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Introduction
This claim for £1,560 arose from a road traffic accident that reached the Supreme Court on its third appeal. While the amount claimed may be modest in monetary value, the decision has significant implications for a wide range of cases where economic loss has resulted from damage to property caused by a third party’s negligence. The crucial question centred on whether the economic loss is deemed ‘pure economic loss,’ thereby precluding recovery, or if its remoteness renders it irrecoverable.
Background
The Claimant/Appellant, Lorna Armstead, experienced the misfortune of being involved in two road traffic collisions within a brief timeframe, with neither incident being her fault. After the first accident, the claimant hired a car, a Mini Copper, from Helphire Ltd on credit hire terms.
Credit hire companies operate by providing a temporary replacement vehicle on credit to individuals involved in accidents who are believed to be not responsible for the incident. These companies aim to reclaim the hire costs from the at-fault driver’s insurance. If the claim fails, they will seek payment from the individual using the replacement vehicle. Typically, this arrangement allows accident victims to access a car without upfront payment while their vehicle is being repaired.
The hire agreement between Helphire and Ms Armstead was on Helphire’s standard terms, which included an obligation on the hirer to return the car in the same condition as it was at the start of the hire and to pay Helphire for any damage to the car. Of particular importance to this appeal was clause 16 of the agreement, which stipulated that if the rented vehicle sustained damage, the renter was responsible for compensating Helphire for the daily rental rate up to a maximum of 30 days. This compensation was for Helphire’s loss of use of the vehicle while it was undergoing repairs or awaiting repair, rendering it unavailable to be rented out.
While driving the hire vehicle, Ms Armstead was involved in a second accident when a negligently driven van struck her vehicle. She filed a claim against the van driver’s insurers, Royal & Sun Alliance Insurance Company Ltd (RSA). Her claim sought compensation not only for the repair costs of the hire vehicle but also for the amount specified under clause 16 of her rental agreement with Helphire, referred to as “the clause 16 sum.” This sum represented her contractual obligation to reimburse Helphire for its loss of use of the vehicle, totalling £1,560.
The central issue in this appeal was whether Ms Armstead was entitled to receive damages for the clause 16 sum.
Ms. Armstead’s claim for the clause 16 sum was initially dismissed by a Deputy District Judge, a Recorder, and subsequently by the Court of Appeal. Ms. Armstead then appealed to the Supreme Court.
By the leading judgment of Lord Leggatt and Lord Burrows, the Supreme Court allowed the appeal and held that Ms Armstead was entitled to clause 16 damages.
Proceedings
Small Claims Trial
At first instance, the claim was allocated to the small claims track. A District Judge dismissed it on the ground that Ms Armstead did not have any proprietary interest in the hire car and, therefore, had no right to recover the economic loss that she suffered as a result of the damage to the vehicle caused by the negligent driver. He held that the loss was “pure economic loss” and, therefore, irrecoverable.
First Appeal
On appeal, the Recorder concluded that the daily hire rate was not a reasonable estimate of Helphire’s actual loss of use of the vehicle, and Ms Armstead’s liability to pay this sum to Helphire was not a reasonably foreseeable consequence of the collision. He also held that the clause 16 sum amounted to “relational economic loss”, which was not recoverable. The appeal was dismissed.
The Recorder also noted that he had not been persuaded that clause 16 was unfair under the Consumer Rights Act 2015 or an unenforceable penalty clause.
Court of Appeal
In arguments before the court of appeal:
- RSA did not maintain its argument regarding clause 16 being unfair and/or a penalty clause.
- Ms Armstead conceded that clause 16 would be irrecoverable if it did not represent a genuine and reasonable attempt to assess Helphire’s likely losses incurred due to its loss of use of the vehicle.
The Court of Appeal dismissed the appeal. The lead judgment, given by Dingemans LJ, held that the clause 16 sum was not recoverable because:
- Clause 16 was an “internal arrangement” between a bailee and the bailor and, as such, could not be a basis for recovering losses from a third party;
- clause 16 was not negotiated at arm’s length and was not a “true independent agreement” between Helphire and Ms Armstead;
- clause 16 did not represent a genuine and reasonable attempt to assess the likely losses to be incurred by Helphire as a result of loss of use of the hire car;
- clause 16 liability was a form of irrecoverable pure economic loss because it arose from the internal agreement between Helphire and Ms Armstead, and
- clause 16 did not represent a genuine and reasonable attempt to assess the likely losses to be incurred as a result of loss of use of the hire car. The loss claimed was not reasonably foreseeable and too remote to be recovered.
