Lender relying on valuation of property – Judge finding valuation negligent – Whether reduction in lender’s damages for contributory negligence should be applied to lender’s basic loss or to amount of valuer’s overvaluation – Law Reform (Contributory Negligence) Act 1945 section 1(1) – Appeal allowed
In 1990 the plaintiff lender, in common with a number of other lenders, operated a system of “non-status” loans. Under the system it would lend money against the security of the property alone without making any substantial investigations into the status of the borrower. In June 1990 a borrower proposed to remortgage his home in Edgbaston, Birmingham, and approached the plaintiff with a view to obtaining a loan of £1.05m in order to pay off his existing mortgage and to leave himself a surplus for investment. He claimed his property was worth £1.5m. The plaintiff, in accordance with its practice, obtained two separate valuations of the property from the first and second defendants, who both valued the property at £1.5m. The normal percentage that the plaintiff lent on a non-status loan was 70% of the property’s value. On that basis, the plaintiff advanced £1,050,195 to the plaintiff secured by way of first legal charge over the property. In 1993 the borrower fell into arrears with the repayments and the plaintiff obtained, possessed and exercised their power of sale, obtaining £435,000 for the property.
The plaintiff issued proceedings against the defendants. The judge held that the valuations were negligent and that the true value of the property at the relevant time in August 1990 would have been £1m, and that, accordingly, the maximum amount the plaintiff would have lent would have been £700,000. He concluded that the borrower would not have proceeded with the transaction if the plaintiff had only been prepared to lend that amount, and therefore, damages for negligence were to be assessed on the basis that the plaintiff entered into a transaction that it would not otherwise have entered. He valued the plaintiff’s basic loss from entering into the transaction at £612,000 less, which he reduced by 20% for contributory negligence for the plaintiff’s failure to ensure that the application form stated how much the property had been purchased for and for the plaintiff’s incautious approach of lending 70% of the value of the property. Damages amounted to £489,000. The Court of Appeal, applying the principle in South Australia Asset Management Corporation v York Montague Ltd [1996] 2 EGLR 93 (the SAAMCO principle), namely that a lender’s damages for negligent valuation was to be subject to a “cap” limiting its recovery to the amount of the defendant’s overvaluation, held that the damages accordingly fell to be reduced to £500,000 and then by the 20% for the contributory negligence to £400,000. The plaintiff appealed.
Held: The appeal was allowed by a majority.
1. By section 1(1) of the Law Reform (Contributory Negligence) Act 1945 damages recoverable by the claimant were to be reduced to such an extent as the court thought just and equitable, having regard to the claimant’s share in the responsibility for the damage, and it was just and equitable to reduce the sum of the plaintiff’s loss, £612,000, caused partly as a result of the defendant’s negligence and partly as result of its own. If the overvaluation had been more than the plaintiff’s loss, the SAAMCO principle would have been irrelevant but the plaintiff’s recoverable damages would nevertheless have fallen to be reduced for contributory negligence by 20%, to £489,000.
2. It did not make a difference that the starting point for calculating the plaintiff’s damages, namely the sum of the plaintiff’s loss, exceeded the amount of overvaluation. Accordingly, the plaintiff’s recoverable damages were not to be reduced to £500,000 under the SAAMCO principle before the reduction was made for contributory negligence. It was not just and equitable to make any further reduction and the figure of £489,000 was within the scope of the duty of care that the judge had found the defendant to have breached. The Court of Appeal had made the same deduction twice over, since the SAAMCO principle already involved an exercise of attribution in relation to the extent of the defendant’s legal responsibility for the plaintiff’s basic loss, which had to be taken into account in deciding what, if any, further reduction in the plaintiff’s recoverable damages was just and equitable.
Nicholas Patten QC and Andrew PD Walker (instructed by Rosling King) appeared for the plaintiff; Simon Berry QC and Timothy Harry (instructed by Williams Davies Meltzer and Dibb Lupton Alsop, of Birmingham) appeared for the first, second third and fourth defendants.
Thomas Elliott, barrister
