An Overview of the Consultation Paper on Periodical Payments for Future Pecuniary Loss in Personal Injury Cases

Introduction

In Hong Kong, the court awards pecuniary damages in personal injury cases in a lump sum. Damages for future pecuniary losses are awarded on the same basis as damages for past pecuniary losses, that is, restitutio in integrum (meaning full compensation for the loss).

Assessing a “once and for all” lump sum award is a difficult task due to the presence of a wide range of imponderables pertinent to the claimant’s vicissitude of life, before and after the injury, amidst the changes in the socio-economic landscape as the claimant may find himself. In the circumstances, the court is forced to take up the task of “crystal ball gazing”. This approach brings the inevitable problem that the lump sum award for future pecuniary loss is either too little or too much, and has been generally criticised as being imprecise and unscientific.

As an alternative, Bharwaney J astutely observed in Chan Pak Ting v Chan Chi Kuen & Anor (HCPI 235/2011 [2013] 1 HKLRD 634 at paras 5-6 and HCPI 235/2011 [2013] 2 HKLRD 1 at para 128) (“Chan Pak Ting”) the option of making a periodical payment order (“PPO”) for future pecuniary loss, except that there was, as yet, no legislation to permit the same.

In early 2015 the Secretary for Justice and the Chief Justice asked the Law Reform Commission of Hong Kong to conduct a review to see if law reform is needed to allow the implementation of PPO and whether it is viable and desirable to introduce a mechanism for fixing and reviewing the presumed rate of return on investment to be applied in assessment of damages in personal injury cases.

The Law Reform Commission’s Sub-committee has reviewed in-depth the law relating to 11 jurisdictions, including England and Wales, Canada, Australia, Germany, Ireland, Netherlands, New Zealand, Scotland, Singapore, Sweden and the US. Particular attention was given to the development of the relevant law in England and Wales as well as Ireland: the former, due to its similar legal system as that of Hong Kong, the latter, for its most recent development in this area of the law and similar potential problems that may also be encountered in Hong Kong.

Experience in overseas jurisdictions

United Kingdom

The Damages Act 1996 (as amended by sections 100-101 of the Courts Act 2003) came into force on 1 April 2005. In brief, under section 2 of the 1996 Act, a court awarding damages for future pecuniary loss in respect of personal injury may order that the damages are wholly or partly to take the form of periodical payments, and the court is obliged to consider whether to make that order. The courts may impose periodical payments with or without the consent of the parties.

Payments under a PPO are normally linked and hence adjusted along with Retail Price Index. Further, the Court has power to index specific items of payment under a PPO, for instance, earning-related losses with other more suitable and relevant indices such as earning statistics issued by the Office of National Statistics. A PPO may also provide for stepped-payments to cater for the changing financial needs of the recipient at different stations of life.

Under section 2(3), a court may not make an order for periodical payments unless satisfied that the continuity of periodical payment is reasonably secure as set out in section 2(4).

Under section 2(5), the courts may in the order include specific provisions to ensure that the continuity of periodical payment is reasonably secure. To ensure the security of the continuity of periodical payment and to relieve the financial burden, defendants tend to rely on insurance and annuities.

In respect of payments under a PPO to be received from a financial institution, it is protected by the Financial Services Compensation Scheme, if the paying institution should default.

Ireland

Prior to recent reform to the law relating to personal injuries compensation, damages in Ireland were assessed and awarded by way of a lump sum to compensate for all past and future losses, including both pecuniary and non-pecuniary loss.

Modelled on the PPO regime in England & Wales, a Civil Liability (Amendment) Bill was introduced into the Irish House of Oireachtas on 8 February 2017 and the Civil Liability (Amendment) Act (“the Act”) was enacted in November 2017. The purpose of the legislation is to empower the courts to award damages by way of PPOs only in catastrophic cases, which is a unique feature.

