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Injury Law - Periodical Payments – the future?

By : Henry Slack, Steven Weddle

Find some answers to questions on the new procedures.

When do the changes come into effect? 

On 1st April 2005 the long awaited changes to the Courts’ ability to impose periodical payments instead of solely lump sum awards arrived. How popular they will be with parties and the Courts is a completely open question and only time will tell.

What are the changes? 

Law- Section 2 of the Damages Act 1996

  1. A court awarding damages for future pecuniary loss in respect of personal injury-
  1. may order that the damages are wholly or partly to take the form of periodical payments, and
  2. shall consider whether to make that order.
  1. A court awarding other damages in respect of personal injury may, if the parties consent, order that the damages are wholly or partly to take the form of periodical payments.
  2. A court may not make an order for periodical payments unless satisfied that the continuity of payment under the order is reasonably secure.

Pleading - Part 41.5 of CPR

  1. In a claim for damages for personal injury, each party in its statement of case may state whether it considers periodical payments or a lump sum is the more appropriate form for all or part of an award of damages and where such statement is given must provide relevant particulars of the circumstances which are relied on.
  2. Where a statement under paragraph (1) is not given, the court may order a party to make such a statement.
  3. Where the court considers that a statement of case contains insufficient particulars under paragraph (1), the court may order a party to provide such further particulars as it considers appropriate.

Practice – CPR 41.6

The court shall consider and indicate to the parties as soon as practicable whether periodical payments or a lump sum is likely to be the more appropriate form for all or part of an award of damages.

Factors to be taken into account – CPR 41.7

When considering –

  1. its indication as to whether periodical payments or a lump sum is likely to be the more appropriate form for all or part of an award of damages under rule 41.6; or
  2. whether to make an order under section 2(1)(a) of the 1996 Act,

the court shall have regard to all the circumstances of the case and in particular the form of award which best meets the claimant's needs, having regard to the factors set out in the practice direction.

Practice Direction 41B

1.The factors which the court shall have regard to under rule 41.7 include –

  1. the scale of the annual payments taking into account any deduction for contributory negligence;
  2. the form of award preferred by the claimant including –
  1. the reasons for the claimant's preference; and
  2. the nature of any financial advice received by the claimant when considering the form of award; and
  1. the form of award preferred by the defendant including the reasons for the defendant’s preference.

What are the effects of the changes?

In all cases where there is a claim for future loss (usually but not only loss of earnings and or care) it is initially up to the parties as to whether to ask for PPs but the Court has a duty to consider it, presumably as an early Case Management decision. There appears to be one gap in all of this – the lack of guidance for the judiciary. It follows that, until such guidance is published, there is likely to be significant variation in judicial approach.

The old PD 40C on Structured Settlements (now withdrawn) suggested that consideration should be given to structured settlements in all cases where the whole value of a claim was over £500,000. As yet there is no such financial guidance. There are going to be some Claimants for whom a steady RPI linked income stream will be very useful even if that income is modest. It follows that cases with a value much less than £500,000 could be suitable. It is therefore hard to anticipate how the ‘scale of the annual payments taking into account any deduction for contributory negligence’ will be used to influence decisions.

What about the competing interests of the parties? How does a judge perform the balancing act?

In the past Structured Settlements, (periodical payments by agreement backed by annuities), were little used because of the very obvious difference in preference of the parties! It is easy to speculate that the primary complaint and opposition of insurers will be the difference in cost.

The few structures that were implemented were mainly top down giving Claimants lower incomes than the original award was based on. The parties would agree the value of the claim based on a lump sum basis then calculate what that lump sum, or a proportion of it, would buy by way of an annuity. With low return rates, increasing life expectancy and the annuity providers need to make profit it was normally impossible to achieve the ‘right’ income unless lump sums for PSLA or past losses were also used.

Where we suspect it will have greatest uptake will be NHS Trusts. The main reason for this is that they will not need to buy annuities or other products, they will be able to self fund.

Does payment have to be secure?

Section 2(3) imposes the need for the court to be satisfied that the method of payment is secure. Subsection (4) expands upon this -

  1. For the purpose of subsection (3) the continuity of payment under an order is reasonably secure if-
  1. it is protected by a guarantee given under section 6 of or the Schedule to this Act,
  2. it is protected by a scheme under section 213 of the Financial Services and Markets Act 2000 (compensation) (whether or not as modified by section 4 of this Act), or
  3. the source of payment is a government or health service body.

The first is a guarantee for public sector settlement backed by Crown guarantee.

The second is that it comes under strict terms and conditions similar to those that existed for structured settlements and

The third speaks for itself.

It is the public sector and the NHS that will prefer to self fund. There is the obvious advantage that no annuity or other product needs to be bought from someone making a profit therefore the cost of the ‘middleman’ is avoided. Budgetary issues also make it preferable for substantial immediate outlay to be avoided in order that the money can be retained for dealing with current business – such as trying to get patients better!

What is the variation clause?

Section 2B of the Damages Act provides for variation of periodical payments orders. This is only in respect of claims commenced after 1st April 2005.

