Negligence — Valuations for mortgage — Valuer’s responsibility in tort to purchaser who has relied on valuer’s report to the knowledge of the latter — Relationship ‘akin to contract’ — Clear duty of valuer to exercise reasonable skill and care — Important decision of House of Lords affirming decision of Court of Appeal in favour of purchaser in Smith v Eric S Bush but declaring Court of Appeal in error in Harris v Wyre Forest District Council — Court of Appeal wrong in latter case in holding that a disclaimer prevented a duty of care from arising, thus defeating the Unfair Contract Terms Act 1977 — Comprehensive review of authorities — Yianni v Edwin Evans & Sons correctly decided — Discussion of general attitude today of purchasers of ordinary houses, who do not in most cases arrange for a structural survey but justifiably assume that the house, having been valued by a qualified person, must be worth not less than the amount of the loan offered by a building society or other mortgagee — The valuer in these cases assumes responsibility to both mortgagee and purchaser by agreeing to carry out a valuation for mortgage purposes, knowing that the valuation fee has been paid by the purchaser and that the valuation will probably be relied on by the latter to decide whether to make the purchase
appeals before the House, although differing in details, gave rise to the same
three questions, namely: (1) Whether the valuer instructed to value the house
for mortgage, knowing that his valuation would probably be relied on by the
prospective purchasers, owed them a duty to exercise reasonable skill and care;
(2) Whether the disclaimer of liability was a notice within the Unfair Contract
Terms Act 1977 and therefore subject to the requirement of reasonableness; and
(3) Whether, if so, the disclaimer in the present cases satisfied the
requirement of reasonableness
firm)
the valuers, who had failed to check the chimney supports, had not disputed
before the Court of Appeal the existence of a duty of care or the breach of it,
but had relied on the disclaimer — The court held that the disclaimer was not
in the circumstances fair and reasonable and so was made ineffective by the
1977 Act — This view was challenged in the House, but the challenge was
rejected — The House agreed with the Court of Appeal that in all the
circumstances, including the fact that the subject property was at the lower
end of the market, the purchaser’s reliance on the mortgage valuation without
further survey, and the unequal incidence of loss and damage if the valuation
went wrong, it would not be fair or reasonable to allow the disclaimer to take
effect — The House accordingly dismissed the valuers’ appeal — It may be noted
that Lord Griffiths in his speech, after mentioning that the burden of proof
was on the valuer to establish fairness and reasonableness, set out a list (not
purporting to be exhaustive) of matters to be taken into account by a judge
when determining this difficult question
District Council
here were broadly similar, the fact that the valuer was an ‘in-house’ valuer in
the employment of the mortgagees being immaterial — His failure was in not
detecting and advising on the extent of settlement and instability in the
property — In this case, however, the Court of Appeal, reversing the decision
of Schiemann J, who had decided in favour of the purchasers, had taken the
critical step of holding that the effect of the disclaimer was to prevent the
duty of care from arising at all and ipso facto to remove anything on which the
1977 Act could bite — In the view of the House this was a fundamental error, a
kind of tortfeasors’ charter, which would ’emasculate’ the 1977 Act, removing
the public’s defence against the imposition of exclusion clauses — The answer
to the Court of Appeal’s construction was given by Lord Griffiths in his ‘but
for’ test, earlier expounded by Slade LJ in Phillips Products Ltd v Hyland; in
considering the primary question as to whether there is a duty of care and a
breach of it, the disclaimer provision must be left out of account — The result
of this analysis in the Wyre Forest case was that, the duty of care and its
breach having been established, the remaining question was whether it was
reasonable under the 1977 Act to allow the local authority and its valuer to rely
on the disclaimer — The House held that it was not and allowed the purchasers’
appeal
deserve study in detail by valuers, both for their interpretations of the law
and their descriptions of practice — It should be noted that the House reserved
their position in regard to valuation for mortgage of quite different types of
property, such as industrial property, large blocks of flats or very expensive
houses, to which different considerations might apply — A comment by Lord
Templeman containing a hint of warning should also be noted: ‘Any increase in
fees, alleged to be justified by the decision of this House in these appeals,
will no doubt be monitored by the appropriate authorities’
The following
cases are referred to in this report.
Anns v Merton London Borough Council [1978] AC 728; [1977] 2 WLR
1024; [1977] 2 All ER 492; [1977] EGD 604; (1977) 243 EG 523 & 591, HL,
[1977] 2 EGLR 94
Candler v Crane, Christmas & Co [1951] 2 KB 164; [1951] 1 All ER
426, CA
Cann v Willson (1888) 39 ChD 39
Curran v Northern Ireland Co-ownership Housing Association Ltd (1986)
8 NIJB 1
Harris v Wyre Forest District Council [1988] 2 WLR 1173; [1988] 1
All ER 691; [1988] 1 EGLR 132; [1988] 05 EG 57, CA
Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964]
AC 465; [1963] 3 WLR 101; [1963] 2 All ER 575; [1963] 1 Lloyd’s Rep 485, HL
Ministry
of Housing and Local Government v Sharp [1970]
2 QB 223; [1970] 2 WLR 802; [1970] 1 All ER 1009; (1970) 68 LGR 187; 21
P&CR 166; [1970] EGD 139; 213 EG 1145, CA
Odder v Westbourne Park Building Society (1955) 165 EG 261
Phillips
Products Ltd v Hyland [1987] 1 WLR 659;
[1987] 2 All ER 620, CA
Roberts v J Hampson & Co [1988] 2 EGLR 181; [1988] 37 EG 110
Smith v Eric S Bush (a firm) [1988] QB 743; [1987] 3 WLR 889;
[1987] 3 All ER 179; [1987] 1 EGLR 157; (1987) 282 EG 326, CA
Yianni
v Edwin Evans & Sons [1982] QB 438;
[1981] 3 WLR 843; [1981] 3 All ER 592; [1981] EGD 803; (1981) 259 EG 969,
[1981] 2 EGLR 118
In the first
of these appeals, Smith v Eric S Bush, the appellants were the
firm of Eric S Bush, surveyors and valuers, of Norwich, and the respondent was
Mrs Jean Patricia Smith, in whose favour the Court of Appeal had given
judgment. In the second appeal, Harris v Wyre Forest District Council,
the appellants were Adam Charles Harris and his wife, Kim Harris, who
challenged the decision of the Court of Appeal in favour of the district
council and Trevor James Lee, a valuer on its staff.
Nigel Hague QC
and Miss Jane Davies (instructed by Barlow Lyde & Gilbert) appeared on
behalf of the appellants, Eric S Bush; Robert Seabrook QC and Philip Havers
(instructed by Hood Vores & Allwood, of Dereham, Norfolk) represented the
respondent, Mrs J P Smith.
Anthony Colman
QC, Malcolm Stitcher and David Platt (instructed by Thursfield Adams &
Westons, of Kidderminster) appeared on behalf of the appellants, Mr and Mrs A P
Harris; Piers Ashworth QC and Nicholas Worsley (instructed by Lawrence Graham,
agents for Rowleys & Blewitts, of Birmingham)
In his speech,
LORD TEMPLEMAN said: These appeals involve consideration of three questions.
The first question is whether a valuer instructed by a building society or
other mortgagee to value a house, knowing that his valuation will probably be
relied upon by the prospective purchaser and mortgagor of the house, owes to
the purchaser in tort a duty to exercise reasonable skill and care in carrying
out the valuation unless the valuer disclaims liability. If so, the second
question is whether a disclaimer of liability by or on behalf of the valuer is
a notice which purports to exclude liability for negligence within the Unfair
Contract Terms Act 1977 and is therefore ineffective unless it satisfies the
requirement of reasonableness. If so, the third question is whether, in the
absence of special circumstances, it is fair and reasonable for the valuer to
rely on the notice excluding liability.
In Harris v
Wyre Forest District Council [1988] QB 835*, the first appeal now under
consideration, Mr and Mrs Harris wished to purchase 74 George Street,
Kidderminster, and needed a mortgage. They applied to the council. By section
43 of the Housing (Financial Provisions) Act 1958 (as amended by section 37 of
the Local Government Act 1974), the council were authorised to advance money to
any persons for the purpose of acquiring a house, provided that:
(2) . . . the
local authority . . . shall satisfy themselves that the house . . . to be
acquired is . . . or will be made in all respects fit for human habitation . .
. 3(e) The advance shall not be made except after a valuation duly made on
behalf of the local authority . . .
*Editor’s
note: Reported also at [1988] 1 EGLR 132; [1988] 05 EG 57.
Mr and Mrs
Harris signed the application form supplied by the council and that form
contained the following declaration and notice:
I/we enclose
herewith valuation fee and administration fee £22. I/we understand that this
fee is not returnable even if the council do not eventually make an advance and
that the valuation is confidential and is intended solely for the information
of Wyre Forest District Council in determining what advance, if any, may be
made on the security and that no responsibility whatsoever is implied or
accepted by the council for the value or condition of the property by reason of
such inspection and report. (You are advised for your own protection to
instruct your own surveyor/architect to inspect the property.) I/we agree that the valuation report is the
property of the council and that I/we cannot require its production.
The council
decided to carry out their own valuation and for that purpose instructed their
employee, the second respondent, Mr Lee. After receiving Mr Lee’s valuation,
the council made a written offer to advance £8,505 to Mr and Mrs Harris to be
secured on a mortgage of the house and subject to their undertaking to carry
out within 12 months the works detailed in the schedule to the offer. The
schedule was in these terms:
Essential
repairs
1. Obtain
report for district council from Midlands Electricity Board regarding electrics
and carry out any recommendations.
2. Make
good mortar fillets to extension.
Mr and Mrs
Harris assumed from the council’s offer that, as was the case, the house had
been valued at £8,505, at the least, and that the valuer had not found serious
defects and they therefore accepted the offer and entered into a contract to
purchase the house for £9,000. Three years later, Mr and Mrs Harris discovered
that the house was defective; one builder quoted £13,000 to carry out work to
make the house safe. Another builder refused to tender for the work, which he
regarded as impractical and unsafe. The damages suffered by Mr and Mrs Smith,
including interest up to the date of trial, were agreed at £12,000. The trial
judge was satisfied that Mr Lee did not exercise reasonable skill and care and
that the council, as his employer, were vicariously liable for Mr Lee’s failure
and he therefore ordered the council to pay £12,000. The Court of Appeal [Kerr
and Nourse LJJ ad Caulfield J] allowed the appeal of the council on the grounds
that by the notice contained in the application form signed by Mr and Mrs
Harris the council had avoided incurring liability. Mr and Mrs Harris now
appeal.
In Smith v
Eric S Bush (a firm) [1988] QB 743† , the second appeal now under
consideration, Mrs Smith wished to purchase 242 Silver Road, Norwich, and
needed a mortage. She applied to the Abbey National Building Society. By
section 25 of the Building Societies Act 1962, now section 13 of the Building
Societies Act 1986, the Abbey National was bound to obtain ‘a written report
prepared and signed by a competent and prudent person who is experienced in the
matters relevant to the determination of the value’ of the house, dealing with
the value of the house and with any matter likely to affect the value of the
house. Mrs Smith paid to the Abbey National an inspection fee of £36.89 and
signed the application form, which contained the following declaration and
notice:
I accept that
the society will provide me with a copy of the report and mortgage valuation
which the society will obtain in relation to this application. I understand
that the society is not the agent of the surveyor or firm of surveyors and that
I am making no agreement with the surveyor or firm of surveyors. I understand
that neither the society nor the surveyor or the firm of surveyors will
warrant, represent or give any assurance to me that the statements, conclusions
and opinions expressed or implied in the report and mortgage evaluation will be
accurate or valid and the surveyor’s report will be supplied without any
acceptance of responsibility on their part to me.
† Editor’s
note: Reported also at [1987] 1 EGLR 157: (1987) 282 EG 326.
