Bank claiming solicitor’s negligence in relation to mortgage transaction causing loss – Whether action in tort statute-barred by virtue of section 2 of Limitation Act 1980 – Whether running time postponed by section 14A of Act – Whether correct measure of damages adopted – Judge allowing claim – Appeal allowed
In March 1989 Sharlands Developments Ltd (SDL) purchased a vacant building plot adjoining the Haven, Marley Road, Exmouth, Devon, for £150,000. Of that sum, 92% was funded by an advance from the claimant bank secured by a first legal charge over the property. The second defendant, a firm of solicitors known as Crosse & Crosse (CC), acted for the bank on the transaction. Its instructions were set out in a letter, which stated: “We should be obliged if you would furnish the Bank with a report stating whether or not the mortgagor has a good and marketable unencumbered title, carry out all necessary searches and usual enquiries and report whether they disclose any matters which could affect the value or the saleability of the property”. The bank agreed to make the advance to SDL on the basis of CC’s advice, given pursuant to those instructions, confirming that, after investigation, it considered that, upon completion, SDL would obtain a good and marketable title.
In fact, the plot was subject to two restrictive covenants, the effect of which was substantially to limit the developable area of the plot. It was subsequently sold for £32,000, leaving the bank with a significant shortfall, which it was unable to recover. In July 1996 the bank issued proceedings against CC, alleging that the firm had breached its contractual and tortious duty of care in failing properly to advise the bank. The damages sought represented the difference between the amount lent to purchase the plot and the net proceeds of realisation of the security. CC pleaded, inter alia, that the claim was statute-barred by reason of section 2 of the Limitation Act 1980, whereby an action cannot be brought more than six years after the date upon which the cause of action accrued. CC contended that that date was in 1989, when the bank had made the advance.
The judge held that CC was negligent, and that although the bank’s contractual claim against CC was statute-barred by virtue of section 2, its action in tort was not. He found that CC had failed to show that the damage had occurred, and the cause of action had arisen, more than six years before the proceedings commenced, and that even if it had, section 14A applied, so that time did not start to run until July 1995, when the bank first learnt of the terms of the covenants. The judge accordingly gave judgment against CC in the full amount of the bank’s claim. CC appealed, contending that: (i) the judge had erred in rejecting its section 2 defence; alternatively (ii) if the bank’s claim was not statute-barred, the judge had adopted the wrong measure of damages, as only part of the pleaded loss had been caused by CC’s negligence.
Held: The appeal was allowed.
1. The judge had erred in his conclusion that CC had failed to discharge the burden of proving its limitation defence under section 2. It had been incumbent upon the judge to make findings on evidence that was before him and that was relevant to the issue. That evidence included valuation evidence, since, on the principle in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1998] 1 EGLR 99, it was not possible to identify the date upon which the bank’s cause of action against CC arose without knowing the value of the security. Moreover, the judge had treated the burden of proof in relation to CC’s limitation defence as lying upon CC, which was a fundamental misdirection.
2. The absence of findings on the valuation evidence could not serve to vitiate the judge’s conclusion on section 14A, given his specific finding that the bank first became aware of the effect of the restrictive covenants on 7 July 1995: see El Ajou v Dollar Land Holdings plc (No 1) [1994] 2 All ER 685. Therefore, regardless of his conclusion in relation to section 2, he had been right to resolve the limitation issue in favour of the bank.
3. The judge had accepted that SDL would not have gone ahead with the transaction had it known of the terms of the restrictive covenants. CC was in all respects in the same position as a valuer, in that the breach of duty in respect of which damages were sought was the failure by CC to draw the attention of the bank to a matter affecting the value and saleability of the plot. By reason of that breach of duty, the bank took a security that it believed to be more valuable than was in fact the case.
4. In the light of that conclusion, a question arose as to the proportion of the overall loss for which CC was liable under the principle in South Australia Asset Management Corp v York Montague Ltd [1996] 2 EGLR 93. The determination of that question required findings on the valuation evidence, including findings as to the value of the plot at the time of the 1989 transaction, with and without the restrictive covenants. The judge had not made such findings. Thus, given that liability was no longer an issue, there was to be an inquiry into damages, which was to proceed upon the basis that CC was not liable for the whole of the overall loss.
Michael Pooles QC and Julian Picton (instructed by Bond Pearce, of Exeter) appeared for the appellant; Simon Berry QC and Katherine Holland (instructed by Rosling King) appeared for the respondent.
Thomas Elliott, barrister
