From nil to £800,000: Court of Appeal delivers landmark judgment in accommodation claims
At 10:30am on 9th October 2020 the Court of Appeal handed down judgment in Swift v Carpenter  EWCA Civ 1295 in which the Court found that it was not bound to follow its own previous decision in Roberts v Johnstone and rejected the loss of income and investment approach contained therein as no longer capable of delivering fair and reasonable compensation to claimants. The Court issued guidance for long life cases that the correct approach was to assess the capital value needed to purchase new accommodation less the reversionary interest which is to be calculated at 5% pa. The effect in Swift was to reverse the previous nil award under this head and award £801,913, being £900,000 capital value minus £98,087 reversionary interest.
Daniel Laking and others take a closer look at the judgment and set out the formula to be applied for the calculation of accommodation claims below.
Swift v Carpenter – Case Digest
Mrs Swift was involved in a serious road traffic accident in October 2013 which left her with crushing injuries to both feet and lower legs and led to a left-sided below-knee amputation. At trial before Mrs Justice Lambert, Mrs Swift was awarded a lump sum of £4,098,051. Lambert J found that the additional capital cost of the special accommodation that Mrs Swift required would be £900,000 more than the value of Mrs Swift's existing home. However, she considered that she was bound by the Roberts v Johnstone formula and therefore awarded Mrs Swift nil in respect of her claim for accommodation.
The Claimant appealed to the Court of Appeal on the basis that, with the advent of a negative discount rate, the formula set out in Roberts v Johnstone was no longer fit for purpose.
The Court of Appeal found:
- It was not bound by the decision in Roberts v Johnstone
- The Roberts v Johnstone approach was
- It gave guidance on the appropriate approach to calculate the award in long life cases similar to the instant claim, namely:
- identify the increased capital cost of the property now required (X);
- calculate the reversionary interest in the property using an annual rate of return of 5% over the claimant's life expectancy (L);
- X – L = the award for purchase of accommodation
The lead judgment was given by Lord Justice Irwin.
The Court considered three questions:
- Was the Court of Appeal bound by the decision in Roberts v Johnstone?
- If yes, should the court award the full capital value of the incremental sum required or should the court award that sum but reduced to reflect the value of the notional reversionary interest, in other words the value of the "windfall" to the claimant's estate?
- If the latter approach was correct, how should the court reach a conclusion as to the value of the reversionary interest?
Question 1: Was the Court bound by RvJ?
No, it was not.
The respondent argued that the court was bound by Roberts v Johnstone and therefore could not depart from the formula set out in that case. The appellant submitted it was not, on the basis that (1) the approach in Roberts was guidance rather than legal principle and (2) conditions have changed so as to render the approach in Roberts unjust.
The court found that the formula laid out in Roberts was guidance rather than principle. It represented a 'means to an end' to allow the courts of the day to reach a position that was fair without overcompensating the claimant. The guidance was now ineffective; the negative discount rate meaning that the claimant received no damages for a significant capital cost arising as a need from the tortious act. It was not just to expect the claimant to invest damages awarded under a different head of loss in the purchase of a property. The conditions prevailing at the time Roberts was decided were significantly different to the present day. It was appropriate in order to deliver the principle of full, fair and reasonable compensation underpinning the original decision, to depart from the guidance in Roberts.
Question 2: Full capital value or reduction for reversionary interest?
Reduction for revisionary interest.
The court concluded that the correct approach was to deduct the value of the reversionary interest and not award the full capital value of the additional accommodation. The principle the court strives to deliver is reasonable, but not over-, compensation. It was not appropriate to withhold the entire capital sum to avoid the risk of a windfall to the claimant or her estate. However, the risk of a windfall had to be taken into account. The most appropriate way of doing so would be to value the reversionary interest and deduct that from the capital sum awarded to the claimant. That depended upon whether a 'valid and reasonably workable approach' could be reached to establishing the value of such a windfall.
Question 3: How should the court value the reversionary interest?
Using a cautious benchmark of 5% pa for the duration of the claimant's estimated life expectancy.
The Court heard expert evidence from actuaries, including a director of the only known company auctioning reversionary interests in property, who tried to assist with this point, though much of their evidence was based on a number of assumptions. Despite the fact that the market in reversionary interests is currently small, the court decided a market approach represented the correct way to value the windfall. As the crucial question was the current value of a future interest in the property, the best measure of such a value was what someone would pay to acquire it.
It was, however, appropriate to take a cautious approach to the market value due to the small size of the market. The correct benchmark was 5%. That reflected a discount from the average rate identified. It further reflected the fact that the vast majority of the sales of reversionary interests concerned tenants older than Mrs Swift.
Irwin LJ conceded that, as a result of the decision, a broader market in reversionary interests might develop. If that were the case then 'a better evidence base from which a revision of the discount rate may be considered'. This may lend itself to fruitful argument in future claims.
The court rejected the respondent's argument that an Ogden 7 Table 28 multiplier (now Table 36 in Ogden 8) should be used to calculate life expectancy and instead used Table 2 to identify the claimant's life expectancy.
The end result in Mrs Swift's case?
The court took the increased purchase cost of £900,000 and calculated the reversionary interest at 5% pa x the life multiplier as £98,087. The award was therefore £900,000 - £98,087 = £801,913.
Calculating accommodation purchase claims
With credit to the Personal Injuries Bar Association for the following formula, it seems the correct approach to the valuation of an accommodation claim is now as follows:
- Value of reversionary interest is: R = (P-B) x 1.05-L
R = reversionary interest
P = value of property now required
B = value of property owned but for the accident
L = predicted life expectancy
- Damages award: D = (P – B) – R
So in the case of Mrs Swift:
- P = £2,350,000
- B = £1,450,000
- L = 45.43 (normal life expectancy derived from Table 2)
- R = (£2,350,000 - £1,450,000) x 1.05– 45.32 = £98,087
- D = (2,350,000 - £1,450,000) - £98,087 = £801,913
- Or D = £900,000 - £98,087 = £801,913
Key Practical Points
- The case represents an overhaul in the way that accommodation claims are valued which is of immediate relevance to lawyers considering the valuation or settlement of cases.
- The case does not give rise to a requirement to obtain actuarial or other expert evidence in every case. The formula can be applied to long life cases provided it is possible to value:
- The value of the current property
- The value of the new property now required
- Predicted life expectancy of the Claimant (Ogden Table 2)
- In longer life cases (i.e. where the claimant is expect to live for some significant period after damages are assessed), claimants will recover the majority of the capital sum. However, the reverse is also true: the shorter a claimant's life span, the smaller the proportion of the capital sum.
- The Court envisaged there may be cases in which the guidance expressed in this case is inappropriate. Such consideration may be given in cases where the claimant has a shorter life, discount rates rise or in particular individual circumstances.
- Whilst welcome clarity has been brought to the long life cases, there is a significant degree of uncertainty regarding how far this guidance will stretch and what expert evidence will be needed in those cases which fall outside this decision.
The full judgment is available here.
If you would like further information on the practical impact of Swift v Carpenter, 39 Essex Chambers will be:
- Providing a webinar at 3pm on Tuesday 13 October with a panel consisting of Susan Rodway QC, Charlie Cory Wright QC, Neil Block QC, Bernard Doherty and Emily Formby. The panel will discuss the new calculation of accommodation claims and the impact of "notional reversionary value" on both claimants and defendants.
- Publishing a detailed article as part of their Civil Liability Newsletter.
- Providing a podcast discussing the implications of the judgment in a range of practical applications.
For further information, please contact the 39 Essex Chambers Marketing Department on firstname.lastname@example.org.