‘It’s Roberts v Johnstone, Jim, but not as we know it!’
October 12, 2020
On 9th October 2020, the Court of Appeal handed down judgment in the case of Swift v Carpenter. It marked a pivotal moment in what had been a long battle fought by those representing Claimants to secure fair compensation for housing needs arising out of the consequences of catastrophic injuries. Over a decade ago, I wrote an article with Ian Gunn, the well-known and highly respected financial expert from PfP, pointing out the injustices suffered by Claimants as a result of the Roberts calculation. We did not propose any particular resolution to the problem, although we outlined a number of potential solutions, one of which was simply that the tortfeasor should meet the whole bill. As it turns out, although the Court of Appeal rejected it, that proposal made its way into the submissions in Swift. Be that as it may, the point Ian and I were making a long time ago was that the Roberts calculation offended against the principle of full compensation. However, it was not until the dawn of multipliers based upon a negative interest rate of return that things came to a head. Before then, whilst acknowledging the flaw in the system for calculating accommodation costs, most Claimant lawyers seem to have taken the view that there was little point in attempting to appeal Roberts because it would probably be doomed to failure. Once there was a negative interest rate of return, things changed. The Roberts calculation, which had been designed to avoid a ‘windfall’ to the Claimant (albeit one that their estate would inherit rather than something they would enjoy during their lifetime) now gave a catastrophically injured person literally nothing for the increased cost of the house they needed over and above the value of the one from which they had been forced to move by reason of the tortfeasor’s negligent conduct.
Swift has removed much of the unfairness that went before. However, it has done so by introduction of ‘new means’ rather than a completely ‘new broom’. The Roberts principle remains alive and well. It would be a mistake to think that Swift overturned it. It did not. Consider what Irwin LJ said at paragraph 80 of his leading judgment:
‘It appears to me that the reasoning in Roberts v Johnstone was a means to an end rather than a principle, or end in itself. If there is a justified call to alter the means by which that end (fair compensation but not overcompensation) is reached, and another means is available, it appears to me, this court should be ready to contemplate a change in the guidance to be given.’
His Lordship went on to say in the following paragraph that:
‘Roberts v Johnstone does apply to this case, but in the form of authoritative guidance from this court, given in the specific conditions prevailing at the time of the decision. If that guidance is demonstrated now to be ineffective in achieving the object of the relevant principles of law, namely full compensation without over – compensation, then this court can revisit and alter such guidance.’
The judgment in Swift is long, detailed and complex. It runs to sixty-six pages. It is a careful analysis of this contentious area of personal injury litigation. It is beyond the scope of this article to dive into the depths of its reasoning. Suffice to say that, ultimately, the Court of Appeal decided that it could and should revisit Roberts and alter its guidance in order to produce a system that is fair, just and reasonable in the much changed circumstances of 2020, some 31 years on from the time at which Roberts produced what was then quite an elegant and simple solution to a potentially tricky problem.
The solution decided upon by the Court of Appeal was to adopt the ‘reversionary interest’ model advanced during course of evidence. Accepting that the current market for purchasing a reversionary interest is very small, nevertheless, the court decided that it afforded a sensible and tolerably straightforward method of calculating damages for accommodation in the majority of cases (although the door was left open for further argument in an exceptional case – for example, where expectation of life is very limited indeed). In short, the calculation is aimed at identifying the current value of a Defendant’s residuary interest in the newly acquired property, which residuary interest is then deducted from the price differential between the ‘injured’ and ‘uninjured’ properties. That interest is, in effect, the ‘windfall’ element at which Roberts had been aimed. It is the ‘over-compensation’ that results from the probability that, at the end of life, the ‘injured’ accommodation will have risen in value and, thus, secured a ‘profit’ for the Claimant. By rights, that profit belongs to the Defendant.
One method of giving credit for the ‘windfall’ at the time of trial is to value the reversionary interest, using an appropriate interest rate of return. It is a simple exercise, achieved by taking the price difference between ‘injured’ and ‘uninjured’ properties and multiplying it by the life multiplier, discounted for accelerated receipt over the anticipated life expectation period. Having heard extensive evidence on the question of valuation of reversionary interests, Irwin LJ said that he ‘would moderate (his) conclusion as to the appropriate discount rate, adopting the lowest individual return on investment which Mr Watson, the only expert with experience of the market, has indicated he has seen in practice. That is 5%.’
The outcome of the decision in Swift was this. In order to purchase an appropriate property, the Claimant needed to find £900,000. Applying the 5% discount rate identified produced a reversionary interest figure of £98,087, thus leaving an award of £801,913 to the Claimant. Contrast that with the position under the old Roberts’ system and it is immediately obvious how very much better off most Claimants will be from now on. Of course, with a negative interest rate of return, Charlotte Swift was awarded nothing at all at first instance! Even if one had applied to the Roberts calculation the former, long-standing, interest rate of return of 2.5%, then the Claimant, who was 43 years of age at trial, would have had a multiplier of 25.67; her multiplicand on a price difference of £900,000 would have been £22,500; and her damages award for capital costs would have amounted to £577,575. So, under the new guidance, she is either almost £802,000 or £224,338 better off. From the Claimant’s perspective, that is a ‘result’!
To summarise the position, the Court of Appeal has found that:
- the Roberts formula is no longer fair as a method of calculating the capital cost of accommodation;
- it was appropriate to offer new guidance on the subject;
- a Claimant should receive the additional capital costs of an appropriate property less the value of the reversionary interest in that property;
- the value of the reversionary interest should be calculated by means of its market value;
- a ‘cautious’ interest rate of return was appropriate to reflect the limited size of the market in reversionary interests and the many uncertainties surrounding life expectation and so on;
- the appropriate interest rate was 5%;
- the calculation of the reversionary interest involves subtracting the value of the ‘uninjured’ property from that of the required property and multiplying that amount by 1.05¯ L, where L is the Predicted Life Expectancy (see Darryl Allen QC’s excellent Note for PIBA);
- a simple way of conducting that calculation is to apply the appropriate accelerated receipt multiplier for the Claimant’s anticipated life expectation period at 5% interest rate of return to the capital sum required to purchase the adapted property (i.e. the difference between the ‘uninjured’ and required property);
- For those who use Excel calculations, the formula is “=X*1.05^-L”, where X is the capital sum required and L is the Projected Life Expectation (with thanks to David Knifton QC for the information);
- the damages awarded to the claimant will be the difference between the required property and the ‘uninjured’ property, less the reversionary interest.
A simple example may assist:
A Claimant is aged 30 at the date of trial and is expected to live until age 75, a further 45 years.
He needs a bungalow costing £650,000. His share of his current home is valued at £150,000. Thus, he requires a capital sum of £500,000.
However, he must give credit against that sum for the reversionary interest to which the Defendant is entitled. The appropriate multiplier for accelerated receipt over a 45-year period, using an interest rate of return of 5%, is 0.1113.
That multiplier is applied to the required £500,000, producing a figure of £55,650.
The reversionary interest is therefore assessed at £55,650 which, when deducted from the £500,000, gives the Claimant an award of £444,350 to cover the capital costs of his adapted accommodation.
Obviously, the shorter the life expectation period, the greater the reversionary interest will be – thus the leaving open of the door for that sort of case. Take the Claimant above. If his life expectation is only 25 years, the accelerated receipt multiplier is 0.2953 and the reversionary interest increases to £147,650, giving him only £352,350 of the required £500,000 he needs. It is not hard to see the issue coming down the line!
No doubt, once we have had time to digest the judgment in full, there will be many more words written and spoken about it.
To read the judgment in full, click here.