Judgment
The Supreme Court recapped three well-established principles:
- A person who, in breach of his duty of care, causes physical damage to another person’s property is liable to pay damages for the diminution in value of the property and any other financial loss consequent on the damage. This is subject to the general principles on recovery of damages in tort, including the test of remoteness.
- A person who negligently causes physical damage to another person’s property is not liable to pay compensation to a third-party claimant who suffers financial loss as a result of the damage.
- To count as the claimant’s property for this purpose, it is sufficient that the claimant has a right to possession of the property. Thus, a bailee in possession of property can claim damages from a stranger whose negligence results in the loss of, or physical damage to, the property. [18-21]
Pure economic loss
The Supreme Court, applying the decision in Network Rail Infrastructure Ltd v Conarken Group Ltd [2011] EWCA Civ 644; [2012] 1 All ER (Comm) 692 held that contractual liabilities to a third party could constitute recoverable loss, provided they represent a reasonable pre-estimate of the likely amount of that loss[36]. It clarified that “there is no difference in principle” between a loss suffered because the claimant does not receive revenue under a contract and a loss suffered because the claimant must pay under a contract because of physical damage to its property [31].
Remoteness
The court noted that though it was not bound by a concession on the point of law, it regarded Ms Armstead’s concession as rightly made as a matter of law.
The court restated the classic test for remoteness [47]: that loss is too remote to be recoverable as damages if the type of loss suffered was not reasonably foreseeable at the time of the breach of duty. But if the type of loss was reasonably foreseeable, it does not matter that the precise manner in which it was incurred was not reasonably foreseeable.
Applying the above principle, the Supreme Court held that financial loss caused by an inability to use a hire car that has been damaged is reasonably foreseeable. The precise manner by which the loss of use of the vehicle resulted in financial loss to the claimant (contractual liability to Helphire) need not have been foreseeable. However, the contractual liability must constitute a reasonable pre-estimate of the loss likely to be incurred due to damage to the property. The same conclusion was also achieved by analysing the contractual liability as either an unenforceable penalty or an unfair term not binding on a consumer under the Consumer Rights Act 2015 [48-51].
The case, therefore, turned on whether the sum claimed was a reasonable pre-estimate of the loss Helphire would suffer for the loss of use of the car and which party had the burden of proof in relation to that.
Burden of Proof
The Supreme Court noted that the law was unclear regarding who has the burden of proof in respect of whether a particular loss is irrecoverable on the grounds of remoteness where it is not in dispute that a tort has been committed. The Court held that once the claimant has proved that a tort has been committed and that the loss claimed was, in fact, caused by the defendant’s breach of duty, it is for the defendant to assert and prove remoteness.
In this case, RSA did not plead or present any evidence to show that the loss of use sum was not a reasonable pre-estimate and had, therefore, failed to discharge its burden of proof. The Court of Appeal could not reject the claim on that ground (the Court of Appeal had made a factual assumption that the £1,560 claimed was not a reasonable pre-estimate of Helphire’s loss of use), and therefore, the appeal was allowed.
While not necessary to decide the appeal, the court considered an issue raised in submission as to the position if the pre-estimate of loss was found not to be a reasonable sum. The court held that in those circumstances, Ms Armstead would have been entitled to damages limited to such amount as would represent Helphire’s reasonably foreseeable loss of use.
Commentary
There are two practical points arising from this decision:
- Where negligence resulting in loss has been established, the burden of proof is on the defendant to show that the loss is too remote for the claimant to recover. To discharge this burden, it will be important for Defendant to communicate with the Claimant and obtain evidence of the hire companies’ loss of use, such as repairs and fleet availability. This could potentially lead to an increase in applications requesting third-party disclosure.
- Economic loss as a result of negligent damage to property is not irrecoverable only because it arises out of a contractual liability between the Claimant and a third party. This decision aims to strike a fair balance. It protects innocent parties from bearing repair costs they didn’t cause while preventing credit hire companies from claiming excessively high amounts, often exceeding what they could reasonably recover from innocent hirers through their contracts. Anthony Hughes, chair and chief executive of the Credit Hire Organisation, the trade body for the credit hire industry, noted that “The ruling is a fair outcome for the recovery of reasonable losses resulting from a loss that, as with credit hire overall, contributes very little to the overall cost of insurance.”
