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Smith v Manchester restored to centre stage?

03 August 2015
The Court of Appeal ruling in Billett v Ministry of Defence is a favourable decision for defendants facing claims for future loss of earnings in cases of lower levels of disability. In this article Daniel Clegg analyses the topic generally, the issues raised in this particular case, the rationale behind the judgment, and the implications for insurers.

Background

Claims for disadvantage on the open labour market
In the 1970s the courts developed a new head of loss relating to earnings in addition to the traditional claims for past loss of earnings and loss of future earning capacity. The Court of Appeal decision in Smith v Manchester Corporation (1974) became the authority for this new head of loss, the aim of which was neatly explained by Hughes LJ in Ronan v Sainsbury’s Supermarkets Ltd & Anor (2006):

"It is an award for a contingent future loss, in the event of the claimant losing his current job, where as a result of the accident, he would then be at a handicap on the open labour market at which he would not have been but for the accident"

This head of loss recognised that even if a claimant’s injury had no effect on the claimant’s level of earnings, he could still be at a disadvantage if he were to find himself on the open labour market. In Smith v Manchester the Court stated it could not calculate this award by reference to a multiplier/multiplicand approach. It looked at matters "in the round and made a general assessment". The later case of Moeliker v A. Reyrolle & Co Ltd (1977) refined the criteria; there must be a real and substantial risk the claimant would lose their current job before the end of their working life. The convention became to allow an award of between 6 and 24 months’ net annual earnings to reflect the additional amount of time a claimant might have to spend looking for a job.

The publication of the 6th edition of the Ogden Tables in 2007 introduced a new methodology to calculate this head of loss. This involved calculating the earnings the claimant would have received if he had not been injured (uninjured earnings), and then deducting the earnings which the claimant would actually achieve in his injured state (injured earnings). These two sums would be calculated using the Ogden Tables, and the multipliers for each calculation would subject to a ‘reduction factor’ determined by reference to a new set of Tables taking into account, age, educational attainment, disability and employment status.

A person would be classified as disabled if all three of the following criteria were met. The claimant must:

i) Have an illness or disability expected to last for over a year, or a progressive illness.

ii) Satisfy the Equality Act definition that the impact of the disability limits the ability to carry out normal day to day activities.

iii) Have a condition which affects either the kind or the amount of paid work they can do.

Paragraph 45 of the Explanatory Notes to the tables suggested that where this methodology is used “there will usually be no need for a separate Smith v City of Manchester award”.

Frantic calculations followed the publication of the new Ogden Tables and it became clear that the methodology would produce significant sums even where the level of the claimant’s annual earnings had not been affected by the accident.

McGregor on Damages predicted the demise of the Smith v Manchester award and the latest (19th) edition points out that “No reported cases of Smith v Manchester later than the arrival of the new Ogden discount factors have appeared…” Until now that is.

Facts and first instance findings

In February 2009 John Edward Billett was aged 23, and a trained driver in the Royal Logistics Corps of the British Army. He suffered a non-freezing cold injury (NFCI) to his feet after being exposed to freezing weather and snow for 6 days in a field exercise. It was agreed that the Ministry of Defence was liable for 75% of damages caused by the NFCI.

The NFCI caused the claimant to be more vulnerable to cold weather than persons who had not been injured in that way. The claimant left the British Army in 2011 for reasons unconnected with the NFCI and obtained employment as an HGV driver. It was accepted that his injuries had less impact on his work activities than on his leisure activities; the unchallenged expert medical evidence of Major General Craig, formerly of the Royal Army Medical Corps, was "He seems to be settled in his present job and his condition is not causing him problems".

On the claimant’s own evidence the only problem he encountered at work was difficulty pulling down the shutters of his lorry in cold weather. The employment experts prepared a joint statement in which they agreed that the claimant "has a disadvantage on the labour market for some occupations… he will have to avoid jobs that require him to work outside and therefore will be more limited in terms of choice".

At first instance the defendant invited the court to assess the claimant’s future earning capacity on the basis of Smith v Manchester. Mr Andrew Edis QC sitting as a High Court Judge rejected this invitation. He found that the claimant fulfilled the definition of disabled "but only just" and therefore that the correct method of assessing the future loss of earnings was under the Ogden Tables. He did however adjust the reduction factor for injured earnings upwards to the mid-point between the ‘disabled’ and ‘non-disabled’ positions. He awarded the claimant £99,062.04 for future loss of earnings.

Court of Appeal

The defendant appealed the award for future loss of earnings on three grounds:

i) The claimant was not ‘disabled’ within the definition set out in the Ogden Tables.

ii) Even if the claimant was ‘disabled’, Smith v Manchester would provide a better method of assessing damages than the Ogden Tables in this particular case.

iii) If the court was correct to use the Ogden Tables the judge erred by taking too low a reduction factor for ‘injured’ earnings.