There is a separate guidance in the Damages (Variation of Periodical Payments) Order 2004. The power is confined to limited situations similar to those for Provisional Damages save for one important difference:

Article 2. If there is proved or admitted to be a chance that at some definite or indefinite time in the future the claimant will -

  1. as a result of the act or omission which gave rise to the cause of action, develop some serious disease or suffer some serious deterioration, or
  2. enjoy some significant improvement, in his physical or mental condition, where that condition had been adversely affected as a result of that act or omission, the court may, on the application of a party, with the agreement of all the parties, or of its own initiative, provide in an order for periodical payments that it may be varied.

Such an award can be made alongside an order for provisional damages and must specify what changes would permit such an application.

It is noteworthy that a Defendant can apply as well as a Claimant How is this going to work? Will video surveillance teams be out 5 years after ‘settlement’?

Will payments be index linked?

There is a presumption in CPR 41.8 that awards will increase annually in line with the RPI but this may be disapplied under section 2(9) of the Damages Act.

There is debate as to whether future care is properly provided by the multiplier/ multiplicand system using the 2.5% return rate. Courts may take the opportunity to get around the decision in Cooke v. United Bristol Healthcare [2004] PIQR Q2.

It is argued that an index of RPI plus 2% would reflect the changes of RPI as against actual care costs in recent years but the effect in Cooke would have be to turn the £2.3m award into £4.6m.

Is tax exemption relevant?

A very real advantage of periodical payments exists for the Claimant in their exemption from inclusion in income assessment for the purposes of tax, benefits and housing assistance. (Section 329AA of the Income and Corporation Taxes Act 1998 (as amended), the Social Security Amendment (Personal Injury Payments) Regulations 2002 and the National Assistance (Assessment of Resources)(Amendment) (no.2) Regulations 2002.) This is an important consideration.

A Claimant may be unemployable and have care needs. If his pre injury earnings level was £15,000 a year and he needs domestic assistance valued at £10,000 a year he has a need for £25,000 a year. His general damages and past losses may do little more than pay off his debts leaving a small sum under £3,500. He has been on benefits of £150 a week for some time and his rent is paid. He is exempt from Council Tax. If he gets a lump sum then it all goes in the bank and he must pay his own way again. If he receives it by way of an appropriate periodical payments order he will get both his income and his benefits – a very real windfall. The only problem is that he would have to spend his money and not accumulate it otherwise the savings would take him out of benefits!

Of greater advantage still would be the same illustration but there is a 50% deduction for contributory negligence. The annual payments would reduce to £12,500 a year but the balance would be made up by benefits.

Is Part 36 affected?

The following has now been inserted to Part 36:

36.2A – This rule applies to a claim for damages for personal injury which is or includes a claim for future pecuniary loss.

36.2A includes the following provisions:

Where an offer includes an offer to pay the whole or part of the damages as a lump sum the amount of the lump sum must be paid into court.

Where the defendant makes an offer in respect of periodical payments as well as a payment into court of a lump sum the offer must include details of the payment and Rules 36.11 and 36.13 (Time for Acceptance and Costs Consequences) apply as if there were only a Part 36 offer: the payment is ignored for the purpose of determining times (PD 7.2A).

An offer to pay or accept may be made in respect of damages for future pecuniary loss in the following forms:

  1. Either a lump sum or periodical payments, or
  2. Both a lump sum and periodical payments.

An offer to pay or accept may be made in respect of any other damages in the form of a lump sum.

An offer MUST state the amount of any lump sum offered.

An offer MAY state:

  1. What part of the offer relates to damages for future pecuniary loss in the form of a lump sum.
  2. What part of the offer relates to non-future pecuniary-loss-damages in the form of a lump sum.

An offer MUST state what part of the offer relates to damages for future pecuniary loss to be paid in the form of periodical payments and MUST specify:

  1. The amount and duration of the periodical payments.
  2. The amount of any payments for substantial capital purchases and when these are to be made.
  3. That each amount is to vary by reference to RPI (or other named index) or that it is not to vary by reference to any index (Ss2(8)(9) Damages Act 1996 deals with index-linking of periodical payments).
  4. That any damages which take the form of periodical payments will be funded in a way which ensures that the continuity of payment is reasonably secure (S2(4) Damages Act 1996).

Where the defendant makes a Part 36 offer which includes a lump sum and periodical payments the claimant may only give notice of acceptance of the offer as a whole (PD 7.11)

How should a case be pleaded?

Consider part 41.5 of CPR -

  1. In a claim for damages for personal injury, each party in its statement of case may state whether it considers periodical payments or a lump sum is the more appropriate form for all or part of an award of damages and where such statement is given must provide relevant particulars of the circumstances which are relied on.

Where a statement under paragraph (1) is not given, the court may order a party to make such a statement.

The word “may” is crucial in that parties potentially have a choice as to whether or not they plead periodical payments. However under 41.6 of the CPR the court “shall” consider whether they are appropriate. In all cases containing future loss, pleading PPs will be an issue.