This is an appeal in judicial review proceedings brought to challenge a decision of the First-tier Tribunal (“FTT”) in relation to a claim brought on behalf of the appellant, LHS, under the Criminal Injuries Compensation Scheme 1990 (“the Scheme”). Mr Justice Jay dismissed the claim for judicial review.

The Scheme is an ex gratia compensation scheme promulgated by the government in exercise of prerogative powers. It was replaced by a compensation scheme made pursuant to primary legislation enacted in 1995. The particular issue of construction which is addressed on this appeal would not arise under the replacement scheme. The challenge to the decision of the FTT is brought by way of judicial review rather than by appeal to the Upper Tribunal for reasons to do with legislative transitional provisions which we do not need to consider.

The issue on the appeal is whether the Criminal Injuries Compensation Authority (“CICA”) which administers the Scheme, and the FTT in its turn, were correct to calculate a substantial lump sum payment to be made to the appellant under the Scheme in respect of injuries suffered by him by reference to a discount rate of 2.5% as prescribed in an order made by the Lord Chancellor in 2001 under section 1(1) of the Damages Act 1996, as applicable to claims for personal injury brought in the ordinary courts (“the 2001 Order”). This turns on the proper interpretation of the critical provision in the Scheme, namely paragraph 12, which sets out the basis on which an award of compensation is to be made: see below.

Mr Aldous QC for the appellant submits that the CICA and the FTT erred in law in applying the discount rate in the 2001 Order and that in doing so they have made an award which will leave the appellant severely under-compensated in relation to the injuries he has suffered. This is contrary to the object of the Scheme to provide full and fair compensation for injuries suffered as a result of relevant criminal acts.

The appellant was born in 1989. He suffered life changing injuries in July 1992 as a result of the gross negligence, amounting to criminal conduct, of his mother in leaving him unsupervised in the presence of an accessible bottle of methadone. In consequence, the appellant has suffered a severe brain injury which has rendered him significantly disabled in terms of his physical, neurological and neuropsychiatric condition. He will require care for the remainder of his life. He has normal life expectancy for a person of his age, being expected to live to well over 80.

On 26 March 1993 an application was made under the Scheme on the appellant’s behalf to the CICA. On 30 January 1997 the CICA accepted that he was eligible for payment of compensation under the Scheme. There was then a delay while detailed assessments were made of the appellant and expert evidence was prepared.

In March 2012 the CICA and those acting for the appellant agreed the quantum of the claim under the Scheme subject only to a dispute regarding the appropriate discount rate to be applied in relation to future losses in respect of costs of care and loss of earnings, to reflect the current receipt of money as compensation for such losses. The CICA made an interim payment of £4,498,335.58, calculated on the basis of a discount rate of 2.5%, being the rate set out in the 2001 Order. The final hearing was adjourned.

The adjourned hearing before the FTT took place on 26 September 2012, to address the outstanding issue of the discount rate to be applied. Expert evidence was adduced on behalf of the appellant, which was not challenged by the CICA, to the effect that if the 2001 Order was not treated as relevant guidance regarding the discount rate, and a fresh discount rate was devised looking at economic indicators as they stood in 2012 and by reference to principles laid down by the House of Lords in its discussion of the discount rate in Wells v Wells [1999] AC 345 , the relevant rate should be 0% in respect of price-related losses and minus 1.5% in respect of earnings-related losses.

Applying these discount rates instead of the 2.5% rate has a major impact on the compensation figure for a person in the position of the appellant, who suffers losses extending several decades into the future. Using these different discount rates, the compensation figure in the appellant’s case would be increased to £16,030,183. Mr Aldous emphasised that if one adopted the highly conservative approach to investment of a lump sum as identified in Wells v Wells, using index-linked government securities, the compensation fund for the appellant, as awarded by the CICA, would be exhausted by the time he reached his 48^th birthday.

However, the FTT concluded that the CICA had been right to apply the 2.5% discount rate in the 2001 Order. That is the rate which would have been applied by a court which awarded compensation by way of a lump sum award in a personal injury claim and paragraph 12 of the Scheme required the FTT to adopt the same approach. The FTT therefore confirmed as final the interim award which had already been made.

