Negligence — Mortgage valuation — Damages — Accrued mortgage interest — Important decision of House of Lords, reversing decision of Court of Appeal, on measure of damages — Review of authorities — Baxter v F W Gapp & Co Ltd ‘not an attractive precedent’ — Lenders entitled to be put in the same position as if the negligence had not occurred but not entitled to receive compensation for lost interest at the rate which the borrowers had contracted to pay — The fallacy of the lenders’ case was that they had been trying to obtain from the defendant valuer compensation for the borrowers’ failure and not the proper damage for the valuer’s negligence — Judgment to be entered for the defendant valuer in the county court without the need for any fresh assessment of damages
with whose speech all the other lords agreed, stated at the outset the main
issue of the appeal — It was whether a person who lends money at a high rate of
interest in reliance on a negligent valuation, and who claims to have suffered
loss as a result, can recover from the negligent valuer, as part of his
damages, interest at the contractual rate which the lender was entitled to be
paid by the borrower and which remained outstanding at the termination of the
transaction between the lender and the borrower — The answer given by the House
of Lords was ‘no’, but this result was reached only after considerable
litigation and analysis of the authorities
was by mortgagees against a chartered surveyor who had made a valuation of a
house for the information of the mortgagees, a finance company lending on
properties at the high risk or ‘non-status’ end of the market — The valuation,
of £18,000, as on a forced sale with vacant
worth anything like so much — It was also admitted that but for the valuer’s
negligence the lenders would not have made any loan to the borrowers on the
property — On the basis of this valuation the lenders advanced the sum of
£10,000 on the security of a mortgage of the house — The interest rates under
the mortgage were high, 36.51% while the borrowers continued to make payments
in accordance with the agreement but increased to 45.619% in the event of default
— The borrowers in fact soon defaulted and after possession proceedings the
mortgagees took over the property — They eventually sold it for £12,000 — In
the county court action the mortgagees claimed damages under the following
heads: the principal sum advanced of £10,000; general disbursements and
interest on them; legal costs arising out of the possession proceedings; estate
agents’ commission on the sale of the property; and (the controversial item)
the interest accrued under the mortgage contract — On the other side of the
account was the £12,000 recovered from the sale of the house and the small
amount of repayment of the loan which the borrowers had been able to make — The
county court judge gave judgment in favour of the mortgagees of the balance of
£7,136.41 and the valuer appealed
of Appeal, as indeed throughout the proceedings, the appellant claimed that the
mortgagees’ calculation of their loss was made on the wrong basis — The correct
basis, on the appellant’s submission, was that the mortgagees were entitled to
be placed in the position that they would have been in if they had received a
correct and competent report from the valuer and had consequently made no loan
to the borrowers — This would have meant in essence a claim for the recovery of
the £10,000 lent plus an amount calculated on the footing that the mortgagees
had for two years (or whatever was the correct period) been deprived of the use
of the £10,000, plus, of course, solicitors’ and estate agents’ charges, credit
being given for the £12,000 recovered on the sale of the house and the small
amount of repayment made by the borrowers — The Court of Appeal recognised the
force of the valuer’s submission but considered that they were bound by the
authority of Baxter v F W Gapp & Co Ltd, supported by the later decision in London
& South of England Building Society v Stone, to decide otherwise
— Although cogent criticisms could be made of Baxter v Gapp, it was a decision of
the Court of Appeal which could not be said to have been made per incuriam —
The ratio decidendi covered the question of interest, even if the rate of
interest was not specifically considered — However, the judgments in the Court
of Appeal, despite unanimity in dismissing the valuer’s appeal, recognised that
questions of principle raised by the case had not been resolved
appeal to the House of Lords provided the opportunity to reconsider the matter
from first principles — These had been laid down in classic, but necessarily
general, statements by Parke B in Robinson v Harman and Lord Blackburn
in Livingstone v Rawyards Coal Co — The gist of these was that when a party sustains
a loss, whether by breach of contract or tort, he should be placed, so far as
money can compensate him, in the same position as if he had not suffered the
wrongful act for which he is entitled to compensation
detailed examination of Baxter v
Gapp, both before Goddard LJ (sitting as an additional
High Court judge) and before the Court of Appeal, Lord Lowry said in his speech
that it was ‘not an attractive precedent’ — Apart from other criticisms, its
approach seemed contrary to principle, the principle being that ‘the aggrieved
party was entitled to be placed in the same position as if the wrong had not
occurred, and not to receive from the wrongdoer compensation for lost interest
at the rate which the borrower had contracted to observe’ — What the lenders
had lost in the present case, in addition to their other damages, was the use
of the £10,000 while it was perforce locked up in the loan — The fallacy of the
lenders’ case was that they had been trying to obtain from the valuer
compensation for the borrowers’ failure and not the proper damage from the
valuer’s negligence
to actual figures there was a lack of evidence as to how the lenders financed
the loan or as to how the money, if not lent, could have been profitably
employed — Taking the figures which had been mentioned of £10,000 for the
advance and £401.35 and £983.25 respectively for estate agents’ and solicitors’
charges on the one side and £12,000 for the sale and £1,734 for repayments on
the other, the lenders were £2,349.40 in credit — If, however, 12% pa interest
were assumed for the use of the £10,000 locked up in the loan, the amount for
two years would be £2,400, a figure not far removed from the £2,349.40 (Lord
Lowry said that 12% would correspond to the 9% allowed by Ralph Gibson J in
Corisand Investments Ltd v Druce & Co) — The lenders did not appear and did not even put in
a written case on the hearing of the present appeal — In view of this and of
the picture deducible from the above figures it would be neither fair nor
sensible to remit the action to the county court for a fresh assessment of
damages — Accordingly, the appeal would be allowed, the order of the Court of
Appeal set aside and judgment directed to be entered for the defendant valuer
in the county court — The valuer was awarded the costs of the appeal to the
House and of the proceedings in the courts below
The following
cases are referred to in this report.
