Supreme Court considers economic loss and remoteness principles in tort of negligence

In Armstead v Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6, the Supreme Court found that where a defendant negligently damages the property of a claimant which results in the claimant incurring a contractual liability to a third party, that liability can be claimed as damages by the claimant.

Background

The Claimant was driving a hired car when it was damaged by a negligent third party. Under the terms of hire, the Claimant was liable in such situations for both the costs of repair and the daily hire rate for the period the car was in disrepair unavailable for hire (the Loss of Use Amount). The Claimant brought a claim against the negligent third party’s insurers, RSA, for the Loss of Use Amount. RSA resisted the claim by arguing that (i) the loss was too remote; and (ii) the Loss of Use Amount was pure economic loss and therefore irrecoverable.

Decision

The Supreme Court unanimously allowed the Claimant’s appeal, reversing the decisions of all three lower courts. The judgment found that the decisions of the lower courts were largely inconsistent with the basic legal principles applicable to negligence claims arising from damage to tangible property.

The Loss of Use Amount was irrecoverable as pure economic loss

A duty of care owed not to cause physical damage to property will cover loss or damage to that property and any consequent economic loss suffered by the owner of that property (subject to the general principles limiting recovery in tort), but not financial loss suffered by a third-party claimant, which is a type of pure economic loss. Pure economic loss is “economic loss that is not consequent on damage to, or loss of, the claimant's property (or on personal injury to the claimant).”

The Supreme Court clarified that the Loss of Use Amount is not pure economic loss, which is typically irrecoverable in the tort of negligence. This is because the Claimant had a proprietary interest in the hire car when the damage occurred. The Court stated that “…[t]here is no reason in principle why recoverable loss should not include a contractual liability to a third party provided that the liability is consequential on physical damage to the claimant’s property.”

The Loss of Use Amount was too remote to be recoverable

The Supreme Court made clear that the real issue was whether the Court of Appeal was right to conclude that the Loss of Use Amount was too remote to be recoverable. Applying the normal rules on recoverability of loss, the Supreme Court found that the loss arising from a contractual liability to compensate the hire company for loss of use was reasonably foreseeable, even if the precise manner in which it arose might not have been. The loss was recoverable if the contractual liability was a reasonable pre-estimate of the hire company’s loss. The Court found that the Loss of Use Amount was a genuine and reasonable pre-estimate of the hire company’s loss of use of its vehicle.

Considering an alternative line of reasoning, the Court noted that losses arising from a contractual liability can only be foreseeable if the liability itself is valid. In other words, if the liability does not constitute a penalty clause. Applying the modern test for penalty clauses as set out in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, the Court concluded that applying this reasoning would be unlikely to produce a different result on the facts.

The burden of proof in respect of remoteness

The Supreme Court also clarified that where the question is whether loss is too remote from a tort, as in this case, the burden of proof in respect of remoteness lies with the defendant.

RSA did not plead that the Loss of Use Amount was not a reasonable pre-estimate of the credit hire company’s loss of use of the hire car. Therefore, RSA had not discharged its burden of showing that the Loss of Use Amount was too remote to be recoverable and the Supreme Court held that it was not open to the Court of Appeal to reject to the claim on that ground. The Claimant’s appeal was therefore allowed.

Key takeaways

The Supreme Court’s clarification of pure economic loss is helpful. The difficulty of this area is shown by the fact that the three previous courts hearing this claim, including the Court of Appeal, came to a different conclusion with different reasoning on economic loss.

This decision will also be relevant to claims involving cryptoassets, where the borders of pure economic loss and the relevance of the nature of cryptoassets as property has caused confusion in the past.

With thanks to Alex Mann for his assistance in preparing this post.