Swift v Carpenter: how to quantify accommodation claims with a negative discount rate
In a three day hearing commencing on 23 June 2020, the Court of Appeal heard the case of Swift v Carpenter, in which the appellant challenged the decision of no award for her accommodation claim. The judgment has been reserved.
Here we provide a brief overview of the evidence before the Court of Appeal and the possible outcomes.
Since the decision in Roberts v Johnstone  a claimant’s accommodation claim in personal injury litigation has been calculated by multiplying the capital cost of the property the claimant needs by the prevailing discount rate, and then applying the appropriate life multiplier.
This approach has been taken to avoid the claimant’s estate potentially benefitting from a ‘windfall’, assuming that the property will have appreciated in value during the claimant’s lifetime. Whilst the calculation was not perfect as claimants invariably needed to ‘borrow’ from other heads of loss to fund the property purchase shortfall, the calculation at least provided the claimant with a contribution towards the purchase, without allowing a windfall. The problem now is that the negative discount rate of -0.25% (-0.75% at the date of the Swift v Carpenter trial) means that the calculation effectively gives the claimant a nil award for their accommodation claim.
The case concerns a road traffic accident in October 2013 where Ms Swift sustained leg injuries leading to a below-knee amputation. Ms Swift was awarded a significant lump sum in damages at trial in 2018, but no award was made for the accommodation she now needed to purchase as a result of her injuries, on the basis the judge considered they were bound by the approach in Roberts v Johnstone.
The claimant’s legal team appealed to the Court of Appeal and following the recent hearing the judgment is awaited. The Personal Injuries Board of Association (PIBA), were represented as an intervener.
Is Roberts v Johnstone binding?
Before any alternatives can be looked at for calculating accommodation claims, the Court needs to be satisfied that it can in fact depart from the calculation in Roberts v Johnstone. At the hearing this was addressed by both the appellant and the respondent in closing submissions. By way of a summary:
- The respondent submitted that Roberts v Johnstone (and the calculation it provided) is binding authority from the Court of Appeal, and binding on the House of Lords as per Thomas v Brighton Health Authority (1996), therefore cannot be disregarded.
- The appellant submitted that the ‘binding precedent’ point does not arise because the calculation from Roberts v Johnstone is not a fundamental legal principle, but pragmatic judicial guidance.
In the event that the Court of Appeal considers it is able to depart from Roberts v Johnstone, leading counsel for both parties offered various alternative approaches to the court, and the expert witnesses gave evidence on these potential approaches.
By way of a summary, submissions made on behalf of the appellant:
- If no other workable solution was agreed by the Court, that claimants should be awarded the full capital value of the property required as a result of the injury. The theory being that the risk of over compensation (or ‘windfall’) was compatible with the fundamental principle of full compensation, whereas the alternative risk of under compensation was not.
- In the alternative, claimants should be awarded the full capital value less the market value of a reversionary interest in that property. The approach to calculating the reversionary interest was discussed in some detail by independent actuarial experts.
Cash flow analysis/equity release approach
This alternative approach advanced by the respondent would treat the lump sum award in totality, with part being used to fund the property purchase. “Unallocated damages” i.e. general damages for pain, suffering and loss of amenity, being utilised to bridge the gap and purchase the property a claimant requires and it being unlikely on the balance of probabilities to result in a claimant suffering a loss. At a later date the claimant is then able to release some equity in the house to fund later years of life. Claimants would therefore be able to benefit from the increase in house value, which the economics expert instructed on behalf of the respondent, estimated would be 3.2% per annum.
The actuary instructed by the appellant gave evidence that the claimant’s heads of loss should be separate, and other heads of loss should not be used to fund the purchase of the property required. The actuary considered that the future of house prices is a complete unknown in itself. This was coupled with the possibility that if a claimant has limited money as a result of borrowing from themselves to fund the property purchase, they are unlikely to maintain the house when faced with a choice between maintaining the house and seeking to meet care needs. The result of this would potentially be that the increase in house value would not happen.
Reversionary interest approach
This potential alternative approach was discussed by both parties, but each presenting different arguments as to the method of calculating the reversionary interest.
By selling the reversionary interest in the property, the claimant would have a life interest in the property. This would enable the claimant to live in the property for life, and upon their death the property would go to the buyer of the reversionary interest. As the house would be effectively sold potentially many years before the claimant died, the value of the house would have to be calculated with reference to forecasting.
The assumption is that house prices will at the very least maintain their real value, and the claimant’s accommodation claim would be the full capital value of the property, less the predicted increase in value of the property when the property went to the buyer upon the claimant’s death. The shortfall would be made up by the claimant’s unallocated damages.
Evidence from the appellant’s economics expert confirmed that house prices have increased over the last 45 years on average, by 1.9% per annum, and over the past 50 years by 3.5%, although the expert did concede that forecasting is not sufficiently reliable and the safest conclusion would be that houses will hold their real value.
Evidence from the respondent’s economics expert suggested that past performance is no guarantee of future performance, and house prices are driven by supply and demand and growth of earnings. However, in cases such as this, the approach is to look far into the future to see what the average might be, which is less unstable than looking at individual years.
Ultimately therefore, the Court of Appeal are tasked with firstly deciding whether they are bound by Roberts v Johnstone, and if not, then which of the alternatives should be utilised for calculating accommodation claims, if any.
The main alternatives are the no loss/cash flow analysis, full capital value or full capital value less the predicted increase in value when a reversionary interest in the property is notionally sold. Of course, another question will be what should be done if the discount rate, at the next review, becomes a positive number again. Would Roberts v Johnstone be reverted to once more?