Baxter v F W Gapp & Co Ltd [1938] 4 All ER 457
Chekiang,
The [1926] AC 637
Livingstone
v Rawyards Coal Co (1880) 5 App Cas 25, HL
London
& South of England Building Society v Stone [1983]
1 WLR 1242; [1983] 3 All ER 105; [1983] EGD 921; [1983] 267 EG 69, [1983] 2
EGLR 131
Lowenburg,
Harris & Co v Wolley (1895) 25 SCR 51
Perry v Sidney Phillips & Son [1982] 1 WLR 1297; [1982] 3 All
ER 705; [1982] EGD 412; [1982] 263 EG 888, [1982] 2 EGLR 135, CA
Radford v De Froberville [1977] 1 WLR 1262; [1978] 1 All ER 33;
(1977) 35 P&CR 316
Robinson v Harman (1848) 1 Exch 850; [1843-60] All ER Rep 383; 18 LJ
Ex 202; 13 LTOS 141
Scholes v Brook (1891) 63 LT 837; 64 LT 674
Susquehanna,
The [1926] AC 655
This was an
appeal by the valuer, Alastair Gibson, a firm (Mr Alastair Gibson FRICS) from
the decision of the Court of Appeal (reported at [1990] 2 EGLR 149; [1990] 34
EG 49) dismissing an appeal from the decision of Judge Harris QC, at
Westminster County Court, in which he awarded damages to the plaintiff company,
the present respondents, Swingcastle Ltd, in respect of the valuation for
mortgage of a house at 36 North Road, Audenshaw, Manchester.
Roger Toulson
QC and Roger Stewart (instructed by Reynolds Porter Chamberlain) appeared on
behalf of the appellant valuer; the respondents did not appear and were not
represented.
In his speech LORD
LOWRY said: This is an appeal by leave of your Lordships’ House from an
order of the Court of Appeal (Neill and Farquharson LJJ and Sir John Megaw)
affirming a judgment for £7,136.41, together with interest and costs, given by
His Honour Judge Harris DSC QC in an action which had been brought by the
respondents, a finance company known as Swingcastle Ltd (‘the lenders’),
against the appellant, who is a chartered surveyor, and remitted to the county
court for trial.
The main issue
in the appeal is whether a person who lends money at a high rate of interest in
reliance on a negligent valuation, and who claims to have suffered loss as a
result, can recover from the negligent valuer, as part of his damages, interest
at the contractual rate which the lender was entitled to be paid by the
borrower and which remained outstanding at the termination of the transaction
between the lender and the borrower.
The facts are
that at the beginning of 1985 Mr John Clarke and Mrs Kathleen Ann Clarke, his
wife, who lived at 36 North Road, Audenshaw, Manchester, were in financial
difficulties. Their home (‘the property’) was mortgaged and they owed £1,700 to
the Leeds Permanent Building Society and £6,300 to Cedar Holdings Ltd.
Being anxious to pay off these debts, they went to a firm called Richard
Murtagh & Co (‘the brokers’) whose business included organising finance for
borrowers by putting them in touch with lenders. The brokers, having found out
what Mr and Mrs Clarke (‘the borrowers’) required and what security they were
offering, instructed the appellant (whom I shall call ‘the valuer’) to survey
the property and give a report, for the benefit of whoever might become the
lending principals of the brokers, on its condition and its value on a forced
sale with vacant possession.
The valuer
placed that value at £18,000 and, relying on his valuation, the lenders on
February 11 1985 lent to the borrowers £10,000 secured by a first charge over
the property. The conditions of the loan reflected the fact that the borrowers
were high risk (or ‘non-status’) borrowers, since (a) the entire loan was used
to pay the debts already mentioned of £1,700 and £6,300 and the brokers’ fee
which amounted to no less than £2,000; (b) the loan was repayable by 120
monthly instalments of £275, which meant that the annual percentage rate of
interest was to be 36.51 per cent calculated in accordance with regulations made
under the Consumer Credit Act 1974, with an alternative rate of 45.619 per cent
calculated in accordance with the First Schedule to the Moneylenders Act 1927;
(c) in the event that the borrowers went into arrears with the payment of
interest, the lenders were entitled to add the outstanding interest to the
principal sum then outstanding and charge interest on the whole at the rate of
45.619 per cent; and (d) an extra charge of six months’ interest was payable in
the event of early redemption of the charge by the borrowers.
