Swift v Carpenter: short life expectancies and cliff edges

The much-anticipated judgment in Swift v Carpenter [2020] EWCA Civ 1295 provided a neat and just approach to the valuation of capital costs in accommodation damages claims. Helpfully the Court of Appeal provided an easy to apply formula for accommodation claims where claimants have longer life expectancies thereby providing much needed litigation certainty – and also substantially reducing potential expert costs in future cases. Whilst the most usual type of claims were addressed, the Court could not provide answers to all of the more complex capital accommodation claims which may come before trial judges in the years ahead.

Irwin LJ noted that the Court of Appeal’s guidance should not be regarded as a “straitjacket to be applied universally and rigidly”. One area in which the jacket may not fit is short life expectancy cases. The simple application of the Court’s reversionary interest formula to such claimants appears to be one area where the direct application of the guidance may be inappropriate. As stated by Irwin LJ:

“There may be cases where this guidance is inappropriate. However, for longer lives, during conditions of negative or low positive discount rates, and subject to particular circumstances, this guidance should be regarded as enduring.” [§210]

The Court has left open the possibility that a different approach may be required for short life expectancy cases, where the value of the reversionary interest, and therefore the deduction to the additional capital sum, will be much greater:

“It may be that different considerations and arguments could be applied to that category of case”. [§171]

To give an example, assume a claimant [“claimant A”] who is 82. A reasonable compromise on the life expectancy evidence is that she will live for another 7 years. As a result of negligence, she is paraplegic. Her present home, which she owns outright, is worth £425,000. The accommodation and care experts agreed that it is unsuitable and cannot be adapted. To buy a suitable property would cost £675,000. The accommodation experts agree on the need for further adaptations of the new property.

The formula devised in Swift provides the following calculation:

Capital shortfall: £250,000 (£675,000 minus £425,000)
Life expectancy: 7
Value of the reversionary interest: £250,000 times 1.05 to the power of – 7.06 = £177,670
Damages: £250,000 – £177,670 = £72,330.

In other words, “claimant A” would need to use other heads of claim to make up the shortfall. Since (given the advanced age of claimant A) there will not be any claim for loss of earnings, all the other damages will relate to her future needs, in care and case management, aids and equipment and therapies. The only damages not allocated to actual needs are her general damages for pain, suffering and loss of amenity (assume around £200,000).

This is a well-known problem: as the Court of Appeal recognised, it has been identified by McGregor on Damages and in the well-known case of Manna v Central Manchester University Hospital Trust [2017] EWCA CIv 12.

What might the solution be? One option is to rent, although that brings with it significant problems about security of tenure, obtaining the landlord’s permission to adapt and the often-exorbitant cost of renting somewhere suitable (particularly in London).

Another option is to seek financial assistance on the open market for a third party to buy a suitable property, allow it to be adapted, and to grant a life tenancy to the injured “claimant A”.

Mr Hough has found that financial advisers are able to source third parties willing to fund such provision. An agreement to pay the rent by way of a periodical payment order can provide absolute security for a lifetime. The disadvantages are that it could prove to be extremely difficult to move or downsize – and the solution eliminates any hope of a “windfall” capital sum for the injured person’s estate.

Some may not want to go down that road. They may want to leave the property as an inheritance for their children. For others rental may not be a workable solution.

Another unresolved problem is how to address the offset to be applied for a hypothetical uninjured claimant who would only have rented – or who would not have purchased a property until after the injured claimant’s life expectancy expires.

To take another example imagine a claimant [“claimant B”] now aged 10 who (a) has a life expectancy until aged 31 on the claimant’s expert view or to age 29 on the defendant view and (b) the accepted evidence is that probably the uninjured claimant B would have purchased a property aged 30. Assume a property purchase of £1,000,000 and share of property in any event of £400,000.

On the “claimant B” view of life expectation to age 31, the calculation would be:

Capital shortfall: £600,000 (£1,000,000 minus £400,000)
Life expectancy: 21
Value of the reversionary interest: £600,000 times 1.05 to the power of minus 21 = £215,365
Damages: £1000,000 – £215,365 = £384,635

However, were the Court to find that “claimant B” will only live until aged 29 – and the hypothetical “but for” claimant B would thereby never purchase a property in that time frame – the Swift calculation looks like this:

Capital shortfall: £1,000,000 (£1,000,000 minus £nil)
Life expectancy: 19
Value of the reversionary interest: £1,000,000 times 1.05 to the power of minus 19 = £395,734
Damages: £600,000 – £395,734 = £604,266.

The latter calculation with the shorter life expectancy increases the award by £384,635, creating a cliff edge for the longer living claimant that seems hard to justify on principle. Should in fact allowance be made for the rental costs to age 29 to reduce the claim? But that would wholly undermine the purpose of Swift to provide fair and reasonable compensation to a claimant in that, first, the rental offset may wipe out entirely the capital cost claimed, and, secondly, it is not comparing like with like: the reversionary interest offset is to prevent a claimant’s estate accruing a capital windfall. Rental expenditure is irrelevant to that calculation.

The answer may be to calculate in a wholly different way the offset of the property owned in any event for the short time the “but for” claimant B would have owned it. Doubtless there will be a more actuarially sound approach or one which accords more accurately with the real or notional reversionary interest market, but it is instructive to consider what happens to the calculation if one assumes no property offset until age 30 in the life expectation to age 31 example.

Capital shortfall: £1,000,000 (£1,000,000 minus £nil)
Life expectancy: 21
Value of the reversionary interest: £1,000,000 times 1.05 to the power of -21 = £358,942
Damages without any alternate property cost offset: £1,000,000 – £395,734 = £641,058.

But if one then offsets in a somewhat simplistic fashion the element from the alternate property:

Offset: £400,000
Period of time: 1 year
Notional reversionary interest offset: -£400,000 times 1.05 to the power of -1 = £380,952
Damages offset minus £400,000 plus £380,952 = minus £19,048 (one could then multiply that by 1.0513 to allow for accelerated receipt to equal £20,025)
This gives a total claim of £622,010

This approach avoids the cliff edge but would doubtless fall foul of both an analysis of the actual (or notional) reversionary interest market and actuarial review. However, it is meant simply to prompt further thought and discussion about how to approach this – and also the other remaining accommodation claim issues after Swift.

So watch this space – and the High Court (and Court of Appeal) – for another appearance of this vexed accommodation issue.