How much compensation should be paid to someone whose life is blighted after being wrongly accused or even convicted and jailed for murder?

Colin Stagg, who suffered years of abuse after being wrongly arrested and prosecuted for the murder of the model Rachel Nickell, was controversially awarded £706,000 last month. Whatever one’s view of the figure (the prosecution case against Stagg was thrown out and he was never convicted) — he is one of the last miscarriage-of-justice victims to benefit from a discretionary compensation scheme abolished without warning by the Government a month after he applied.

Barry George, acquitted of the murder of Jill Dando, the TV presenter, after two appeals and a retrial, is similarly seeking compensation — this time for eight lost years in prison. Unlike Stagg, who qualified for the discretionary scheme because his was an exceptional case, George will have to apply under the statutory scheme that could mean far lower awards.

The Government has legislated to to cap claims under that scheme at £500,000 for wrongful imprisonment of under ten years and £1 million for more than ten years to “better balance” it with payments made to victims of crime.

The Ministry of Justice says that the provisions are unlikely to be in force before the end of the year, so George, a convicted sex attacker, will slip under the wire; and there is no limit to what he could receive. The scheme has paid out £1.2 million in compensation this year, with a further £7 million offered to claimants and other claims waiting final assessment.

Winning compensation is not an automatic consequence of a wrongful accusation or conviction: it is a complex battle in its own right — as highlighted by Michael O’Brien, who spent 11 years in prison before being cleared along with two other men of the 1987 murder of the Cardiff newsagent Phillip Saunders.

His fight through the courts for proper compensation is detailed in his book The Death of Justice, published next week. In an eight-year battle O’Brien took the independent assessor to court to discover how his initial offer was reached so he could challenge the figures which were then increased by £48,000. He finally accepted £692,000 in 2006. He is furious at the Government’s attempts to limit compensation payments. “Your life is devastated. My marriage broke up, my father and baby daughter died while I was inside and I had to go to their funerals in handcuffs. When I was finally cleared, I left prison with a £44 discharge grant in my pocket. It has taken me ten years to rebuild my life.

“The Government says it is making the scheme more in line with compensation for victims of crime as though it is somehow unfair if we get more. But nobody in their right mind would do 11 years inside for £1 million.”

His co-defendant Darren Hall and Stephen Miller, of the Cardiff Three, are challenging the amounts they were awarded for loss of liberty in a judicial review in October. Matthew Gold, their solicitor, hopes that the court will set guidelines.

Yet whatever the strength of their legal arguments, the climate remains unfavourable. Compensating wrongly accused or jailed defendants is unfashionable at a time when crime victims are at the top of the agenda.

Miscarriage-of-justice victims and their lawyers were incensed when Charles Clarke, then Home Secretary, announced in April 2006 the abolition of the discretionary scheme, which covered convictions reversed as a result of in-time appeals or where facts emerged during trial that exonerated the suspect. Their only option now is to claim damages for the consequences through the courts.

Susie Labinjoh, a partner with Hodge Jones & Allen, is appealing against that decision to the House of Lords on behalf of two miscarriage-of- justice victims who, overnight, found that they were no longer eligible for compensation. Clarke also announced, again without consultation, that solicitors would be paid only legal aid rates for preparing applications — cutting fees from private rates of about £300 an hour for eligible applications to about £57 an hour.

Six law firms unsuccessfully challenged that decision to the Court of Appeal. John Halford, a public law and human rights partner with Bindmans, acts for both his firm and the five other practices. The law firms, he says, cannot risk further costs by taking the case to the Lords; so miscarriage-of-justice victims face an “invidious” choice of being unrepresented or having to pay their lawyers’ fees out of their compensation.

“We haven’t taken on a case since the new system was introduced,” he says. “This had been a sensible, no-fault compensation system that avoided costly and damaging civil litigation to prove fault on the part of the police or prosecution. Abolishing it and refusing to pay proper rates is a false economy as there will now be an incentive for people to litigate.”

Meanwhile, Stagg’s award stands out — but as the exception rather than the rule. Lord Brennan, QC, the independent assessor, said it was the police’s “highly unusual and legally bizarre tactics” that contributed to such a high sum. Ben Douglas-Jones, Stagg’s barrister, says that based on previous case law, he would have been awarded a modest sum in five figures because he was on remand for only 13 months. But “it was the highest-profile case where there hadn’t been a conviction and he suffered such appalling opprobrium”.

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