shift in economic conditions giving rise to the possibility of a negative adjustment rate, it still seems most straightforward to refer to the percentage used for identifying the appropriate multiplier in the Ogden Tables as the ‘discount rate’. 3 4. Calculation of the discount rate has for more than a decade now been far less problematic in England in Wales as a result of two legislative initiatives not applicable under Bermudian law. Firstly, the Lord Chancellor is empowered by statute to fix the discount rate and in 2001 fixed it at 2.5%2. Secondly, English courts are now empowered by statute to make periodical payment orders in respect of future loss awards in personal injury cases3. Bermudian courts continued to follow older English common law authorities suggesting a discount rate of between 4% and 5%. This was until Mr. Pachai in the Talbot and Warren matters sought to rely on the (Guernsey) Judicial Committee of the Privy Council decision in Simon-v-Helmot [2012] UKPC 5. In that case a 0.5% discount rate was approved for prices related heads of future loss based on expert evidence given by an actuary and an economist. A discount rate of -1.5% was approved for earnings related heads of future loss. 5. Mr. Harshaw, as I recall, foreshadowed relying on Simon-v-Helmot at an earlier stage of the Thomson case, despite the fact that it was only formally raised in early 2015. Be that as it may, in my judgment in Argus Insurance Company Ltd-v-Harold Talbot et al [2014] SC (Bda) 93 Civ (25 November 2014); [2014] Bda LR 114, which was delivered on the second day of the three- day trial of the Warren matter where Mr. Pachai urged the Court to adopt a 0% rate without hearing expert evidence, I reached the following findings on the discount rate issue: “18…Having considered the above legal principles, I determine that it would not be appropriate for this Court to depart, as dramatically as counsel for the claimant suggests, from the longstanding discount rates upon which local litigants have relied and which have been applied by this Court after Simon-v-Helmot, without expert evidence from either an economist, actuary or chartered accountant addressing the following issues: (1) what is the most appropriate measure in Bermuda for the rate of return on a lump sum conservatively invested (e.g. ILGS/US TIP securities/local bank term deposit rates?); (2) what provision if any should be made for a gap between price and earnings inflation; (3) within the constraints of a modest retainer and providing a very basic guide, what range of discount percentage appears appropriate for the 2nd Defendant’s case.” 2 The Damages (Personal Injury) Order 2001, made under section 1(4) of the Damages Act 1996 (UK). 3 Section 2(1) of the Damages Act 1996 (as amended by section 100(1) of the Courts Act 2003). If the parties consent, damages other than future loss can be dealt with by way of periodical payment orders: section 2(2). Unless otherwise ordered under section 2(9), a periodical payment order provides for the amount to vary in accordance with the retail price index: section 2(8), construed by the English Court of Appeal in Thompstone-v-Tameside and Glossop Acute Services NHS Trust [2008] 1 WLR 2207. 4 6. Mr. Pachai’s subsequent application in the Warren matter for leave to adduce such expert evidence was not opposed by Mr Rothwell: Warren-v-Harvey [2015] SC (Bda) 1 Civ (January 2015); [2015] Bda LR 1, at paragraphs 17, 22. 7. The three Plaintiffs adduced evidence from the same actuary the Plaintiff in Thomson also adduced evidence from an economist while the Defendants (or their insurers) adduced evidence from the same actuary without adducing opposing evidence from an economist. Each side essentially advanced conflicting expert assessments of what the most appropriate discount rate calculation methodology was. It was common ground that the factual assessment was governed by the umbrella legal principle pithily expressed by Lady Hale in Simon-v-Helmot: “60. The only principle of law is that the claimant should receive full compensation for the loss which he has suffered as a result of the defendant’s tort, not a penny more but not a penny less…” 8. The present Ruling primarily sets out this Court’s findings for the purposes of the three cases before the Court. However, it also attempts to lay down principles of general application which can hopefully be applied in other cases without the need to adduce similar expert evidence in the near future. The current Bermudian law position 9. The assessment of damages in tort is primarily governed by common law rather than statutory rules. Subject of course to more recent changes initiated by statute in the United Kingdom in this area of law, English case law will, where relevant remain highly persuasive. As Harvey da Costa (Acting President) pointed out in Crockwell-v-Haley [1993] Bda LR 7 (at pages 5-6): “In