The Abbey
National instructed the appellant firm, Eric S Bush, to carry out the
valuation. The appellants valued the house at £16,500 and the report contained
the following paragraph:
11. Repairs
recommended as a condition of mortgage: No essential repairs are required. We
noted a number of items of disrepair in the building which we have taken into
account in our valuation, but which are not considered to be essential for
mortgage purposes.
A copy of the
report was supplied to Mrs Smith by the Abbey National.
In reliance on
the report, Mrs Smith accepted an advance of £3,500 from the Abbey National and
entered into a contract to purchase the house for £18,000. Eighteen months
later, bricks from the chimneys collapsed and fell through the roof into the
loft and the main bedroom and ceilings on the first floor. The collapse was due
to the fact that two chimney breasts had been removed from the first floor,
leaving the chimney breasts in the loft and the chimneys unsupported. Mr
Cannell, who carried out the inspection for the appellants and was a chartered
surveyor, had observed the removal of the first-floor chimney breasts but had
not checked to see that the chimneys above were adequately supported.
The trial
judge was satisfied that Mr Cannell had not exercised reasonable skill and care
and that the appellants were liable for his negligence to Mrs Smith and awarded
her £4,379.97 damages including interest. The judge ignored the notice
contained in the application and signed by Mrs Smith whereby the Abbey National
disclaimed liability on the part of the appellant firm. The Court of Appeal
(Dillon and Glidewell LJJ and Sir Edward Eveleigh) held that the disclaimer was
not fair and reasonable and was ineffective under the Unfair Contract Terms Act
1977; they accordingly affirmed the award of damages made by the judge. The
appellants now appeal.
As I have
indicated, therefore, the three questions involved in these appeals are, first,
whether the council’s valuer was liable to Mr and Mrs Harris in negligence and
whether the appellants were liable to Mrs Smith in negligence; second, whether,
if negligence applies, the notices excluding liability fall within the ambit of
the Unfair Contract Terms Act 1977, and, third, whether it is fair and
reasonable for the valuers to rely on the notices.
Section 1(1)
of the Act of 1977 defines ‘negligence’ as the breach:
(a) of any obligation, arising from the express
or implied terms of a contract, to take reasonable care of exercise reasonable
skill in the performance of the contract;
(b) of any common law duty to take reasonable
care or exercise reasonable skill . . . ;
Section 2 of
the Act provides that:
(1) A person cannot by reference to any contract
term or to a notice . . . exclude or restrict his liability for death or
personal injury resulting from negligence.
(2) In the case of other loss or damage, a person
cannot so exclude or restrict his liability for negligence except in so far as
the term or notice satisfies the requirement of reasonableness.
The common law
imposes on a person who contracts to carry out an operation an obligation to
exercise reasonable skill and care. A plumber who mends a burst pipe is liable
for his incompetence or negligence whether or not he has been expressly
required to be careful. The law implies a term in the contract which requires
the plumber to exercise reasonable skill and care in his calling. The common
law also imposes on a person who carries out an operation an obligation to
exercise reasonable skill and care where there is no contract. Where the
relationship between the operator and a person who suffers injury or damage is sufficiently
proximate and where the
the injured person, the operator is liable in the tort of negligence.
Manufacturers
and providers of services and others seek to protect themselves against
liability for negligence by imposing terms in contracts or by giving notice
that they will not accept liability in contract or in tort. Consumers who have
need of manufactured articles and services are not in a position to bargain.
The Unfair Contract Terms Act 1977 prohibits any person excluding or
restricting liability for death or personal injury resulting from negligence.
The Act also contains a prohibition against the exclusion or restriction of
liability for negligence which results in loss or damage unless the terms of
exclusion or the notice of exclusion satisfies the requirements of
reasonableness.
These two
appeals are based on allegations of negligence in circumstances which are akin
to contract. Mr and Mrs Harris paid £22 to the council for a valuation. The
council employed, and therefore paid, Mr Lee, for whose services as a valuer
the council are vicariously liable. Mrs Smith paid £36.89 to the Abbey National
for a report and valuation and the Abbey National paid the appellants for the
report and valuation. In each case the valuer knew or ought to have known that
the purchaser would contract to purchase the house only if the valuation were
satisfactory and that the purchaser might suffer injury or damage or both if
the valuer did not exercise reasonable skill and care. In these circumstances,
I would expect the law to impose on the valuer a duty owed to the purchaser to
exercise reasonable skill and care in carrying out the valuation.
In Cann v
Willson (1888) 39 ChD 39, approved by this House in Hedley Byrne
& Co Ltd v Heller & Partners Ltd [1964] AC 465, a valuer
instructed by a mortgagor sent his report to the mortgagee, who made an advance
in reliance on the valuation. The valuer was held liable in the tort of
negligence to the mortgagee for failing to carry out the valuation with
reasonable care and skill.
A valuer who
values property as a security for a mortgage is liable either in contract or in
tort to the mortgagee for any failure on the part of the valuer to exercise
reasonable skill and care in the valuation. The valuer is liable in contract if
he receives instructions from and is paid by the mortgagee. The valuer is
liable in tort if he receives instructions from and is paid by the mortgagor
but knows that the valuation is for the purpose of a mortgage and will be
relied upon by the mortgagee.
In Odder v
Westbourne Park Building Society (1955) 165 EG 261, a purchaser paid a
survey fee to a building society, the survey was carried out by the chairman of
the building society and in the result the purchaser purchased the house for
£4,000 with the help of an advance of £3,000. There were serious defects and
the house was unsaleable. There was a disclaimer of liability for negligence
for the survey in the mortgage offer, but Harman J held that the disclaimer:
did no more
than to state what the legal position would be even if it were not there but it
did emphasise the matter and took much of the sting out of the plaintiff’s
allegation, which was to the effect that once the building society had had a
survey made and were willing to lend money, everything was all right and that
she would not have entered on the transaction if they had not kept silent about
the defects or been negligent in not discovering them. In view of the warning in
the proposal form that grievance, if it were one, lost any of its
justification.
Since 1955 a
good deal of water has passed under the negligence bridge.
In Candler v
Crane, Christmas & Co [1951] 2 KB 164, the accountants of a company
showed their draft accounts to and discussed them with an investor who, in
reliance on the accounts, subscribed for shares in the company. Denning LJ,
whose dissenting judgment was subsequently approved in the Hedley Byrne case
[1964] AC 465, found that the accountants owed a duty to the investor to
exercise reasonable skill and care in preparing the draft accounts. Denning LJ
said, at p 176:
If the matter
were free from authority, I should have said that they clearly did owe a duty
of care to him. They were professional accountants who prepared and put before
him these accounts, knowing that he was going to be guided by them in making an
investment in the company. On the face of those accounts he did make the
investment, whereas if the accounts had been carefully prepared, he would not
have made the investment at all. The result is that he has lost his money.
Denning LJ, at
pp 178-179, rejected the argument that:
a duty to
take care only arose where the result of a failure to take care will cause
physical damage to persons or property . . . I can understand that in some
cases of financial loss there may not be a sufficiently proximate relationship
to give rise to a duty of care; but, if once the duty exists I cannot think
that liability depends on the nature of the damage.
The duty of
professional men ‘is not merely a duty to use care in their reports. They have
also a duty to use care in their work which results in their reports’ (p 179).
The duty of an accountant is owed ‘to any third person to whom they themselves
show the accounts, or to whom they know their employer is going to show the
accounts, so as to induce him to invest money or take some other action on
them. But I do not think the duty can be extended still further so as to include
strangers of whom they have heard nothing and to whom their employer without
their knowledge may choose to show their accounts’ (pp 180-181). ‘The test of
proximity in these cases is: did the accountants know that the accounts were
required for submission to the plaintiff and use by him?’ (p 181).
Subject to the
effect of any disclaimer of liability, these considerations appear to apply to
the valuers in the present appeals.
In the Hedley
Byrne case [1964] AC 465, a bank which supplied a reference for a customer
was held to owe a duty of care to a stranger who relied on the reference, but
the bank escaped liability because in the reference the bank expressly
disclaimed liability. Lord Reid said, at p 486:
A reasonable
man, knowing that he was being trusted or that his skill and judgment were
being relied on, would, I think, have three courses open to him. He could keep
silent or decline to give the information or advice sought; or he could give an
answer with a clear qualification that he accepted no responsibility for it or
that it was given without that reflection or inquiry which a careful answer
would require; or he could simply answer without any such qualification. If he
chooses to adopt the last course he must, I think, be held to have accepted
some responsibility for his answer being given carefully, or to have accepted a
relationship with the inquirer which requires him to exercise such care as the
circumstances require.
Lord Devlin,
at p 515, rejected the argument that the maker of a careless statement is only
under a duty to be careful if the duty, which is contractual or fiduciary or
arises from the relationship of proximity, causes physical damage to the person
or property of the plaintiff. Lord Devlin also said, at pp 528-529, that:
the
categories of special relationships which may give rise to a duty to take care
in word as well as in deed are not limited to contractual relationships or to
relationships of fiduciary duty, but include also relationships which . . . are
‘equivalent to contract’, that is, where there is an assumption of
responsibility in circumstances in which, but for the absence of consideration,
there would be a contract.
In the present
appeals, the relationship between the valuer and the purchaser is ‘akin to
contract.’ The valuer knows that the
consideration which he receives derives from the purchaser and is passed on by
the mortgagee, and the valuer also knows that the valuation will determine
whether or not the purchaser buys the house.
In Ministry
of Housing and Local Government v Sharp [1970] 2 QB 223, the local
authority was held liable to the ministry because of the failure of an employee
of the authority to exercise reasonable skill and care in searching for entries
in the local land charges register. The search certificate prepared by the
clerk negligently failed to record a charge of £1,828 11s. 5d. in favour of the
ministry. Lord Denning MR at p 268, rejected the argument:
that a duty
to use due care (where there was no contract) only arose when there was a
voluntary assumption of responsibility . . . Lord Reid in Hedley Byrne’s case
[1964] AC 465, 487 and . . . Lord Devlin, at p 529 . . . used those words
because of the special circumstances of that case (where the bank disclaimed
responsibility). But they did not in any way mean to limit the general
principle. In my opinion the duty to use due care in a statement arises, not
from any voluntary assumption of responsibility, but from the fact that the
person making it knows, or ought to know, that others, being his neighbours in
this regard, would act on the faith of the statement being accurate.
Salmon LJ
said, at p 279:
I do not
accept that, in all cases, the obligation to take reasonable care necessarily
depends upon a voluntary assumption of responsibility. Even if it did, I am far
from satisfied that the council did not voluntarily assume responsibility in
the present case. On the contrary, it seems to me that they certainly chose to
undertake the duty of searching the register and preparing the certificate.
There was nothing to compel them to discharge this duty through their servant.
In the present
proceedings by Mr and Mrs Harris, the council accepted the application form and
the valuation fee and chose to conduct their duty of valuing the house through
Mr Lee. In the case of Mrs Smith, the appellant first accepted the valuation
fee derived
would be shown to and relied upon by Mrs Smith.
Mr Ashworth,
on behalf of the council, relied on the decision of the Court of Appeal of
Northern Ireland in Curran v Northern Ireland Co-ownership Housing
Association Ltd (1986) 8 NIJB 1. On a preliminary issue the court held that
a mortgagee of a house owed no duty of care to the purchaser in respect of a
valuation. The purchaser’s action against the valuer remains to be determined.
Gibson LJ, at p 14, said that in the Hedley Byrne type of case:
there must be
an assumption of responsibility in circumstances in which, but for the absence
of consideration, there would be a contract. Responsibility can only attach if
the defendant’s actions implied a voluntary undertaking to assume
responsibility.