The Act provides the court with the power to make PPOs where appropriate, having regard to the best interests of the plaintiff and in all circumstances of the case. Likewise, it also contains provisions regarding security and indexation. It also stipulates that PPOs will not be subject to income tax and that such payments will not be taken into account in the event of bankruptcy.

Other jurisdictions

In jurisdictions such as Australia and Scotland, the courts may make an order for periodical payment only with the consent of the parties.

The compensation system adopted in some jurisdictions, such as Germany and New Zealand differ to a large degree from the system in Hong Kong. Under section 253(2) of the German Civil Code, a claimant is entitled to expect a reasonable compensation instead of an express right to full compensation.

New Zealand has a “no fault” accident compensation scheme which differs from the common law system for compensating persons who had suffered personal injury as a result of the negligence of another person. Under the current statutory scheme, anyone in New Zealand who suffers a “personal injury by accident” can file a claim for compensation for their losses with the Accident Compensation Corporation, i.e. a Crown organisation responsible for administering the country’s no-fault accidental injury scheme.

Discount rate

An important question relating to periodical payments is the setting of discount rates for the selection of multipliers in assessing damages in personal injury cases.

By reason of accelerated receipts, the plaintiff may be overcompensated if the lump sum is not discounted on the ground that the bulk of money in his hand can be invested to produce income. The measure of the discount is the presumed rate of return, which can reasonably be expected on that sum of damages if invested in such a way as to enable the plaintiff to meet the whole amount of the loss during the entire period.

In practice, the discount rate (“Discount Rate”) will dictate the selection of multipliers used in the calculation of damages. The multiplier is just another representation of the Discount Rate, which can be read from actuarial tables for PI Cases (such as Ogden Tables in UK and the Chan’s Tables in Hong Kong).

Once the period of loss (or future needs) has been determined, the selection of multiplier at a given Discount Rate is a mathematical exercise and there is no more room for judicial tinkering on the ground of “contingencies of life” (see Lord Lloyd in Wells v Wells [1999] 1 AC 345 at 378C).

For decades, the assumed rate of return on investment in personal injury cases was taken as 4% to 5% (or 4.5%), net of tax and inflation, on the strength of the decision of the House of Lords in Cookson v Knowles [1979] AC 556. The underlying assumption is that the receiving party would be able to achieve a real rate of return of 4 to 5% (net of tax and inflation) by establishing a portfolio of assets producing an annual income which, together with a portion of the capital, would be sufficient to fully compensate the widow for loss of dependency.

Primarily, it was accepted in Wells v Wells [1999] 1 AC 345 that the injured person should not be forced to take unnecessary risks such as that attendant upon investment in equities in order to achieve a higher rate of return resulting in a higher Discount Rate and a lower multiplier (hence, a lower award) which would benefit the wrongdoer. In Wells v Wells (supra), the House of Lords was convinced that the Discount Rate should be fixed on the basis of the returns from Index-Linked Government Securities (ILGS). On the evidence, the Discount Rate based on ILGS was fixed at 3% (net of tax and inflation).

Thereafter, pursuant to section 1 of the Damages Act 1996, Lord Irvine of Lairg (Lord Chancellor) set the Discount Rate at 2.5% (net). The Discount Rate so fixed has done away with the need to pay for extra investment advice. The procedure for investing in ILGS is simple enough and the management fee has been factored into the Discount Rate. Hence, claims for investment advice thereafter have been disallowed.

To the surprise of many, the Lord Chancellor announced on 27 February 2017 a reduction of the Discount Rate to minus 0.75% and this change came into force on 20 March 2017. The same was followed by Scotland on 28 March 2017. It is not difficult to imagine that this is due to the prolonged low return on investments in general over the preceding years.

Further to this development, a consultation exercise “The Personal Injury Discount Rate, How it should be set in future” was conducted by the UK Ministry of Justice and Scottish Government from 30 March to 11 May 2017. The post-consultation report was released in September 2017. A draft legislation was published with a view to invite comments from the public.

