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Civil Litigation case update – March 2024

The Supreme Court recently handed down judgement in the case of Armstead v Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6.

The judgement will be of particular interest to anybody involved in credit hire litigation. However, even if credit hire is not something that forms part of your practice, the judgement provides a useful reminder of some of the general principles around the recovery of damages in tort.

By way of background, the Claimant, Ms Armstead, was involved in a road traffic collision that was not her fault. While her car was being repaired, she hired a car from a company called Helphire on credit hire terms. For those not familiar with credit hire, the concept involves credit hire companies such as Helphire renting out cars to non-fault drivers who were involved in road traffic collisions. The car is rented out on credit-hire terms meaning the non-fault driver is not paying upfront. Although the non-fault driver is liable for the hire cost, the credit hire company seeks to recover that cost, on behalf of the non-fault driver, from the at-fault driver (via their insurers). The ‘credit-hire’ rate is significantly higher than the standard, or ‘basic’ commercial hire rate offered on the general market.

The hire agreement between Ms Armstead and Helphire included an obligation to return the car in the same condition as it was at the start of hire and to indemnify Helphire for any damage to the vehicle. In addition to the ‘cost of repair’ liability, the agreement also included a term (under clause 16) which stipulated that Ms Armstead would be liable to pay a daily hire rate for up to 30 days to cover Helphire’s loss of use of the car while it is being repaired (the “clause 16 sum”). The clause 16 sum amounted to £1,560. During the period that Ms Armstead was driving the hire car, she was involved in another road traffic accident, which, again, was not her fault. Following this, Ms Armstead brought a claim against the insurers of the at-fault driver – Royal & Sun Alliance Insurance Company (RSA) – for the cost of repair as well as the clause 16 sum.

Although initially, RSA disputed liability for both the cost of repair as well as the clause 16 sum, by the time the case reached the Supreme Court the cost of repair issue was conceded. RSA accepted that the fact that Ms Armstead was in possession of the hire car as a bailee when it was damaged entitled her to recover the sum for the cost of repair. Therefore, the main issue revolved around whether Ms Armstead was entitled to recover the clause 16 sum.

Ms Armstead’s claim for the clause 16 sum was rejected when it was first tried in the County Court before Deputy District Judge Fawcett, it was rejected on first appeal before Recorder John Benson KC, and it was rejected on second appeal to

the Court of Appeal. While the lower courts reached the same conclusion, the reasons that led to this conclusion differed; having said this, a commonality in reasoning was that the clause 16 sum was seen as amounting to irrecoverable economic loss.

The Supreme Court considered that the reasoning adopted by the lower courts was inconsistent with basic legal principles applicable to claims in the tort of negligence. In particular, at paragraphs 19 – 20 of the judgement, it recalled the following three well-established principles:

i) A person owes a duty of care not to cause physical damage to another person’s property 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;

ii) 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 (i.e., the principle that pure economic loss cannot be recovered); and

iii) To count as the claimant’s property for this purpose it is sufficient that the claimant has a right to possession of the property.

Applying these principles to the present case, the Supreme Court held that the clause 16 sum was not irrecoverable pure economic loss. This is because it arose from the damage to the hire car in which Ms Armstead had a possessory title. Further, the fact that the clause 16 sum arose from a contractual liability with a third party was not a barrier to recovery, provided that the clause 16 sum was consequential on the physical damage to the property.

The Supreme Court recognised the potential issue with allowing the recovery of clause 16 sums. The concern is that hire companies should not be able, simply by stipulating an amount of money in a contract to which a defendant is not a party and over which it has no control, to recover an amount which exceeds a fair or reasonable estimate of loss actually suffered. This is what the Recorder and the Court of Appeal appeared to be troubled by and which contributed to Ms Armstead’s claim being rejected. The Supreme Court considered that the way to address this valid concern lies in the legal principle of remoteness. Having articulated its reasoning regarding remoteness at paragraph 47 of the judgement, the Supreme Court stated that a contractual liability which is not a reasonable pre-estimate of the loss likely to be incurred, is a type of loss that could not be reasonably foreseen and would therefore be too remote to be recoverable.

Following its legal analysis, the real question for the Supreme Court therefore became: a) was clause 16 a reasonable pre-estimate of the loss of use incurred by Helphire as a result of the unavailability of the hire car while it was repaired, and b) who has the burden of proof in relation to that? In the absence of existing legal authority on b), the Supreme Court determined that the burden of proof is on the defendant, in this case RSA. In relation to a), RSA had not pleaded a case that the

clause 16 sum was not a reasonable pre-estimate of Helphire’s loss of use and had consequently not presented any evidence on that point. For example, no evidence was adduced by RSA as to whether Helphire would have had other spare cars available that it could have rented out during the period of repair of the damaged car. In the absence of such evidence, it was not open to a court to make factual assumptions about whether the clause 16 sum represented a reasonable estimate of Helphire’s likely loss. As a consequence, Ms Armstead’s appeal succeeded and RSA was found liable to pay damages in respect of the clause 16 sum.

In obiter comments, the Supreme Court went on to consider what the position would have been if the clause 16 sum had been found not to be a reasonable estimate. In this situation, the Supreme Court observed that Ms Armstead would have been entitled to recover as damages such lesser sums as would represent Helphire’s reasonably foreseeable loss of use.

The judgement provides a framework in which the interests of all parties are balanced. While hire companies are able to claim for damage to their property including financial loss directly flowing from the physical damage to the property, hire companies cannot abuse this by putting in place contractual arrangements which are not a reasonable reflection of actual loss. Any attempt at doing so can be exposed by defendants. Further, non-fault drivers can be reassured that they are not left out of pocket in circumstances such as the present.

The full Supreme Court judgment can be accessed here.

For any other enquiries, or to discuss instructing the Civil Team at Atlantic Chambers, please contact clerks@atlanticchambers.co.uk

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