The borrowers
quickly fell into arrears and, after possession proceedings, they surrendered
possession of the property to the lenders on June 30 1986. On February 9 1987
the lenders exchanged contracts for the sale of the property to a third party
for £12,000 and completion took place on February 27 1987.
After an
exchange of correspondence the lenders issued on September 4 1987 a writ
endorsed with a statement of claim against the valuer claiming damages for loss
allegedly sustained by the lenders in reliance upon the valuer’s negligent
valuation of the property. The lenders pleaded their loss as follows:
PARTICULARS OF LOSS AND DAMAGE
|
Amount required to redeem |
|
|
February 27 1987 |
£19,912.96 |
|
Payment to Messrs |
401.35 |
|
Legal costs and charges of Messrs Brand Montague |
983.25 |
|
£21,297.56 |
|
|
Less sale proceeds of property |
£12,000.00 |
|
£9,297.56 |
13. By reason of the matters aforesaid the Plaintiffs suffered a
shortfall in respect of the amount due to them under their loan to the said Mr
and Mrs Clarke and under the security of their Legal Charge and they thereby
suffered loss and damage.
14. Further
the Plaintiffs are entitled to and claim interest pursuant to Section 35A of
the Supreme Court Act 1981 at such rate and for such period as the Court thinks
fit.
(Cordingleys
were estate agents and Brand Montague & Co were the lenders’ solicitors.)
The defence
denied negligence, averred that the measure of damages alleged in para 13 of
the statement of claim was incorrect and set out as an algebraic formula what
was alleged to be the correct measure of damages.
Liability was
admitted at the trial in the county court and it was further admitted that but
for the valuer’s negligence the lenders would not have made any loan to the
borrowers. Thus the sole issue was the measure and the amount, if any, of the
lenders’ damages against the valuer on the basis that, if he had made a competent
valuation, the lenders would not have made the loan.
About some of
the figures and the way in which they should be taken into account there was no
dispute. The lenders’ outgoings included the loan of £10,000, the estate
agents’ charges of £401.35 in connection with the sale of the property and the
costs of the solicitors amounting to £983.25 for the work described in the
particulars. On the other side of the account the lenders had received a total
sum of £1,734 from the borrowers between February 1985 and April 1986 and
£12,000 from the purchasers of the property.
The disputed
ingredient of the lenders’ claim was the sum of £19,912.96, which gave credit
for the receipt of £1,734, as mentioned above, and was described in the
particulars as ‘Amount required to redeem the loan as at February 27 1987’, the
date of the sale of the property when the transaction between the lenders and
the borrowers was deemed to be concluded. The lenders arrived at this figure,
which was in itself accurate, by calculating the amount of principal and
interest outstanding, having regard to the initial rate of interest of 36.51
per cent and also the penal rate of 45.619 per cent which they became entitled
to charge when the borrowers defaulted, as I have already described. They also
claimed £344.99 for ‘disbursements’ H and interest thereon of £129.31. To the
total thus arrived at they added an extra charge of six months’ interest which,
according to the loan agreement, was to be payable by the borrowers in the
event of early redemption.
The judge
disallowed the last element in the claim on the ground that it was not a sum
which was owing as interest on February 27 1987. I might point out that
according to condition 8 of the conditions annexed to the agreement the extra
charge of interest was claimable only if the borrowers repaid the whole of the
loan. In all other respects, including the charge for interest on
disbursements, he allowed the claim and gave judgment for £7,136.41 with
interest and costs.
The valuer’s
case before action brought and throughout the proceedings has consistently been
that the lenders’ calculation of their loss was made on the wrong basis and
that the damages should have been assessed on the basis that the lenders were
entitled to be placed in the position that they would have been in if they had
received a competent report from the valuer and had consequently made no loan
to the borrowers; more explicitly, the lenders’ damages are to be calculated on
the footing that they should: (1) take credit for the payment of £10,000 to the
borrowers, £401.35 to their estate agents and £983.25 to their solicitors; and
(2) give credit for £1,734 paid by the borrowers and £12,000 received on the
sale of the property and also on the footing that they have for two years (or
such shorter period as might be thought right to allow) been deprived of the
use of the £10,000 which they would not have lent but for the negligent
valuation.
