2.1 The Commission is asked to report on the manner of assessment of damages where uncertainty exists as to future conditions or events relevant to the quantum of the plaintiff’s recoverable loss. Such uncertainties may exist for a number of reasons, and it is helpful to separate them into uncertainties which exist generally and those which are peculiar to the plaintiff’s case. Those in the latter group are the focus of this reference.
2.2 Examples of the uncertainties which may arise for cases generally are the impact of inflation and the impact of income taxation on the award in the future where (as in personal injury cases) the award is assumed to constitute a fund upon the capital and income components of which the plaintiff will draw progressively during the period of the loss. In this case a plaintiff will have to pay tax on the (assumed) income from the fund but the future rates of taxation will be unknown. Other examples involve the “vicissitudes of life” in personal injury cases - that is, the unknown factors which affect people generally such as the risk of early death, incurring further or other injury by accident, being prevented from working by strikes, and so forth.1
2.3 These uncertainties are dealt with in the following ways:
- In respect of taxation and inflation, the courts quantify the present value of the future loss by adopting a discount rate of 3%. This amount was prescribed by the High Court in Todorovic v Waller.2 In New South Wales, damages awarded in contexts which attract the operation of the provisions of the Motor Accidents Act or the Workers Compensation Act, are discounted at a rate of 5%.3 This rate is intended to make the appropriate (and only) allowance for inflation, future changes in rates of wages generally or in prices, and for tax upon income from investment of the sum awarded.
- In respect of the “vicissitudes of life”, the courts make a conventional deduction. In New South Wales that deduction is 15%,4 although there may be circumstances justifying a departure from it in some cases.5
2.4 As to the uncertainties which may arise because of circumstances peculiar to the plaintiff, typical examples in personal injury cases include the plaintiff’s life span and the prognosis of the plaintiff’s medical condition.6 In such circumstances the courts do the best they can by means of a “guesstimate” as to, for example, the cost of care, life expectancy and so on.
LUMP SUM ASSESSMENT
2.5 The compensation principle endeavours to provide a person who has suffered an injury with an equivalent in money for the loss. This is effected by a lump sum payment under the “once-and-for-all” rule which applies at common law.7 At common law there is no provision for the court to make the award other than in a lump sum.8
2.6 It is obviously impossible to arrive at a precise monetary equivalent for future loss in a system which requires speculation by a court as to future events. The reality is that the court cannot look into the future and possibly foresee the social conditions which will exist, or the means of care available and the costs involved.9 This is particularly so with respect to serious and long term illness.
2.7 An award of damages under the once-and-for-all rule will, therefore, almost certainly be wrong. It will result either in under-compensation which disadvantages the plaintiff who is prevented from commencing another action in respect of the injuries, despite further manifestation; or over-compensation for an injury that never manifests itself to the degree expected.10 Lord Scarman put it well when he said:
The award is final; it is not susceptible to review as the future unfolds, substituting fact for estimate. Knowledge of the future being denied to mankind, so much of the award as is to be attributed to future loss and suffering - in many cases the major part of the award - will almost surely be wrong. There is really only one certainty: the future will prove the award to be either too high or too low.11
2.8 Other arguments against once-and-for-all rule awards focus on the financial abilities of the plaintiff.12 The problems are particularly acute in the case of personal injuries. Mismanagement of funds can leave a plaintiff with no financial security, relying on social security payments once the lump sum has been dissipated. Many plaintiffs do not have the financial acumen to invest a lump sum successfully, quite apart from the fact that the award may not have been sufficient in the first place. Work undertaken as part of the Commission’s Accident Compensation reference included a detailed study of the experiences of plaintiffs who had received compensation in a common law negligence action.13 The findings supported arguments that it is wrong to assume the plaintiff will wisely invest the lump sum award to produce income for the period of incapacity assessed by the court, and that there is often inadequate allowance made for the effects of inflation on the cost of items and services such as wheelchairs, pharmaceuticals and home nursing. However, research undertaken by the English Law Commission for their review of structured settlements, interim awards and provisional damages, suggests that dissipation claims are exaggerated. This was particularly the case where the award was large. The English Law Commission found that victims of personal injury were concerned to preserve capital in order to cover future health care and care assistance costs, at least during the period up to ten years after injury.14
2.9 There are nevertheless strong arguments in favour of the once-and-for-all rule. Many argue that the lump sum award is made in the interests of the parties and the community, on the basis that the litigation is settled once and for all, liability is discharged, the matter can be forgotten and the plaintiff can concentrate on mitigating the loss. There is also no doubt that schemes of reviewable and continuing payments incur administrative and legal costs, which ultimately flow through and affect the community at large in the form of decreased services and impact on the availability and cost of insurance. Further, there will always be difficulties in ensuring future payments in a system that requires interim, provisional or periodical payments, as there is no guarantee of the future availability or solvency of the defendant. A lump sum also encourages independence by leaving plaintiffs free to use the award as they think fit.15
ALTERNATIVES TO LUMP SUM ASSESSMENT
2.10 Recognition of the inability of lump sum awards to compensate adequately for future loss in many cases16 has led to the consideration and development of alternative forms and structures of compensation,17 not necessarily limited to the context of personal injury.18 The alternative forms and structures include statutory compensation schemes, provision for periodical payments, structured settlements, deferred assessment, interim damages and provisional damages.
Statutory compensation schemes
2.11 The most comprehensive solution to the problem of adequately compensating future loss is a statutory compensation scheme. Most schemes of this nature apply in the context of personal injury, are no-fault and involve periodical payments. The current workers’ compensation scheme in New South Wales is an example.19 Such a scheme was recommended for traffic accidents by this Commission in the early 1980s.20 The Transport Accidents Act 1988 gave some effect to the recommendations of the Commission but in the context of a fault-based system. The Act was repealed by the Motor Accidents Act 1988.
Periodical payments
2.12 Another option is the statutory modification of the once-and-for-all rule at common law to allow periodical payments. Periodical payments would, obviously, not cover past loss but only future loss. In most cases a comprehensive system of periodical payments would be impractical because of:
- resource implications for courts, with plaintiffs repeatedly coming back to the court for assessment;
- administrative inconvenience and expense to insurers of keeping files open; and
- the anti-rehabilitative effect it may have in personal injury cases.
This approach has not been adopted in any jurisdiction and would be a radical solution.
Structured settlements
2.13 Structured settlements usually consist of an initial lump sum payment representing compensation for past pain and suffering and expenses already incurred, with the balance of the award used to fund a series of periodical payments over a number of years. In England, where structured settlements are entered voluntarily, the balance of the award is used by the defendant’s insurer to purchase life insurance annuities.21
2.14 In New South Wales structured settlements are provided for under the Motor Accidents Act 198822 and the Workers Compensation Act 1987.23 The Commission has been advised by representatives of the insurance industry in New South Wales that there has been no use of the Motor Accidents Act scheme to date, 24 largely because it is subject to an open-ended review25 and is not exempt from tax, unlike its English counterpart where the voluntary structures agreed to by the parties are exempt from tax.26 However, it can be argued that periodical payments on the lines of the English model may not attract taxation in Australia.27
2.15 The English Law Commission has recently reviewed structured settlements and made several recommendations concerning them.28 In particular the Commission recommended that judges should not be given the power to impose a structured settlement because it was thought that the power would have a detrimental effect on the current flexible regime, which was based on negotiation and agreement between the parties.29 Further, because the system of structured settlements was still evolving, the Law Commission was reluctant to constrain its development by the premature introduction of a power of imposition. It did, however, make several suggestions to rationalise the existing voluntary regime.30
Interim payments
2.16 The general purpose of interim damages schemes is to allow courts to make some provision for a plaintiff by means of interim payments pending trial and final assessment of damages. In New South Wales the power to do this is available under s 76E of the Supreme Court Act 1970; in South Australia, under s 30b of the Supreme Court Act 1930 (SA); and in England, under O 29 r 11 of the Rules of the Supreme Court.31
Deferred assessment
2.17 Deferred assessment involves the postponement of the assessment of damages until certain aspects of a plaintiff’s condition or circumstances become clearer.32 It is an option which can be most effectively combined with a system of interim payments. Such an approach was recommended by the Commission in 1969.33
2.18 The approach of delaying trial until a personal injury plaintiff’s condition has stabilised might, however, have undesirable effects. In some cases it might lessen the incentive to rehabilitation, as improvement in a plaintiff’s condition would reduce any award. Further, where there is a delay in having the matter heard, financial worries may force a plaintiff to settle for an inadequate amount. There is also the incidence of litigation neurosis.
Provisional damages
2.19 Provisional damages can be seen as a variation of the concept of deferred assessment of damages. Under such a scheme the final assessment of damages is made but the plaintiff is given the option of returning for a further assessment on the occurrence of a certain specified event, the possibility of which is foreseen at the time of assessment, such as the development of a further medical condition or a significant deterioration in an existing condition. In New South Wales provisional damages are available for claims before the Dust Diseases Tribunal.34 These provisions are largely in line with the general scheme for provisional damages established by s 32A of the English Supreme Court Act 1981. However, provisional damages are not generally available in New South Wales or any other Australian jurisdiction, although something similar to provisional damages is theoretically achievable by making a deferred award with interim assessment under the South Australian legislation.35
FOOTNOTES
1. See generally M Tilbury, Civil Remedies: Remedies in Particular Contexts, Volume 2 (Butterworths, Sydney, 1993) at paras 9029-9030.
2. (1981) 150 CLR 402 at 409.
3. See Motor Accidents Act 1988 (NSW) s 71 and Workers Compensation Act 1987 (NSW) s 151J.
4. Wynn v NSW Insurance Ministerial Corp (1995) 70 ALJR 147 at 153 per Brennan CJ; Hobell v Leonard (NSW CA, No CA 40209/89, 29 May 1990, unreported) per Samuels JA.
5. Djapa v Comalco Aluminium Ltd (NSW CA, No CA 64/86, 3 July 1987, unreported) per Samuels JA.
6. For example, the plaintiff’s condition could deteriorate as a result of the onset of syringomyelia, sympathetic ophthalmia, post traumatic epilepsy and mesothelioma: see Law Society of New South Wales, Submission (20 March 1992) at 1-2.
