In the joint leading judgment of Lord Leggatt and Lord Burrows, the Supreme Court found that where a clause contained within a contract is a reasonable pre-estimate of loss, it may be recoverable from a third party tortfeasor, but should a defendant show that the sum is too remote (i.e. not a reasonable pre-estimate of the actual loss to hire company), only a lesser and reasonable sum will be recoverable.
This decision will work to prevent a credit hire company from recovering exorbitant sums over its actual anticipated losses or that are demonstratively more than it would be able to recover itself for its loss of use, by utilising a contractual liability against innocent hirers.
Background of the Case
The claimant, Ms Armstead, was involved in a non-fault accident in 2015 and, as a result, hired a Mini on credit terms from Helphire Limited (now trading as Auxillis). When driving in Helphire’s vehicle, Ms Armstead was involved in a further accident with RSA’s insured. Liability for the accident was subsequently admitted by RSA.
The rental agreement between Helphire Limited and Ms Armstead included a clause which stated that Ms Armstead would pay on demand the full contractual rate, for up to a maximum of 30 days, in respect of Helphire’s loss of use for each calendar day the vehicle was unavailable to be hired (Clause 16).
In March 2018, Ms Armstead received a purported demand for this loss of use. Subsequently proceedings were issued by Principia Law for Ms Armstead, seeking to recover consequential loss arising under the contract, by virtue of her position as bailee of the hired vehicle. This was defended on a number of issues, including issues of bailment, the principles of recoverability of loss in negligence, including pure economic loss.
After the point was successfully defended in the County Court, the County Court appeal before a Recorder and at the Court of Appeal, the Supreme Court granted permission to hear the claimant's appeal.
The Decision of the Supreme Court
The court found that the sum claimed under the hire agreement was, in fact, contingent upon the physical damage to the vehicle and the loss did not arise solely from the hire contract. On this basis, the loss was found not to be a pure economic loss. Nor were the questions on negligence set out in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20; [2022] AC 783, para 6, and Meadows v Khan [2021] UKSC 21; [2022] AC 852 appropriate to identify the scope of the of duty care.
On this the court departed from the findings of the lower courts, instead focusing on the issue of remoteness of damages in tort. It found that the Clause 16 sum would be recoverable, if it represented a reasonable pre-estimate of Helphire's loss of use.
The court was however alive to the concerns of the lower courts, in that a clause without such a limitation would be open to abuse:
- […] They were understandably concerned that the hire company should not be able, simply by stipulating an amount of money in a contract to which the 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.
Recognising and noting that these were valid concerns, the conclusion that followed was:
- (iv) […] we have noted the danger that in a case of this kind, without an insistence that the contractual liability is a reasonable pre-estimate of the hire company’s loss of use, the contractual clause might specify a sum to be paid by the claimant (even if expressed as being for loss of use of the car) that would impose an excessive liability on the defendant. Put another way, without that restriction there is a danger that this sort of contractual arrangement would be open to abuse and would inappropriately burden the defendant with a liability that does not reflect any actual loss.
(v) In this case, therefore, the loss comprising the claimant’s contractual liability under clause 16 would be too remote if clause 16 was not a reasonable pre-estimate of Helphire’s loss of use of its vehicle.
The court went on to state that when examining remoteness and unfair contract terms, 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.
In the Court of Appeal, it was conceded by the appellant that if the sum did not represent a reasonable pre-estimate of loss, the claim must fail (something that the appellant did not seek to resile from in the Supreme Court). The Supreme Court found that this concession was rightly made as a matter of law.
The court held that the burden fell to the defendant to assert and show that the Helphire's loss was too remote, being not reasonably reflected in the pre-estimate of loss in the Clause 16 sum. The decision went on to state that the recorder and subsequently the Court of Appeal were wrong to infer in their respective decisions that Helphire had other spare cars available, without there being a pleading and/or evidence from the defendant to that effect.
This led to the finding that in the absence of pleadings or evidence of Helphire's loss of use from the defendant, it was not open to the Court of Appeal to reduce the Clause 16 sum sought in this case.
The Implications of the Decision
Before the use of Clause 16, fleet providers would claim their own loss of use when their vehicles were off the road due to an accident. When considering the implications of this decision, there has been little change from the 'pre-Clause 16' position, that a hire company could claim for its loss of use.
This decision provides some finality, that a hire company cannot use a contractual demand against their hirer to recover more than it would be entitled to recover for its loss of use. It has been rightly decided that placing an excessive burden onto defendants and insurers for sums beyond the actual loss suffered (for a rate without any limit or control, as the sum within the agreement is decided only by the hire company) cannot be correct and that sum cannot simply be recovered without any basis for challenge or limitation.
The existence of the contract between the parties does have one important practical consequence, which is that the hire company does not first need to prove its loss of use, as would be expected if it brought the claim itself or if its clause represented a genuine attempt to estimate its loss of use. Instead it becomes the defendant's burden to plead and prove that the loss would be less.
Whilst it remains to be seen, there may be what could be considered a pitfall in the application of the burden of proof, in that the defendant may have to force the hire company's co-operation, where the turning point in such a case will be whether a hire company generally has a fleet of vehicles available. This may cause some procedural issues, as the requirement will be to evidence the loss of a party not in proceedings or for disclosure by such a third-party. Evidence, however, of Auxillis' 13,000 strong fleet, with access to further vehicles through relationships to meet demand, is demonstrable, so this should not pose an issue for those defending 'Clause 16' type claims.
Summary
The decision in Armstead represents a hard and long fought matter that has spanned many cases, many appeals and many years. Whilst the order on this appeal will be that Mrs Armstead will recover her claim, the goal has been achieved in setting a framework to prevent sums that are not a reasonable pre-estimate of loss from being recovered.
Ultimately, this decision gives defendants and their insurers the tools to defend cases properly where sums are sought that are significantly over and above the actual loss to the hire company.
For more information or advice, please contact one of our experts in our Vehicle Hire and Damage Team.