In the Court
of Appeal [1990] 1 WLR 1223*, however, this submission fared no better than it
had done in the county court. Neill LJ reviewed a number of authorities,
including Baxter v F W Gapp & Co Ltd [1938] 4 All ER 457,
affirmed in the Court of Appeal [1939] 2 KB 271, and London & South of
England Building Society v Stone [1983] 1 WLR 1242† , both of which
had been successfully relied on in the county court, and, having set out the
defendant’s argument at p 1229C-G, said ‘I see the force of these criticisms’,
but, having then concluded that Baxter v Gapp was a binding
authority, was in favour of dismissing the appeal ‘on the short ground that
this court is bound by authority and that the judge was right to assess the
damages in the way that he did.’
*Editor’s
note: Also reported at [1990] 2 EGLR 149.
† Editor’s
note: Also reported at [1983] 267 EG 69, [1983] 2 EGLR 131
The lord
justice then considered the case as if it were free from authority (p 1230B),
commencing with the classic statement of principle by Lord Blackburn in Livingstone
v Rawyards Coal Co (1880) 5 App Cas 25 at p 39:
where any
injury is to be compensated by damages, in settling the sum of money to be
given for reparation of damages you should as nearly as possible get at that
sum of money which will put the party who has been injured, or who has
suffered, in the same position as he would have been in if he had not sustained
the wrong for which he is now getting his compensation or reparation.
He divided
lenders’ actions arising out of negligent valuations into two types, the first
being where the valuer’s client had lent more than he would have done if
competently advised, and the second where, if competently advised, he would (as
in the present case) not have lent at all. In his consideration of the second
type he said at p 1231 G:
A number of
approaches are possible, including the following. (a) The lender could
be awarded the unpaid interest owed by the borrower at the date when the
security was realised. This was the method adopted in Baxter v F W
Gapp & Co Ltd [1939] 2 KB 271. But to award damages on this basis is in
effect to treat the valuer as the guarantor of the contract of loan. In the
absence of authority I would for my part reject this solution. (b) The
lender could be awarded a sum equivalent to the amount he would have earned by
way of
my view, however, such an award should not be made in the absence of evidence
that the money lent would have been used for another transaction. This evidence
would have to be directed to proving an unsatisfied demand for loans and I
anticipate that such evidence might seldom be forthcoming. Moreover, even if
evidence of a lost transaction were available, I see no reason why the interest
should be at the default rate rather than at the ordinary rate provided for in
a standard contract for this type of business. (c) The lender could be
awarded a sum equivalent to the interest which would have been earned if the
sum had been placed on deposit. (d) The lender could be awarded a sum to
represent the loss of the opportunity to invest the money elsewhere. This was
the solution adopted by the Supreme Court of British Columbia in Seeway
Mortgage Investment Corporation v First Citizens Financial Corporation (1983)
45 BCLR 87, where it was said, at p 101: ‘What the plaintiff lost then was the
opportunity to invest its $50,000 in a security which had the same risks except
that the appraisal would be accurate.’
I do not
propose to express any concluded view about these methods of assessment. I do
not consider that any one of the last three methods of assessment would
necessarily be right to suit all cases. It would depend on the evidence.
The lord
justice, although he does not in principle appear to have been in favour of
method (a) above, concluded his judgment by saying (p 1232D):
In the present
case, however, for the reasons which I have stated, I consider that the court
is bound by the decision in Baxter v F W Gapp & Co Ltd [1939]
2 KB 271.
I would
dismiss the appeal.
Farquharson LJ
neatly summed up the valuer’s case and his own reaction to it at p 1233E:
The
plaintiff’s claim, he argues, in effect puts it in the same position as if the
defendant had warranted or guaranteed the performance by the Clarkes of their
contractual obligations, which he had not. Neither had he warranted the
correctness of his valuation. Counsel concedes that the plaintiff could
properly recover as damages any loss it sustained by reason of losing the use
of the £10,000 advanced under the mortgage, but that there would have to be
evidence, which there was not, that the plaintiff could have applied the
£10,000 in another mortgage investment or at the very least to have earned
interest by placing it on deposit.
As a matter
of principle, I would, for my part, find these arguments hard to resist, but it
is submitted by Mr Wulwik on behalf of the plaintiff that the weight of
authority shows that the judge’s decision as to the measure of damages is
correct.
He noted the
textbook writers’ distinction between the two categories of case mentioned by
Neill LJ and continued (p 1233H):
In the case
of a mortgagee who would not have made any advance but for the negligent
valuation the measure of damages will be the difference between the sum
advanced and the sum recovered on sale of the property plus any consequential
loss and expenses: see Clerk and Lindsell on Torts, 16th ed (1989), p
28, para 11-45. This definition does not, of course, answer the present problem
and it is necessary to look at the authorities upon which it is based.
The lord
justice then referred to Baxter v Gapp and London & South
of England Building Society v Stone and concluded (p 1235B):
In the result,
although the authorities are not entirely satisfactory in resolving the
question whether a mortgagee in these circumstances is entitled to recover loss
of contractual interest under the mortgage from the negligent valuer, they are
binding on this court.
I would
accordingly dismiss the appeal.
