2006 Chapter 29

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     These notes refer to the Compensation Act 2006 (c.29) which received Royal Assent on 25 July 2006

COMPENSATION ACT 2006

     EXPLANATORY NOTES

INTRODUCTION

     1.     These explanatory notes relate to the Compensation Act 2006 which received Royal Assent on 25 July 2006. They have been prepared by the Department for Constitutional Affairs in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

     2.     The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given.

OVERVIEW

     3.     The Compensation Act contains provisions in relation to the law on negligence and breach of statutory duty, damages for mesothelioma, and the regulation of claims management services.

     4.     The explanatory notes are divided into parts reflecting the structure of the Act. In relation to each Part, there is a summary and background section. Commentary on particular sections is then set out in number order, with the commentary on the various schedules included with the section to which they relate.

     5.     The Act is divided into 3 parts:

Part 1: Standard of Care

• Part 1 contains provisions relating to the law of negligence, breach of statutory duty and damages for mesothelioma.

Part 2: Claims Management Services

• Part 2 contains provisions relating to the regulation of Claims Management Services.

     Part 3: General

• Part 3 contains technical provisions including provisions about commencement and extent.

PART 1: STANDARD OF CARE

SUMMARY

     6.      Part 1 of the Act contains provisions relating to the law on negligence, breach of statutory duty and damages for mesothelioma.

BACKGROUND

Negligence and Breach of Statutory Duty

     7.     The purpose of this provision is to address what was suggested by the Better Regulation Task Force (BRTF) report of May 2004 (Better Routes to Redress) to be a common misperception, that can lead to a disproportionate fear of litigation and consequent risk-averse behaviour.

8.     Under the current law, for a claim in negligence or for breach of a statutory duty involving a standard of care to succeed there must be a duty of care owed by the defendant to the claimant; a breach of that duty by the defendant; and loss or injury suffered by the claimant which is causally connected with the breach. Section 1 concerns a particular aspect of the current law, relating to the second component: whether there is a breach of the duty of care.

     9.     The question whether there has been a breach of the duty of care involves two elements: how much care is required to be taken (the standard of care) and whether that care has been taken. The ordinary standard of care is "reasonable care"; and the question whether or not that standard has been met - whether reasonable care has been taken - is a question of fact for the court to decide, having regard to all the circumstances of the case. What amounts to reasonable care in any particular case will vary according to the circumstances. In some cases, what would be required to prevent injury of the kind suffered may be such that to demand it of the defendant would be to demand more than is reasonable.

     10.     This provision is intended to contribute to improving awareness of this aspect of the law; providing reassurance to the people and organisations who are concerned about possible litigation; and to ensuring that normal activities are not prevented because of the fear of litigation and excessively risk-averse behaviour.

     11.     This provision is not concerned with and does not alter the standard of care, nor the circumstances in which a duty to take that care will be owed. It is solely concerned with the court's assessment of what constitutes reasonable care in the case before it. It only affects statutory duties which involve a standard of care, such as those owed under the Occupiers' Liability Acts of 1957 and 1984. It does not extend to other forms of statutory duty, such as cases where there is an absolute statutory duty involving strict liability in the event of failure; cases which concern what is reasonable in a context other than carelessness; or cases where infringement of a right is actionable as a breach of statutory duty which does not depend on carelessness.

     12.      Part 1 also contains a provision to the effect that in claims in negligence or breach of statutory duty, an apology, offer of treatment or other redress shall not of itself amount to an admission of liability.

     Damages for Mesothelioma

13.     In the 2002 case of Fairchild v Glenhaven Funeral Services Ltd and others [2002] UKHL 22, the House of Lords decided that a person who had contracted mesothelioma after wrongful exposure to asbestos at different times by more than one negligent person could sue any of them, notwithstanding that he could not prove which exposure had actually caused the disease - because all had materially contributed to the risk of him contracting the disease. Fairchild did not resolve whether liability should be joint and several, although it was presumed by the parties that this would be the rule and this was the approach taken in practice. However, in Barker v Corus UK Ltd (and conjoined cases) [2006] UKHL 20, the House of Lords decided that the damages were instead to be apportioned among those responsible for the wrongful exposure according to their relative degree of contribution to the chance of the person contracting the disease.

