UK Supreme Court Clarifies Recoverability of Economic Loss From Contractual Liabilities in Negligence Cases

Citation: [2024] UKSC 6
Judgment on

Introduction

In the case of Armstead v Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6, the Supreme Court of the United Kingdom examined several fundamental principles of negligence law, and more specifically, the recoverability of economic losses resulting from physical damage to property. This case provided an opportunity for the court to clarify when consequential losses arising from a pre-existing contractual liability are recoverable in the tort of negligence. It also addressed the burdens of proof concerning the issues of remoteness of damages.

Key Facts

The appellant, Lorna Armstead, hired a vehicle from Helphire Ltd on credit hire terms after being involved in a traffic collision. Subsequently, a second collision occurred, for which she was not at fault, resulting in damage to the hired vehicle. Helphire invoked clause 16 of their agreement, which required Armstead to pay a daily rental rate for the period when the vehicle was unavailable for hire due to damages. The sum claimed under this clause amounted to £1,560 based on a credit hire rate rather than a basic hire rate.

Duty of Care and Property Damage

Key legal principles reaffirmed in this case include:

  1. A person owes a duty of care to not cause physical damage to another’s property and is liable for the diminution in value and consequential financial loss due to damage (SCM (United Kingdom) Ltd v WJ Whittall & Son Ltd; Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd).
  2. Pure economic loss that does not result from personal injury or damage to claimant’s property is generally not recoverable.
  3. A possessor or bailee of the property has sufficient title to sue for damages caused by a third party’s negligence (The Winkfield).

Remoteness of Damages

The recoverability of damages is limited by general principles such as foreseeability and remoteness. In the context of negligence, the test for remoteness is whether the loss is of a type reasonably foreseeable at the time of the breach of duty (Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co, The Wagon Mound).

Contractual Liability as Recoverable Loss

The court expanded upon the principle that a pre-existing contractual liability may give rise to recoverable loss if it is consequential on physical damage to property. It referred to two cases – Ehmler v Hall and Network Rail Infrastructure Ltd v Conarken Group Ltd – as authority for the proposition that contractual liabilities can constitute recoverable loss, provided they represent a reasonable pre-estimate of the likely amount of loss resulting from the damage.

Burden of Proof

The Supreme Court elucidated on the burden of proof relating to remoteness in negligence claims. It ascertained that once the claimant proves the commission of a tort causing loss, the burden shifts to the defendant to demonstrate that the loss is too remote to be recoverable, a principle analogous to mitigation of loss, contributory negligence, and legal causation.

Outcomes

The Supreme Court allowed the appeal, ultimately determining that the lower courts erred in their rejection of the claim. Critically, RSA did not provide any evidence to suggest that clause 16 did not represent a reasonable estimate of Helphire’s likely loss of hiring-out revenue, despite having the burden of proof. The court asserted that recoverable loss in tort for negligence may include a liability arising from a contractual obligation, such as the clause 16 sum, provided that it is reasonably foreseeable and not too remote.

Conclusion

Armstead v Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6 clarified the circumstances under which economic losses tied to contractual liabilities are recoverable in tort. The judgment underscores the importance of the proper application of well-established legal principles to disputes concerning recoverable losses and the significance of the burden of proof in determining questions of remoteness. Through its detailed analysis, the Supreme Court has provided an important precedent on how contractual liabilities are treated in negligence claims and the parameters for determining the recoverability of such losses.

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