The appellant sought judicial review of the FTT’s decision, being granted an extension of time in which to do so. By his judgment below, Jay J dismissed the claim for judicial review and upheld the decision of the FTT. On his interpretation of paragraph 12 of the Scheme, its objective is “to achieve a similar level of financial outcome for the victim of a crime of violence as compared with the victim of a tortfeasor with a civil claim”: [50]. The appellant now appeals with permission granted by myself.

The Scheme is an ex gratia scheme “for compensating victims of violence”. According to paragraph 4 of the Scheme, so far as relevant, it allows for applications for ex gratia payments of compensation in cases “where the applicant … sustained in Great Britain … personal injury directly attributable to a crime of violence (including arson or poisoning) …”. For reasons which appear below, it is relevant to note that it is common ground that the Scheme does not apply in the Channel Islands.

Paragraphs 12 to 21 of the Scheme appear in the section headed “Basis of compensation”. In relevant part, paragraph 12 states:

“Subject to the other provisions of this Scheme, compensation will be assessed on the basis of common law damages and will normally take the form of a lump sum payment, although [the CICA] may make alternative arrangements in accordance with paragraph 9 above. …”

Paragraph 9 allows for payment of the amount of any award to trustees to be held on trust for an applicant and also provides that the CICA shall have general discretion to make special arrangements for the administration of an award of compensation. The relationship between para. 12 and para. 9 is not altogether clear, and there was some debate before us whether the CICA has a discretion to make an award for a structured payment regime involving periodical payments such as may be ordered by a court in England & Wales in a personal injury claim pursuant to the 1996 Act (a periodical payment order, or “PPO”). However, it is unnecessary to consider this question because it is common ground that the CICA was entitled (even if not bound) to make a lump sum compensation award in the appellant’s case pursuant to paragraph 12. The issue is what principles should govern the calculation of such an award.

Paragraphs 14 to 20 of the Scheme set out provisions which modify in various ways the approach to calculating a lump sum amount of compensation which would be followed by a court in a personal injury action, for instance in relation to bringing social security benefits into account (see paragraph 18).

Paragraph 21 provides:

“When a civil court has given judgment providing for payment of damages or a claim for damages has been settled on terms providing for payment of money, or when payment of compensation has been ordered by a criminal court, in respect of personal injuries, compensation by [the CICA] in respect of the same injuries will be reduced by the amount of any payment received under such an order or settlement. When a civil court has assessed damages, as opposed to giving judgment for damages agreed by the parties, but the person entitled to such damages has not yet received the full sum awarded, he will not be precluded from applying to [the CICA], but [the CICA’s] assessment of compensation will not exceed the sum assessed by the court. Furthermore, a person who is compensated by [the CICA] will be required to undertake to repay them from any damages, settlement or compensation he may subsequently obtain in respect of his injuries. In arriving at their assessment of compensation [the CICA] will not be bound by any finding of contributory negligence by any court, but will be entirely bound by the terms of the Scheme.”

Section 1 of the 1996 Act makes provision in relation to the “Assumed rate of return on investment of damages”. Section 1(1) confers power on the Lord Chancellor, after consultation, to prescribe the relevant rate of return “to be expected from the investment of a sum awarded as damages for future pecuniary loss in an action for personal injury” and requires a court to “take into account” that rate of return. The 2001 Order was made pursuant to this provision. It prescribes a discount rate of 2.5%. The Lord Chancellor issued a statement of his reasons for adopting that rate. The Scottish Executive has adopted the same discount rate. Section 1(2) provides that a court may take a different rate of return into account if any party to proceedings shows that it is more appropriate in the case in question.

