A hire car was damaged in a collision caused by the other driver’s negligence. The hirer claimed £1,560 owed to the hire company under a contractual loss-of-use clause. The Supreme Court held this consequential loss was recoverable, as the insurer failed to prove the clause was an unreasonable pre-estimate of loss.
Background
The appellant, Lorna Armstead, hired a Mini Cooper from Helphire Ltd on credit hire terms while her own car was being repaired following an earlier collision. On 23 November 2015, a Ford Transit Connect van negligently collided with the hire car. Liability was admitted by the respondent insurer, Royal & Sun Alliance Insurance Company Ltd (‘RSA’). Although the hire car was damaged, Ms Armstead continued to drive it until her own car was repaired, at which point she returned it to Helphire. The hire car was then off the road for repairs for 12 days.
Clause 16 of the hire agreement required Ms Armstead to pay Helphire an amount equal to the daily rental rate for each day the vehicle was unavailable for hire due to damage, up to a maximum of 30 days. Helphire demanded £1,560 (12 days at £130 per day, being the credit hire rate). Ms Armstead claimed this sum, together with repair costs, from RSA as damages for negligence.
The claim was rejected at trial by Deputy District Judge Fawcett on the basis that Ms Armstead had no proprietary interest in the hire car and therefore could not recover economic loss resulting from its damage. The first appeal before Recorder Benson QC was dismissed on different grounds, including that the loss was ‘relational economic loss’, too remote, and outside the scope of the duty of care. The Court of Appeal ([2022] EWCA Civ 497) also dismissed the appeal, holding variously that the clause 16 liability was an unrecoverable ‘internal arrangement’ between bailor and bailee, was pure economic loss, and was too remote because the clause did not represent a genuine and reasonable pre-estimate of Helphire’s loss.
The Issue(s)
The Supreme Court identified the following key issues:
Was the clause 16 liability pure economic loss?
The lower courts characterised the loss variously as ‘relational economic loss’ or ‘pure economic loss’. The Supreme Court needed to determine whether this characterisation was correct given that Ms Armstead had possessory title to the hire car when it was damaged.
Was the loss too remote?
The central question was whether the clause 16 sum was irrecoverable as too remote a consequence of the negligent damage to the car, specifically whether it needed to be a reasonable pre-estimate of Helphire’s loss of use, and if so, who bore the burden of proving that it was or was not.
Who bears the burden of proof on remoteness?
This was a novel question on which there was a surprising absence of authority.
The Court’s Reasoning
Not pure economic loss
Lord Leggatt and Lord Burrows (with whom Lord Richards and Lady Simler agreed) held that the loss was not pure economic loss. Ms Armstead, as a bailee in possession of the hire car, had a possessory title sufficient to found a claim in negligence for damage to the property. Loss consequent upon that physical damage — including a contractual liability to the bailor — was recoverable in principle:
“It follows from the well-established principles stated above that Ms Armstead is 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.”
Rejection of the lower courts’ reasoning
The Court systematically rejected the reasoning of the courts below. The ‘internal arrangement’ theory advanced by Dingemans LJ — that the law of bailment treats bailor and bailee as having one set of rights — was unsupported by authority. The Winkfield [1902] P 42 did not establish any such principle; rather, it confirmed that a bailee in possession could sue as if owner. The Court stated:
“The Winkfield did not decide that, where the bailee suffers loss arising from a contractual liability to the bailor, such loss cannot be recovered from the wrongdoer.”
The Court also rejected the suggestion that the hire agreement needed to have been ‘negotiated at arm’s length’ to give rise to recoverable loss, and clarified that neither ‘scope of duty’ (SAAMCO) nor ‘legal causation’ (intervening cause) principles were engaged.
Remoteness — the real issue
The Court accepted that the concession made by Ms Armstead’s counsel — that the clause 16 sum could only be recovered if it represented a reasonable pre-estimate of Helphire’s loss of use — was rightly made as a matter of law. The analysis was rooted in the remoteness principle from The Wagon Mound [1961] AC 388:
“However, to fall within this reasonably foreseeable type of loss, it is necessary for the claimant’s contractual liability to reflect the loss of use of the hire company. As the Network Rail case confirms, 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.”
The Court also identified an alternative route to the same conclusion through the law on unfair terms and penalties:
“The link between remoteness and the law on unfair terms and penalties is that the type of loss, here a contractual liability, is only reasonably foreseeable if it really is a contractual liability. To be a valid contractual liability, as opposed to an unfair term or penalty, clause 16 must comprise a reasonable pre-estimate of the hire company’s loss of use.”
Burden of proof on remoteness
In an important clarification of the law, the Court held that the burden of proving that loss is too remote lies on the defendant:
“Once it has been proved that the defendant has committed a wrong which has caused loss to the claimant, it is fair to place the onus on the wrongdoer to show a good reason why the wrongdoer should not be liable to compensate the victim for the full extent of the loss caused.”
The Court reasoned by analogy with mitigation, contributory negligence, and intervening cause — all of which must be pleaded and proved by the defendant — and observed that pleading practice confirmed this analysis.
Application to the facts
RSA had not pleaded any case that the clause 16 sum was not a reasonable pre-estimate of Helphire’s loss of use. No evidence was adduced at trial to that effect. The Court of Appeal’s conclusion that clause 16 was unreasonable rested on unsupported factual speculation — for example, that Helphire was likely to have had spare cars available, or that not every hire would be at the credit hire rate. The Court held:
“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.”
Lord Briggs’ concurrence
Lord Briggs agreed with the outcome but expressed a reservation about endorsing the proposition that clause 16 must be a reasonable pre-estimate of loss, noting that this point went by concession and was not subject to adversarial argument. He observed that the law on penalties had moved on since Network Rail following Cavendish Square Holding BV v Makdessi [2015] UKSC 67, and would have preferred adversarial debate before lending the Court’s authority to the proposition.
Practical Significance
This decision is significant in several respects. First, it confirms that a bailee in possession of damaged property can recover consequential economic losses — including contractual liabilities to the bailor — from a negligent third party, and that such losses are not ‘pure economic loss’. Second, it establishes clearly that the burden of proving remoteness lies on the defendant, resolving a previously uncertain area of law. Third, it provides guidance on the recoverability of pre-estimated contractual liabilities as damages in tort, confirming the Network Rail approach but anchoring it firmly within the remoteness framework. Fourth, the decision has particular practical importance for the credit hire industry, confirming that loss-of-use clauses in hire agreements can found claims against negligent drivers’ insurers, provided the defendant cannot demonstrate that the agreed sum is an unreasonable pre-estimate of loss. The Court also indicated, obiter, that even if a pre-estimate were found unreasonable, the claimant would still be entitled to recover a lesser sum representing the reasonably foreseeable loss.
Verdict: The Supreme Court unanimously allowed the appeal and entered judgment in favour of Ms Armstead for the clause 16 sum of £1,560. The decisions of the County Court, the first appellate court, and the Court of Appeal were all reversed.
Source: Armstead v Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6