Sir John
Megaw, as well as holding that Baxter v Gapp was a binding
authority, rejected in principle the measure of damages put forward by the
valuer and drew an analogy with the cases, such as Perry v Sidney
Phillips & Son [1982] 1 WLR 1297,* where a house is purchased above its
true value as a result of a negligent valuation. He also stated that he could
see no practical basis for any distinction in the assessment of damages
according to whether the lender, if he had not been misled as to the value of
the security, would have lent a smaller amount or would not have lent at all.
The judgment concluded as follows (p 1236D):
In the absence
of authority to the contrary, I should regard the correct principle of damages
as being that the claim for damages arises when the loss is incurred. The loss
is incurred if and when the lender, validly under the loan contract, realises
the security, and the amount realised is less than the amount due under the
loan contract, including expenses properly incurred, and allowing for all
payments made by the borrower. There is one important qualification. The valuer
should not be liable for a greater amount than the amount of his original
overestimate of the value compared with the true market value as at the date of
the valuation. Any shortfall in the proceeds of the realisation above that
amount should not be regarded as being caused by the negligent valuation.
*Editor’s
note: Also reported at (1982) 263 EG 888, [1982] 2 EGLR 135.
Subject,
possibly, to that qualification, which did not arise in Baxter v F W
Gapp & Co Ltd [1939] 2 KB 271, it appears to me that the principle
which I have suggested above is wholly in accord with that case.
My Lords, I
approach the assessment of damages in the first place by reference to
principle, including the statement of Lord Blackburn which was cited by Neill
LJ. The relevant part of the paragraph from Clerk and Lindsell (11-45)
(incorporating the footnotes in the text) reads as follows:
Where money
is advanced by a mortgagee on the basis of a negligent valuation the measure of
damages will vary dependent on whether, had a proper valuation been made, the
mortgagee would have made no advance at all, or advanced a lesser sum. Where
the mortgagee can establish he would have made no advance, the measure of
damages will be the difference between the sum advanced and the sum recovered
on sale of the property, plus any consequential losses and expenses: Baxter v
F W Gapp & Co Ltd [1938] 4 All ER 457. In Corisand Investments
Ltd v Druce & Co (1978) 248 EG 315 Gibson J found that on a
proper valuation a lesser sum would have been advanced and awarded the
plaintiff the difference between the sum advanced and that sum. The defendants
in such an action by a mortgagee can no longer generally set off against the
prima facie measure of damages the amount which the mortgagee could recover by
enforcing personal covenants by the mortgagor to repay the sums borrowed: London
& South of England BS v Stone [1983] 1 WLR 1242.
I would also
refer to McGregor on Damages (15th ed 1988). Para 1212 states:
Claims
against surveyors and valuers by clients may be by those who have bought
property on the strength of a negligent survey or valuation or by those who
have lent money on mortgage in reliance on a negligent survey or valuation of
the property mortgaged. The measure of damages is substantially different in
the two cases so that they call for separate treatment.
The learned
author then considers purchasers of property, and at para 1217 comes to
mortgagees of property negligently surveyed or valued:
Claims by
lenders to intending purchasers or to owners on the strength of a negligent
survey or valuation of the property to be purchased or already owned have
produced a different pattern of damages. For one thing, the emphasis shifts
from the purchase price of the property to the amount loaned on the security of
the property . . .
The text
proceeds at para 1218:
While the
starting point of the plaintiff’s loss is still generally the amount of money
that he has paid away, though here not by way of price to his seller but by way
of loan to his mortgagor, the amount which falls to be deducted from the amount
paid away is not, as it is in the case of the paying purchaser, the real value of
the property; rather is it the amount that the plaintiff would have lent had
the defendant produced a proper valuation.
Baxter v Gapp is then cited as authority for the proposition that
the difference between the amount lent and the amount that would have been lent
on foot of a proper valuation:
. . . may not
always be the true measure of the lender’s actual loss: the loss of the money
advanced may be increased by expenses and reduced by receipts.
The further
comments in the same paragraph on Baxter v Gapp do not help to
elucidate the problem with which your Lordships have been presented, while the
discussion of London & South of England Building Society v Stone shows
that the ultimate effect on the damages of the lenders’ rights against the
borrowers depends on the facts of each case.
My Lords, it
is now time for me to take a closer look at Baxter v Gapp, which
has been regarded by all three members of the Court of Appeal as the authority
for accepting the lenders’ approach to the claim for interest.
At first
instance most of the judgment of Goddard LJ was devoted to the question of
liability. Certain facts, however, mentioned at [1938] 4 All ER at p 461 are
relevant to the now disputed question of interest. The property had been
negligently valued at £1,800 and was ultimately sold for £850. The plaintiff
had advanced £1,200 on first mortgage. Goddard LJ said at p 461B:
A further
£150 was advanced at a much higher rate of interest — 9 per cent, reducible to
8 per cent if punctually paid. I ought to have said, perhaps, that the client
had interest, not at 4 1/2 per cent, the amount of interest contemplated on the
first mortgage, but at 5 per cent. I dare say that he did that because he
thought, after hearing what Mr Humfrey had said, that there was some risk in
the matter.