14.     That decision did not impose a limit on the damages which could be recovered from those responsible for the exposure to asbestos. But it did mean that the risk of any of them being insolvent and unable to pay the appropriate share would fall on the claimant, and that in practice the claimant would have to trace all relevant defendants, as far as this was possible, before liability could be apportioned and full compensation paid, or alternatively to issue multiple claims to recover damages on a piecemeal basis. The practical effects of this decision (which their Lordships were not asked to consider) were that claims could take much longer to be concluded, and would be much more difficult and time-consuming for claimants in circumstances where they and their families are already under considerable pain and stress. The Act reverses the effects of the Barker judgment to enable claimants, or their estate or dependants, to recover full compensation from any liable person. It will then be open to the person who has paid the compensation to seek a contribution from other negligent persons.

15.     The Act also confers a power for HM Treasury to make provisions that would facilitate the speeding up of payment of claims to mesothelioma victims. These provisions would enable responsible persons to claim money back from the Financial Services Compensation Scheme in specified circumstances (that is, in circumstances in which previously only the claimant would have had such a right), when another responsible person and their insurer are both insolvent and thus unable to pay their own share of compensation payments.

COMMENTARY ON SECTIONS: PART 1

Provisions relating to the law of negligence and breach of statutory duty

Section 1: Considering a claim in negligence or breach of statutory duty

16.     Section 1 provides that in considering a claim in negligence or breach of statutory duty, a court may, in determining whether the defendant should have taken particular steps to meet a standard of care (whether by taking precautions or otherwise), have regard to whether a requirement to take those steps might prevent an activity which is desirable from taking place (either at all, to a particular extent, or in a particular way), or might discourage persons from undertaking functions in connection with the activity.

17.     This provision reflects the existing law and approach of the courts as expressed in recent judgments of the higher courts.

Section 2: Apologies, offers of treatment or other redress

18.     Section 2 provides that an apology, an offer of treatment or other redress shall not of itself amount to an admission of negligence or breach of statutory duty. This provision is intended to reflect the existing law.

Section 3: Mesothelioma: Damages

     19.     Section 3 contains provisions establishing joint and several liability in cases where a person has contracted mesothelioma as a result of being negligently exposed to asbestos.

20.     Subsection (1) sets out the conditions that must be satisfied before the substantive provisions of the section will apply. The conditions are that someone contracts mesothelioma from exposure to asbestos, that they were exposed to asbestos as a result of negligence by a person (defined as the 'responsible person') and that it is not possible to prove whose negligent act caused them to become ill. Paragraph (d) indicates that the final condition is that the responsible person must be liable in tort.

     21.     Subsection (2) provides that where the conditions in subsection (1) are met, the responsible person is liable for all of the damage caused by the mesothelioma. The provision establishes that it makes no difference whether or not someone else also could have caused the disease; whether the person could have contracted the disease from environmental exposure; or whether the responsible person would not be liable in tort for some of the periods of exposure. Paragraph (b) indicates that, if there is more than one responsible person, the liability is joint and several. That means that the victim (or any dependants if the victim is dead) may proceed against any of the responsible persons and that any person proceeded against is responsible for paying the full amount of compensation, and for recovering contributions from the others.

     22.     Subsection (3) confirms that contributions from other responsible persons may subsequently be sought by the responsible person who has paid the compensation (or by any who have jointly done so). The subsection also makes clear that if the victim is found to have negligently exposed himself to asbestos then the damages may be reduced accordingly under the principle of contributory negligence (as is currently the case).

     23.     Subsection (4) provides that a court shall, when deciding the level of contributions, have regard to the relative lengths of exposure, unless the responsible persons agree to approach the apportionment differently or the court thinks another approach is more appropriate. This will assist parties in agreeing the basis on which contributions are to be made without going to court.

     24.     Subsection (5) makes it clear that the provision covers failure to protect someone from exposure to asbestos.

     25.     Subsection (6) makes provision in relation to the application of the section in Scotland.

26.     Subsections (7) to (11) confer power on Her Majesty's Treasury to make regulations about the provision of compensation to a responsible person or an insurer of a responsible person in specified circumstances. These provisions would enable responsible persons to claim money back from the Financial Services Compensation Scheme when a liable employer and insurer are both insolvent. The power includes the ability to deal with situations arising prior to the establishment of the Financial Services Compensation Scheme that were settled under the Policyholders Protection Act 1975. The provisions would only come into effect once Treasury has laid the necessary regulations and the FSA has made the relevant rules. However, the power provides that rules could permit the liable party to claim contributions in respect of claims dealt with from the date of Royal Assent.

