Supreme Court decision on recoverability of contractual losses, economic loss and the principle of remoteness

Supreme Court decision on recoverability of contractual losses, economic loss and the principle of remoteness

The recent Supreme Court judgment in Armstead v Royal and Sun Alliance Insurance Company Limited (2024) UKSC 6 has clarified important principles relating to pure economic loss, remoteness of damage and the burden of proof in recovering contractual losses. 

Background

The facts of the matter are largely irrelevant, it is the principles considered which are of more general application that are of interest but it is useful to understand the factual background. Following a road traffic accident caused by a third-party driver, Ms Armstead hired a car under a ‘credit hire’ agreement from a company named Helphire Ltd which supplies vehicles to individuals whose own vehicles have been damaged in road traffic accidents caused by a third-party. Helphire Ltd then recovers its fees on behalf of its customers from the insurers of the driver at fault. 

Unfortunately, Ms Armstead was involved in another road traffic accident caused by a different third-party driver who was insured by Royal & Sun Alliance Insurance Company Ltd (“RSA”) whilst using the hire car from Helphire Ltd. The hire car was damaged as a result of the accident. 

Clause 16 of Helphire Ltd’s credit terms with Ms Armstead provided that Ms Armstead was to pay a rate of £130 per day for each day the hire car is unavailable to Helphire Ltd for hire due to damage occasioned during the rental period. 

Whilst Ms Armstead could continue to use the hire car during the rental period, once it was returned to Helphire Ltd it could not be supplied by Helphire Ltd to another customer for 12 days whilst the damage caused during Ms Armstead’s rental period was repaired. Helphire Ltd therefore charged Ms Armstead the sum of £1,560 (“Clause 16 Sum”) for the 12-day period during which the hire car was being repaired. In turn, Ms Armstead sought to claim the Clause 16 Sum from RSA as consequential loss arising as a result of her being bailee of the hire car.  

At trial of the matter in the County Court at Walsall, it was determined that the Clause 16 Sum was irrecoverable pure economic loss. Ms Armstead’s claim reached the Supreme Court on a third appeal. 

The Supreme Court’s Decision

The Supreme Court repeated the well-established principles governing negligence in the context of damage to property:

1. “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” 
    
2. “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” 
    
3. “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” 

As bailee of the hire car, and the fact that the Clause 16 Sum arose as a result of damage to the hire car whilst in her possession, meant that the Clause 16 Sum was not pure economic loss and therefore was recoverable.

The Supreme Court held that, Ms Armstead could recover the Clause 16 Sum from RSA as long as the loss was not too remote or excluded by any other limitation on the recovery of damages in tort. The fact that the financial loss in question arose from contractual liabilities was not a barrier to recovery.

Further, the Court held Ms Armstead was right as a matter of law to concede that she could not recover the Clause 16 Sum unless it represented a genuine and reasonable attempt to assess the likely losses incurred by Helphire Ltd as a result of its inability to utilise the hire car.

The Supreme Court decided that the Clause 16 Sum was a reasonably foreseeable loss. The precise manner by which the Clause 16 Sum became financial loss to Ms Armstead (by way of contractual liability to Helphire Ltd) need not be foreseeable however, where financial loss arises as a result of contractual liability, the value of the loss must constitute a reasonable pre-estimate of loss likely to be incurred by the third party as a result of damage to the property otherwise it will be considered too remote. 

In summary, the Supreme Court found that the Clause 16 Sum was, in fact, contingent upon the physical damage to the vehicle and the loss did not arise solely from the credit hire agreement. On this basis, the loss was found not to be a pure economic loss

Finally, and probably the most important issue of principle in the case,  the Supreme Court addressed where the burden of proof lies in proving whether or not the relevant loss is too remote. Whilst the Court noted a lack of authority on this issue, it asserted that a defendant bears the burden of establishing that a certain category of loss is too remote to be recovered by a claimant upon consideration of both fairness and efficiency. Once a 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 damages should be limited because, for example, the damage was too remote, the claimant failed to mitigate its loss or the claimant was contributorily negligent. 

Practical Implications of the Supreme Court’s Decision

This case has important ramifications for organisations that wish to rely on such contractual provisions similar to Clause 16 or for any party seeking to recover economic loss. Whilst such organisations may welcome the confirmation that financial loss arising from contractual liabilities can be recovered, it is important that such financial loss is a genuine pre-estimate of loss and this forms the basis of contractual terms upon which they seek to rely, otherwise such loss will be considered too remote to be recoverable. 

Secondly, the decision that the burden of proof is on the defendant to show that the loss is too remote for the claimant to recover provides welcome clarity on the issue.

For further information on this topic, please contact Callum Powell. 

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