Ms Lorna Armstead v Royal Sun Alliance Insurance Company Ltd

Heard on 23 November 2023

Lord LeggattANDLord Burrows ( with whomLord RichardsandLady Simleragree):

This claim for £1,560 has reached the Supreme Court on a third appeal. Although the sum at stake is small, the decision has the potential to affect a significant number of other cases. Moreover, it raises 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 arises from a road traffic collision in which a hire car was damaged through the fault of the other driver. The main issue is whether the damages recoverable by the hirer from the other driver (or their insurer) include, as well as the cost of repair, a sum which the hirer has 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.

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.”

There is evidence, and it is 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. The parties have agreed that the driver of the van was negligent and that Ms Armstead was not at fault. 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.

It should be noted that 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.

Proceedings were brought by Ms Armstead as claimant against the van driver's insurers, Royal & Sun Alliance Insurance Company plc (“RSA”) who, under the European Communities (Rights Against Insurers) Regulations 2002, are directly liable to a party who has a cause of action against their insured in tort arising out of an accident. The remedy claimed was damages comprising (i) the cost of repairs and (ii) the sum claimed from Ms Armstead by Helphire under clause 16 of the hire agreement, which for short we will call “the clause 16 sum”.

It is fair to assume that Ms Armstead has not been paying out of her own pocket to pursue a claim for £1,560 all the way to the Supreme Court and that the proceedings have been funded and pursued in her name by Helphire in the exercise of a right to do so that it has under the hire agreement. While it is as well to keep an eye on this commercial reality, it is not suggested by RSA (the respondent to this appeal) that it alters the legal analysis of the claim. Ms Armstead is the claimant; it is her rights which are being enforced and whether the claim is valid or not does not depend on who is funding the proceedings.

In its defence RSA admitted that the collision was caused by the negligence of its insured. It did not admit liability for the cost of repairs. In answer to the claim for the clause 16 sum, RSA pleaded that clause 16 was an unfair term under sections 62 and 63 of the Consumer Rights Act 2015 and/or a penalty and was therefore unenforceable. RSA further asserted that Ms Armstead had a duty to mitigate her loss by refusing to pay the clause 16 sum to Helphire.

The claim was allocated to the small claims track and was tried on 1 July 2019 in the County Court at Walsall before Deputy District Judge Fawcett. He dismissed the claim on the ground that Ms Armstead did not have any proprietary interest in the hire car and, accordingly, had no right to recover economic loss which she suffered as a result of the damage to the vehicle caused by the negligent driving of RSA's insured. In other words, he held that the loss was irrecoverable pure economic loss. The Deputy District Judge did not make any findings as to clause 16 being unfair, unenforceable or a penalty.

Ms Armstead appealed against this decision. The appeal was heard by Recorder John Benson QC, who dismissed the appeal: [2022] Lloyd's Rep IR 574. Before the Recorder, 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 compensation for the diminution in value of the car. RSA accordingly conceded that the Deputy District Judge had been wrong to reject the claim for the cost of repairs and that Ms Armstead was entitled to judgment for this sum. But RSA argued, and the Recorder accepted, that she was not entitled as a matter of law to recover the clause 16 sum.

The essence of the Recorder's reasoning was that Helphire should not be able to recover, by way of a claim brought in the name of Ms Armstead, a greater sum as compensation for its loss of use of the vehicle while it was repaired than Helphire could have recovered if it had sued RSA for such loss directly. The Recorder concluded that, if Helphire had claimed damages for loss of use, the assessment of those damages would have followed the approach identified in Beechwood Birmingham Ltd v Hoyer Group UK Ltd[2010] EWCA Civ 647; [2011] QB 357. In that case the claimant was a substantial motor dealership with many vehicles at its disposal. A car driven by an employee, which was allocated to him out of the claimant's stock for his personal use, was damaged as a result of the defendant's negligence. Rather than allocating a similar car to the employee from the claimant's own pool of available cars while the damage was repaired, the claimant hired a replacement vehicle on credit hire terms for its employee's use. The Court of Appeal decided that, on these facts, the hire cost was not recoverable as damages for the loss of use and that the appropriate measure of damages was interest on the capital value of the damaged car and any depreciation in value during the period of repair.

The Recorder held that in circumstances where the clause 16 sum was not, for this reason, a reasonable estimate of Helphire's actual loss of use, 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, and that RSA's insured did not owe a duty of care to Ms Armstead to prevent her from incurring a contractual liability to pay this sum: see para 72 of his judgment. The Recorder said that he had not been persuaded that clause 16 was unfair under the Consumer Rights Act 2015 or that it was an unenforceable penalty clause, which in any event was not a ground on which the Deputy District Judge had relied to dismiss the claim (paras 75–76).

Ms Armstead appealed, once again, to the Court of Appeal. Again, her appeal was dismissed: [2022] EWCA Civ 497; [2022] RTR 23. Two points should be noted about how the case was argued in the Court of Appeal which are relevant on this appeal. First, RSA did not pursue any argument that clause 16 was unenforceable either as an unfair term or as a penalty. Second, a concession was made by counsel for Ms Armstead that she could not claim the clause 16 sum as damages if it did not represent a genuine and reasonable attempt to assess the likely losses to be incurred by Helphire as a result of its loss of use of the hire car.

The main judgment was given by Dingemans LJ. He held that Ms Armstead was not...