The trial
judge dealt with damages at pp 465-6. Starting with a basic figure of £500
(£1,350 advanced less the sale price of £850), he concluded at p 466F:
If he has
done all that he can be required to do, so far as realising the property is concerned,
you get at once the measure of the loss which he has suffered.
The loss
which he has suffered is not challenged in this case as a figure. Taking all
the various items, and giving loss of interest, which lies in the ordinary way,
and insurance premiums and credits allowed, the expenses of the sale, and one
thing and another, and giving credit for the purchase price, the plaintiff says
that he has suffered a loss of £742 16s 7d. That, I think, is the measure of
the damage which he is entitled, and fairly entitled, to recover from the
defendants in this case. I accordingly give judgment for that amount, and, if
it is asked for, I think it must be with interest at the rate of 4 1/2 per cent
from June 3.
In the All
England Reports ([1939] 2 All ER 752) the appeal is reported in full, but it is
interesting to note that, while the £1,200 advanced on first mortgage and the
£150 advanced on second mortgage are mentioned in the headnote, the second
mortgage is not referred to in any of the judgments. In referring to the
damages at p 757B MacKinnon LJ said:
As a result
of lending this money upon this mortgage (the plaintiff) has sustained a
certain pecuniary loss — namely, the loss of his interest during 2 years and
the loss of his capital, so far as it has been repaid by the price paid by Mrs
Raposo (the purchaser). That resulting figure — amounting to £720 (sic),
I think — the judge has awarded the plaintiff as damages. In principle, apart
from any authority, it seems to me that that is the right basis on which to
assess the damages.
In the Law
Reports ([1939] 2 KB 271) the case is reported only on the question of damages.
The amount of the first and second advances, made in August and October 1935
respectively, and their rates of interest of 5 and 8 per cent, as well as the
amount of the judgment for £742 16s 7d, are correctly set out in the law
reporter’s summary of the facts, and among the heads of damage making up the
total is included ‘the amount of the interest which the mortgagor had failed to
pay’. The argument of counsel for the appellant was, it appears, confined to
the proposition that the proper measure of damages was the difference between
the value actually arrived at by the surveyor and the value at which he ought
to have arrived. Not surprisingly the question of the rate of interest was not
referred to. The respondent’s counsel were not called on. In his judgment
MacKinnon LJ made the observations on damages to which I have already referred
above (although he is reported as mentioning a total of £742 16s 7d). The cases
cited in the judgment, namely, Scholes v Brook (1891) 63 LT 837;
64 LT 674 and Lowenburg, Harris & Co v Wolley (1895) 25 SCR
51 are really of no assistance.
My Lords, I
have gone into this amount of detail for two purposes: (1) to show that the
trial judge calculated the claim for interest by reference, so far as I can
make out, to what the mortgagor had failed to pay under her contract; but also
(2) to indicate that the appropriate rate of interest (as to which a very small
pecuniary difference must have been involved) was never in issue between the
parties or in the mind of the court either at first instance or on appeal. The
real issue, which has occasioned no difficulty in the present case, was
whether, in addition to the difference between the capital amounts, the
plaintiff could recover as damages his consequential loss. Having regard,
however, to point (1) above, the case is, almost by accident I would suggest,
an authority for the proposition by which Neill and Farquharson LJJ found
themselves, I think reluctantly, bound.
Your Lordships
will recall two observations in particular about Baxter v Gapp which
were made by Neill LJ. At p 1230A he said:
In the Court
of Appeal detailed argument was directed to the measure of damages, and, even
if no reference was made to the rate of interest, it seems to me to be
impossible to exclude this one element of the award from the general approval
given to the judge’s method of assessment.
I have already
quoted the passage in the lord justice’s judgment at p 1231G where he set out
four approaches and concerning method (a), ‘the method adopted in Baxter v
Gapp‘, said:
But to award
damages on this basis is in effect to treat the valuer as the guarantor of the
contract of loan.
Farquharson LJ
commented on Baxter v Gapp as follows (p 1234B):
The most
important case is Baxter v Gapp & Co Ltd. Here again the
mortgagee would not have advanced money on a house but for a negligent survey.
Goddard LJ [1938] 4 All ER 457, sitting as an additional judge of the King’s
Bench Division, held that the measure of damage was the whole loss sustained by
the mortgagee and included the expenses of abortive sales, insurance premiums,
a builder’s account for upkeep of the property, the mortgagee’s expenses and
disbursements and the selling agent’s commission upon the ultimate sale of the
property, in addition to the principal advanced and the interest unpaid by the
mortgagor. Goddard LJ’s decision was also upheld by this court [1939] 2 KB 271.