The 1996 Act included provision for a court to make a PPO in personal injury proceedings in a court in England & Wales if the parties consented to this. With effect from 2005, a court has had power to make a PPO even if the parties do not consent. We were told that in cases where there is no significant question about the ability of a defendant or his insurer being able to satisfy their obligations to make periodical payments at dates in the future, it is usual in a case such as that before us involving continuing loss many years into the future for a PPO to be made by a court. This would be done by a court in preference to making an order for payment of a lump sum amount of compensation. Where a PPO is made, the court can adjust the periodical payments to take account of inflation and other economic circumstances as they vary from time to time. This relieves the court of the task of having to guess now at how inflation and other economic circumstances might fluctuate over time over many decades into the future, in order to fix upon a discount rate applicable now to take account of that.

However, it remains the case that sometimes a court has to award compensation in the form of a lump sum payment, e.g. if there is doubt that obligations under a PPO will not be met in future: see Harries v Stevenson [2012] EWHC 3447 (QB). Over the years since 2001, the continued appropriateness of using the discount rate in the 2001 Order has come increasingly into question as economic circumstances have changed and the arguments in favour of using a lower discount rate (leading to higher lump sum awards) have become stronger. Attempts were made pursuant to section 1(2) of the 1996 Act to persuade courts that it would be appropriate to use discount rates different from and lower than that in the 2001 Order on the grounds that these would result in a fairer award of damages to a claimant in line with the principle of full compensation applicable in a personal injury claim in tort.

But the courts consistently rejected these arguments, holding that in the general run of cases (including, in particular, cases involving loss which would be suffered over many years into the future) application of the discount rate in the 2001 Order did not infringe the common law principle of full compensation for a tort, despite changing economic circumstances. The courts consistently held that the discount rate in the 2001 Order should continue to be used in calculating lump sum awards of damages: see Warriner v Warriner [2001] EWCA Civ 81; [2002] 1 WLR 1703; Cooke v United Bristol Healthcare NHS Trust [2003] EWCA Civ 1370; [2004] 1 WLR 251; and Harries v Stevenson, supra. The courts recognised that the setting of a discount rate for a lump sum payment covering losses many years into the future is inevitably a rough and ready exercise. A claimant who receives a lump sum award is not obliged to invest it in the highly conservative manner discussed in Wells v Wells, and there may be ways of achieving far better rates of return on investment of a lump sum amount by using different investment strategies which could still be regarded as prudent, in which case a claimant might end up being over-compensated. Also, there are other advantages in terms of the certainty achieved by using a clear and settled discount rate, thereby assisting parties in their settlement negotiations and reducing the costs of dispute resolution. It is not necessary to dwell upon the reasoning of the courts in these cases, because it is common ground that if the appellant had brought a personal injury claim in court and had been awarded damages in the form of a lump sum, the court would have applied the discount rate in the 2001 Order in calculating the amount of the award.

The same would have been true if the appellant had suffered his injury in Scotland and had litigated in the courts there. In Tortolano v Ogilvie Construction Ltd [2013] CSIH 10 the Inner House of the Court of Session held that, absent special or exceptional features of a particular case, a court would be obliged to calculate a lump sum award of damages using the 2.5% discount rate in the 2001 Order, as adopted and endorsed by the Scottish Executive. It would not be permissible, pursuant to section 1(2) of the 1996 Act, to disapply that rate and use another. This is particularly important in Scotland because, as we were told, the provisions of the 1996 Act (as amended) in relation to the making of PPOs are not in force there.

On the other hand, where the 1996 Act does not apply, for instance in the Channel Islands, a court which is not constrained by the obligation in section 1(1) of that Act has greater freedom to assess for itself the up-to-date expert evidence regarding the discount rate which might be thought to be appropriate at the time it gives judgment. This is what happened in Simon v Helmot [2012] UKPC 5; [2012] 126 BMLR 73, a case concerning a personal injury claim brought in Guernsey. The Court of Appeal in Guernsey held that the discount rate in the 2001 Order should have been disregarded by the trial court and, on the available expert evidence and applying common law principles unaffected by the 1996 Act, a discount rate of 0.5% for price-related future losses and a rate of minus 1.5% for earnings-related future losses should have been used instead. The decision of the Court of Appeal was upheld by the Privy Council.