I agree that
by obtaining and disclosing a valuation, a mortgagee does not assume
responsibility to the purchaser for that valuation. But in my opinion the
valuer assumes responsibility to both mortgagee and purchaser by agreeing to
carry out a valuation for mortgage purposes knowing that the valuation fee has
been paid by the purchaser and knowing that the valuation will probably be
relied upon by the purchaser in order to decide whether or not to enter into a
contract to purchase the house. The valuer can escape the responsibility to
exercise reasonable skill and care by an express exclusion clause, provided the
exclusion clause does not fall foul of the Unfair Contract Terms Act 1977. The
Court of Appeal also decided in Curran’s case that a local authority
which provides a house-owner with a grant to carry out works of extension to
his house might owe a duty of care to a subsequent purchaser of the house to
ensure that the works of extension are carried out in a manner free from
defect; this House reversed the Court of Appeal on this point ([1987] 1 AC
718), but the speech of Lord Bridge of Harwich dealt with the ambit of Anns v
Merton London Borough Council [1978] AC 728 and not with the duty of
care which arises when the proximity between tortfeasor and victim is akin to
contract.
It was
submitted by Mr Ashworth, on behalf of the council, that the valuation was
prepared in fulfilment of the statutory duty imposed on the council by section
43 of the Housing (Financial Provisions) Act 1958. Similarly, the valuation
obtained by the Abbey National was essential to enable them to fulfil their
statutory duty imposed by the Building Societies Act 1962. But in Candler v
Crane, Christmas & Co [1951] 2 KB 164, the draft accounts were
prepared for the company, which was compelled by statute to produce accounts.
In the present
appeals, the statutory duty of the council to value the house did not, in my
opinion, prevent the council coming under a contractual or tortious duty to Mr
and Mrs Harris, who were cognisant of the valuation and relied on the
valuation. The contractual duty of a valuer to value a house for the Abbey
National did not prevent the valuer coming under a tortious duty to Mrs Smith,
who was furnished with a report of the valuer and relied on the report.
In general, I
am of the opinion that in the absence of a disclaimer of liability the valuer
who values a house for the purpose of a mortgage, knowing that the mortgagee
will rely and the mortgagor will probably rely on the valuation, knowing that
the purchaser mortgagor has in effect paid for the valuation, is under a duty
to exercise reasonable skill and care and that duty is owed to both parties to
the mortgage for which the valuation is made. Indeed, in both the appeals now
under consideration the existence of such a dual duty is tacitly accepted and
acknowledged because notices excluding liability for breach of the duty owed to
the purchaser were drafted by the mortgagee and imposed on the purchaser. In
these circumstances it is necessary to consider the second question which
arises in these appeals, namely, whether the disclaimers of liability are
notices which fall within the Unfair Contract Terms Act 1977.
In Harris v
Wyre Forest District Council [1988] QB 835, the Court of Appeal (Kerr
and Nourse LJJ and Caulfield J) accepted an argument that the Act of 1977 did
not apply because the council by their express disclaimer refused to obtain a
valuation save on terms that the valuer would not be under any obligation to Mr
and Mrs Harris to take reasonable care or exercise reasonable skill. The
council did not exclude liability for negligence but excluded negligence, so
that the valuer and the council never came under a duty of care to Mr and Mrs
Harris and could not be guilty of negligence. This construction would not give
effect to the manifest intention of the Act but would emasculate the Act. The
construction would provide no control over standard form exclusion clauses
which individual members of the public are obliged to accept. A party to a
contract or a tortfeasor could opt out of the Act of 1977 by declining, in the
words of Nourse LJ, at p 845, to recognise ‘their own answerability to the
plaintiff’. Caulfield J said, at p 850, that the Act ‘can only be relevant
where there is on the facts a potential liability’. But no one intends to
commit a tort and therefore any notice which excludes liability is a notice
which excludes a potential liability. Kerr LJ, at p 853, sought to confine the
Act to ‘situations where the existence of a duty of care is not open to doubt’
or where there is ‘an inescapable duty of care’. I can find nothing in the Act
of 1977 or in the general law to identify or support this distinction. In the
result the Court of Appeal held that the Act does not apply to ‘negligent
misstatements where a disclaimer has prevented a duty of care from coming into
existence’, per Nourse LJ, at p 848. My lords, this confuses the
valuer’s report with the work which the valuer carries out in order to make his
report. The valuer owed a duty to exercise reasonable skill and care in his
inspection and valuation. If he had been careful in his work, he would not have
made a ‘negligent misstatement’ in his report.
Section 11(3)
of the Act of 1977 provides that in considering whether it is fair and
reasonable to allow reliance on a notice which excludes liability in tort,
account must be taken of:
all the
circumstances obtaining when the liability arose or (but for the notice) would
have arisen.
Section 13(1)
of the Act prevents the exclusion of any right or remedy and (to that extent)
section 2 also prevents the exclusion of liability:
by reference
to . . . notices which exclude . . . the relevant obligation or duty.
Nourse LJ
dismissed section 11(3) as ‘peripheral’ and made no comment on section 13(1).
In my opinion, both these provisions support the view that the Act of 1977
requires that all exclusion notices which would in common law provide a defence
to an action for negligence must satisfy the requirement of reasonableness.
The answer to
the second question involved in these appeals is that the disclaimer of
liability made by the council on its own behalf in the Harris case and
by the Abbey National on behalf of the appellants in the Smith case
constitute notices which fall within the Unfair Contract Terms Act 1977 and
must satisfy the requirement of reasonableness.
The third
question is whether in relation to each exclusion clause it is, in the words of
section 11(3) of the Act of 1977:
fair and
reasonable to allow reliance on it, having regard to all the circumstances
obtaining when the liability arose or (but for the notice) would have arisen.
The liability
of the council for the breach by Mr Lee of his duty of care to Mr and Mrs
Harris arose as soon as Mr and Mrs Harris, in reliance on the valuation of
£8,505, bought the house for £9,000. The liability of the appellants for the
breach of their duty of care to Mrs Smith in their valuation arose as soon as
Mrs Smith, in reliance on the valuation of £16,500, bought the house for
£18,000. The damages will include the difference between the market value of
the house on the day when it was purchased and the purchase price which was in
fact paid by the purchaser in reliance on the valuation.
Both the
present appeals involve typical house purchases. In considering whether the
exclusion clause may be relied upon in each case, the general pattern of house
purchases and the extent of the work and liability accepted by the valuer must
be borne in mind.
Each year one
million houses may be bought and sold. Apart from exceptional cases the
procedure is always the same. The vendor and the purchaser agree a price but
the purchaser cannot enter into a contract unless and until a mortgagee,
typically a building society, offers to advance the whole or part of the
purchase price. A mortgage of 80% or more of the purchase price is not unusual.
Thus, if the vendor and the purchaser agree a price of £50,000 and the
purchaser can find £10,000, the purchaser then applies to a building society
for a loan of £40,000. The purchaser pays the building society a valuation fee
and the building society instructs a valuer, who is paid by the building
society. If the valuer reports to the building society that the house is good
security for £40,000, the building society offers to advance £40,000 and the
purchaser contracts to purchase the house for £50,000. The purchaser, who is
offered £40,000 on the security of the house, rightly assumes that a qualified
valuer has valued the house at not less than £40,000.
At the date
when the purchaser pays the valuation fee, the date when the valuation is made
and at the date when the purchaser is offered an advance, the sale may never
take place. The amount
or the vendor may increase his price and sell elsewhere. For many reasons a
sale may go off, and in that case the purchaser has paid his valuation fee
without result and must pay a second valuation fee when he finds another house
and goes through the same procedure. The building society which is anxious to
attract borrowers and the purchaser who has no money to waste on valuation fees
do not encourage or pay for detailed surveys. Moreover, the vendor may not be
willing to suffer the inconvenience of a detailed survey on behalf of a
purchaser who has not contracted to purchase and may exploit minor items of
disrepair disclosed by a detailed survey in order to obtain a reduction in the
price.
The valuer is
and, in my opinion, must be a professional person, typically a chartered
surveyor in general practice, who, by training and experience and exercising
reasonable skill and care, will recognise defects and be able to assess value.
The valuer will value the house after taking into consideration major defects
which are, or ought to be, obvious to him in the course of a visual inspection
of so much of the exterior and interior of the house as may be accessible to
him without undue difficulty. This appears to be the position as agreed between
experts in the decided cases which have been discussed in the course of the
present appeal. In Roberts v J Hampson & Co [1988] 2 EGLR
181, Ian Kennedy J, after hearing expert evidence, came to the following
conclusions concerning a valuation commissioned by the Halifax Building
Society. I have no doubt the case is of general application. The judge,
referring to the Halifax Building Society valuation, as described in the literature
and as described by expert evidence, said, at p 185:
It is a
valuation and not a survey, but any valuation is necessarily governed by
condition. The inspection is, of necessity, a limited one. Both the expert
surveyors who gave evidence before me agreed that with a house of this size
they would allow about half an hour for their inspection on site. That time
does not admit of moving furniture, or of lifting carpets, especially where
they are nailed down. In my judgment, it must be accepted that where a surveyor
undertakes a scheme I valuation it is understood that he is making a limited
appraisal only. It is, however, an appraisal by a skilled professional man. It
is inherent in any standard fee work that some cases will colloquially be
‘winners’ and others ‘losers’, from the professional man’s point of view. The
fact that in an individual case he may need to spend two or three times as long
as he would have expected, or as the fee structure would have contemplated, is
something which he must accept. His duty to take reasonable care in providing a
valuation remains the root of his obligation. In an extreme case . . . a
surveyor might refuse to value on the agreed fee basis, though any surveyor who
too often refused to take the rough with the smooth would not improve his
reputation. If, in a particular case, the proper valuation of a £19,000 house
needs two hours’ work, that is what the surveyor must devote to it. The second
aspect of the problem concerns moving furniture and lifting carpets. Here again,
as it seems to me, the position that the law adopts is simple. If a surveyor
misses a defect because its signs are hidden, that is a risk that his client
must accept. But if there is specific ground for suspicion and the trail of
suspicion leads behind furniture or under carpets, the surveyor must take
reasonable steps to follow the trail until he has all the information which it
is reasonable for him to have before making his valuation.
In his
reference to ‘a scheme valuation’, the judge was alluding to the practice of
charging scale fees to purchasers and paying scale fees to valuers.
The valuer
will not be liable merely because his valuation may prove to be in excess of
the amount which the purchaser might realise on a sale of the house. The valuer
will be liable only if other qualified valuers, who cannot be expected to be
harsh on their fellow professionals, consider that, taking into consideration
the nature of the work for which the valuer is paid and the object of that
work, nevertheless he has been guilty of an error which an average valuer, in
the same circumstances, would not have made and, as a result of that error, the
house was worth materially less than the amount of the valuation upon which the
mortgagee and the purchaser both relied. The valuer accepts the liability to
the building society, which can insist on the valuer accepting liability. The
building society seeks to exclude the liability of the valuer to the purchaser,
who is not in a position to insist on anything. The duty of care which the
valuer owes to the building society is exactly the same as the duty of care
which he owes to the purchaser. The valuer is more willing to accept the
liability to the building society than to the purchaser because it is the
purchaser who is vulnerable. If the valuation is worthless, the building
society can still insist that the purchaser shall repay the advance and
interest. So, in practice, the damages which the valuer may be called upon to
pay to the building society and the chances of the valuer being expected to pay
are less than the corresponding liability to the purchaser. But this does not
make it more reasonable for the valuer to be able to rely on an exclusion
clause which is an example of a standard form exemption clause operating in
favour of the supplier of services and against the individual consumer.
Mr Hague, who
has great experience in this field, urged on behalf of the valuers in this
appeal and on behalf of valuers generally that it is fair and reasonable for a
valuer to rely on an exclusion clause, particularly an exclusion clause which
is set forth so plainly in building society literature. The principal reasons
urged by Mr Hague are as follows:
(1) The exclusion clause is clear and
understandable and reiterated and is forcefully drawn to the attention of the
purchaser.
(2) The purchaser’s solicitors should reinforce
the warning and should urge the purchaser to appreciate that he cannot rely on
a mortgage valuation and should obtain and pay for his own survey.
(3) If valuers cannot disclaim liability they
will be faced by more claims from purchasers some of which will be
unmeritorious but difficult and expensive to resist.
(4) A valuer will become more cautious, take more
time and produce more gloomy reports, which will make house transactions more
difficult.
(5) If a duty of care cannot be disclaimed the
cost of negligence insurance for valuers and therefore the cost of valuation
fees to the public will be increased.