Mr Toulson seeks to discount the weight of that authority by pointing to the
fact that Goddard LJ said at p 466F that ‘the loss suffered is not challenged
as a figure,’ and says this issue was not argued. However, I think Mr Wulwik is
right when he submits that the reference is to the mathematics of calculating
the figure rather than to the measure of damages which was clearly in dispute.
While this case is authority for Mr Wulwik’s submission in the present case,
once again the principle involved does not seem to have been argued; ie,
whether the interest should be the contractual amount in the mortgage deed or
what represents the loss of use of the capital sum.
The lord
justice continued at p 1234E:
Corisand
Investments Ltd v Druce & Co (1978) 248
EG 315 was a case where the mortgagees lent a greater sum than they would have
done but for the negligent valuation. Ralph Gibson J rejected the argument that
the mortgagees were entitled to the 30 per cent interest they would have got if
the borrowers had performed their contractual obligations.
However, in London
& South of England Building Society v Stone [1983] 1 WLR 1242
O’Connor LJ in referring to that decision, said: ‘For some reason which is not
clear to me Ralph Gibson J rejected the plaintiffs’ claim for ‘interest.” In Stone’s case the issue was whether
the plaintiff mortgagee was obliged to pursue its rights against the mortgagors
and take any amount recovered into account when suing the negligent valuer, so
the decision is not in point. Nevertheless, O’Connor LJ held, at p 1255, that Baxter
v Gapp & Co Ltd [1939] 2 KB 271 was binding on the Court of
Appeal. Furthermore Stephenson LJ said, at p 1261:
‘Though the
identity of the borrowers was of no interest or relevance to the valuer or his
duty to the lenders, the amount of the advance and the length of time for
repayment were. Though the mortgage deed by way of legal charge gave the
lenders a right to foreclose for other breaches of covenant, the object of
securing the loan by charging the property was to secure repayment of the sum
lent with interest under the covenant to repay. The borrowers’ obligation to
repay was therefore not so collateral or remote as to be disregarded altogether
in measuring the lenders’ loss, and although the valuer was not a party to the
mortgage, and the mortgage was literally res inter alios acta, it was a
transaction with which the valuer’s report and valuation and breach of duty
were closely connected, as now demonstrated by the decision of Park J in Yianni
v Edwin Evans & Sons [1982] QB 438.’
(The rate of
interest actually awarded by Ralph Gibson J was 9 per cent, the Short Term
Investment Account Rate for most of the relevant period.)
My Lords, Baxter
v Gapp is not an attractive precedent. For one thing, it does not
clearly exemplify the proposition contended for by the lenders, even if that
proposition can be teased out of it; second, the dispute was about all the
plaintiff’s consequential damage and the pecuniary effect of the difference in
interest rates (say, 1/2 per cent in relation to the initial advance of £1,200
and 3 1/2 per cent in relation to the much smaller second advance of £150) was
relatively insignificant; and, third and most important, the approach, if
carefully scrutinised, seems contrary to principle: the aggrieved party was
entitled to be placed in the same position as if the wrong had not occurred,
and not to receive from the wrongdoer compensation for lost interest at the
rate which the borrower had contracted to observe.
The approach
of the valuer in this case and the analysis of Neill LJ, which I have
reproduced above, seem to me to be correct. What the lenders lost, in addition
to their other damages was the use of the £10,000 while it was perforce locked
up in the loan. I say ‘perforce’ because I do not overlook the duty of the
injured party to mitigate his loss or the fact that, once the borrowers had
well and truly defaulted, the lenders had access to their remedy and thereby to
their money.
There is, as
Neill LJ perceived, no cut and dried solution to calculating the amount of
damages in cases of this kind. It depends on the evidence. Mr Toulson, who
presented the appellant’s case to your Lordships both clearly and persuasively,
illustrated that point by reference to certain observations of Oliver J, as my
noble and learned friend Lord Oliver of Aylmerton then was, in Radford v
De Froberville [1977] 1 WLR 1262. That was a different kind of case, but
the points made in the following passages are most apposite.
(1) at p 1268G:
As to
principle, I take my starting point from what, I think, is the universal
starting point in any inquiry of this nature — that is to say, the well known
statement of Parke B in Robinson v Harman (1848) 1 Exch 850, 855
which is in these terms:
‘The rule of
common law is, that where a party sustains a loss by reason of a breach of
contract, he is, so far as money can do it, to be placed in the same situation,
with respect to damages, as if the contract had been performed.’
(2) at p 1269G:
One of the
difficulties about any question of damages is that there are so few general
principles and that such as there are have, at times, been expressed in
ambiguous and even contradictory terms. The matter was well expressed by
Viscount Haldane LC in British Westinghouse Electric and Manufacturing Co
Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673,
688, where he says:
‘In some of
the cases there are expressions as to the principles governing the measure of
general damages which at first sight seem difficult to harmonize.
the particular questions submitted for decision. The quantum of damage is a question
of fact, and the only guidance the law can give is to lay down general
principles which afford at times but scanty assistance in dealing with
particular cases. The judges who give guidance to juries in these cases have
necessarily to look at their special character, and to mould, for the purposes
of different kinds of claim, the expression of the general principles which
apply to them, and this is apt to give rise to an appearance of ambiguity.