matters of commerce uniformity is of course highly desirable and this court in J.E.L. Lightbourne & Co. Ltd. v Test Freres (1980) LRC (Comm) 463 readily followed the decision of the House of Lords in the Advocaat case (1980) RPC 31…The President of the Court took the view that there was no reason why the Common Law…as applied in these islands should be any different…” 10. The Court of Appeal for Bermuda in Haley-v-Crockwell approved the approach of the trial judge (Ward J, as he then was) in assessing future damages for personal injuries articulated by Lord Diplock in the House of Lords case of Cookson-v-Knowles [1979] A.C. 556. As da Costa (P, Acting) further opined (at page 15): 5 “The “Diplock approach” has been consistently followed in assessing damages in Bermuda. As I have observed it has its critics. It is not a perfect system but then it operates in a realm in which perfection must remain beyond the wit of man. On the whole however it produces results that are substantially just. There does not appear to be any valid reason why Bermuda should seek to depart from it a system of assessment that has become well established here. 11. Telford Georges JA (at pages 26-27) observed that different local circumstances would justify Bermudian common law taking its own distinctive course. However, he cited (at 30-31 of Haley) with approval the following dictum of Lord Diplock in Cookson-v-Knowles (at page 571): “Quite apart from the prospects of future inflation, the assessment of damages in fatal accidents can at best be only rough and ready because of the conjectural nature of so many of the other assumptions upon which it has to be based. The conventional method of calculating it has been to apply what is found upon the evidence to be a sum representing “the dependency”, a multiplier representing what the judge declared to be the appropriate number of years purchase. In times of stable currency the multipliers that were used by judges were appropriate to interest rates of 4 percent to 5 per-cent whether the judges using them were conscious of this or not. For the reasons I have given I adhere to the opinion Lord Pearson and I had previously expressed which was applied by the Court of Appeal in Young v Percival [1975] 1WLR.27-29, that the likelihood of continuing inflation after the date of trial should not affect either the figure for the dependency or the multiplier used. Inflation is taken care of in a rough and ready way by the higher rates of interest obtainable as one of the consequences of it and no other practical basis of calculation has been suggested that is capable of dealing with so conjectural a factor with greater precision.” 12. The late 20th century approach was admittedly “rough and ready” and specifically designed to avoid the need for expert evidence, which was in turn viewed as an equally imperfect assessment tool. As Lord Dyson would later explain in Simon-v-Helmot: “100. It was well understood that accurate quantification was impossible. The courts were unwilling to admit expert evidence as to future costs based on attempts to predict the economic or social future of the nation. The objections to such evidence were stated, for example, by Lord Oliver in Hodgson v Trapp [1989] AC 807, 833C where he drew attention to the ‘inherently unscientific’ nature of the exercise, saying memorably that ‘to assess the probabilities of future political, economic and fiscal 6 policies requires not the services of an actuary or an accountant but those of a prophet.’ No doubt, he would have excluded economists as well.” 13. The discount rate of 4 to 5% would be unquestioningly followed in Bermuda until the far from obvious implications of the Judicial Committee’s decision in Simon-v-Helmot [2012] UKPC 5 seeped into the consciousness of local personal injuries practitioners. The position prior to this landmark decision understandably appeared to be that English and Bermudian common law in this field had parted ways because shortly after the “Diplock” approach was replaced by the House of Lords in Wells-v-Wells [1999] 1AC 345: (a) the Lord Chancellor fixed a standard statutory discount rate in England at 2.5% (subject to potential modification in individual cases by the courts) in 2001; and (b) the UK Parliament introduced periodical payments for future loss awards in personal injuries cases in 2003. 14. Wells-v-Wells substituted for the “fixed” 4 to 5% discount rate a rate based on the inflation- linked returns available on Index-linked Government Securities (“ILGS”). As Lord Lloyd opined (at 373E), the Cookson-v-Knowles [1979] AC 556 approach was adopted “only because there was no better way of allowing for future inflation”. Since the comparatively risk free ILGS instrument was now available to British claimants, it made more sense to assume that the lump sum awarded would be invested in such an instrument. At first blush, this English common law decision had no application to Bermuda where no investment instruments comparable to ILGS existed. The decision of the Judicial Committee to follow Wells in relation to a Guernsey future loss claim did not obviously have any implications for Bermuda. 