Mr Hague also
submitted that there was no contract between a valuer and a purchaser and that,
so far as the purchaser was concerned, the valuation was ‘gratuitous’, and the
valuer should not be forced to accept a liability he was unwilling to
undertake. My lords, all these submissions are, in my view, inconsistent with
the ambit and thrust of the Act of 1977. The valuer is a professional man who
offers his services for reward. He is paid for those services. The valuer knows
that 90% of purchasers in fact rely on a mortgage valuation and do not
commission their own survey. There is great pressure on a purchaser to rely on
the mortgage valuation. Many purchasers cannot afford a second valuation. If a
purchaser obtains a second valuation the sale may go off and then both
valuation fees will be wasted. Moreover, he knows that mortgagees, such as
building societies and the council, in the present case, are trustworthy and
that they appoint careful and competent valuers and he trusts the professional
man so appointed. Finally, the valuer knows full well that failure on his part
to exercise reasonable skill and care may be disastrous to the purchaser. If,
in reliance on a valuation, the purchaser contracts to buy for £50,000 a house
valued and mortgaged for £40,000 but, in fact, worth nothing and needing
thousands more to be spent on it, the purchaser stands to lose his home and to
remain in debt to the building society for up to £40,000.
In Yianni v
Edwin Evans & Sons [1982] 1 QB 438, Mr and Mrs Yianni decided that
if the Halifax Building Society would agree to advance £12,000, they would buy
a house for £15,000, otherwise they would let the house go, as they had no
money apart from £3,000. The house was valued by a valuer on behalf of the
Halifax at £12,000, an advance of this amount was offered and accepted and the
house was bought and mortgaged. Mr and Mrs Yianni then discovered that the
house needed repairs amounting to £18,000. Park J, at p 445, found on evidence
largely derived from the chief surveyor to the Abbey National, that the
proportion of purchasers who have an independent survey is less than 15%; that
purchasers rely on the building society valuation; purchasers trust the
building societies; each purchaser knows that he has paid a fee for someone on
behalf of the society to look at the house:
. . . the
intending mortgagor feels that the building society, whom he trusts, must
employ for the valuation and survey competent qualified surveyors; and, if the
building society acts upon its surveyor’s report, then there can be no good
reason why he should not also himself act upon it. The consequence is that if,
after inspection by the building society’s surveyor, an offer to make an
advance is made, the applicant assumes that the building society has satisfied
itself that the house is valuable enough to provide suitable security for a
loan and decides to proceed by accepting the society’s offer. So, if Mr Yianni
had had an independent survey, he would have been exceptional in the experience
of the building societies and of those employed to carry out surveys and
valuations for them.
Park J,
following the Hedley Byrne case [1964] AC 465, concluded at pp 454-455
that a duty of care by the valuers to Mr and Mrs Yianni would arise if the
valuers knew that their valuation:
in so far as
it stated that the property provided adequate security for an advance of
£12,000, would be passed on to the plaintiffs, who,
under section 30 of the Building Societies Act 1962, in the defendants’
reasonable contemplation would place reliance upon its correctness in making
their decision to buy the house and mortgage it to the building society . . . .
These defendants are surveyors and valuers. It is their profession and
occupation to survey and make valuations of houses and other property. They
make reports about the condition of property they have surveyed. Their duty is
not merely to use care in their reports, they have also a duty to use care in
their work which results in their reports . . . . Accordingly, the building society’s
offer of £12,000, when passed on to the plaintiffs, confirmed to them that 1,
Seymour Road was sufficiently valuable to cause the building society to advance
on its security 80 per cent of the purchase price. Since that was also the
building society’s view the plaintiffs’ belief was not unreasonable.
In Yianni’s case
[1982] QB 438, there was no exclusion of liability on behalf of the valuer. The
evidence and the findings of Park J, which I have set out, support the view
that it is unfair and unreasonable for a valuer to rely on an exclusion clause
directed against a purchaser in the circumstances of the present appeals.
Mr Hague
referred to a new Abbey National proposal resulting from a consideration of Yianni’s
case. The purchaser is offered the choice between a valuation without
liability on the valuer and a report which, as Mr Hague agreed, did not involve
any more work for the valuer but accepted that the valuer was under a duty to
exercise reasonable skill and care. The fee charged for the report as compared
with the fee charged for the valuation represents an increase of £100 for a
house worth £20,000, £150 for a house worth £100,000 and £200 for a house worth
£200,000. On a million houses, this would represent increases of income to be
divided between valuers, insurers and building societies of about £150m. It is
hardly surprising that few purchasers have chosen the report instead of the
valuation. Any increase in fees, alleged to be justified by the decision of
this House in these appeals, will no doubt be monitored by the appropriate
authorities.
It is open to
Parliament to provide that members of all professions or members of one
profession providing services in the normal course of the exercise of their
profession for reward shall be entitled to exclude or limit their liability for
failure to exercise reasonable skill and care. In the absence of any such
provision, valuers are not, in my opinion, entitled to rely on a general
exclusion of the common law duty of care owed to purchasers of houses by
valuers to exercise reasonable skill and care in valuing houses for mortgage
purposes.
In the Green
Paper Conveyancing by Authorised Practitioners (Cm 572), the Government
propose to allow building societies, banks and other authorised practitioners
to provide conveyancing services to the public by employed professional
lawyers. The Green Paper includes the following relevant passages:
3.10 There will inevitably be claims of financial
loss arising out of the provision of conveyancing services. A bad mistake can
result in a purchaser acquiring a property which is worth considerably less
than he paid for it — because, for example, the conveyancer overlooked a
restriction on use or the planning of a new motorway. The practitioner will be
required to have adequate professional indemnity insurance or other appropriate
arrangements to meet such claims.
Annex, para
12:
An authorised
practitioner must not contractually limit its liability for damage suffered by
the client as a result of negligence on its part.
The Government
thus recognises the need to preserve the duty of a professional lawyer to
exercise reasonable skill and care so that the purchaser of a house may not be
disastrously affected by a defect of title or an encumbrance. In the same way,
it seems to me, there is need to preserve the duty of a professional valuer to
exercise reasonable skill and care so that a purchaser of a house may not be
disastrously affected by a defect in the structure of the house.
The public are
exhorted to purchase their homes and cannot find houses to rent. A typical
London suburban house, constructed in the 1930s for less than £1,000, is now
bought for more than £150,000 with money largely borrowed at high rates of
interest and repayable over a period of a quarter of a century. In these
circumstances, it is not fair and reasonable for building societies and valuers
to agree together to impose on purchasers the risk of loss arising as a result
of incompetence or carelessness on the part of valuers. I agree with the speech
of Lord Griffiths, and with his warning that different considerations may apply
where homes are not concerned.
In the instant
case of Harris v Wyre Forest District Council, I would allow the
appeal of Mr and Mrs Harris, restore the order of the trial judge and order the
costs of Mr and Mrs Harris to be borne by the council. In the case of Smith v
Eric S Bush, I would dismiss the appeal with costs.
Agreeing, LORD
GRIFFITHS said in his speech: These appeals were heard together because they
both raise the same two problems. The first is whether the law places a duty of
care upon a professional valuer of real property which he owes to the purchaser
of the property although he has been instructed to value the property by a
prospective mortgagee and not by the purchaser. The second problem concerns the
construction and application of the Unfair Contract Terms Act 1977.
Smith v Eric S Bush (a
firm)
I shall deal
with this appeal first because its facts are similar to hundreds of thousands
of house purchases that take place every year. It concerns the purchase of a
house at the lower end of the market with the assistance of finance provided by
a building society. The purchaser applies for finance to the building society.
The building society is required by statute to obtain a valuation of the
property before it advances any money: see section 13 of the Building Societies
Act 1986. This requirement is to protect the depositors who entrust their
savings to the building society. The building society therefore requires the purchaser
to pay a valuation fee to cover or, at least, to defray the cost of obtaining a
valuation. This is a modest sum and certainly much less than the cost of a full
structural survey; in the present case it was £36.89. If the purchaser pays the
valuation fee, the building society instructs a valuer, who inspects the
property and prepares a report for the building society giving his valuation of
the property. The inspection carried out is a visual one designed to reveal any
obvious defects in the property which must be taken into account when comparing
the value of the property with other similar properties in the neighbourhood.
If the valuation shows that the property provides adequate security for the
loan, the building society will lend the money necessary for the purchaser to
go ahead, but prior to its repeal by the Building Societies Act 1986 would send
to the purchaser a statutory notice pursuant to section 30 of the Building
Societies Act 1962 to make clear that by making the loan it did not warrant that
the purchase price of the property was reasonable.
The building
society may either instruct an independent firm of surveyors to make the
valuation or use one of its own employees. In the present case, the building
society instructed the appellants, an independent firm of surveyors. I will
consider whether it makes any difference if an ‘in-house’ valuer is instructed
when I come to deal with the other appeal. The building society may or may not
send a copy of the valuer’s report to the purchaser. In this case the building
society was the Abbey National and they did send a copy of the report to the
purchaser, Mrs Smith. I understand that this is now common practice among
building societies. The report, however, contained in red lettering and in the
clearest terms a disclaimer of liability for the accuracy of the report
covering both the building society and the valuer. Again, I understand that it
is common practice for other building societies to incorporate such a
disclaimer of liability.
Mrs Smith did
not obtain a structural survey of the property. She relied upon the valuer’s
report to reveal any obvious serious defects in the house she was purchasing.
It is common ground that she was behaving in the same way as the vast majority
of purchasers of modest houses. They do not go to the expense of obtaining
their own structural survey; they rely on the valuation to reveal any obvious
serious defects and take a chance that there are no hidden defects that might
be revealed by a more detailed structural survey.
The valuer’s
report said: ‘the property has been modernised to a fair standard . . . no
essential repairs are required’ and it valued the property at £16,500. If
reasonable skill and care had been employed when the inspection took place, it
would have revealed that as a result of removing the chimney breasts in the
rooms the chimneys had been left dangerously unsupported. Unaware of this
defect and relying on the valuer’s report, Mrs Smith bought the house for
£18,000 with the assistance of a loan of £3,500 from the building society.
After she had
been living in the house for about 18 months, one of the chimney flues
collapsed and crashed through the bedroom ceiling and floor causing damage for
which Mrs Smith was awarded £4,374.97 against the surveyors who had carried out
the valuation.
Mr Hague, on
behalf of the surveyors, conceded that on the facts of this case the surveyors
owed a duty of care to Mrs Smith unless they were protected by the disclaimer
of liability. He made this concession, he said, because the surveyors knew that
their report was going to be shown to Mrs Smith and that Mrs Smith would, in
all probability, rely upon it, which two factors would create the necessary
proximity to found the duty of care. He submitted, however, that if the surveyor
did not know that his report would be
v Edwin Evans & Sons [1982] QB 438 was wrongly decided. I shall
defer consideration of this question to the second appeal, for it does not
arise on the facts of the present case. Suffice it to say, for the moment, that
on the facts of the present case it is my view that the concession made by Mr
Hague is correct.
At common law,
whether the duty to exercise reasonable care and skill is founded in contract
or tort, a party is as a general rule free, by the use of appropriate wording,
to exclude liability for negligence in discharge of the duty. The disclaimer of
liability in the present case is prominent and clearly worded and on the authority
of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]
AC 465, in so far as the common law is concerned effective to exclude the
surveyors’ liability for negligence. The question then is whether the Unfair
Contract Terms Act 1977 bites upon such a disclaimer. In my view it does.
The Court of
Appeal, however, accepted an argument based upon the definition of negligence
contained in section 1(1) of the Act of 1977, which provides:
For the
purposes of this Part of this Act, ‘negligence’ means the breach —
(a) of any obligation, arising from the express
or implied terms of a contract, to take reasonable care or exercise reasonable
skill in the performance of the contract;
(b) of any common law duty to take reasonable
care or exercise reasonable skill (but not any stricter duty);
(c) of the common duty of care imposed by the
Occupiers’ Liability Act 1957 or the Occupiers’ Liability Act (Northern
Ireland) 1957.
