Remoteness control: Supreme Court rules on burden of proof and contractual losses in negligence

The decision also raises a significant point on burden of proof regarding a remoteness defence. As with other defences which seek to reduce a claimant’s recoverable loss, the court held that it is for the defendant to prove that a loss is too remote to be recoverable.

We explore these points further below.

Background

Ms Armstead had hired a car on credit terms from Helphire Ltd after her own car was damaged in an accident that was not her fault.

While using the hire car, Ms Armstead was involved in another accident, caused by the negligence of a driver insured by Royal & Sun Alliance Insurance Company Ltd, and the hire car was damaged. Ms Armstead was able to continue driving it, but it had to be repaired once she returned it at the end of her hire period.

For the 12 days during which the car was being repaired, it was unavailable for hire by Helphire. Under the terms of the hire agreement, Ms Armstead had to pay Helphire a sum equal to the daily rental rate for each day that the car was off the road, up to a maximum of 30 days. This sum amounted to £1,560.

Ms Armstead claimed this sum, along with the cost of repairs, from RSA as damages for the negligence of its insured driver. RSA admitted liability for the cost of repairs but disputed the claim for the sum payable to Helphire. RSA argued that it was either pure economic loss, or too remote, or outside the scope of the driver’s duty of care, or not a reasonable estimate of Helphire's loss of use.

Decision

The claim was dismissed in all three courts below. The Court of Appeal’s reasons for dismissing the claim included that the sum was irrecoverable pure or relational economic loss that arose from an internal arrangement between Helphire and Ms Armstead, and that it did not represent a reasonable and genuine attempt to assess the likely loss for not having use of the hire car (and therefore was “too remote” to be recoverable). 

The Supreme Court unanimously reversed the earlier decisions and held that Ms Armstead was entitled to recover the sum payable to Helphire as damages.

Duty of care

The Supreme Court recapped the well-established principles that a person who negligently causes physical damage to another person's property is liable to pay damages for the diminution in value of the property and any other financial loss consequent on the damage. There was “no issue” about the scope of the relevant duty to take care to avoid causing such damage.

Pure economic loss

The Supreme Court rejected the findings below that the sum payable to Helphire was irrecoverable as a pure or relational economic loss. Rather, it was an example of loss consequential on the physical damage to the car.

The court also held that there 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 the damage to the claimant’s property. Applying Network Rail Infrastructure Ltd v Conarken Group Ltd [2011] EWCA Civ 644; [2012] 1 All ER (Comm) 692, it held that:

“Where physical damage is negligently caused to revenue-generating property, the loss recoverable by the owner of the property from the person who caused the damage includes a sum payable by the owner, under an agreement with another party to compensate that party for its loss of revenue resulting from the damage, provided the sum agreed is a reasonable estimate of the likely amount of that loss”.

It further clarified that “there is no difference in principle” between a loss suffered because the claimant does not receive revenue under a contract and a loss suffered because the claimant must make a payment under a contract because of physical damage to its property.

Remoteness

The court stated that the real issue in this case came down to the question of whether the loss was too remote to be recoverable.

The court rejected the argument that the liability to Helphire was not a reasonably foreseeable type of loss. The court restated the classic test for remoteness in negligence: a loss is too remote to be recoverable as damages if the type of loss suffered was not reasonably foreseeable at the time of the breach of duty. In addition, if the type of loss was reasonably foreseeable, it does not matter that the way in which it was incurred was not reasonably foreseeable.

Applying this, the court said that financial loss caused by an inability to use a hire car that has been damaged is reasonably foreseeable. The precise manner by which the loss of use of the vehicle became financial loss to the claimant (through contractual liability to Helphire) need not have been foreseeable.

The court accepted, however, that the contractual liability must constitute a reasonable pre-estimate of the loss likely to be incurred by the third party because of the damage to the property. If that were not the case, it would not be the type of loss which is reasonably foreseeable and therefore not be recoverable.

Burden of proof

The case therefore turned on (i) whether the sum claimed was a reasonable pre-estimate of the loss Helphire would suffer for loss of use of the car, and (ii) which party had the burden of proof in relation to that. The Supreme Court noted that there was a “surprising” absence of authority on the question of who has the burden of proof in respect of whether a particular loss is irrecoverable on grounds of remoteness.

The Supreme Court clarified that, as with the other possible limits on damages recoverable after a defendant’s breach (such as scope of duty, intervening cause, failure to mitigate and contributory negligence), for reasons of fairness and efficiency, the burden is on the defendant to prove that a loss is too remote to be recoverable – i.e. that it was not a type of loss that was reasonably foreseeable.

Once the claimant has established that the defendant's wrong caused its loss, it was fair that the defendant should demonstrate a sound reason for not fully compensating the claimant. It would be unduly burdensome to require the claimant to anticipate ways it might be said that the defendant should not be legally accountable for the loss and rebut them. This accords with the rules of pleading, where it is not practice for claimants in negligence claims to have to plead that losses were of a reasonably foreseeable type.

As RSA (on whom the burden of proof lay) had not argued or adduced any evidence to show that the loss of use sum was not a reasonable pre-estimate, it had failed to discharge its burden of proof. As such, it was not open to the court to reject the claim on grounds the loss was too remote. The appeal was therefore allowed.

Conclusion

There are two significant points arising from this decision. First, where negligence resulting in loss has been established, the burden of proof is on the defendant to show that the loss is too remote for the claimant to recover. The Supreme Court has now stated this definitively where previously there was no clear authority on the point.

Secondly, the decision reconfirms that economic loss resulting from physical damage to property is not irrecoverable in negligence simply because it arises from a contractual arrangement between the claimant and a third party. Parties should not fall into the trap of thinking that a contractual liability to pay is automatically classified as “pure” economic loss; it can be a consequence of damage to property, in which case the usual rules on recoverability will apply.

While this decision concerned a relatively small sum in hire car rental, the principles at play extend far further – including to other revenue-generating property. The case will have significant implications in situations where a third party's negligence causes physical harm to property which triggers contractual liabilities such as liquidated damages or accelerated or higher payments, in which case the need to show that these clauses were reasonable will be engaged.