15. Be that as it may, the ‘old’ approach was followed by me (applying a 4% discount rate) in Best- v-Jensen [2012] SC (Bda) 44 Civ (28 August 2012); [2012] Bda LR 53 and tacitly approved by the Court of Appeal in Best-v- Jensen [2014] CA (Bda) 13 Civ (28 March 2014); [2014] Bda LR 23. The decision in Simon-v-Helmot [2012] UKPC had by then been delivered on March 7, 2012. Should there be a new Bermudian law position on discount rates? The issue defined 16. The claimants in the present cases submit that this Court should follow the Privy Council’s decision Simon-v-Helmot and adopt the approach to discount rates established by the House of Lords in Wells-v-Wells. The Defendant insurers contend that, having regard to economic realities, the more nuanced approach adopted by the Hong Kong Court of First Instance in Chang Pak Ting-v- Chan Chi Kuen [2013] HKCFI 179 (Bharwaney J) should be preferred. 17. Having regard to the pronouncements made in Crockwell-v-Haley [1993] Bda LR 7 about the precedential effect of decisions of the House of Lords (now UK Supreme Court) and the Judicial Committee of the Privy Council set out above, the starting assumption must be decisions of those 7 courts will be followed unless good reason (grounded in relevant local conditions) exists for not doing so. 18. In a case centrally based upon expert evidence, any articulation of the applicable legal principles can only tentatively be expressed in isolation from factual findings based on that evidence. What legal principles the main cases in controversy establish will next be considered in their widest canvass before deciding, having found the applicable facts, what assessment techniques ought ultimately to be applied with a view to determining the applicable discount rate. Simon-v-Helmot [2012] UKPC 5 19. The claimant was seriously injured when, whilst cycling, he was struck by a car negligently driven by the defendant. He was 28 at the time of the accident and 39 at the time of judgment and had a substantial claim for future loss of earnings and care and management expenses (comprising both earnings and other elements), the latter expenses being required by the claimant’s severe physical and cognitive impairments. The Royal Court of Guernsey awarded damages in excess of £9 million and applied a single discount rate of 1% following a six week trial at which expert actuarial and economical evidence was adduced. The claimant had contended for discount rates of -1.5% (minus 1.5%) for earnings-related losses and 0.5% for non-earnings-related losses. The defendant had contended for a discount rate of 2.5%, namely the statutory rate fixed by the Lord Chancellor in respect of England and Wales in 2001. 20. On appeal to the Guernsey Court of Appeal, the claimant sought the discount rate it contended for at trial and the defendant cross-appealed seeking the discount rate it had contended for at trial. The Court of Appeal (Sumption, Jones and Martin JJA) allowed the claimant’s appeal and dismissed the cross-appeal, fixing the discount rate at -1.5% for earnings related future losses and 0.5% for other future losses. This increased the award by some £4.5 million. Sumption JA (as he then was) delivered the judgment of the Court, which essentially concluded as follows: (a) Wells-v-Wells and earlier cases continued to reflect the common law position on determining the discount rate for future damage awards in Guernsey; (b) the English judicial approach to assessing future damage awards and its relevance to Guernsey was described as follows: “21.The English courts have always attached importance to certainty and consistency in the assessment of damages for personal injuries, and I certainly do not under-estimate the importance of these factors. They facilitate the settlement of cases without resort to expensive expert evidence and contested litigation. But there is a natural tension between certainty and consistency on the one hand and perfect accuracy on the 8 other. The English courts have never carried their emphasis on certainty and consistency beyond the point where it starts to work injustice to either side. Leaving aside cases in which the English courts have felt bound by the inherent rigidity of the statutory scheme for assessing lump sum damages, the furthest that they have gone is to discourage major litigation with a view to achieving relatively minor changes in the going discount rate, in circumstances where there had been no major change in the relevant economic conditions. None of these considerations can justify assessing damages in Guernsey on an assumption about the rate of