They held
that, as the disclaimer of liability would at common law have prevented any
duty to take reasonable care arising between the parties, the Act had no
application. In my view, this construction fails to give due weight to the
provisions of two further sections of the Act. Section 11(3) provides:
In relation
to a notice (not being a notice having contractual effect), the requirement of
reasonableness under this Act is that it should be fair and reasonable to allow
reliance on it, having regard to all the circumstances obtaining when the
liability arose or (but for the notice) would have arisen.
And section
13(1):
To the extent
that this Part of this Act prevents the exclusion or restriction of any
liability it also prevents —
(a) making the liability or its enforcement
subject to restrictive or onerous conditions;
(b) excluding or restricting any right or remedy
in respect of the liability, or subjecting a person to any prejudice in
consequence of his pursuing any such right or remedy;
(c) excluding or restricting rules of evidence or
procedure;
and (to that
extent) sections 2 and 5 to 7 also prevent excluding or restricting liability
by reference to terms and notices which exclude or restrict the relevant
obligation or duty.
I read these
provisions as introducing a ‘but for’ test in relation to the notice excluding
liability. They indicate that the existence of the common law duty to take
reasonable care, referred to in section 1(1)(b), is to be judged by
considering whether it would exist ‘but for’ the notice excluding liability.
The result of taking the notice into account when assessing the existence of a
duty of care could result in removing all liability for negligent
mis-statements from the protection of the Act. It is permissible to have regard
to the second report of the Law Commission on Exemption Clauses (Law Com no
69), which is the genesis of the Unfair Contract Terms Act 1977, as an aid to
the construction of the Act. Para 127 of that report reads:
Our
recommendations in this Part of the report are intended to apply to exclusions
of liability for negligence where the liability is incurred in the course of a
person’s business. We consider that they should apply even in cases where the
person seeking to rely on the exemption clause was under no legal obligation
(such as a contractual obligation) to carry out the activity. This means that,
for example, conditions attached to a licence to enter on to land, and
disclaimers of liabilities made where information or advice is given, should be
subject to control . . .
I have no
reason to think that Parliament did not intend to follow this advice, and the
wording of the Act is, in my opinion, apt to give effect to that intention.
This view of the construction of the Act is also supported by the judgment of
Slade LJ in Phillips Products Ltd v Hyland (Note) [1987] 1 WLR
659, when he rejected a similar argument in relation to the construction of a
contractual term excluding negligence.
Finally, the
question is whether the exclusion of liability contained in the disclaimer
satisfies the requirement of reasonableness provided by section 2(2) of the Act
of 1977. The meaning of reasonableness and the burden of proof are both dealt
with in section 11(3), which provides:
In relation
to a notice (not being a notice having contractual effect), the requirement of
reasonableness under this Act is that it should be fair and reasonable to allow
reliance on it, having regard to all the circumstances obtaining when the
liability arose or (but for the notice) would have arisen.
It is clear,
then, that the burden is upon the surveyor to establish that in all the circumstances
it is fair and reasonable that he should be allowed to rely upon his disclaimer
of liability.
I believe that
is impossible to draw up an exhaustive list of the factors that must be taken
into account when a judge is faced with this very difficult decision.
Nevertheless, the following matters should, in my view, always be considered.
1 Were the parties of equal bargaining
power? If the court is dealing with a
one-off situation between parties of equal bargaining power, the requirement of
reasonableness would be more easily discharged than in a case such as the
present where the disclaimer is imposed upon the purchaser who has no effective
power to object.
2 In the case of advice, would it have been
reasonably practicable to obtain the advice from an alternative source, taking
into account consideration of costs and time?
In the present case, it is urged on behalf of the surveyor that it would
have been easy for the purchaser to have obtained his own report on the
condition of the house, to which the purchaser replies that he would then be
required to pay twice for the same advice and that people buying at the bottom
end of the market, many of whom will be young first-time buyers, are likely to
be under considerable financial pressure without the money to go paying twice
for the same service.
3 How difficult is the task being undertaken
for which liability is being excluded?
When a very difficult or dangerous undertaking is involved, there may be
a high risk of failure which would certainly be a pointer towards the
reasonableness of excluding liability as a condition of doing the work. A
valuation, on the other hand, should present no difficulty if the work is
undertaken with reasonable skill and care. It is only defects which are
observable by a careful visual examination that have to be taken into account
and I cannot see that it places any unreasonable burden on the valuer to
require him to accept responsibility for the fairly elementary degree of skill
and care involved in observing, following up and reporting on such defects.
Surely it is work at the lower end of the surveyor’s field of professional
expertise.
4 What are the practical consequences of the
decision on the question of reasonableness?
This must involve the sums of money potentially at stake and the ability
of the parties to bear the loss involved, which, in its turn, raises the
question of insurance. There was once a time when it was considered improper
even to mention the possible existence of insurance cover in a lawsuit. But those
days are long past. Everyone knows that all prudent professional men carry
insurance, and the availability and cost of insurance must be a relevant factor
when considering which of two parties should be required to bear the risk of a
loss. We are dealing in this case with a loss which will be limited to the
value of a modest house and against which it can be expected that the surveyor
will be insured. Bearing the loss will be unlikely to cause significant
hardship if it has to be borne by the surveyor, but it is, on the other hand,
quite possible that it will be a financial catastrophe for the purchaser, who
may be left with a valueless house and no money to buy another. If the law in
these circumstances denies the surveyor the right to exclude his liability, it
may result in a few more claims, but I do not think so poorly of the surveyor’s
profession as to believe that the floodgates will be opened. There may be some
increase in surveyors’ insurance premiums which will be passed on to the
public, but I cannot think that it will be anything approaching the figures
involved in the difference between the Abbey National’s offer of a valuation
without liability and a valuation with liability discussed in the speech of
Lord Templeman. The result of denying a surveyor, in the circumstances of this
case, the right to exclude liability will result in distributing the risk of
his negligence among all house purchasers through an increase in his fees to
cover insurance, rather than allowing the whole risk to fall upon the one
unfortunate purchaser.
I would not,
however, wish it to be thought that I would consider it unreasonable for
professional men in all circumstances to seek to exclude or limit their
liability for negligence. Sometimes
would be impossible for the adviser to obtain adequate insurance cover and
which would ruin him if he were to be held personally liable. In these
circumstances it may indeed be reasonable to give the advice upon a basis of no
liability or possibly of liability limited to the extent of the adviser’s
insurance cover.
In addition to
the foregoing four factors, which will always have to be considered, there is
in this case the additional feature that the surveyor is employed in the first
place only because the purchaser wishes to buy the house and the purchaser in
fact provides or contributes to the surveyor’s fees. No one has argued that if
the purchaser had employed and paid the surveyor himself it would have been reasonable
for the surveyor to exclude liability for negligence, and the present situation
is not far removed from that of a direct contract between the surveyor and the
purchaser. The evaluation of the foregoing matters leads me to the clear
conclusion that it would not be fair and reasonable for the surveyor to be
permitted to exclude liability in the circumstances of this case. I would
therefore dismiss this appeal.
It must,
however, be remembered that this is a decision in respect of a dwelling-house
of modest value in which it is widely recognised by surveyors that purchasers
are in fact relying on their care and skill. It will obviously be of general
application in broadly similar circumstances. But I expressly reserve my
position in respect of valuations of quite different types of property for
mortgage purposes, such as industrial property, large blocks of flats or very
expensive houses. In such cases it may well be that the general expectation of
the behaviour of the purchaser is quite different. With very large sums of
money at stake prudence would seem to demand that the purchaser obtain his own
structural survey to guide him in his purchase and, in such circumstances, with
very much larger sums of money at stake, it may be reasonable for the surveyors
valuing on behalf of those who are providing the finance either to exclude or
to limit their liability to the purchaser.
Harris and
Another v Wyre Forest District Council and Another
The Housing
(Financial Provisions) Act 1958 (as amended by the Local Government Act 1974)
gave power to local authorities to lend money for house purchase. Section 43 of
the Act of 1958 provided, inter alia, that before making the loan the
local authority had to satisfy themselves that the house was, or would after
repair be, fit for human habitation. The local authority were also required to
secure the loan by way of mortgage on the property and only to make the loan
after they had obtained a valuation of the property made on their behalf.
The
appellants, Mr and Mrs Harris, two young first-time buyers, applied to the
first respondents, Wyre Forest District Council, for a loan to enable them to
purchase a small old house in Kidderminster. The asking price of the house was
£9,450. Mr and Mrs Harris completed an application form to the council seeking
a loan of £8,950. The application form contained the following paragraphs:
To be read
carefully and signed personally by all applicants
I/we enclose
herewith valuation fee and administration fee £22.00. I/we understand that this
fee is not returnable even if the council do not eventually make an advance and
that the valuation is confidential and is intended solely for the information
of Wyre Forest District Council in determining what advance, if any, may be
made on the security and that no responsibility whatsoever is implied or
accepted by the council for the value or condition of the property by reason of
such inspection and report. (You are advised for your own protection to
instruct your own surveyor/architect to inspect the property.) I/we agree that the valuation report is the
property of the council and that I/we cannot require its production.
When the
council had received their application and their cheque for £22, they
instructed the second respondent, Mr Lee, a valuation surveyor in the council’s
employment, to inspect and value the house. Mr Lee inspected the house and
prepared a report in which he valued the property at the asking price of £9,450
and under the head ‘Essential Repairs’ he entered ‘Obtain report for district
council from MEB (Midland Electricity Board) regarding electrics and carry out
any recommendations’ and ‘Make good mortar fillets to extension’. We were told
that the entry in respect of the electrical installation is one that is
standard in all councils’ reports and it would seem the only other essential
repair was a minor matter relating to mortar fillets in the extension. No other
defects of any sort were noted on the report.
This report
was not shown to Mr and Mrs Harris, but having received the report, the council
made them an offer of a loan of £8,505 secured by a mortgage on the property on
condition that they undertook to carry out the electrical work and the repair
of the mortar fillets in the extension as recommended by the valuer to the
satisfaction of the council. The Harrises accepted the offer and bought the
house for £9,000
Unfortunately,
Mr Lee had failed to report that the house had suffered from serious settlement
which required inspection by a structural engineer. When the Harrises tried to
sell the house three years later, the prospective purchaser also applied to the
council for a loan and Mr Lee was again sent to inspect the house. On this
occasion he reported the settlement and recommended that a structural
engineer’s report should be obtained before any loan was made. In due course, a
structural engineer’s report revealed that the house was in a dangerous and
unstable condition and that the cost of repairs would be many thousands of
pounds. In fact, damages, subject to liability, were agreed at £12,000.
Obviously, had Mr Lee reported in his first report in the same terms as he did
in his second report, the Harrises would never have bought the house. The judge
held that Mr Lee was negligent in the making of his first report and there is no
appeal from that finding of fact.
For the
reasons that I have already given, the disclaimer of liability must be
disregarded when considering whether the council or Mr Lee owed any duty of
care to Mr and Mrs Harris. Mr Ashworth has submitted that they did not because
there was no voluntary assumption of responsibility on their part in respect of
Mr Lee’s inspection and report. He submits that Yianni v Edwin Evans
& Sons [1982] QB 438 was wrongly decided. That case was the first of a
number of decisions at first instance in which surveyors instructed by
mortgagees have been held liable to purchasers for negligent valuations. The
facts were that the plaintiffs, who wished to buy a house at a price of
£15,000, applied to a building society for a mortgage. The building society
engaged a firm of valuers to value the property, for which the plaintiffs had
to pay. There was no disclaimer of liability although the mortgage application
form advised the plaintiffs to obtain an independent survey. They did not do so
because of the cost involved. The surveyors valued the property at £15,000 and
assessed it as suitable for maximum lending. The building society offered the
plaintiffs a maximum loan of £12,000 with which they purchased the property.
There was serious damage to the house caused by subsidence which should have
been discovered by the surveyors at the time of their inspection and it was
admitted that the surveyors had been negligent.