Jackson LJ, Patten LJ and McFarlane LJ allowed the defendant’s appeal with Jackson LJ giving the lead judgment:

On the question of disability, emphasis was placed on the facts accepted by the trial judge: in cold weather the claimant could not manage DIY, gardening, play rugby, swim or play with his children. The trial judge was therefore entitled to find that the injuries had a substantial adverse effect on the claimant’s ability to carry out normal activities, and to conclude, the claimant was disabled.

There was greater force in the defendant’s argument on the second ground. The reduction factors utilised by the Ogden methodology are extremely wide, covering a very broad spectrum. If the claimant’s disability were to be classified within a scale of 1 to 10, it would fall towards the bottom, i.e. within 1 to 3. To attempt to determine the reduction factor in these circumstances would be “no more scientific than the broad brush judgment the court makes in carrying out a Smith v Manchester assessment”. Whilst the Ogden methodology of Tables A to D will in many cases be a valuable aid in valuing loss of earnings, this was not such a case for the following reasons:

i) Disability covers a broad spectrum, and the claimant was on the outer fringe.

ii) The disability affected the claimant’s ability to work much less that his activities outside work.

iii) There was no rational basis for determining how the reduction factor should be adjusted.

In view of the above, the best the court could do was to make a broad assessment of the present value of the claimant’s likely future loss as a result of handicap on the open labour market, following Smith v Manchester. In this case an appropriate award was two years’ earnings, rounded up to £45,000.

Jackson LJ further commented in response to the third ground that he would certainly accept that the reduction factor allowed by the first instance judge was too low; it should have been much closer to the uninjured reduction factor. This approach too would have produced an award in the region of two years loss of earnings, and therefore the same conclusion as that reached by the Smith v Manchester route.

Implications

It was previously thought that Ogden 7 was the likely starting point for assessing claims for future loss of earnings. The first instance decision in Billett suggested that even minor disability qualified a claimant to recover on a multiplier/multiplicand basis, albeit with the discount factor for residual earnings adjusted upwards to reflect lower level disability. This resulted in insurers being exposed to perversely high awards.

Jackson LJ’s judgment directs the judiciary and practitioners to place less emphasis upon the Ogden methodology where disability is minor. Where a claimant can be categorised towards the lower end of disability, the broad brush approach of Smith v Manchester is appropriate. He has also helpfully affirmed that Smith awards typically range from between 6 to 24 months loss of earnings. If this guidance is applied by the courts nationwide then awards will be significantly lower than those allowed under the Ogden 7 approach.

Insurers would be well advised to review reserves held against claims for future loss of earnings by those with low level disabilities, and to consider whether Part 36 settlement offers based at least in part on the Ogden methodology should be withdrawn or varied.

Going forward, insurers should carefully consider with their medical experts the nature of a claimant’s disability, and specifically how this affects the claimant’s ability to work. There will be better prospects of avoiding exposure to an Ogden 7 type award where the claimant is categorised within the lower end of the spectrum of disability. In this case, Jackson LJ saw that position would be reached if the claimant was within a disability level of 1 to 3 on a scale of 1 to 10, but even if another claimant is marginally above that level it might be worth using the same argument. It is worth noting that although here the Court of Appeal made an award of 24 months’ earnings, this is the top end of the range and insurers should not feel pressured into agreeing an award of 24 months to avoid an Ogden 7 calculation. It is of course also important to consider the extent to which an injury, however serious, will actually affect a claimant’s job prospects, so for example a serious ankle injury suffered by a professional with no physical duties should not result in a significant award for disadvantage on the open labour market.

Victoria Wass of the Ogden Working Party

The judgment is at odds with the view of Victoria Wass of the Ogden Working Party. Her article published in JPIL earlier this year, but prior to the Court of Appeal’s judgment, put forward the proposition that the claimant in Billett was not ‘disabled’, and that the first instance decision was therefore wrong. However she felt that to compensate the claimant accurately, adjustments could have been made by reference to other characteristics such as age or educational attainment within tables A to D. For example, she highlighted that a claimant could artificially be deemed to be older or alternatively of lower educational attainment, rather than disabled. Whilst these notions are not specifically dealt with in the judgment, it is implicit that he does not favour unscientific and arbitrary adjustments to the reduction factor over the broad brush approach of Smith v Manchester.

While it may be understandable that a prime supporter of the Ogden approach, Victoria Wass, sees room for continued use of it in even in a lower disability case such as Billett, albeit in an adapted form, the approach of the Court of Appeal is to place less reliance on Ogden, and instead to turn to more traditional tools such as those created by the same court 41 years ago in Smith v Manchester.

Within this decade the question was being asked as to what role was left for the Smith v Manchester approach in future loss of earnings claims, amidst the argument adopted by claimants that the more scientific approach from Ogden should be followed, an effect of which was to raise significant concerns about increasing claims costs. We see the judgment in Billett as restoring much needed balance. Clearly, the Smith v Manchester approach is here to stay. The new judgment clearly makes it now the preferred approach in cases of lower levels of disability, but we would expect it to have a broader approach in returning Smith v Manchester to centre stage in future loss of earnings claims more generally.

Further Reading

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