PART 2: CLAIMS MANAGEMENT SERVICES

SUMMARY

     27.      Part 2 of the Act sets out the framework for the regulation of claims management services.

     BACKGROUND

     28.     The Better Regulation Task Force (BRTF) report: Better Routes to Redress published in May 2004 found that the "compensation culture" is a myth but that it is a damaging myth that needs to be tackled. The BRTF identified the activities of claims intermediaries as contributing to a 'have a go culture' and recommended that claims intermediaries should be subject to statutory regulation, if self-regulation did not work.

     29.     One of the concerns identified by the BRTF was that while there were established complaints mechanisms and bodies to help people who are unhappy with the way they have been treated by solicitors or insurers, there has been no clear-cut equivalent in the case of claims intermediaries. It has been suggested that as a result, more claims for redress have been brought against solicitors and insurers because there has been no regulatory way to proceed against anyone else.

     30.     The Government published a consultation and responses paper on the simplification of conditional fee agreements (CFAs) in June 2004 Making Simple CFAs a Reality which included a discussion of the widespread concern over claims intermediaries' activities and work underway to try to produce a self regulatory solution. The Government responded to the BRTF's report in November 2004 accepting the recommendation that regulation of claims intermediaries should be considered if self-regulation failed.

     31.     The legislative framework is flexible and allows the Secretary of State to designate a body to regulate claims management services, to establish a body to regulate (where he thinks that no existing body is suitable for designation) or to regulate himself. The Act provides the outline regulatory framework to authorise providers who would be required to comply with rules and codes of practice. The Act also includes power for the Regulator to investigate unauthorised activities and to prosecute those who try to evade regulation.

     32.      If the Secretary of State designates a body to regulate claims management services he will retain oversight responsibility for the body. He will have the power to issue directions, provide guidance, require the body to try to meet regulatory targets and to provide information on its regulatory responsibility. It is anticipated that the regulation of claims management services will in due course be integrated into the proposed new regulatory framework for legal services set out in the Draft Legal Services Bill (Cm 6839).

COMMENTARY ON SECTIONS: PART 2

     Section 4: Provision of regulated claims management services

     33.     This section prohibits the provision of regulated claims management services by those who are not authorised, exempted from authorisation or subject to a waiver, or an individual acting otherwise than in the course of a business. Subsection 1(d) makes it clear that the prohibition does not apply to individuals who offer claims management services on a voluntary basis (for example a friend offering advice on a claim for compensation). It would, however, apply to voluntary or not-for-profit organisations (although not to individual volunteers providing their services through such an organisation).

     34.     Subsection 2 defines "authorised person" as a person authorised by the Regulator. This would also allow the Regulator to authorise claims management companies (as "person" also applies to a body corporate or unincorporate (Schedule 1 to the Interpretation Act 1978)). Thus employees or members of a company or other organisation would be covered by the authorisation granted to the 'parent' company or organisation for which they are providing claims management services, avoiding the need for specific authorisation of each individual (natural) person. This subsection also defines claims management services as "advice or other services in relation to the making of a claim". The claim may be for compensation, restitution, repayment or other remedy or relief in respect of loss or damage, or in respect of an obligation - whether pursued through the courts or by other means (for example the Employment Tribunals, Criminal Injuries Compensation Scheme or complaints to insurers or the Financial Ombudsman, about the mis-selling of financial products such as endowment policies). Only those claims management services that the Secretary of State prescribes by order under section 4(2)(e) will be subject to regulation. The Secretary of State can therefore target regulation in areas where he considers there to be a particularly high risk to consumers.

     35.     Subsection 3 gives examples of activities which constitute the provision of services (where they are connected with a claim). The list, which is not exhaustive, includes financial services (for example assisting with the purchase of insurance or loans); legal representation (for example acting on a claimants behalf in pursuing a claim); referring or introducing one person to another (for example referring a claim to a solicitor); and making inquiries (for example contacting witnesses in the course of investigating a claim). The provision of advice does not extend to the preparation or giving of evidence. For example, if a person were asked to give evidence in a personal injury claim (whether or not expert evidence) this would not amount to providing claims management services.

     36.     Subsection 4 sets out the circumstances in which, for the purposes of sub-section 1(d), an individual acts in the course of a business. Individuals acting in the course of employment or who otherwise receive or hope to receive reward (directly or indirectly) as a result of the provision of services will need to apply for authorisation unless they are exempt or subject to a waiver. Individuals who are not acting in the course of a business will fall within sub-section 1(d) and will not need to be authorised.