In that case
there was no disclaimer of liability and the valuer’s report was not shown to
the purchaser. Ignoring the disclaimer of liability, the facts are virtually
indistinguishable from the present case unless it can be said that the fact
that Mr Lee was an in-house valuer can make a difference when considering the
existence of his duty of care to the purchaser. Park J said, at P 454:
. . . I
conclude that, in this case, the duty of care would arise if, on the evidence,
I am satisfied that the defendants knew that their valuation of 1 Seymour Road,
in so far as it stated that the property provided adequate security for an
advance of £12,000, would be passed on to the plaintiffs, who . . . in the
defendants’ reasonable contemplation would place reliance upon its correctness
in making their decision to buy the house and mortgage it to the building
society.
Finding both
these conditions satisfied, Park J held the surveyors to be liable.
Mr Ashworth
drew attention to the doubts expressed about the correctness of this decision
by Kerr LJ, in the course of his judgment in the Court of Appeal, and
submitted, on the authority of Hedley Byrne & Co Ltd v Heller
& Partners Ltd [1964] AC 465 that it was essential to found liability
for a negligent misstatement, that there had been ‘a voluntary assumption of
responsibility’ on the part of the person giving the advice. I do not accept
this submission and I do not think that voluntary assumption of responsibility
is a helpful or realistic test for liability. It is true that reference is made
in a number of the speeches in Hedley Byrne to the assumption of
responsibility as a test of liability, but it must be remembered that those
speeches were made in the context of a case in which the central issue was
whether a duty of care could arise when there had been an express disclaimer of
responsibility for the accuracy of the advice. Obviously, if an adviser
expressly assumes responsibility for his advice, a duty of care will arise, but
such is extremely unlikely in the ordinary course of events. The House of Lords
approved a duty of care being imposed on the facts in Cann v Willson (1888)
39 Ch D 39 and in Candler v Crane, Christmas & Co [1951] 2 KB
164. But if the surveyor in Cann v
Co had actually been asked if he was voluntarily assuming responsibility
for his advice to the mortgagee or the purchaser of the shares, I have little
doubt he would have replied, ‘Certainly not. My responsibility is limited to
the person who employs me.’ The phrase
‘assumption of responsibility’ can only have any real meaning if it is
understood as referring to the circumstances in which the law will deem the
maker of the statement to have assumed responsibility to the person who acts
upon the advice.
In Ministry
of Housing and Local Government v Sharp [1970] 2 QB 223, both Lord
Denning MR and Salmon LJ rejected the argument that a voluntary assumption of
responsibility was the sole criterion for imposing a duty of care for the
negligent preparation of a search certificate in the local land charges
register.
The essential
distinction between the present case and the situation being considered in Hedley
Byrne [1964] AC 465 and in the two earlier cases is that in those cases the
advice was being given with the intention of persuading the recipient to act
upon it. In the present case, the purpose of providing the report is to advise
the mortgagee, but it is given in circumstances in which it is highly probable
that the purchaser will in fact act on its contents, although that was not the
primary purpose of the report. I have had considerable doubts whether it is
wise to increase the scope of the duty for negligent advice beyond the person
directly intended by the giver of the advice to act upon it to those whom he
knows may do so. Certainly in the field of the law of mortgagor and mortgagee
there is authority that points in the other direction. In Odder v Westbourne
Park Building Society (1955) 165 EG 261, Harman J held that a building
society owed no duty of care to purchasers in respect of the valuation report
for mortgage purposes prepared by the chairman of the society. From the tenor
of the short report it appears that Harman J regarded it as unthinkable that a
mortgagee could owe a duty of care to the mortgagor in respect of any action
taken by the mortgagee for the purpose of appraising the value of the property.
In Curran v Northern Ireland Co-ownership Housing Association Ltd (1986)
8 NIJB 1, the Court of Appeal in Northern Ireland held that the Northern
Ireland Housing Executive, which had lent money on mortgage pursuant to powers
contained in the Housing Act (Northern Ireland) 1971, owed no duty of care to
their mortgagor in respect of the valuation of the property. The claim against
the executive had been struck out by the judge on the ground that the pleadings
disclosed no cause for action. For the purpose of the appeal, the following
facts were assumed, that (1) the executive had instructed an independent valuer
to prepare a valuation of the property; (2) the valuation had been negligently
prepared; (3) the executive had negligently instructed an incompetent valuer;
(4) the valuer’s report would not be shown to the purchaser; (5) the purchaser
knew that the executive would not lend money without a valuation to justify the
loan; (6) the executive knew that the purchaser would assume that the valuation
showed that the property was worth at least as much as the figure which the
executive was willing to advance on mortgage, and that the purchaser would rely
on the valuation to that extent. Gibson LJ based his judgment on the absence of
any acceptance of responsibility on the part of the executive. In the course of
his judgment he said at p 14:
Responsibility
can only attach if the defendant’s act implied a voluntary undertaking to
assume responsibility. Were it otherwise a person who offered to an expert any
object for sale, making it clear that he was unaware of its value and that he
was relying on the other to pay a proper price, could sue the other should he
later discover that he had not received the full value even though the
purchaser had made no representation that he was doing any more than look after
his own interests. Nor can any class of persons who to the knowledge of another
habitually fail to take precautions for their own protection in a business
relationship cast upon another without his consent an obligation to exercise
care for their protection in such transaction so as to protect them from their
own lack of ordinary business prudence. Generally, a mortgage contract in
itself imports no obligation on the part of a mortgagee to use care in
protecting the interests of a mortgagor . . .
Gibson LJ
said, at p 21:
But in so far
as the facts of this case are clearly within the area of contemplation in the Hedley
Byrne case, I have no doubt that the condition precedent to liability is
that the executive should have indicated to the plaintiffs, or so acted as to
mislead them into believing, that the executive was accepting responsibility
for its opinion.
Commenting on Yianni
v Edwin Evans & Sons [1982] QB 438, Kerr LJ in his judgment in
the Court of Appeal in the present case [1988] QB 835 at pp 851-852, said:
But its
inherent jurisprudential weakness in any ordinary situation is clear. Suppose
that A approaches B with a request for a loan to be secured on a property or
chattel — such as a painting — which A is proposing to acquire. A knows that
for the purpose of considering whether or not to make the requested loan, and
of its amount, B is bound to make some assessment of the value of the security
which is offered, possibly on the basis of some expert inspection and formal
valuation. Then assume that B knows that in all probability A will not have had
any independent advice or valuation and is also unlikely to commission anything
of the kind as a check on B’s valuation. B also knows, of course, that any
figure which he may then put forward to A by way of a proposed loan on the
basis of the offered security will necessarily be seen to reflect B’s estimate
of the minimum value of the offered security. Suppose that A then accepts B’s
offer and acquires the property or chattel with the assistance of B’s loan and
in reliance — at least in part — on B’s willingness to advance the amount of
the loan as an indication of the value of the property or chattel. Given those
facts and no more, I do not think that B can properly be regarded as having
assumed, or as being subjected to, any duty of care towards A in his valuation
of the security. Even in the absence of any disclaimer of responsibility I do
not think that the principles stated in Hedley Byrne & Co Ltd v Heller
& Partners Ltd [1964] AC 465 support the contrary conclusion. B has not
been asked for advice or information but merely for a loan. His valuation was
carried out for his own commercial purposes. If it was done carelessly, with
the result that the valuation and loan were excessive, I do not think that A
can have any ground for complaint. And if B made a small service charge for
investigating A’s request for a loan, I doubt whether the position would be
different; certainly not if he were also to add a disclaimer of responsibility
and a warning that A should carry out his own valuation.
Kerr LJ,
however, added:
It may be,
but I agree that we should not decide this general question on the present
appeal, that the particular circumstances of purchasers of houses with the
assistance of loans from building societies or local authorities are capable of
leading to a different analysis and conclusion.
I have come to
the conclusion that Yianni [1982] QB 438 was correctly decided. I have
already given my view that the voluntary assumption of responsibility is
unlikely to be a helpful or realistic test in most cases. I therefore return to
the question: in what circumstances should the law deem those who give advice
to have assumed responsibility to the person who acts upon the advice or, in
other words, in what circumstances should a duty of care be owed by the adviser
to those who act upon his advice? I
would answer — only if it is foreseeable that if the advice is negligent the
recipient is likely to suffer damage, that there is a sufficiently proximate
relationship between the parties and that it is just and reasonable to impose
the liability. In the case of a surveyor valuing a small house for a building
society or local authority, the application of these three criteria leads to
the conclusion that he owes a duty of care to the purchaser. If the valuation
is negligent and is relied upon, damage in the form of economic loss to the
purchaser is obviously foreseeable. The necessary proximity arises from the
surveyor’s knowledge that the overwhelming probability is that the purchaser
will rely upon his valuation; the evidence was that surveyors knew that
approximately 90% of purchasers did so, and the fact that the surveyor obtains
the work only because the purchaser is willing to pay his fee. It is just and
reasonable that the duty will be limited both as to its extent and amount. The
extent of the liability is limited to the purchaser of the house — I would not
extend it to subsequent purchasers. The amount of the liability cannot be very
great because it relates to a modest house. There is no question here of
creating a liability of indeterminate amount to an indeterminate class. I would
certainly wish to stress that in cases where the advice has not been given for
the specific purpose of the recipient acting upon it, it should only be in
cases when the adviser knows that there is a high degree of probability that
some other identifiable person will act upon the advice that a duty of care
should be imposed. It would impose an intolerable burden upon those who give
advice in a professional or commercial context if they were to owe a duty not
only to those to whom they give the advice but to any other person who might
choose to act upon it.
I accept that
the mere fact of a contract between mortgagor and mortgagee will not of itself
in all cases be sufficient to found a duty of care. But I do not accept the
view of the Court of Appeal in Curran v Northern Ireland Co-ownership
Housing Association Ltd (1986) 8 NIJB 1 that a mortgagee who accepts a fee
to obtain a valuation of a small house owes no duty of care to the mortgagor in
the selection of the valuer to whom he entrusts the work. In my opinion, the
mortgagee in such a case, knowing that the mortgagor will rely upon the
valuation, owes a duty to the mortgagor to take reasonable care to employ a
reasonably competent valuer. Provided he does this, the
who acts an an independent contractor.
I have already
pointed out that the only real distinction between the present case and the
case of Yianni [1982] QB 438 is that the valuation was carried out by an
in-house valuer. In my opinion, this can make no difference. The valuer is
discharging the duties of a professional man whether he is employed by the
mortgagee or acting on his own account or is employed by a firm of independent
surveyors. The essence of the case against him is that he as a professional man
realised that the purchaser was relying on him to exercise proper skill and
judgment in his profession and that it was reasonable and fair that the
purchaser should do so. Mr Lee was in breach of his duty of care to the
Harrises and the local authority, as his employers, are vicariously liable for
that negligence.
For reasons
that are essentially the same as those I considered in the other appeal, I
would hold that it is not reasonable to allow the local authority or Mr Lee to
rely upon the exclusion of liability. Accordingly, I would allow this appeal.
In his speech,
LORD JAUNCEY OF TULLICHETTLE said: These two appeals raise the important issue
of the extent to which a valuer instructed by a mortgagee owes a duty of care
to a potential mortgagor whom he knows will be shown in some shape or form the
results of his valuation prior to purchasing the property in question.
Smith v Eric S Bush (a
firm)
(1) Mrs Smith applied to the Abbey National
Building Society for a mortgage to enable her to purchase a house. The building
society in pursuance of its statutory duty under section 25 of the Building
Societies Act 1962 (now section 13 of the Building Societies Act 1986)
instructed the appellants, a firm of surveyors and valuers, to prepare a
written report as to the value of the house. Mrs Smith paid to the building
society a fee in respect of this report. Mrs Smith’s application to the
building society contained a disclaimer of liability by them on behalf of the
appellants, which disclaimer she acknowledged. Thereafter the building society
sent to Mrs Smith a copy of the report and informed her that her application
had been accepted. Both the copy report and the letter drew attention to the
fact that the report was not to be taken as a structural survey. The report
stated that the surveyor had made the report without any acceptance of
responsibility to Mrs Smith and the letter advised her to obtain independent
professional advice. Thereafter, without obtaining an independent valuation,
Mrs Smith purchased the house, which later proved to be structurally defective
to a material extent. The surveyor, who was a member of the appellant firm, was
found to be negligent in failing to discover and report upon the defect. He was
at all material times aware that his report would be shown to Mrs Smith, that
she would be likely to place reliance upon it in deciding whether to buy the
house and that his fee derived from a payment by her to the building society.
Three
questions arise, namely:
1 Whether in the absence of the disclaimers
of liability the appellants owed a duty to Mrs Smith;
2 If so, whether the disclaimers fell within
the ambit of the Unfair Contract Terms Act 1977; and
3 If they did, whether they satisfied the
requirements of reasonableness.
Since Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, it has
been beyond doubt that in certain circumstances A may be liable to B in tort in
respect of a negligent statement causing economic loss to B. In considering
whether such circumstances exist in the present case I propose, before looking
at Hedley Byrne & Co Ltd v Heller & Partners Ltd to look
at two earlier cases. In Cann v Willson (1888) 39 Ch D 39 an
intending mortgagor, at the request of the solicitor of an intending mortgagee,
applied to a firm of valuers for a valuation of the property in question. The
valuers sent the valuation, which subsequently turned out to be wholly inept,
to the mortgagee’s solicitors, knowing that it was required for the purpose of
an advance. When the mortgagor defaulted, the property was found to be worth
far less than the valuation, whereby the mortgagee suffered loss. In an action
by the mortgagees against the valuer Chitty J said, at p 42:
In this case
the document called a valuation was sent by the defendants direct to the agents
of the plaintiff for the purpose of inducing the plaintiff and his co-trustee
to lay out the trust money on mortgage. It seems to me that the defendants
knowingly placed themselves in that position, and in point of law incurred a
duty towards him to use reasonable care in the preparation of the document
called a valuation.
In Candler v
Crane, Christmas & Co [1951] 2 KB 164 accountants were in the course
of preparing the accounts of a company. They were instructed to press on and
complete them so that they might be shown to the plaintiff who, they were
informed, was a potential investor. A clerk of the accountants prepared the
accounts and at the request of the company discussed these with the plaintiff
who, relying thereon, invested money in the company. In the event, the accounts
gave a wholly misleading picture of the state of the company and the plaintiff
sustained loss. In a dissenting judgment which was subsequently approved in Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465,
Denning LJ, after suggesting that professional persons such as accountants,
surveyors and valuers might in certain circumstances owe a duty apart from
contract to use care in their reports and in the work from which they resulted,
said, at pp 180-181:
Secondly, to
whom do these professional people owe this duty? I will take accountants, but the same
reasoning applies to the others. They owe the duty, of course, to their
employer or client; and also I think to any third person to whom they themselves
show the accounts, or to whom they know their employer is going to show the
accounts, so as to induce him to invest money or take some other action on
them. But I do not think the duty can be extended still further so as to
include strangers of whom they have heard nothing and to whom their employer
without their knowledge may choose to show their accounts. Once the accountants
have handed their accounts to their employer they are not, as a rule,
responsible for what he does with them without their knowledge or consent . . .
The test of proximity in these cases is: did the accountants know that the
accounts were required for submission to the plaintiff and use by him? That appears from the case of Langridge v
Levy [(1837) 2 M & W 519] as extended by Cleasby B in George v
Skivington [(1869) LR 5 Ex 1, 5] and from the decision of that good
judge, Chitty J in Cann v Willson [(1888) 39 Ch D 39] which is
directly in point.
Denning LJ
said, at p 183:
It will be
noticed that I have confined the duty to cases where the accountant prepares
his accounts and makes his report for the guidance of the very person in the
very transaction in question. That is sufficient for the decision of this case.
I can well understand that it would be going too far to make an accountant
liable to any person in the land who chooses to rely on the accounts in matters
of business, for that would expose him to ‘liability in an indeterminate amount
for an indeterminate time to an indeterminate class’: see Ultramares
Corporation v Touche (1931) 255 NY Rep 170 per Cardozo CJ.
In Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465,
bankers who were asked about the financial stability of one of their customers
gave favourable references but stipulated that these were ‘without
responsibility’. The plaintiffs on whose behalf the information had been sought
relied on the references and thereby suffered loss. They sued the bank. Lord
Reid said, at p 486:
A reasonable
man, knowing that he was being trusted or that his skill and judgment were
being relied on, would, I think, have three courses open to him. He could keep
silent or decline to give the information or advice sought: or he could give an
answer with a clear qualification that he accepted no responsibility for it or
that it was given without that reflection or inquiry which a careful answer
would require: or he could simply answer without any such qualification. If he
chooses to adopt the last course he must, I think, be held to have accepted
some responsibility for his answer being given carefully, or to have accepted a
relationship with the inquirer which requires him to exercise such care as the
circumstances require.
Lord Reid
said, at p 487, with reference to Candler v Crane, Christmas & Co
[1951] 2 KB 164: ‘This seems to me to be a typical case of agreeing to
assume responsibility.’ Lord Morris of
Borth-y-Gest said, at pp 494-495:
My Lords, it
seems to me that if A assumes a responsibility to B to tender him deliberate
advice, there ‘could be’ a liability if the advice is negligently given. I say
‘could be’ because the ordinary courtesies and exchanges of life would become
impossible if it were sought to attach legal obligation to every kindly and
friendly act . . . Quite apart, however, from employment or contract there may
be circumstances in which a duty to exercise care will arise if a service is
voluntarily undertaken.
He further
stated, at p 497:
Leaving aside
cases where there is some contractual or fiduciary relationship, there may be
many situations in which one person voluntarily or gratuitously undertakes to
do something for another person and becomes under a duty to exercise reasonable
care. I have given illustrations. But apart from cases where there is some
direct dealing there may be cases where one person issues a document which
should be the result of an exercise of the skill and judgment required by him
in his calling and where he knows and intends that its accuracy will be relied
upon by another.
He further
stated, at pp 502-503:
My Lords, I
consider that it follows and that it should now be regarded as settled that if
someone possessed of a special skill undertakes, quite irrespective of
contract, to apply that skill for the assistance of another person who relies
upon such skill, a duty of care will arise. The fact that the service is to be
given by means of or by the instrumentality of words can make no difference.
Furthermore, if in a sphere in which a person is so placed that others could
reasonably rely upon his judgment or his skill or upon his ability to make
careful inquiry, a person takes it upon himself to give information or advice
to, or allows his information or advice to be passed on to, another person who,
as he knows or should know, will place reliance upon it, then a duty of care
will arise.
Lord Devlin,
after posing the question, at p 525, ‘is the relationship between the parties
in this case such that it can be brought within a category giving rise to a
special duty?’ referred to a number of
cases and continued at pp 528-529:
I think,
therefore, that there is ample authority to justify your Lordships in saying
now that the categories of special relationships which may give rise to a duty
to take care in word as well as in deed are not limited to contractual
relationships or to relationships of fiduciary duty, but include also relationships
which in the words of Lord Shaw in Nocton v Lord Ashburton [(1914)
AC 932, 972] are ‘equivalent to contract’, that is, where there is an
assumption of responsibility in circumstances which, but for the absence of
consideration, there would be a contract. Where there is an express
undertaking, an express warranty as distinct from mere representation, there
can be little difficulty. The difficulty arises in discerning those cases in
which the undertaking is to be implied. In this respect the absence of consideration
is not irrelevant. Payment for information or advice is very good evidence that
it is being relied upon and that the informer or adviser knows that it is . . .
‘I do not understand any of your Lordships to hold that it is a responsibility
imposed by law upon certain types of persons or in certain sorts of situations.
It is a responsibility that is voluntarily accepted or undertaken, either
generally where a general relationship, such as that of solicitor and client or
banker and customer, is created, or specifically in relation to a particular
transaction. In the present case the appellants were not, as in Woods v Martins
Bank Ltd [[1959] 1 QB 55] the customers or potential customers of the bank.
Responsibility can attach only to the single act, that is, the giving of the
reference, and only if the doing of that act implied a voluntary undertaking to
assume responsibility.’
Lord Devlin
summarised his conclusions at p 530:
I shall
therefore content myself with the proposition that wherever there is a
relationship equivalent to contract, there is a duty of care. Such a
relationship may be either general or particular. Examples of a general
relationship are those of solicitor and client and of banker and customer . . .
Where, as in the present case, what is relied on is a particular relationship
created ad hoc, it will be necessary to examine the particular facts to see
whether there is an express or implied undertaking of responsibility. I regard
this proposition as an application of the general conception of proximity.
There are a
number of references in the speeches in Hedley Byrne & Co Ltd v Heller
& Partners Ltd to voluntary assumption of responsibility. Although in
that case the respondent bankers gave the financial reference without payment,
I do not understand that ‘voluntary’ was intended to be equiparated with
‘gratuitous’. Rather does it refer to a situation in which the individual
concerned, albeit under no obligation in law to assume responsibility, elected
so to do. This is, I think, made clear by Lord Devlin’s reference to the
responsibility voluntarily undertaken by a solicitor to his client.
Here the
building society had a statutory duty under section 25 of the Building
Societies Act 1962 to satisfy itself as to the adequacy of the security of any
advance to be made and for that purpose to obtain ‘a written report prepared
and signed by a competent and prudent person who is experienced in the matters
relevant to the determination of the value’. In pursuance of that duty the
building society instructed the appellants who, by accepting these
instructions, not only entered into contractual relations with the building
society but also came under a duty in tort to it to exercise reasonable care in
carrying out their survey and preparing their report. To that extent they were
in no different position to that of any other professional person who has
accepted instructions to act on behalf of a client. However, there were certain
other factors present which must be taken into account. In the first place, the
appellants were aware that their report would be made available to Mrs Smith.
In the second place, they were aware that she would probably rely upon the
contents of the report in deciding whether or not to proceed with the purchase
of the house and that she would be unlikely to obtain an independent valuation.
In the third place, they knew that she had at the time of the mortgage
application paid to the building society an inspection fee which would be used
to defray their fee. In these circumstances, would the appellants in the
absence of disclaimers of responsibility have owed a duty of care to Mrs Smith?
In each of the
three cases to which I have referred, there was direct contact between the
negligent provider of information on the one hand and the plaintiff or his
agent on the other. In Cann v Willson (1888) 39 Ch D 39, the sole
purpose of the valuation was to enable the intending mortgagor to obtain a
mortgage over the property value. In Candler v Crane, Chrismas &
Co [1951] 2 KB 164, although the accounts were prepared for the benefit of
the company, the discussion between the accountants’ clerk and the plaintiff
was for the sole purpose of enabling the latter to decide whether or not to
invest in the company. Chitty J and Denning LJ referred to the valuation being
sent and the accounts being shown and discussed for the purpose of inducing the
plaintiff to do something. In Hedley Byrne & Co Ltd v Heller
& Partners Ltd [1964] AC 465, the information was provided to satisfy
the inquiry made on behalf of the plaintiff. In the present case there was no
direct contact between the appellants and Mrs Smith and their sole purpose in
preparing their report was to enable the building society to fulfil its
statutory obligation. There are thus points of important distinction between
the facts of this case and those of the other three. However, that does not
necessarily mean that a different result must follow. The question must always
be whether the particular facts disclose that there is a sufficiently proximate
relationship between the provider of information and the person who has acted
on that information to his detriment, such that the former owes a duty of care
to the latter.
