The UK Supreme Court has handed down judgment in Armstead v Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6, granting an appeal which allowed the recovery of losses from an insurance company who was not a party to the hire contract for a replacement vehicle. 

Background 
The Appellant (Claimant) Lorna Armstead, in what can only be described as a string of bad luck, was involved in two road traffic collisions in short succession. Following the first accident, involving the Respondent's insured driver, Ms Armstead entered into a credit hire agreement for a replacement vehicle while hers was being repaired. During this hire period, Ms Armstead was involved in a second incident, causing damage to the hire vehicle. She was not at fault for either accident. 

Ms Armstead sought to recover the repair costs sustained when returning the hire vehicle from the original negligent driver’s insurance company, pursuant to her contact with the rental company. 

The Respondent, RSA Insurance, sought to argue that the contractual provision the Claimant relied on to recover costs incurred under the credit agreement was an unfair contract term under sections 62 and 63 of the Consumer Rights Act 2015 and/or that the sums sought were a penalty and therefore not enforceable. 

The Appellant had failed at all stages leading up to this judgment, with the Courts below finding that the relevant contractual provision was too remote to be recovered as it was not a reasonable estimate of the hire company’s loss of use.

Findings

The UK Supreme Court held that the Appellant was entitled to damages for the clause in the hire agreement, upholding that a Claimant in the tort of negligence can recover, by way of damages, the amount of any contractual liability that the Claimant owes to a third party when it is incurred as a result of the defendant's wrongful act. In essence, because the Respondent's insured driver acted negligently, the Claimant can recover liability from them what she incurred because of that act. 

While the Bench was unanimous in its decision to grant the appeal, they highlighted that all three lower courts dismissed the claim. 

The UK Supreme Court’s judgment was critical of the earlier findings of the lower courts, stating, “Of the various reasons given for rejecting the claim, only one was in principle a legally valid reason. This was that the loss was too remote to be recoverable because the clause 16 sum was not a reasonable estimate of the hire company’s likely loss of revenue while the car was off the road for repairs.” 

The Court held that once the Claimant has proved that a tort has been committed and the loss was caused by the breach of duty, the burden then shifts to the Defendant to contest the recoverability of the damages claimed. Lord Leggatt and Lord Burrows stated at [74] that since, “RSA […] did not plead or adduce any evidence to show that the clause 16 sum was not a reasonable estimate of the hire company’s likely loss […] it was not open to the Court of Appeal to reject the claim on this ground.” 

Implications  

This decision provides something of a middle ground between innocent parties facing repair costs which they are not at fault for incurring, while also preventing a credit hire company from recovering unreasonably high sums that are demonstrably more than they would be able to recover themselves if utilising the contract against innocent hirers. 

The judgment may create some procedural hurdles for parties to navigate. For example, the burden is on defendants to satisfy the court that the sums sought by the hire company are too remote, or not a reasonable pre-estimate of loss. In order to show this, there will likely need to be some cooperation by the hire company, potentially leading to an increase in applications for third party disclosure.