7. Pamment v Pawelski (1949) 79 CLR 406; Todorovic v Waller (1981) 150 CLR 402.
8. H McGregor, McGregor on Damages (15th ed, Sweet & Maxwell, London, 1988) at paras 1 and 1795.
9. See Mundy v GIO (NSW SC, No 14795/87, 5 June 1995, Spender AJ, unreported) at 3; Lim v Camden and Islington Area Health Authority [1980] AC 174 at 183 per Lord Scarman.
10. For a study identifying cases involving under- and over-compensation in South Australia, see M Neave and L Howell, The Adequacy of Common Law Damages (Adelaide Law Review Research Paper No 5, 1992) at 71-84.
11. Lim v Camden and Islington Area Health Authority [1980] AC 174 at 183. See also comments by Harman LJ in Jones v Griffith [1969] 1 WLR 795 at 802.
12. See also DP 25 at para 2.6.
13. New South Wales Law Reform Commission, Accident Compensation: Traffic Accident Case Studies (Research Paper 1, 1984).
14. England and Wales, Law Commission, Structured Settlements and Interim and Provisional Damages (Law Com No 224, 1994) at 30-31.
15. These arguments are also outlined at DP 25 para 2.3.
16. The English Law Commission also suggests that it is not only deficiencies with the lump sum award, but also increases in the number of claims made that has led to a need to focus on alternative forms of compensation: see England and Wales, Law Commission, Structured Settlements and Interim and Provisional Damages (Law Com No 224, 1994) at 9.
17. In the last twenty five years there have been a number of reviews of personal injury compensation in common law jurisdictions: see England and Wales, Royal Commission on Civil Liability and Compensation for Personal Injury (The Pearson Report) (Cmnd 7054 - I-III, March 1978); Ontario, Law Reform Commission, Report on Compensation for Personal Injuries and Death (1987); New South Wales Law Reform Commission, Accident Compensation: A Transport Accidents Scheme for New South Wales (Report 43, 1984) especially paras 4.4-4.15; Manitoba Law Reform Commission, Interim Payment of Damages (Report 87, June 1995).
18. In commercial claims there may be doubts about what profits would have been made, and will now be made, from a particular commercial venture, for example in the circumstances of Settlement Wines Company Pty Ltd v National General Insurance Co Ltd (1994) 62 SASR 40.
19. The New Zealand system is also an example: Accident Rehabilitation and Compensation Insurance Act 1992 (NZ).
20. See New South Wales Law Reform Commission, Accident Compensation: Report on a Transport Accidents Scheme for NSW (Report 43, 1984) especially at paras 8.2-8.3 and Recommendation 35.
21. England and Wales, Law Commission, Structured Settlements and Interim and Provisional Damages (Law Com No 224, 1994) at para 3.1.
22. Section 81. See para 3.4.
23. Section 151Q. See paras 3.6-3.7.
24. Consultation (20 July 1995) with motor insurance industry representatives, including the Motor Accidents Authority.
25. Motor Accidents Act 1988, s 81(7) provides that a party to any structured settlement or arrangement may apply to the court at any time for an order varying or terminating the arrangements.
26. England and Wales, Law Commission, Structured Settlements and Interim and Provisional Damages (Law Com No 224, 1994) at paras 3.2-3.7.
27. See D Colenbrander, Tax Implications of Introducing the UK Structured Settlements Model into Australia (Discussion Paper, Motor Accidents Authority of NSW, 26 October 1995) which concludes (at 13): “The signposts in the case law suggest that index linked periodic payments over a fixed term will be treated as capital in the hands of the plaintiff”.
28. England and Wales, Law Commission, Structured Settlements and Interim and Provisional Damages (Law Com No 224, 1994) Part 3.
29. England and Wales, Law Commission, Structured Settlements and Interim and Provisional Damages (Law Com No 224, 1994) paras 3.37-3.53.
30. England and Wales, Law Commission, Structured Settlements and Interim and Provisional Damages (Law Com No 224, 1994) at paras 3.54-3.160.
31. Interim payments are also available in Scotland under the Rules of Court of Session 1994 (Scot) and in Bermuda under the Law Reform (Miscellaneous Provisions) (No 2) Act 1977 (Bermuda). See also recommendations in Western Australia Law Reform Committee, Interim Damages in Personal Injury Claims (Project 5, May 1969) and Manitoba Law Reform Commission, Interim Payment of Damages (Report 87, June 1995).
32. See paras 3.13, 4.1, 5.2 and 5.3.
33. New South Wales Law Reform Commission, Working Paper on Deferred Assessment of Damages for Personal Injuries and Interim Payments During the Period of Postponement of Assessment and on the Relevance of Remarriage or Prospects of Remarriage in an Action Under Lord Campbell’s Act (Working Paper 2, 1969) at 15.
34. Dust Diseases Tribunal Act 1989 (NSW) s 11A.
35. See paras 4.1-4.10. There is also a possibility of a similar outcome being achieved under the current New South Wales provisions: para 3.13.