37.     Subsection 5 provides that the Secretary of State may by order provide that a claim for a specified benefit shall be treated as a claim for the purposes of this Part. Such an order would allow claims management services provided in relation to specified benefits to be regulated in an order under subsection 2(e).

     38.     Subsection 6 requires that the Secretary of State only specify a benefit under subsection 5 if it appears to him to be a United Kingdom social security benefit designed to provide compensation for industrial injury.

     Section 5: The Regulator

     39.     Subsection 1 permits the Secretary of State to designate by order an existing individual or body to carry out regulatory functions, including:

-     authorising persons to provide claims management services,

-     regulating the conduct of authorised persons (for example by prescribing mandatory rules and codes of practice),

-     other functions which are conferred on the Regulator by or under Part 2 of the Act (for example additional functions which the Secretary of State specifies in regulations under section 9).

     40.     Subsection 2 sets out the criteria that must be met before the Secretary of State may designate a person as the Regulator. The Secretary of State must satisfy himself (under subsection 2(a)), that the individual or body is competent to carry out the regulatory functions. In considering whether a person meets the criteria, it is likely that the Secretary of State will take into account a wide range of possible factors including:

-     an appropriate infrastructure,

-     suitable internal governance arrangements,

-     adequate financial and staffing resources,

-     appropriate regulatory policies.

     41.     The Secretary of State must also satisfy himself that the proposed Regulator has made arrangements to ensure that there is clear separation between its regulatory functions and any other functions undertaken (such as representative functions). In addition, he must be satisfied that the proposed Regulator will promote the interests of persons using regulated claims management services in order to increase consumer confidence in the sector. This would include:

-     setting and monitoring standards of competence and conduct for authorised persons (for example by prescribing rules of conduct and a code of practice);

-     promoting good practice by authorised persons, particularly the provision of information about charges and other matters (such as the availability of free, alternative means of pursuing a claim);

-     promoting practices likely to facilitate competition between claims management companies (for example by ensuring rules of conduct are not anti-competitive), which should result in more consumer choice and better value for money; and

-     ensuring that consumers are protected (including putting in place a mechanism for handling complaints where consumers are dissatisfied with the service they have received).

     42.     Subsection 3 gives the Secretary of State the power by order to create a new body (for example a non-Departmental public body) which he may then designate as the Regulator. This power may only be exercised where the Secretary of State thinks that no existing body is suitable for designation under subsection (1).

     43.     Subsection 4 places obligations on the Regulator, including the requirement to comply with any directions given to him by the Secretary of State, and to have regard to any guidance or code of practice issued to him. The Regulator must also try to meet any targets set by the Secretary of State (for example targets relating to the handling of complaints). The ability to assess performance against targets would provide the Secretary of State with an indication of the body's effectiveness as the Regulator. The Secretary of State could also require the disclosure of other information and reports. For example, he might request an annual report on the Regulator's performance, a copy of any business plan or annual budget estimate or information relating to a specific regulatory activity. The Regulator must not release information to the Secretary of State where disclosure would contravene other legislation such as the Data Protection Act 1998.

     44.     Subsection 5 requires the Secretary of State to lay before Parliament any code of practice issued to the Regulator.

     45.     Subsection 6 gives the Secretary of State the power to pay grants to the Regulator (for example to assist with the costs of establishing the new regulatory regime or subsidising operational costs). Grants may be subject to terms and conditions, including terms as to repayment.

46.     Subsection 7 makes it clear that the powers and duties of the Regulator may be exercised or undertaken by others acting on his behalf or with his authority.

     47.     Subsection 8 makes it clear that the Secretary of State may by order revoke an individual or body's designation as Regulator. The decision to revoke designation would only be taken if the Regulator were persistently failing to carry out his regulatory functions effectively and efficiently, and after careful consideration of the circumstances that led to the failure.

     48.     Subsection 9 requires the Secretary of State to exercise functions of the Regulator if no other body or individual is designated, or as an interim measure until a new body is established.

     49.     Subsection 10 gives the Secretary of State the power to transfer by order a function of the Regulator to himself, either for a specified period or indefinitely. For example, if the designated Regulator failed to deal adequately with consumer complaints, the Secretary of State could transfer these functions to himself. This would ensure that the Secretary of State had the ability to protect consumers (without revoking designation) in the event that the Regulator failed to properly carry out particular functions.