It is tempting
to say that in this case the relationship between Mrs Smith and the appellants
was, in the words of Lord Shaw of Dunfermline quoted by Lord Devlin in Hedley
Byrne & Co Ltd v Heller & Partners Ltd, ‘equivalent to
contract’ inasmuch as she paid for the appellants’ report. However, I do not
think that Lord Devlin, when he used those words, had in mind the sort of
tripartite situation which obtained here, but rather was he considering a
situation where the provider and receiver of information were in contact with
one another either directly or through their agents, and where, but for the
lack of payment, a contract would have existed between them. In the present
case a contract existed between the building society and the appellants, who
carried out their inspection and produced their report in pursuance of that
contract. There was accordingly no room for a contract between Mrs Smith and
the appellants. I prefer to approach the matter by asking whether the facts
disclose that the appellants in inspecting and reporting must, but for the
disclaimers, by reason of the proximate relationship between them, be deemed to
have assumed responsibility towards Mrs Smith as well as to the building
society who instructed them.
There can only
be an affirmative answer to this question. The four critical facts are that the
appellants knew from the outset:
(1) That the report would be shown to Mrs Smith;
(2) That Mrs Smith would probably rely on the
valuation contained therein in deciding whether to buy the house without
obtaining an independent valuation;
(3) That if, in these circumstances, the
valuation was, having regard to the actual condition of the house, excessive
Mrs Smith would be likely to suffer loss; and
(4) That she had paid to the building society a
sum to defray the appellants’ fee.
In the light
of this knowledge, the appellants could have declined to act for the building
society, but they chose to proceed. In these circumstances, they must be taken
not only to have assumed contractual obligations towards the building society
but delictual obligations towards Mrs Smith, whereby they became under a duty
towards her to carry out their work with reasonable care and skill. It is
critical to this conclusion that the appellants knew that Mrs Smith would be
likely to rely on the valuation without obtaining independent advice. In both Candler
v Crane, Christmas & Co [1951] 2 KB 164 and Hedley Byrne
& Co Ltd v Heller & Partners Ltd [1964] AC 465 the provider
of the information was the obvious and most easily available, if not the only
available, source of that information. It would not be difficult therefore to
conclude that the person who sought such information was likely to rely upon
it. In the case of an intending mortgagor the position is very different since,
financial considerations apart, there is likely to be available to him a wide
choice of sources of information, to wit, independent valuers to whom he can
resort, in addition to the valuer acting for the mortgagee. I would not
therefore conclude that the mere fact that a mortgagee’s valuer knows that his
valuation will be shown to an intending mortgagor of itself imposes upon him a
duty of care to the mortgagor. Knowledge, actual or implied, of the mortgagor’s
likely
fairly readily implied in relation to a potential mortgagor seeking to enter
the lower end of the housing market but non constat that such ready
implication would arise in the case of a purchase of an expensive property
whether residential or commercial. Mr Hague for the appellants conceded that if
there had been no disclaimer they must fail. For the reasons which I have just
given I consider that this concession was rightly made.
I would only
add three further matters in relation to this part of the case. In the first
place the duty of care owed by the appellants to Mrs Smith resulted from the
proximate relationship between them arising in the circumstances hereinbefore
described. Such duty of care was accordingly limited to Mrs Smith and would not
extend to ‘strangers’ (to use the words of Denning LJ in Candler v Crane,
Christmas & Co [1951] 2 KB 164 at p 180) who might subsequently derive
a real interest in the house from her. In the second place, the fact that A is
prepared to lend money to B on the security of property owned by or to be acquired
by him cannot per se impose upon A any duty of care to B. Much more is
required. Were it otherwise, a loan by A to B on the security of property, real
or personal, would ipso facto amount to a warranty by A that the
property was worth at least the sum lent. In the third place, the sum sought by
Mrs Smith as a mortgage was relatively small and represented only a small
proportion of the purchase price. The house with all its defects was worth
substantially more than that sum, and had the report merely stated that the
house was adequate security for that sum, Mrs Smith would have had no
complaint. However, the report contained a ‘mortgage valuation’ of the house,
which valuation wholly failed to reflect the structural defect. It is that
valuation of which Mrs Smith is entitled to complain.
The next
question is whether the disclaimers by and on behalf of the appellants fall
within the ambit of the Unfair Contract Terms Act 1977. In Hedley Byrne
& Co Ltd v Heller & Partners Ltd [1964] AC 465, it was held
that the disclaimer of responsibility made by the defendant bankers when giving
the reference negatived any assumption by them of a duty of care towards the
plaintiff. If the circumstances of this case had arisen before 1977 there can
be no doubt that the disclaimers would have been effective to negative such an
assumption of responsibility. Has the Act of 1977 altered the position? The relevant statutory provisions are
sections 2(2), 11(3) and 13(1):
2.–(2) In the case of other
loss or damage, a person cannot so exclude or restrict his liability for
negligence except in so far as the term or notice satisfies the requirement of
reasonableness . . .
11.–(3) In relation to a notice
(not being a notice having contractual effect), the requirement of
reasonableness under this Act is that it should be fair and reasonable to allow
reliance on it, having regard to all the circumstances obtaining when the
liability arose or (but for the notice) would have arisen . . .
13.–(1) To the extent that this
Part of this Act prevents the exclusion or restriction of any liability it also
prevents —
(a) making the liability or its enforcement
subject to restrictive or onerous conditions;
(b) excluding or restricting any right or remedy
in respect of the liability, or subjecting a person to any prejudice in
consequence of his pursuing any such right or remedy;
(c) excluding or restricting rules of evidence or
procedure;
and (to that
extent) sections 2 and 5 to 7 also prevent excluding or restricting liability
by reference to terms and notices which exclude or restrict the relevant
obligation or duty.
In the other
appeal, Harris v Wyre Forest District Council [1988] QB 835, the
Court of Appeal held that the Act of 1977 did not apply. Nourse LJ at p 848
accepted the defendant’s argument that a notice which prevented a duty of care
from coming into existence was not one upon which section 2(2) bit. Kerr LJ
said at p 854:
For these
reasons I agree with the judgments of Nourse LJ and Caulfield J that the effect
of the Unfair Contract Terms Act 1977 on the disclaimer of responsibility and
warning is of no relevance to the present case. One never reaches that issue,
since it arises only if the existence of a duty of care and a breach of it have
first been established.
Mr Ashworth in
the Harris appeal supported the reasoning of the Court of Appeal and
argued that the Act applied only to a disclaimer which operated after a breach
of duty had occurred. Mr Hague in this appeal adopted Mr Ashworth’s argument.
My lords, with
all respect to the judges of the Court of Appeal, I think that they have
overlooked the importance of section 13(1). The words ‘liability for
negligence’ in section 2(2) must be read together with section 13(1), which
states that the former section prevents the exclusion of liability by notices
‘which exclude or restrict the relevant obligation or duty’. These words are
unambiguous and are entirely appropriate to cover a disclaimer which prevents a
duty coming into existence. It follows that the disclaimers here given are subject
to the provisions of the Act and will therefore be effective only if they
satisfy the requirement of reasonableness.
I have had the
advantage of reading in draft the speech of Lord Griffiths, and I gratefully
adopt his reasons for concluding that the disclaimers did not satisfy the
statutory requirement of reasonableness. I cannot usefully add anything to what
he has said upon this matter.
For the
foregoing reasons I would dismiss this appeal.
Harris v Wyre Forest
District Council and Another
Mr and Mrs
Harris, two young people who were at the time contemplating matrimony, applied
to the council for a mortgage over a house which they wished to buy. At the
time, local authorities were empowered by section 43 (as amended) of the
Housing (Financial Provisions) Act 1958 (as amended by section 37 of the Local
Government Act 1974) to advance money up to a sum not exceeding the value of
the security for house purchase. Before making an advance the local authority
was required to satisfy itself that the house was or would be made in all
respects fit for human habitation and have a valuation made.
The Harrises
submitted their application form together with a ‘valuation fee and
administration fee’ of £22. The form contained an acknowledgment that the
council accepted no responsibility for the value or condition of the house by
reason of the inspection report. The council instructed the second respondent,
Mr Lee, a valuer in their employment, to inspect the house and report. Mr Lee
valued the house at the asking price of £9,450, recommended that the maximum
loan should be 90% of the value and under the heading of ‘Essential Repairs’
stated: ‘Obtain report for district council from MEB [Midland Electricity
Board] regarding electrics and carry out any recommendations. Make good mortar
fillets to extension’. Mr Lee’s report was not shown to the Harrises, but they
were subsequently offered, by the council, an advance of £8,505 on condition, inter
alia, that they carried out the essential repairs above referred to.
Relying on this offer and without obtaining other advice as to value, the
Harrises bought the house. Unfortunately there were present serious structural
defects in the house which Mr Lee had not referred to and which materially
reduced its value. As a result of the defects the Harrises suffered loss.
The foregoing
is a summary of the relevant facts and I turn to examine in more detail those
facts which determine whether or not Mr Lee owed a duty of care to the
Harrises. He knew that the report would not be sent to the Harrises but that
they would be told the amount of any advance and would be told of any repairs
which he considered to be essential. He also knew that the Harrises were likely
to be first-time buyers of modest means. There is no finding by the judge that
he was aware that the Harrises were likely to rely on his valuation in buying
the house and that they were unlikely to obtain independent advice. However,
after referring to the position of a valuer acting for a building society,
Schiemann J in [1987] 1 EGLR 231 at p 236 said:
Such a valuer
has been held to be liable to the mortgagor in the Yianni case and I see
nothing on the grounds of policy or in the subsequent case law which should
prevent me from following that decision.
In Yianni v
Edwin Evans & Sons [1982] 1 QB 438, the plaintiffs applied to a
building society for a mortgage and paid a fee for the statutory valuation. The
building society instructed the defendant surveyors to value the property and
on receipt of their valuation offered to the plaintiffs a loan of 80% of the
asking price of the house. The defendants’ report was not made available to the
plaintiffs. The application form advised the plaintiffs to obtain an
independent survey and with the offer of the loan the plaintiffs received a notice
under section 30 of the Building Societies Act 1962 indicating that an advance
by the building society did not imply that the purchase price was reasonable.
Consequent upon the offer, the plaintiffs bought the house without obtaining an
independent valuation. Some time later, structural defects were discovered
which the defendants admitted that they should have found on their inspection.
The plaintiffs successfully sued the defendants for negligence. However, the
facts in that case differed in one material aspect from those in the present in
that there was there unchallenged evidence from the chief surveyor of a very
large building society that
instructed independent surveys. Park J concluded that the defendant surveyors,
who had regularly carried out valuations for the building society, were aware
that their figure of valuation would be passed on to the plaintiffs and were
aware that the plaintiffs would rely upon it when they decided to accept the
offer of the building society. In the absence of such a specific finding of
awareness in the present case I do not think that it can necessarily be assumed
that the experience of a local authority valuation surveyor must be the same as
that of an independent surveyor regularly acting on behalf of a large building
society. The only other relevant piece of evidence in the extracts from the
transcript is the following question by the judge to Mr Lee and the answer
thereto:
Q You did know that if the list of essential
repairs was passed on to the mortgagor he would take the view that these were,
in your eyes, the essential repairs?
A That is right . . .
My Lords, I
have found this case very much more difficult than that of Smith v Eric
S Bush [1988] QB 743. I do not find it easy to infer from such findings as
were made by Schiemann J and from the question and answer above quoted that Mr
Lee was aware that the Harrises would be likely to buy on reliance on his
valuation without obtaining further advice. However, I understand that your
lordships do not share this difficulty and in these circumstances I do not feel
disposed to dissent from the majority view. I therefore conclude, albeit with
hesitation, that Mr Lee would, but for the terms of the disclaimer in the
application form, have owed a duty of care to the Harrises. In that situation
the second and third question which I posed in the Smith v Eric S
Bush appeal would arise and would fall to be answered in the same way as in
that appeal. It therefore follows that this appeal should be allowed.
LORD KEITH OF
KINKEL and LORD BRANDON OF OAKBROOK agreed that for the reasons given the
appeal in Smith v Eric S Bush should be dismissed and the appeal
in Harris v Wyre Forest District Council should be allowed. They
did not add anything of their own.
The appeal in
Smith v Eric S Bush was dismissed with costs. The appeal in Harris v Wyre Forest
District Council was allowed and the order of Schiemann J restored, the costs
to be paid by the council.
