Paul Bugden, Bugden + Co., London

Ref: Armstead v Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6

This extremely important recent decision of the UK Supreme Court case raised, amongst other issues, some fundamental questions in applying the tort of negligence in a situation where economic loss, comprising a contractual liability to pay a sum of money, has resulted from physical damage to property. In particular, is that loss irrecoverable, either because it is “pure economic loss” or because it is too remote?

The claim arose from a road traffic collision in which a hire car was damaged through the fault of the other driver. The main issue was whether the damages recoverable by the hirer from the other driver included, as well as the cost of repair, a sum which the hirer had agreed to pay to the hire company for the company’s loss of use of the car while it is unavailable for hire because it is off the road for repairs.

The claimant (and appellant), Lorna Armstead, was unlucky enough to be involved in two road traffic collisions within a short space of time, neither of which was her fault. After the first collision, while her car was being repaired, she hired a car, a Mini Cooper, from a company called Helphire Ltd on credit hire terms. The business model of credit hire companies is that they rent out a substitute car on credit to an accident victim believed not to have been at fault while the victim’s car is repaired. The hire company seeks to recover the hire cost on behalf of the victim from the other driver’s insurers and only looks to the victim for payment if the claim fails. In the normal course of events this enables the accident victim to have the use of a car for which she does not have to pay.  Unsurprisingly the daily rental hire rate was what is termed the “credit-hire” rate and it is not in dispute that this was significantly higher than the standard (ie “basic”) rental rate charged by a hire company that was not operating on credit hire terms.

The hire agreement between Helphire and Ms Armstead dated 11 November 2015 was on Helphire’s standard terms, which included an obligation on the hirer to return the vehicle in the same condition as it was at the start of the hire and to indemnify Helphire for any damage to the vehicle. A further term of the agreement is central to this appeal. Clause 16 stated:

You will on demand pay to [Helphire] an amount equal to the daily rental rate specified overleaf, up to a maximum of 30 days in respect of damages for loss of use for each calendar day or part of a calendar day when the vehicle is unavailable to Helphire for hire because … the Hire Vehicle has been damaged.”

It was an agreed fact, that terms similar to clause 16 were common in car rental agreements.

On 23 November 2015 a Ford Transit Connect van collided with the Mini Cooper hire car which Ms Armstead was driving. Although the hire car was damaged, Ms Armstead was able to carry on driving it until the repairs to her own car had been completed, whereupon she returned the hire car to Helphire. The hire car was then repaired between 8 and 21 January 2016, a period of 12 days. Helphire subsequently made a demand on Ms Armstead under clause 16 of the hire agreement for the rental charge for this period. It is agreed that the applicable daily rental rate was £130 so that the amount payable under clause 16 is £1,560.

The court helpfully started by recalling three well-established principles in tort cases all of which are frequently engaged in carriage of goods and like cases.

First, a person owes a duty of care not to cause physical damage to another person’s property (such as a car) and, if in breach of that duty, is liable to pay damages to compensate that person for the diminution in value of the property and any other financial loss consequent on the damage. This is subject to the general principles which limit the recovery of damages in tort, including the limitation that loss is not recoverable if it is too remote a consequence of the wrong.

Second, by contrast, someone 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. It is not enough that the claimant had contractual rights which were rendered less valuable by the damage if the property in question was not that of the claimant.

Third, to count as the claimant’s property for this purpose it is sufficient that the claimant has a right to possession of the property. At common law a person in possession of property has a right to possession of it as against a stranger. 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. As against a wrongdoer who is not the bailor, possession is title and a bailee in possession of the goods must therefore be treated as their owner. It follows that the bailee is entitled to sue for damages for the loss of (or damage to) the goods simply by virtue of being treated as the owner, irrespective of what rights in the property exist as between the bailee and the bailor and whether the bailee is liable to the bailor for the loss.

It was agreed: (i) that Ms Armstead was a bailee in possession of the hire car on the terms of the hire agreement with Helphire (the bailor) when RSA’s insured caused physical damage to the car by his negligent driving; and (ii) that, as a result of the damage, the car was unavailable for Helphire to hire out for 12 days. It follows from the well-established principles stated above that Ms Armstead was entitled to recover the clause 16 sum as damages from RSA, subject only to the question whether this loss is too remote or is excluded by any other limitation on the recovery of damages in tort.

The court observed that; a) where it is shown that loss has (factually) been caused by the defendant’s breach of a duty of care, five principles are capable of limiting the damages recoverable by the claimant, namely (i) the scope of the duty; (ii) remoteness; (iii) intervening cause; (iv) failure to mitigate; and (v) contributory negligence and, b) 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 that one, or more, of the these principles apply to limit the damages recoverable by the claimant.

Failure to mitigate and contributory negligence were not in issue here but the other three points were.

As to the scope of the duty, the loss in this case was not pure economic loss because it was common ground that Ms Armstead had a possessory title to the hire car. Furthermore there was no reason in principle why recoverable loss should not include a contractual liability to a third party provided that the liability is consequential on physical damage to the claimant’s property and where physical damage is negligently caused to revenue-generating property, the loss recoverable by the owner of the property from the person who caused the damage includes a sum payable by the owner, under an agreement with another party to compensate that party for its loss of revenue resulting from the damage, provided the sum agreed is a reasonable estimate of the likely amount of that loss. 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 has to make a payment under a contract as a consequence of physical damage to its property.

RSA argued that the liability to pay Helphire the clause 16 sum was outside the scope of the duty of care owed by its insured to Ms Armstead. However, this argument conflated the scope of the duty with remoteness issues. There could be no issue here about the scope of the relevant duty, it being the commonplace duty to take care to avoid causing physical damage to another person’s property. The case simply did not engage the scope of duty principle at all.

As to remoteness, to fall within the ambit of reasonably foreseeable type of loss for remoteness purposes where a contractual liability of the claimant forms a head of loss there is nothing wrong in principle, in a case where the actual loss may be difficult to calculate, in using an amount estimated in advance as the basis of the contractual liability. But to serve this purpose the contractual liability must constitute a reasonable pre-estimate of the hire company’s loss of use. So here if, or in so far as, the contractual liability of the claimant was not a reasonable pre-estimate of the hire company’s loss of use, it did not fall within the type of loss that is reasonably foreseeable.  As it was, however, RSA, on whom the burden lay, pleaded no case and adduced no evidence to prove, or even suggest, that Helphire was likely to have had other spare cars available and that a liability to pay the daily hire rate for the vehicle limited to 30 days’ loss of use was likely to result in overcompensation. In these circumstances it was not open to RSA to advance such a case on appeal. The issue was raised in the submissions as to what the position would be if the pre-estimate of loss was found not to be a reasonable sum. The court thought that applying the principle recognised in Cory v Thames Ironworks and Shipbuilding Co Ltd (1868) LR 3 QB 181, the claimant would be entitled in this situation to recover as damages such lesser sum as would represent Helphire’s reasonably foreseeable loss of use and that although this case involved a claim for breach of contract it saw no reason why the position should be any different in tort.

Then finally as to intervening cause, the court held that the chain of causation cannot have been broken here as the contract that gave rise to the liability in issue existed before the hire car was damaged by the negligent driving of RSA’s insured.

Accordingly, the Ms Armstead’s appeal was allowed and her claim succeeded in full.