Faculty calls for discount rate reform, to prevent injustice

Earlier this year, the rate - a key factor in fixing damages awards and negotiating settlements - was reduced from 2.5 per cent to –0.75 per cent, the first change for 15 years.

The Faculty said such a “massive” change without any corresponding recent alteration in market conditions strongly suggested that there ought to have been a change in the rate much earlier.

In response to a joint consultation by the Ministry of Justice and the Scottish government on how the rate should be fixed in future, the Faculty stated: “We have no reason to think that the existing legal framework does not justify the new discount rate but the effect of this abrupt and huge change is to create real injustice for both pursuers and defenders.

“There is a significant difference between what pursuers would have received and what defenders would have had to pay out before and after the change, and that will be most striking for those whose settlements were closest in time either side.”

The rate is set by the Lord Chancellor in England and Wales, and by the Scottish ministers in Scotland.

The Faculty said it wanted to see reform of the present law.

“There should be regular review by a body independent of the government. Regular review would allow financial conditions to be monitored and prevent large step changes such as have occurred with the most recent announcement.

“There is a strong perception that government is not impartial because it pays damages in many of the higher value cases. There is therefore a need for an independent body to take the responsibility for setting the discount rate…A review every two years would provide certainty and reduce the risk of a sudden and major change in the discount rate as has just occurred.”

Elsewhere in the response, the Faculty supported greater use of periodical payment orders (PPOs). Currently, Scottish courts, unlike those elsewhere in the UK, have no power to impose an order. However, PPOs are used in out-of-court settlements.

“In catastrophic cases involving children requiring significant future care, parents are keen for a PPO,” the Faculty said.

“If a case is settled on a lump sum basis and the child lives longer than expected, the family will run out of funds to pay for future care. This tends to be the main factor taken into account when agreeing a PPO. Understandably, most parents want their child to have access to an annual payment so that care for life is guaranteed.”

Cerebral palsy cases where there was a dispute over life expectancy were the most common claims to settle by PPO. If the case were settled on a lump sum basis and the child died earlier than expected, it could be thought that there had been over compensation, and under compensation if the child lived longer than expected.

“We do not consider that the current law in Scotland (relating to PPOs) is satisfactory. There should be far greater use of PPOs, particularly where life expectancy is in dispute. In the higher value claims, a lump sum award is very unlikely to provide the right level of compensation and there is a significant risk of substantial over or under compensation,” said the Faculty.