Subject to
these observations, I think that there are certain broad principles which are
quite well settled. The first is that, as far as possible, he who has proved a
breach of a bargain to supply what he contracted to get is to be placed, as far
as money can do it, in as good a situation as if the contract had been
performed.
The
fundamental basis is thus compensation for pecuniary loss naturally flowing
from the breach; but this first principle is qualified by a second, which
imposes on a plaintiff the duty of taking all reasonable steps to mitigate the
loss consequent on the breach, and debars him from claiming any part of the
damage which is due to his neglect to take such steps.’
(3) at p 1270F:
There is, I
think, a danger in elevating into general principles what are in truth mere
applications to particular facts or situations of the overriding general
principle as enunciated by Parke B; and on more than one occasion attention has
been drawn to the undesirability of the application in this area of rigid rules
or practices: see, for instance, the speech of Viscount Dunedin in The
Susquehanna [1926] AC 655, 661 and that of Lord Sumner in The Chekiang [1926]
AC 637, 643, 644.
(4) at p 1271A:
As it was put
by Denning J in Duke of Westminster v Swinton [1948] 1 KB 524,
534: ‘The real question in each case is: what damage has the plaintiff really
suffered from the breach?’
Radford v De Froberville was a contract case, whereas the present
action is founded on tort, but the principles to which I have just drawn
attention apply equally (see The Susquehanna and The Chekiang)
and the statement of Parke B in Robinson v Harman is entirely
consistent with that of Lord Blackburn in Livingstone v Rawyards and
leads to the same result. Of course, a different standard of remoteness may
apply (though not necessarily with different results) in contract and tort, but
I need not develop the point here.
My Lords, it
is clear that the lenders ought to have presented their claim on the basis
that, if the valuer had advised properly, they would not have lent the money.
Where they went wrong was to claim not only correctly that they had to spend
all the money which they did but incorrectly that the valuer by his negligence
deprived them of the interest which they would have received from the borrowers
if the borrowers had paid up. The security for the loan was the property, but
the lenders did not have a further security consisting of a guarantee by the
valuer that the borrowers would pay everything, or indeed anything, that was
due from them to the lenders at the date, whenever it occurred, on which the
loan transaction terminated. The fallacy of the lenders’ case is that they have
been trying to obtain from the valuer compensation for the borrowers’ failure
and not the proper damages for the valuer’s negligence.
My Lords,
having considered the principle, I come back to the figures. In his notice of
appeal the valuer submitted that the sum due to the lenders was £66.22, but
there has been no indication of how that sum was arrived at. Taking the figures
I have mentioned of £10,000, £401.35 and £983.25 on one side and £12,000 and
£1,734 on the other, the lenders are £2,349.40 in credit. Clause 9 of the
mortgage agreement provided that the lenders could debit the mortgage account
with ‘all costs expenses and disbursements incurred directly or indirectly in
relation thereto’. This no doubt explains the claim for £344.99, though not the
claim for interest thereon of £129.31. But I find it impossible to say whether
the whole or part of the £344.99 should be taken into account against the
valuer or simply be treated as administrative expenses of the mortgage
chargeable by agreement against the borrowers.
In the absence
of any evidence as to how the lenders financed the loan or evidence showing how
the money, if not lent to the borrowers, could have been profitably employed, I
consider that 12 per cent interest, which would correspond to the 9 per cent
allowed by Ralph Gibson J in Corisand, is the proper rate at which to
recompense the lenders for being deprived of their £10,000. The actual time was
two years, which would yield a result of £2,400, but one may ask whether it was
reasonable for the tortfeasor to bear the liability up to the date of sale in
February 1987, possession of the property having been surrendered on June 30
1986. Moreover, it is not clear how a calculation of damages would be affected
by the incidence of tax or whether this is a case in which it would have been
reasonable for the court to contemplate partial recovery by the lenders against
the borrowers: see London & South of England Building Society v Stone
(supra).
It was for the
lenders to furnish the evidence by which to prove their case on the correct
basis. Admittedly, the correct basis in this case has only now been
established. But the lenders did not even put in a written case or appear on
the hearing of this appeal, although they knew what the issue was. Having
regard to that fact and to the picture which is deducible from the figures
already available, I consider that it would be neither fair nor sensible to
remit the action to the county court for a new assessment of the damages.
Accordingly, I
would allow the appeal, set aside the order of the Court of Appeal and direct
judgment to be entered for the defendant in the county court. I would also
order the lenders to pay the valuer’s costs of the appeal and of the
proceedings in the courts below.
LORDS KEITH
OF KINKEL, BRIGHTMAN, GRIFFITHS and OLIVER OF
AYLMERTON agreed with the speech of Lord Lowry and the reasons given in it
and did not add any observations of their own.