Review of Lagden v O'Connor [2004] 1 AC 1067

Termed the "sequel to Dimond v Lovell", the case of Lagden v O'Connor explores the issue of the impecunious hirer who does not have the funds to hire a vehicle and is forced to use a credit hire company.  The case of Dimond v Lovell had, of course, outlined that claimant's were only entitled to the market (or spot hire) rate and could not recover the costs of the additional services provided by accident hire/credit hire companies (note: that the term 'accident hire company' and 'credit hire company' are interchangeable).  It was argued, however, that an impecunious hirer should be entitled to claim the full hire rate charged as they had no alternative.  

The issue at hand is summarised in Lord Hope of Craighead's leading judgment:

"Mr Lagden's case raises an issue which is of concern to those innocent motorists who wish to hire a car while their own car is being repaired but, for economic or financial reasons, have no choice but to use the services of a credit hire company. It is of concern too to the motor insurance industry, as the effect of the services which the credit hire companies provide has been to increase substantially the cost of claims which must be met by insurers on behalf of the motorists who were responsible for these accidents. It arises from the decision in Dimond v Lovell [2002] 1 AC 384 that only the spot hire rate of hiring an alternative vehicle is recoverable, and not the higher rates charged by credit hire companies. The question is whether that decision applies to a claimant who, due to lack of funds or for any other reason which is reasonably foreseeable, has no alternative but to use the services of a credit hire company."

Circumstances of Lagden v O'Connor

The claimant's car was damaged as a result of the defendant's negligence and required to be repaired at a garage. The claimant, who was unemployed and could not afford to pay for the hire of a replacement car while his own car was off the road, signed an agreement with a credit hire company whereby it provided a hire car at no cost to him by way of the provision of a 26-week credit facility, to allow for the company to recover its charges from the negligent driver's insurers, and an insurance policy to provide payment in the event of non-recovery within that period. The fees involved in those services were reflected in a higher rate for the car hire than the equivalent spot hire rate charged by traditional car hire firms for a similar vehicle. The defendant admitted liability but disputed the claim for damages, which included £659 in respect of the credit hire company's charges. In relation to the claim for £659 the judge held that an impecunious claimant who could not afford to hire a replacement car at commercial rates or obtain a loan for that purpose had no option but to obtain a credit hire package with additional benefits that would ordinarily be irrecoverable and was therefore entitled to recover the whole cost of the package from the tortfeasor. The Court of Appeal upheld the judge's decision.

Decision

Held:
(1) that in approaching the question of damages payable to an injured party whose expenditure in mitigation had been augmented by his impecuniosity, the court was not precluded from considering the injured party's lack of means as being a factor too remote to be taken into account, but would apply the principle that a wrongdoer had to take his victim as he found him and had to bear the consequences if it was reasonably foreseeable that the injured party would have to borrow money or incur some other kind of expenditure to mitigate his damages.

(2) Dismissing the appeal (Lord Scott of Foscote and Lord Walker of Gestingthorpe dissenting), that although only an amount equivalent to the spot hire rate of hiring an alternative vehicle would normally be recovereable by a claimant who, deprived of the use of his car by the negligence of the defendant, had used the services of a credit hire company, and not the cost or the additional benefits obtained by the use of such a company, if it was shown that the claimant's impecuniosity was such that he would have been unable to obtain a replacement car had he not used a credit hire company, the reasonable additional charges of that company would be recoverable as damages, it being reasonably foreseeable that there would be some car owners who would be unable to obtain a replacement car other than by use of a credit hire company; and that, accordingly, the judge had been correct in allowing recovery of the whole cost of the claimant's car hire.

Comment

A couple of key themes in credit hire cases are explored in this case: a) impecuniousity; b) mitigation of loss. 

Impecuniousity

The precise meaning of what the courts will deem to be an "impecunious hirer" was explored.  As Lord Nicholls of Birkenhead states:

"Lack of financial means is, almost always, a question of priorities. In the present context what it signifies is inability to pay car hire charges without making sacrifices the plaintiff could not reasonably be expected to make."

Lord Hope of Craighead states:-

"The full cost of obtaining the services of a credit hire company cannot be claimed by the motorist who is able to pay the cost of the hire up front without exposing himself or his family to a loss or burden which is unreasonable.....In practice the dividing line is likely to lie between those who have, and those who do not have, the benefit of a recognised credit or debit card. It ought to be possible to identify those cases where the selection has been made on grounds of convenience only without much difficulty." 

Mitigation of Loss

Lord Hope of Craighead comments on the general duty a claimant has to ensure that the loss suffered is 'reasonably incurred'.  He states:-

"[T]he principle is that he must take reasonable steps to mitigate his loss. The injured party cannot claim reimbursement for expenditure by way of mitigation that is unreasonable. So the motorist cannot claim for the cost of hiring another vehicle if he had no reason to use a car while his own car was being repaired—if, for example, he was in hospital during the relevant period or out of the country on a package holiday. If it is reasonable for him to hire a substitute, he must minimise his loss by spending no more on the hire than he needs to do in order to obtain a substitute vehicle. If the defendant can show that the cost that was incurred was more than was reasonable—if, for example, a larger or more powerful car was hired although vehicles equivalent to the damaged car were reasonably available at less cost—the amount expended on the hire must be reduced to the amount that would have been needed to hire the equivalent."

The onus on  proving that the claimant could have mitigated his loss is on the defendant in such cases.  As Lord Hope of Craighead states:-

"It is for the defendant who seeks a deduction from expenditure in mitigation on the ground of betterment to make out his case for doing so. It is not enough that an element of betterment can be identified. It has to be shown that the claimant had a choice, and that he would have been able to mitigate his loss at less cost. The wrongdoer is not entitled to demand of the injured party that he incur a loss, bear a burden or make unreasonable sacrifices in the mitigation of his damages. He is entitled to demand that, where there are choices to be made, the least expensive route which will achieve mitigation must be selected. So if the evidence shows that the claimant had a choice, and that the route to mitigation which he chose was more costly than an alternative that was open to him, then a case will have been made out for a deduction. But if it shows that the claimant had no other choice available to him, the betterment must be seen as incidental to the step which he was entitled to take in the mitigation of his loss and there will be no ground for it to be deducted."

"Applying those principles to the present case, I would hold that the defendant's insurers have not made out a case for the deduction which they seek. The evidence showed that Mr Lagden had no choice but to use the services of the credit hire company and that, if he was to make use of these services, he had no way of avoiding the additional benefits that were provided to him. The principles which I would apply are of general application. But it by no means follows that the same result must follow in every case where the innocent motorist uses the services of a credit hire company. The criterion that must be applied is whether he had a choice—whether it would have been open to him to go into the market and hire a car at the ordinary rates from an ordinary car hire company."

Comment

The application of the principles in Lagden v O'Connor has led to defendants instructing companies to provide hire reports to try to show that the claimant could have chosen cheaper alternatives and mitigated the loss he incurred.  The defandant solicitor will also try and recover as much financial information as possible from the pursuer where impecuniousity is pled to try and prove that he was not although it is notable that the onus of proving impecuniousity is with the Pursuer.

Review of Dimond v Lovell [2002] 1 AC 384

Let's kick start our review of credit hire case law by looking at one of the main decisions on the topic - the House of Lords case of Dimond v Lovell [2002] 1 AC 384.

This case was a landmark judgment in that it provided an overview of the facts/circumstances surrounding this complex area.  It is a lengthy decision and I have summarised the case below:-

Circumstances

The plaintiff, whose car had been damaged as a result of the defendant's negligence, signed a form of agreement with a specialist vehicle hire company for the hire of a replacement car whilst hers was being repaired. Under the agreement the company had the conduct of any litigation necessary to recover the damages and the payment of the hire charges was postponed until any such claim was concluded. The defendant's insurers refused to pay the sum claimed as hire charges on the ground that the agreement was a regulated consumer credit agreement for the purposes of the Consumer Credit Act 1974 but was unenforceable for failure to comply with the requirements of that Act. The insures had also argued that the hire charges were far in excess of the market rate (aka the "spot hire" rate) for vehicle hire.

Decision

Held , dismissing the appeal, that:-

(i) The only obligation on the hire company under the agreement had been to provide the car and, in the absence of credit, the company would have been entitled to payment during or at the end of the hire; 

(ii) that all the provisions concerning the pursuit of the claim were express or implied conditions deferring the right to recover the hire and therefore constituted a granting of credit; 

(iii) That since there was only one obligation on the hire company the agreement did not constitute a multiple agreement under section 18 of the 1974 Act but was a regulated agreement within the meaning of the Act; 

(iv) That Parliament intended that if such an agreement was improperly executed it would be unenforceable and the debtor should not have to pay; 

(v) That it would be contrary to that intention to apply the doctrine of unjust enrichment or to allow the plaintiff to sue the defendant as trustee for the company; 

(vi) That the only way the plaintiff could recover damages for the notional cost of hiring a vehicle which she had actually had free was under an exception to the rule against double recovery and there was no reason of policy why there should be such an exception; 

(vii) Accordingly, the agreement was unenforceable and a claim for damages for loss of use of the plaintiff's own car failed.

(vii) Where an agreement with a specialist accident hire company is enforceable the plaintiff will not be able to recover the full amount charged since, although it is reasonable for a plaintiff to use the services of such a company, he obtains more from the agreement than the cost of a replacement car and the additional benefits (e.g. the provision of credit and the loss of risk of pursuing a claim in the courts) are not recoverable against the defendant. The recoverable loss after allowance has been made for the additional benefits which a specialist accident hire company provides will normally be the market rate (aka 'spot hire' rate) for hiring a car from an ordinary car hire company.

The Key Points from Lord Hoffman's Decision

Lord Hoffman delivers the key decision in this case.  He elaborates on some of the overriding themes of credit hire and his judgment should be read by anyone with an interest in this area.  I have taken some of the main points from his judgment and can summarise as follows:-

The Need for Accident Hire Companies

"The services...offered by an accident hire company, in providing the car on credit and assuming the burden and risk of pursuing the claim, have filled a gap in the market. Many comprehensive motor insurance policies cover damage to the vehicle but not the cost of hiring a replacement. The owner of a damaged car can arrange for his car to be repaired in the knowledge that the bill will be sent to the insurance company. Whether his company meets the cost itself or recovers it from the other driver's insurer is (apart from the question of a no-claim bonus) not a matter which need concern him. If, however, he wants to hire a replacement vehicle, he will have to make the arrangements at his own expense and claim the cost from the other driver himself. Faced with such a prospect, many drivers will make do without a car while their vehicle is off the road. Accident hire companies enable them to have a replacement car without cost, trouble or risk."

The Impact on the Insurance Sector

"The accident hire business has increased the cost of third party claims against motor insurance companies.... Motorists not only hire replacement cars when they would not previously have done so but also, since they are not themselves paying, do not necessarily exercise the closest scrutiny over the rate that is being charged. Partly for this reason and partly because the companies have to be compensated for the credit and additional services that they provide, claims by accident hire companies are generally at rates substantially above the market or "spot" rates that an ordinary hire company would have been willing to offer for ready money. Motor insurance companies have therefore tried to resist such claims."

Credit Hire Agreements - The Consumer Credit Act 1974 

Section 65(1) of the Act provides: "An improperly-executed regulated agreement is enforceable against the debtor or hirer on an order of the court only."

"There has been no court order for the enforcement of Mrs Dimond's hiring agreement and...it is accepted on both sides that on the facts of the present case the court would not have jurisdiction to make one. It is also accepted that, for reasons which I shall explain, the agreement was improperly executed. So the only question for your Lordships' decision on this part of the case is whether the hiring agreement was a "regulated agreement" within the meaning of the Act."

(a) "Regulated agreement" 

The Act has a definition of a "regulated agreement" in section 189(1) . It means: "a consumer credit agreement, or consumer hire agreement, other than an exempt agreement."

A "consumer credit agreement" is defined in section 8(2):  "A consumer credit agreement is a personal credit agreement by which the creditor provides the debtor with credit not exceeding [a sum specified by regulation, which at the time of the hiring agreement was £15,000: see the Consumer Credit (Increase of Monetary Limits) Order (SI 1983 No 1878) ]."

This definition sends one to the definition of a "personal credit agreement", which is to be found in section 8(1) : "A personal credit agreement is an agreement between an individual ('the debtor') and any other person ('the creditor') by which the creditor provides the debtor with credit of any amount."

The definition chase ends with the meaning given to "credit" by section 9(1) : "In this Act 'credit' includes a cash loan, and any other form of financial accommodation."

"[I]t seems to me that one emerges from these statutory thickets holding onto a very simple question. Did...[the company]...provide Mrs Dimond with credit? If so, the hiring agreement was a personal credit agreement and, since it was for a good deal less than £15,000, a consumer credit agreement and thus (subject to the question of exemption) a regulated agreement."

Lord Hoffman then goes onto look at the terms of the hire agreement:-

"The only obligation of...[the company]...under the agreement was to provide the vehicle. In the absence of credit, it would have been entitled to payment during or at the end of the hire. All the provisions about the pursuit of the claim were express or implied conditions that deferred the right to recover the hire and therefore constituted a granting of credit. In addition, of course, the pursuit of the claim by..[the company]...on behalf of Mrs Dimond may have given rise to further obligations to her, such as the obligation to indemnify her against a liability."

"[If the] first argument was rejected and the hiring agreement not construed as an entire contract, then it..[was argued that it]...became a multiple agreement within section 18. One part was the hiring of the car and the other the provisions for pursuit of the claim.....The difficulty I have with this argument is that it seems to sever the provisions that create the debt (hiring the car) from the provisions that allow credit for payment of the debt. Whatever a multiple agreement may be, one cannot divide up a contract in that way. The creation of the debt and the terms on which it is payable must form parts of the same agreement. The truth of the matter is that I accept that the hiring agreement was a single contract. But I do not accept...[the]...submission as to what that contract was. He argues that it involved multiple obligations on the part of...[the company]..that had to be performed over a period starting when the car was hired and ending when the damages were recovered. I consider, on the contrary, that the only primary obligation of...[the company]...was to provide the car. The rest of the agreement dealt with the conditions upon which it would be entitled to recover the hire. To such an agreement section 18 has, of course, no relevance. "

"It is conceded that the agreement was not an exempt agreement. It is however worth noticing that article 3(1)(a) of the Consumer Credit (Exempt Agreements) Order 1989 (SI 1989 No 869) exempts consumer credit agreements such as this one if the total number of payments to be made by the debtor does not exceed four and: "those payments are required to be made within a period not exceeding 12 months beginning with the date of the agreement."

"[The company]" can therefore obtain exemption from the Consumer Credit Act 1974 if they include a clause that requires that the hire should in any event be paid (if at all) within 12 months. But the hiring agreement executed by Mrs Dimond was a regulated agreement within the meaning of section 65(1) ."

(b) Improperly executed 

Although it is conceded that the agreement was not properly executed, I think I should briefly explain why. By section 61(1) , a regulated agreement is not properly executed unless, among other things:

"(a) a document in the prescribed form itself containing all the prescribed terms and conforming to regulations under section 60(1) is signed in the prescribed manner both by the debtor or hirer and by or on behalf of the creditor or owner."

"Schedule 6 provided that certain terms were to be "prescribed terms" which the document had to contain for the purposes of section 61(1). These were, in the case of a consumer credit agreement to finance the acquisition of services by the debtor (such as the provision of the car to Mrs Dimond), "a term stating the amount of the credit, which may be expressed as the total cash price of the ... services". It is conceded that no such term appeared in the agreement signed by Mrs Dimond. The agreement was therefore improperly executed."

(c) Order of the court

"Section 65(1) provides that an improperly executed agreement shall be enforceable only "on an order of the court". Section 127 gives the court power to make orders for the enforcement of agreements that are, for various reasons, improperly executed. But subsection (3) provides that a court shall not make an enforcement order for an agreement that does not comply with section 61(1)(a) unless the debtor signed a document containing "all the prescribed terms". The hiring agreement in this case did not and is therefore irredeemably unenforceable."

Unjust enrichment 

"[It was argued that] if the hiring agreement is unenforceable, Mrs Dimond has been unjustly enriched. She has had 8 days use of a Ford Mondeo for nothing. She has certainly been enriched at the expense of...[the accident hire company]....The real difficulty, as it seems to me, is that to treat Mrs Dimond as having been unjustly enriched would be inconsistent with the purpose of section 65(1). Parliament intended that if a consumer credit agreement was improperly executed, then subject to the enforcement powers of the court, the debtor should not have to pay. This meant that Parliament contemplated that he might be enriched and I do not see how it is open to the court to say that this consequence is unjust."

Res inter alios acta

"[The next argument] was that it did not matter whether Mrs Dimond was liable to pay for the hire of the Ford Mondeo. The fact was that Mr Lovell had negligently deprived her of eight days' use of her Suzuki. This was her loss and the fact that she had been lucky enough to obtain the use of another car for nothing was, as one used to say, res inter alios acta. It should not affect Mr Lovell's liability, any more than if a friendly neighbour who happened to be going on holiday had put his car at her disposal. The neighbour would be surprised to learn that his generosity had been for the benefit of Mr Lovell."

"The courts have realised that a general principle of res inter alios acta which assumes that damages will be paid by "the wrongdoer" out of his own pocket is not in accordance with reality. The truth is that virtually all compensation is paid directly out of public or insurance funds and that through these channels the burden of compensation is spread across the whole community through an intricate series of economic links. Often, therefore, the sources of "third party benefits" will not in reality be third parties at all. Their cost will also be borne by the community through taxation or increased prices for goods and services."

Argument that Payment Should be Made to Mrs Dimond as Trustee for the Hire Company

"This case is....far away from the gratuitous provision of services (usually by a relative) which was considered suitable for recovery as trustee in Hunt v Severs [1994] 2 AC 350. If Mrs Dimond is allowed to sue Mr Lovell as trustee for...[the accident hire company]...the effect will be to confer legal rights upon...[the accident hire company]...by virtue of an agreement which the 1974 Act has declared to be unenforceable. This would be contrary to the intention of the Act. The only way, therefore, in which Mrs Dimond could recover damages for the notional cost of hiring a car which she has actually had for free is if your Lordships were willing to create another exception to the rule against double recovery. I can see no basis for doing so. The policy of the 1974 Act is to penalise...the accident hire company...for not entering into a properly executed agreement. A consequence is often to confer a benefit upon the debtor, but that is a consequence rather than the primary purpose. There is no reason of policy why the law should insist that Mrs Dimond should be able to retain that benefit and make a double recovery rather than that it should reduce the liability of Mr Lovell's insurers."

Damages

"I consider that the claim for damages for loss of the use of the car failed and should have been dismissed.The unenforceability of the agreement is a technical defect which more sophisticated drafting can easily correct. But the principles upon which damages are calculated are vital to the future profitability of the accident hire business....I would accept....that Mrs Dimond acted reasonably in going to...[an accident hire company]...and availing herself of its services. I am sure that any of your Lordships in her position would have done the same. She cannot therefore be said not to have taken reasonable steps to mitigate her damage."

"But that does not necessarily mean that she can recover the full amount charged by..[the accident company]. By virtue of her contract, she obtained not only the use of the car but additional benefits as well. She was relieved of the necessity of laying out the money to pay for the car. She was relieved of the trouble and anxiety of pursuing a claim against Mr Lovell or...[his insurer]...She was relieved of the risk of having to bear the irrecoverable costs of successful litigation and the risk, small though it might be, of having to bear the expense of unsuccessful litigation. Depending upon the view one takes of the terms of agreement, she may have been relieved of the possibility of having to pay for the car at all."

"My Lords, English law does not regard the need for any of these additional services as compensatable loss...[but]...How does one calculate the additional benefits that Mrs Dimond received by choosing the...[accident company]...package to mitigate the loss caused by the accident to her car? The hiring contract does not distinguish between what is attributable simply to the hire of the car and what is attributable to the other benefits. But I do not think that a court can ignore the fact that, one way or another, the other benefits have to be paid for. [The accident company]...have to bear the irrecoverable costs of conducting the claim, providing credit to the hirers, paying commission to brokers, checking that the accident was not the hirer's fault and so on. A charge for all of this is built into the hire."

"How does one estimate the value of these additional benefits that Mrs Dimond obtains? It seems to me that prima facie their value is represented by the difference between what she was willing to pay...[the accident company]...and what she would have been willing to pay an ordinary car hire company for the use of a car....[The accident company]...charged more because they offered more. The difference represents the value of the additional services which they provided. I quite accept that a determination of the value of the benefits which must be brought into account will depend upon the facts of each case. But the principle to be applied is that in the case of a hiring from an accident hire company, the equivalent spot rate will ordinarily be the net loss after allowance has been made for the additional benefits which the accident hire company has provided."

Note

As you can see, this is a detailed decision and it is worthwhile reading the original in detail.  Many of  the themes outlined in Lord Hoffman's judgment are frequently encountered in the world of credit hire law and I shall be exploring them further in future posts.

Getting Started - The Basic Principles

Ok folks let's get started by looking at those cases where people are seeking to recover credit hire charges for vehicle hired following an accident.  This is the subject of much litigation in the insurance sector.

A basic overview is can be found in this article entitled "Credit Hire: A Tug of War?" by Paola Sproul which can you can view at the site of  The Journal of the Law Society of Scotland

Stay posted for a more in-depth look at the case law and concepts surrounding this area of Credit Hire in due course.

Welcome

Welcome to the Credit Hire Law blog.

I am an insurance lawyer in Scotland and I thought I would create this blog for people who need a 101 on credit hire law particularly in relation to road traffic accidents where a party has to hire a vehicle and later seeks to recover their losses from the wrongdoing 3rd party (in reality, the claim is usually in made in the form of a claim to the 3rd party's insurer).  I deal with these types of cases on a day-to-day basis and I hope to provide a resource for practitioners over time.

Of course, many of the legal authorities for Scots law in this area come from England and therefore this blog will also be of relevance to those England practitioners who require a resource for credit hire.

Over the coming months I will be providing an overview of this area of the law so stay tuned....