Supreme Court’s Valentine’s Day judgment considers whether subrogated claims by Credit Hire Organisations comprise relational or pure economic loss

The Supreme Court delivered its judgment in Armstead v Royal & Sun Alliance Insurance Company Ltd. [2024] UKSC 6.

The wider question before the court was whether a claimant could recover an economic loss, comprising a contractual liability to pay a sum of money, as a result of physical damage to property they either owned or had possessory interest in as a bailee. A relationship of bailment arises where one person voluntarily takes temporary possession of property belonging to another and with their consent; A hire contract represents a paradigm example.

In this case, a credit hire organisation (CHO) was litigating claims because it had lost the use of its vehicles, which required repair following non-fault accidents involving its customers. The CHO sought to recover a higher level of damages by bringing subrogated claims in the name of hire customers, rather than simply making a personal claim in its own name. The mechanism deployed by CHOs involved entering into hire agreements with customers on its standard terms that, by including a specific clause in those agreements [“clause 16”], imposed a (higher) contractual liability upon the customer to pay to the CHO a sum in the event of an accident that caused damage to the vehicles. That liability was calculated by reference to the commercial daily hire rate over a maximum period of up to 30 days. 

The CHO would then bring claims against the insurers of at-fault drivers in the name of its customers to recover this contractual liability, instead of bringing a conventional claim itself for general damages arising from the vehicles’ loss of use, which would generally mean recovering a lesser sum.

In the instant case, the Court of Appeal had earlier held, following Conarken Group Ltd & Anor v Network Rail Infrastructure Ltd [2011] EWCA Civ 644, that the contractual liability was not recoverable as it comprised “relational economic loss”, defined as financial loss that occurs only because of the relationship between the immediate, physical, victim of a wrong [the customer] and the claimant [the CHO]. In so finding, the Court of Appeal approved a leading textbook: “Palmer on Bailment” (at 4-113): 

“The quantum recovered by the bailee [hire customer] should not be permitted to exceed the aggregate of, first, the amount which the bailor [hire company] could have recovered in person from the wrongdoer and secondly, the amount, if any, of the bailee’s [hire customer’s] personal loss. 
Why, to state matters rhetorically, should the fact of the bailment [hire agreement] entitle the bailor [hire company] to recover more indirectly than he could have recovered personally…”

The Supreme Court's judgment

The Court found that the contractual liability of a credit hire customer to a CHO – as result of the former’s inability to return a hire vehicle in an undamaged state following a non-fault road traffic accident – was not a pure or relational economic loss and may now be recoverable from a wrongdoer and their insurer. 

Pure or relational economic loss is irrecoverable in negligence if the claimant had no proprietary or possessory interest in the property when the damage occurred. However, the loss of use in this case was not irrecoverable because it was agreed that the hire customer had a possessory interest in hiring the vehicle from the CHO, which – against third-parties – proves title to sue.

However, full recovery is not assured. Instead, the level of recovery is always subject to the proviso that the contractual liability did not exceed a reasonable pre-estimate of the CHO’s loss. In the instant case, the contractual liability – calculated by reference to the daily hire rate and, critically, capped at a maximum period of 30 days’ hire – was recoverable as a reasonable estimate of the CHO’s loss of use because the defendant had not led any evidence to prove that this sum exceeded a reasonable estimate of loss. 

Nevertheless, where the contractual liability did not represent a reasonable pre-estimate of loss – and sufficient evidence could be adduced in support – the claimant would still be entitled to recover such lesser sum as would represent the reasonably foreseeable loss of use, per Cory v Thames Ironworks and Shipbuilding Co Ltd (1868) LR 3 QB 181 and Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, 539.

In summary:

1. The contractual loss found in this specific contract is recoverable;
2. It is, however, subject to the loss claimed representing a reasonable estimation of the actual loss to the hire company;
3. The burden of proving the sum claimed is not a reasonable estimation rests with defendants.

What this means for you

We do not expect this decision to mark the end of the so-called war of attrition between CHOs and insurers. On the contrary, we anticipate that future disputes will now focus on obtaining sufficient information – for example, via published statutory accounts or applications for disclosure – to enable prospective parties to identify what actually represents a reasonable pre-estimate of a loss of use claim. 

In that respect, West Midlands Travel Ltd v Aviva Insurance UK Ltd [2013] EWCA Civ 887 held that the proper measure of damages for loss of use should be calculated by reference to (i) interest foregone on the capital value of the damaged vehicles (if owned), or the daily amount payable under a chattel lease (if not), (ii) wasted expenses directly attributable to each damaged vehicle and (iii) an allowance for their depreciation, limited to the period that the vehicles were not available for commercial deployment. 

Whilst, therefore, we may expect a flurry of amendments to contracts from CHOs, that does come with its own risks. The very real risk is that defendants, in having to discharge the burden of proving what represents a reasonable estimation of the loss, have the weight of a Supreme Court judgment behind them when they make applications for, what credit hire companies would no doubt consider, commercially sensitive information. That would include fleet numbers, records of utilisation, actual recovery rates compared with claimed rates in credit hire cases (ie. the rate recovered v commercial rates), profit and loss accounts, together with evidence of how their commercial rate is comprised. 

We very much doubt the credit hire companies will willingly disclose such evidence, therefore, applications to obtain evidence in support of these heads of loss will now surely become the next contentious issue.