return which is out of date, has no current evidential basis and is not required by any statute or rule of law.” (c) it should accordingly be assumed that claimants would invest their lump sum in UK ILGS. According to Sumption JA: “36…The reason for calculating a lump sum award on the footing that the lump sum will be invested in index-linked gilts is that it achieves an automatic adjustment for future increases in the general level of prices. On the assumption that the lost earnings or costs which are being compensated increase in line with the UK RPI, the assumed portfolio will automatically grow at the same rate as the losses which it supposed to replace and the costs which it is supposed to fund…”; (d) the credentials of the three experts, who included Mr. Christopher Daykin, the actuary called by the claimants in the present matters, “were as impressive as they could possibly have been” (paragraph 41); (e) the expert evidence from economist Mr. Bootle established, inter alia, the following material facts: “Given Guernsey’s state of economic development, and its close economic relationship and monetary union with the United Kingdom, a broadly comparable relationship between price and earnings inflation in the bailiwick is to be expected there…” (paragraph 42(4)); (f) the Jurats erred in “disregarding evidence which was powerful, consistent and unchallenged, on issues on which their own experience of Guernsey society was unlikely to be of much assistance”(paragraph 46). It was permissible to both assume the lump sum would be invested in ILGS and adjust the discount rate to take into account relevant local economic variations in the inflation rate; 9 (g) the Jurats ought to have accepted earnings in Guernsey would likely rise at a rate of 2% above the United Kingdom retail price index for the foreseeable future. This justified two different rates for earnings-related losses (a lower rate) and non-earnings-related or price- related losses (a rate which would match the RPI). 21. The Judicial Committee of the Privy Council affirmed the decision of the Guernsey Court of Appeal. Lord Hope explained the broad function of the discount rate as follows: “10. Leaving aside the changes introduced by statute, English law requires that an award of damages must take the form of a single lump sum. The award has to take account of all the elements of future loss as well as all the loss for the past. The inevitable delay in the provision of compensation for past losses can be made good by an award of interest at the appropriate rate on those parts of the lump sum that relate to the past. But the payment as part of the lump sum of an amount that is to compensate for losses to be incurred in the future gives rise to a different problem. Account must be taken of the fact that the money is being paid now for losses that will not arise until some date in the future. The adjustment that has to be made to the lump sum to account for this will affect the total amount to be paid by way of damages.” 22. In assessing damages for future loss, Lord Hope also pointed out, perfection could never be achieved: “12. It has to be recognised that it is not possible, when dealing with losses that will be incurred in the future, to achieve perfect accuracy. As Lord Steyn said in Wells v Wells at p 383, perfection in the assessment of future compensation is unattainable. But, just as there can be no good reason for a shortfall in the amount required to meet the outlays for nursing care in the future, there can be no reason for requiring the defendant to pay more than is needed to compensate the injured party for these outlays. It follows that the calculation should make the best use of such tools as are available. 13. The conventional approach, as Lord Oliver explained in Hodgson v Trapp at p 826, is to assess the amount that is notionally required to be laid out in the purchase of an annuity which will provide the annual amount that is needed for the whole period of the loss. The recurring annual amount has first to be determined. This is the multiplicand, to which a multiplier is then applied. It is the selection of the multiplier that lies at the heart of the dispute in this case. It has to take account of the period for which the loss can be expected to continue. If, as in this case, the injuries are of the maximum severity this will be the injured party’s life expectancy. But one then has to determine the interest rate which represents the return which can reasonably be expected on the lump sum, assuming that it is invested in such a way as to enable the whole amount of the loss to be met during the entire period by the expenditure of income together with capital. This is the critical stage in the exercise. The higher the interest rate the lower the number of years’ purchase that is required to calculate the capital value of the annuity.” [emphasis added] 10