The position in Hong Kong

By reason of the decision in Chan Pui Ki v Leung On [1996] 2 HKLR 401, plaintiffs in Hong Kong were saddled with the presumed rate of return of 4.5% in selecting multipliers.

There is no equivalent of ILGS in Hong Kong although there have been recent issues of bonds (denominated in Hong Kong Dollar) by government or quasi-government organisations. Anyone living in Hong Kong for the last 10 years would know that there was no investment (let alone low-risk investments) which would give a net return anywhere near 4 to 5%. Although there is no tax on investment, the rate of inflation was substantial.Due to changes in the financial landscape, it is unrealistic to have a presumed rate of return of 4 to 5% as was held in Chan Pak Ting. Nonetheless, the setting of the discount rate (“Discount Rate”) would involve a very costly exercise, and is often unaffordable for plaintiffs to challenge the current Discount Rate.

Over the years, there might have been sporadic attempts by plaintiffs to assault the underlying assumptions of Cookson v Knowles (supra) as entrenched by the decision in Chan Pui Ki v Leung On (supra). However, the path was only clear for a thorough re-visitation of the topic under the guidance of Bharwaney J in his management of a number of catastrophic cases, which culminated in his judgment in Chan Pak Ting.

Several principles are clear from the exposition of the law made by Bharwaney J:

(a)How the plaintiff actually invested the damages is irrelevant; and

(b)The fact that insurance premium will go up due to downward adjustment of the Discount Rate (resulting in higher multiplier) should not affect the plaintiff’s entitlement to “full compensation”.

Based on the economic evidence adduced, Bharwaney J, looking at returns of the preceding 5 to 12 years, devised Discount Rates (net of inflation and management fees) according to the duration of future needs as follows:

Importantly, after a close examination on the differential (less than 0.5%) between the rate of increase in wages and that of retail prices over a long period, Bharwaney J held that there is no justification for different Discount Rates to be applied to earning-based element of losses such as the costs of nursing care.

The appeal from the decision of Bharwaney J in Chan Pak Ting has since been abandoned. However, the approach and new Discount Rates have been fully endorsed by the Court of Appeal in Chan Wai Ming v Leung Shing Wah [2014] 4 HKLRD 669.

A review by the Court of the Discount Rate in the context of litigation is a very costly exercise and the resources involved may be prohibitive to many individual claimants.

Experience in overseas jurisdictions

The Sub-committee has also studied the position of Discount Rate in overseas jurisdictions (apart from England & Wales and Scotland). Except for New Zealand, which operates a non-fault based compensation scheme, the law in various overseas jurisdictions invariably provides for certain Discount Rate (ranging from 1.5% to 5%) where by way of statute or case law.

Questions to be consulted

The Sub-committee invites submissions from the public on the first key question (Question 1) as to whether, as a matter of principle, the court should be given, by way of legislation, the power to make periodical payment orders in respect of damages for future pecuniary loss in personal injury cases.

In Question 2, we consult the public on the mechanism to be adopted for the formulation and promulgation of the Discount Rate. We also seek the public’s view as to whether the Chief Justice or any other person or body should be the authority empowered to conduct periodical review of the Discount Rate.

In Question 3, we seek the public’s view on the factors and limitations, if any, that should be imposed on the court’s power to award and review periodical payment orders. For instance:

(i) whether the power of the court to award periodical payment could be made irrespective of the consent of the parties to the proceedings; and

(ii) whether such power should be limited to cover a specific class of personal injury cases, and, if so, how the class of cases is to be defined.

For Question 4, the public is asked to consider the circumstances for reviewing PPOs and related contingencies, and whether the current regime of awarding Provisional Damages should co-exist with a PPO regime.

Lastly, for Question 5, we invite submission as to whether the court should take into account the security, funding options and suitability of a paying party before making a PPO to ensure adequate security for periodical payments.

Consultation

The consultation period will last for four months until 24 August 2018 and the sub-committee would welcome views, comments and suggestions on any issues discussed in the consultation paper. We would strongly encourage members of the profession to respond on this important subject.

Jurisdictions: