· Any kind of imprudence
by a lender may reduce the damages payable by a valuer
· But the SAAMCO
‘cap’ may have a bizarre effect on the calculations
In a number
of recent cases, a lender’s allegations of negligence against a valuer have
been met by counter-allegations that the plaintiff, because of its imprudent
lending decision, was partly to blame for its own loss and must therefore
suffer a reduction in its damages for contributory negligence. In Interallianz
Finanz AG v Independent Insurance Co Ltd [1997] EGCS 91 it was held
that, since the House of Lords in South Australia Asset Management
Corporation v York Montague Ltd [1996] 2 EGLR 93 had limited a
valuer’s liability to the extent of the overvaluation (the SAAMCO
‘cap’), negligence by a lender could only be treated as ‘contributory’ if it
contributed to that overvaluation. Thus, negligent reliance on an obviously
shaky valuation could cause a lender to lose part of its damages, while wholly
‘independent’ negligence (such as a failure to check out the borrower’s
financial viability) could not.
The Interallianz
ruling was overturned by the Court of Appeal in Platform Home Loans Ltd v
Oyston Shipways Ltd [1998] 1 EGLR 108 and on February 18 1999 the House
of Lords handed down the result of a further appeal.
negligence is ‘contributory’?
The plaintiff
in Platform lent £1.05m on the security of a house that the defendant
had negligently valued at £1.5m. The true value was found to be £1m, so the
maximum damages for which the defendant could be liable was £500,000. However,
the lender had also been negligent, in two respects: not making the borrower
disclose the price he had paid for the property (information that would have
led them to challenge the valuation); and, more generally, making non-status
loans on a loan-to-value ratio of 70%. The trial judge and the Court of Appeal
agreed that each of these defaults amounted to contributory negligence and
justified a reduction of 20%. The lender appealed to the House of Lords, arguing
that the high LTV ratio did not contribute to the damages for which the valuer
was liable, and did not therefore justify reducing the award.
Valuers will
be relieved to know that the House of Lords has unanimously agreed with the
Court of Appeal’s interpretation of the Law Reform (Contributory Negligence)
Act 1945. As a result, any negligence by a lender in reaching the
decision to lend a certain amount to a certain borrower may be used by a
negligent valuer in order to set up the defence of contributory negligence.
of calculation
One-nil to
the valuer; but its elation was short-lived. The trial judge had assessed the
plaintiff’s total loss at £611,748, deducted 20% (which reduced it to £489,398)
and held that, since this sum was less than the £500,000 by which the defendant
had overvalued the property (the SAAMCO cap), the plaintiffs were
entitled to recover it. The Court of Appeal had disagreed, holding that the
correct approach was: first, to decide which of the total loss and the
overvaluation was the lesser amount (ie whether or not the cap applied); and, second,
to deduct 20% from the lesser figure. Thus, the lender was awarded only
£400,000.
On further
appeal, the majority view (4–1), most clearly expressed by Lord Hobhouse, was
that the Court of Appeal’s decision penalised the lender to an unfair extent,
by subjecting its damages to a ‘double deduction’. As his lordship put it:
It is not
just and equitable that the plaintiff’s recoverable damages be reduced to
£400,000 on account of contributory negligence, which is already fully taken
into account by reducing them to £489,000.
Their
lordships overturned the decision of the Court of Appeal and restored the award
to its previous level of £489,398. Thus, it appears, the law is now:
contributory negligence first, SAAMCO cap second.
It is
respectfully suggested that the Court of Appeal’s decision on this issue was
entirely correct. Given that the lender’s negligence contributed (to the tune
of 20%) to every penny of loss that it suffered, and that the valuer’s
liability to a lender who had not been negligent at all would have been
only £500,000, it seems obvious to us that the lender must lose 20% of its
£500,000. As for the double deduction argument, this appears to lose sight of
the fact that the reason for capping the damages to the amount of the
overvaluation has nothing whatever to do with contributory negligence — and if
there are two entirely separate reasons for reducing the total award, how can
it be unjust and inequitable to apply them both?
In seeking a
deeper explanation for this surprising decision, the following remark of Lord
Millett may be instructive. Referring to the reduction of the plaintiff’s
damages by the Court of Appeal, he said:
The
remarkable consequence is that, if the award stands, the [plaintiff] will bear
more than one-third of a loss for which it was only 20% to blame.
To which we
would reply: ‘What is so remarkable about that?’ It would only be remarkable if
the corollary of the plaintiff’s being 20% to blame were that the defendant
were 80% to blame — in that case, the latter would indeed be getting off unduly
lightly. And it may be that the majority decision is based on such a tacit
assumption as to the division of blame. However, that assumption is inaccurate.
In legal terms, thanks to SAAMCO, the valuer is not ‘to blame’ for that
part of the lender’s loss which exceeds £500,000, and so it is not at all
surprising that the lender must carry that loss itself.
The last
word goes to Lord Cooke who, in his dissenting judgment, indicated all too
clearly where the problem really lies:
If any anomalies or inequities be thought to
arise from approaching the present case in this way, they will be attributable
to the limit of a valuer’s duty of care, and consequent liability, imposed by
your Lordships’ House in SAAMCO and Nykredit, decisions which
your Lordships were not asked to reconsider on this occasion.