Mr Aldous for the appellant makes two submissions. First, he points out that section 1 of the 1996 Act only applies in relation to personal injury claims determined by a court and has no application according to its terms to a claim for compensation under the Scheme. The consequence, he says, is that the CICA and the FTT should have applied common law principles identified in Wells v Wells unaffected by the statute, as had happened in Simon v Helmot, and should have found on the undisputed expert evidence directed to economic circumstances in 2012 that the lower discount rates identified by the appellant’s expert witness should be applied in calculating the lump sum compensation payment in the appellant’s case. Secondly, in the alternative, Mr Aldous submits that even if the judge was right at para. [50] to interpret paragraph 12 of the Scheme to mean that the CICA and the FTT were to achieve a similar level of financial outcome for the victim of a crime of violence as compared to the victim of a tortfeasor with a civil claim, they should have sought to replicate more accurately what would be likely to happen in a civil claim. In the circumstances of 2012, if the appellant had brought a claim in the civil court for tort this would in all likelihood have resulted in the making of a PPO involving payments to be made in the future at a number of staging points. Mr Aldous says that this again means that the same lower discount rates identified by the appellant’s expert should be used to calculate the award, as these represent the best way to replicate the effect of such a PPO.

I do not accept either of these submissions. In my view, the first submission was rightly rejected by the judge, essentially for the reasons he gave. Mr Eadie QC for the CICA rightly accepts that section 1 of the 1996 Act and the 2001 Order made under it do not apply directly to compensation claims made under the Scheme. His argument, however, is that on its proper construction, paragraph 12 of the Scheme requires the CICA, when it decides to make a lump sum payment, to calculate that payment in the same way that a court adjudicating upon a civil claim in respect of the same loss would calculate a lump sum payment (subject only to the modifications in approach specified in paragraphs 14 to 21 of the Scheme). Since a court adjudicating on a civil claim in 2012 would have calculated a lump sum compensation amount using the discount rate in the 2001 Order, paragraph 12 requires the CICA to do the same. I agree with this construction of paragraph 12, which accords with the judge’s view.

There are a number of points which support this construction of paragraph 12, as follows:

I also reject Mr Aldous’s alternative submission. The proper construction of paragraph 12 of the Scheme is that when the CICA makes an award of compensation it is normally to do so by making a lump sum payment (as opposed to some kind of structured award), and that in doing that it is to seek to replicate what a court adjudicating on a civil claim and making a lump sum award would do (subject to the adjustments specified in the Scheme). A court making a lump sum award in 2012 would have calculated the amount of the award by applying the discount rate in the 2001 Order, so that is what the CICA was required to do.

The CICA was not required under paragraph 12 to try to fashion a lump sum award on some other basis. In particular, it was not required to fashion the lump sum award by attempting to replicate in financial terms some notional structured award in relation to losses extending into the future. That is far removed from anything a civil court would do when calculating the amount of a lump sum award of damages. It would involve an elaborate and complex exercise, replete with scope for argument and disagreement, entirely at odds with the intended practical and straightforward operation of the Scheme.

I also consider that Mr Aldous’s suggestion that the CICA should have proceeded in this way is fundamentally flawed. The point of using a selected discount rate when making a lump sum award of compensation in the present in relation to losses which will occur in the future is to arrive at an appropriate amount of an award reflecting the value of receipt of money in the present before the losses actually arise. Accordingly the need to use the discount rate in the 2001 Order cannot be sidestepped, as Mr Aldous contends, by imagining what a structured settlement involving staged payments in the future to reflect losses as they arise in the future might look like and then applying a different discount rate in relation to those notional future stage payments, as indicated by the appellant’s expert. The present value of the notional future stage payments ought to be no different from the present value of the future losses, for which those notional future stage payments are supposed to provide compensation. Since the appropriate discount rate in relation to the losses themselves, as would be applied by a court, is that in the 2001 Order, it cannot be said that going through the intellectual exercise proposed by Mr Aldous of imagining how a structured settlement might be devised to meet those losses would justify use of a different discount rate, more favourable to the claimant.

For the reasons given above, I would dismiss this appeal.

I agree.