Disapplying the UK discount rate for foreign claimants

Date published

26/06/2018

Locations

The UK is currently the only jurisdiction in the world using a discount rate model for compensating future losses that assumes a negative investment return. The Ministry of Justice has acknowledged that the -0.75% rate overcompensates claimants and its draft reforms are contained in the Civil Liability Bill that is currently passing through parliament.

Both the existing Damages Act 1996 and the draft reforms contain an exception to the UK rate where 'more appropriate in the case in question'. Previous attempts to invoke that exception on purely economic grounds have failed. However, the Court of Session acknowledged in Tortolano v Ogilieve Construction Ltd [2013] that an appropriate case would be 'a non-UK taxpayer' whose net returns are determined by foreign investment products, inflation, financial adviser fees etc.

The scenario is not uncommon of a foreign claimant being injured in the UK and later repatriated to their home country, but the UK courts having jurisdiction as the place where the accident happened. In such cases, the discount rate should be calculated by applying the prevailing UK methodology to local economics in the relevant jurisdiction. The existing methodology is to assume that the claimant will invest solely in index-linked government securities (ILGS). In her February 2017 statement introducing a new rate of -0.75%, the then-Lord Chancellor used a simple average of returns across all ILGS (excluding those with less than five years to maturity) over a three year period to 30 December 2016.

For a foreign claimant, research therefore has to be undertaken to find the local investment products best matching the February 2017 statement. Kennedys recently managed a brain injury claim following a UK accident where the claimant was repatriated to the US and, working with our local offices, we sourced specialist advice from a US economist that in the relevant state the applicable rate was 1.5%. In that case, disapplying the UK discount rate in favour of the US equivalent (based on UK methodology) had the effect of reducing the multiplier by over 40 and saved a seven-figure amount in damages.

The ongoing reforms promise to introduce a new methodology to setting the discount rate. It seems probable that the new methodology will be based on a different assumption that a prudently advised claimant invests in a diversified portfolio (not solely ILGS) offering more risk than very low risk, but still less risk than the ordinary investor. When determining the rate, the Lord Chancellor will review actual investment practices for realism. In our view, the new methodology will apply to foreign claimants as soon as the reforms are enacted, even before any decision is made about a change in UK rate, and is highly likely to produce higher discount rates (and correspondingly lower multipliers) for foreign claimants than the current approach. Going forwards, the draft reforms envisage the Lord Chancellor publishing reasons for future rate decisions, which should be used as an updated reference point when managing the process of sourcing foreign evidence regarding local economics.

In practice, the theory is one thing but the logistics are another. In order to successfully argue the UK rate should be disapplied, defendants will need to source local expertise from any combination (depending on the jurisdiction) of a local serious injury lawyer who knows the expert market, a local economist or financial adviser regarding best-matching products. A guardian or other local equivalent of our UK professional deputies who can provide leadership regarding actual investment practices of claimants may also be required.

Our experience has been that the process can be time-consuming, especially in terms of translating and explaining UK methodology for the foreign expert team. However, it tends to be worth the investment because of the potential deflationary effect on damages compared to using the inappropriate UK rate.

Related item: Progress at last: Civil Liability Bill brings promise of certainty on discount rate and whiplash reform

Read other items in the Personal Injury Brief - July 2018