In our February 2013 and June 2013 Client Alerts, we reported on Mr Justice Bharwaney’s judgment of 7 February 2013 in respect of the discount rates to be applied to calculations for future losses in personal injury cases (“the Justice Bharwaney Ruling”).
To recap, until the Justice Bharwaney Ruling, the courts proceeded on the basis that the return on the capital sum awarded for future losses would more than cater for the future and would in fact generate a profit and therefore a “discount” had to be made to the accelerated payment of the lump sum. The conventional multiplier approach proceeded on the assumption that a 4.5% discount rate (as laid down in 1996 by the Court of Appeal in Chan Pui Ki) was appropriate, the discount rate being a reflection of the interest rate or rate of return from investment of the lump sum awarded. However on 7 February 2013, Mr Justice Bharwaney ruled that given the substantial change in Hong Kong’s economic landscape since Chan Pui Ki, the assumption of a 4.5% net rate of return (or discount rate) was no longer valid in Hong Kong. He held that the courts should move away from that conventional multiplier approach and instead a multiplier for future loss should be calculated by reference to the net rate of return (or discount rate) and actuarial tables and that there should be three different discount rates, depending on the periods of future need, as follows:
The result of lowering discount rates is higher multipliers for future losses and therefore higher awards of damages.
As stated in our June 2013 Client Alert, the Justice Bharwaney Ruling created some uncertainty because, being a Court of First Instance decision, arguably, Chan Pui Ki (confirming a discount rate of 4.5%), being a Court of Appeal decision, prevailed over it. We opined that the position was unlikely to become clear until the matter was again tested in the Court of Appeal and the Court of Appeal had ruled on the same.
Chan Wai Ming v Leung Shing Wah CACV 266/2013 (“the Chan Wai Ming Ruling”)
The Court of Appeal has now ruled on the issue in the Chan Wai Ming Ruling delivered on 3 July 2014, holding that the Justice Bharwaney Ruling is correct. In this case, the Plaintiff, a back seat motorcycle passenger, aged 60 at the time of the trial, suffered serious head injuries in a road traffic accident. The Court of First Instance found the driver of the motorcycle 25% liable for the accident. In respect of future loss of earnings, the Plaintiff was awarded HK$1,546,930, that being an annual base figure of HK$193,366.20, to which a multiplier of 8 was applied.
The Defendant’s appeal to the Court of Appeal on liability was dismissed. The Plaintiff cross-appealed on quantum, arguing that a multiplier of 9.13, rather than 8, should have been applied to future loss of earnings. The 9.13 multiplier was based on actuarial tables (Personal Injury Tables Hong Kong 2013) in which the appropriate multiplier based on the 1% discount rate was 9.13 for a man of 60 years of age with a working life of another 10 years. The Court of Appeal allowed the Plaintiff’s cross-appeal, adjusting the multiplier to 9.13 and thereby increasing the damages for future loss of earnings to HK$1,765,433 (i.e. HK$193,366.20 x 9.13).
The Court of Appeal held that in the Justice Bharwaney Ruling, the Learned Judge had correctly addressed the law and facts, which amply demonstrated that the assumed 4.5% net rate of return was simply not achievable in present day Hong Kong, and that the only issue was whether the decision in Chan Pui Ki, which was binding on Mr Justice Bharwaney and also on them, should be departed from on the basis that it was plainly wrong.
Although the Court of Appeal recognized that it had to exercise great caution before departing from Chan Pui Ki, which has been followed since 1996 in Hong Kong, it held that given Hong Kong’s great economic change since then, holding on to the conventional multiplier approach based on a discount rate of 4.5%, failed to provide full compensation to the victim because this notional return does not accord with the economic reality of present day Hong Kong. Accordingly, the Court of Appeal departed from Chan Pui Ki and adopted the new approach in the Justice Bharwaney Ruling.
The Court of Appeal said that the issue of the appropriate discount rate was bound to resurface time and again (i.e. because of economic changes) and the only solution in the long term is to introduce legislation similar to the United Kingdom’s Damages Act 1996 (referred to in our October 2012 Client Alert), which allows the Lord Chancellor to prescribe a rate of return from time to time in order to meet changing economic conditions. The Court of Appeal recommended that such legislation be introduced in Hong Kong without further delay. Further, the Court of Appeal suggested that structured settlements by way of periodical payment orders (also referred to in our October 2012 Client Alert), which are commonly used in the United Kingdom and ensure that different rates of return are taken into account at different times, are also worth looking into by Hong Kong’s personal injury practitioners.
As mentioned in our October 2012 Client Alert, the most significant impact of lower discount rates is for cases involving seriously injured plaintiffs, where damages for future losses will increase significantly. Accordingly, insurers must review their current reserves and consider the need to adjust premiums, if they have not already done so.