A lifetime commitment
Jennifer Stone , Nick Leech , Andrew Sands and Nick Martin reflect on the implications of the change in the discount rate.
In order to understand the current discount rate, it is useful to appreciate what has led us to this point. For a large portion of the last century, lawyers and judges were reluctant to utilise consistent calculations for the compensation for future losses. This created great uncertainty and arguably unfairness in awards of damages. As stated by Lord Diplock in Cookson v Knowles :
The conventional method of calculating it (future loss) has been to apply to what is found upon the evidence to be a sum representing ‘the dependency’ (multiplicand), a multiplier representing what the judge considers in the circumstances, particularly in terms of a deceased, to be an appropriate number of years’ purchase. In times of stable currency the multipliers that were used by judges were appropriate to interest rates of 4% to 5% whether the judges using them were conscious of this or not.
The use of a 4 to 5% discount rate was based upon gross investment returns in equities in very different economic conditions to those we find ourselves in today. Lawyers who were in practice at the time state that a ceiling of 18 was thought by the judiciary to be appropriate to a whole life multiplier.
As also stated by Lord Diplock: … the likelihood of continuing inflation after the date of trial should not affect either the figure for the dependency (multiplicand) or the multiplier used. Inflation is taken care of in a rough and ready way by the higher rates of interest obtainable as one of the consequences of it, and no other practical basis of calculation has been suggested that is capable of dealing with so conjectural a factor with greater precision.
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