One stage closer to accurate compensation? Update on the Scottish Damages Bill

Late on 18 December 2018 the Scottish Parliament passed stage 1 of the Damages (Investment Returns and Periodical Payments) (Scotland) Bill (the Bill) in Holyrood.

There was clear support from all sides of the general principles of the Bill, but concerns were raised around Periodical Payment Orders (PPOs) in particular, and fears that the changes will swing the pendulum too far in the opposite direction to its current position, and lead to under-compensation for pursuers.

Background

The Bill was introduced on 14 June 2018, setting out a mechanism, which would ultimately lead to a different discount rate being applied in Scotland.

The Bill proposal was for the rate to be set by the Government Actuary Department (the GAD), with reference to a notional, cautious 30-year investment period and a three-yearly review of the methodology in the Bill. The Bill also paves the way for courts to impose a compulsory PPO in appropriate cases, previously only available with consent and scarcely used.

Since its introduction, it has been slowly progressing through stage 1. On 3 December the Economy, Energy and Fair Work Committee (the Committee) published its report on the Bill confirming:

We are….very supportive of this legislation, which changes the framework for setting the rate to one that bears much more relation to what happens in reality

Whilst supportive, the Committee, nevertheless, made a few recommendations, which the government responded to on 12 December ahead of the parliamentary debate.

Recommended changes

Committee recommendation Government response
Extending the review cycle for the discount rate from three years to five.

Agree.

The frequency will be amended every five years, and the facility to call for an out-of-cycle review will remain – likely to be brought about should economic conditions change rapidly.

Applying the discount rate when a claim is raised, rather than the rate in place when the claim is settled.

This recommendation was due to concerns that defenders would ‘game the system’ and delay settlement.

Do not agree.

The government believed that pursuers would be at more of a disadvantage, particularly in cases involving catastrophic injuries at birth, which can take many years to settle.

Provide more detail on their commitment to keep the 30-year notional investment period under review, along with the degree of divergence over 15, 30 and 50-year periods that would prompt multiple discount rates.

Ahead of each review, the GAD will check the returns on the portfolio over different time periods, probably at 10 or 15 years and 50 years.

If the outcome of that exercise demonstrates a significant divergence in returns, that will point to the use of more than one rate for different lengths of award being more appropriate in the pursuit of the goal of 100% compensation.

The GAD have cautioned against setting out an approach that is too formulaic as this would provide false accuracy.

More weight be given to a pursuer’s view when a court is considering a PPO, possibly through a statutory presumption in their favour.

Reluctant.

They are wary of undermining the court’s ability to make a decision in a particular case.

Scottish Ministers should promote PPOs beyond the public sector.

Increasing the use of PPOs is not solely within the gift of the Scottish Government – a defender must be reasonably secure and pursuers have many reasons for wanting a lump sum.

Suggest the best way forward is to liaise with the courts on how the use of PPO’s could be encouraged in appropriate cases.

Likely to be looked at when they discuss the need for Rules of Court to support the Bill’s provisions.

The Ministry of Justice is investigating ways to encourage the use of PPO’s, which remains a choice in England and Wales.

Scottish Ministers to report in twelve months on its considerations to add the Motor Insurer’s Bureau to the list of bodies approved to enter into PPOs. Happy to do so.

The debate in parliament, on 18 December, was mainly favourable of the Bill and its aims, but with a suggestion that there are still some areas to play for come Stage 2. In particular, the main area of debate revolved around PPOs, with some acknowledging that there are many reasons not to use them. There were also concerns around the notional investment period used to calculate the discount rate with some wanting clarity and others holding concerns of under-compensation for pursuers.

Comment

The extension of the review period from three to five years is to be welcomed, as is the provision to apply the discount rate at the point of settlement. Catastrophic and severe injury cases, routinely take more than three years to conclude and might otherwise encourage bad behaviours, such as delaying settlement.

The rate-setting process is more prescriptive than currently in place in England and Wales and is designed as more of a technical exercise than a political one. That is a conscious aim of the Bill, but government oversight of how matters are working in practice, must be preserved.

There is a strong chance that different rates will apply across the United Kingdom - we already have a prevailing 2.5% in Northern Ireland. Forum shopping in such a small country will be all too easy, and is a significant concern.

PPOs are, by their very nature, the most effective way of accurately compensating a pursuer. That said, there is force in the suggestion that a pursuer should be allowed to choose a lump sum if, having taken advice, that is what they would prefer. In the absence of a Scottish Court of Protection, however, care would need to be taken to protect the most vulnerable pursuers.

It is pleasing to note that significant time is being dedicated to ensuring the Bill comes as close to providing 100% compensation as it can do. History has shown something of a tendency to over-compensate in the pursuit of simplicity and in response to more vocal pursuer interest groups – such as the Damages (Scotland) Act 2011 that led to significant increases in dependency claims by applying a blanket approach based on 75% of the deceased’s earnings.

Whilst the current level of scrutiny is to be welcomed, we need to be careful not to spend too long chasing the impossible goal of recession proof 100% compensation, as seen in Jersey in their Draft Damages (Jersey) Law 201.

Stage 2 is likely to start soon after recess in the new year – this will be an opportunity for further debate within the Scottish Parliament and to make any amendments to the Bill.

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