Armstead v Royal & Sun Alliance Insurance Company Ltd

The Supreme Court held that a hirer (a bailee in possession) can recover from a negligent third party a contractual liability to the hire company which arises as a direct consequence of physical damage to the hired vehicle, subject to ordinary limits on recovery in tort. The central legal question was remoteness: such a contractual liability is recoverable only if it represents a reasonable pre-estimate of the hire company's loss of use. The Court treated that requirement as an aspect of the remoteness rule (Wagon Mound foreseeability). Because the defendant insurer (RSA) bore the burden of proving that clause 16 was not a reasonable pre-estimate and had not pleaded or adduced any such evidence, the Court allowed the appeal and entered judgment for the claimant for the clause 16 sum.

This appeal concerned whether a hirer of a car could recover from a negligent third party the contractually agreed charge which the hirer had agreed to pay to the hire company for loss of use of the car while it was being repaired (clause 16 of the hire agreement). The claimant, Ms Armstead, had hired a car on credit-hire terms from Helphire. The hire car was damaged by a negligent driver insured by RSA. Helphire had a clause requiring the hirer to pay a daily rental rate for up to 30 days in respect of loss of use while the vehicle was unavailable for hire; Helphire demanded £1,560 for 12 days.

The claim sought (i) repair costs and (ii) the clause 16 sum. The lower courts dismissed recovery of the clause 16 sum on a variety of grounds including pure economic loss, scope of duty and that the clause did not represent a genuine estimate of loss. On further appeal to the Supreme Court the Court reviewed principles governing: bailment and the right of a bailee in possession to sue for damage; the distinction between recoverable economic loss consequential on damage to property and irrecoverable 'pure economic loss'; remoteness (the Wagon Mound foreseeability test); and the interaction with rules on penalties and unfair terms.

Issues framed by the Court included whether the clause 16 sum was pure economic loss or otherwise too remote, whether clause 16 was an enforceable contractual pre‑estimate rather than an unfair term or penalty, and who bore the burden of proof on remoteness/validity. The Court concluded that (i) the loss was not pure economic loss because Ms Armstead was a bailee in possession; (ii) remoteness is the real issue and the clause 16 sum is recoverable only insofar as it is a reasonable pre‑estimate of the hire company’s loss of use; (iii) that requirement may be analysed either as part of the remoteness doctrine or by reference to the law of penalties and unfair terms; and (iv) once the claimant has proved the tort and factual causation, it is for the defendant to plead and prove that a particular consequential loss is too remote or otherwise excluded. Because RSA did not plead or produce evidence that clause 16 was not a reasonable pre‑estimate, the Court allowed the appeal and entered judgment for the clause 16 sum of £1,560.

Appeal allowed. The Supreme Court held that a bailee in possession can recover a contractual liability to the bailor arising as a consequence of negligent physical damage to the bailed property, but such a contractual liability is recoverable only to the extent that it represents a reasonable pre-estimate of the bailor’s loss of use (an aspect of remoteness and of contractual validity). RSA bore the burden of proving that clause 16 was not a reasonable pre-estimate and failed to plead or adduce evidence to that effect, so the clause 16 sum was recoverable and judgment for £1,560 was entered for the claimant.

Trial: County Court at Walsall, Deputy District Judge Fawcett, claim dismissed on basis bailee lacked proprietary interest (1 July 2019). Appeal to Recorder John Benson QC, dismissed: [2022] Lloyd’s Rep IR 574 (Recorder accepted some recovery for repair costs but refused clause 16 sum). Further appeal to Court of Appeal, dismissed: [2022] EWCA Civ 497 ; [2022] RTR 23. Appeal to Supreme Court allowed: [2024] UKSC 6.