Negligence — Valuation for non-status mortgage — Contributory negligence — Law Reform (Contributory Negligence) Act 1945 — Meaning of damage — Whether damage overall transaction loss or part of loss attributable to negligent valuation
In 1990 the plaintiff mortgage lender, after
obtaining valuation reports from the two defendant valuation firms, lent H
£1.05m secured on H’s home by way of a non-status loan. Each report valued the
property at £1.5m. H, who had purchased the property two years earlier for
£375,000, defaulted. The plaintiff obtained possession and, in 1994, sold the
property for £435,000. In proceedings for negligence against the defendant
valuers, Jacob J found that: (i) the value of the property was £1m in 1990;
(ii) the defendants were negligent; and (iii) the plaintiff’s overall loss was
£611,748; he deducted 20% for contributory negligence on the part of the
plaintiff. The plaintiff appealed to the Court of Appeal contending that any
contributory negligence in making a non-status loan of 70% of the value of the
security did not result in ‘damage’ for the purposes of section 1 of the Law
Reform (Contributory Negligence) Act 1945. The Court of Appeal held that
damages for the purposes of section 1 of the 1945 Act are the overall loss
sustained by a lender, such as the plaintiff, and, it is assumed, caused by his
fault. The damages were reduced to £400,000, representing 80% of the
defendants’ overvaluation of £500,000. The plaintiff appealed.
allowed. On the application of section 1(1) of the Law Reform (Contributory
Negligence) Act 1945, the contributory negligence percentage of 20% should be
deducted from the plaintiff’s basic loss of £611,748, to arrive at £489,398. As
this sum is less than the overvaluation of £500,000, the damages did not have
to be further reduced under the principle in South Australia Asset
Management Corporation v York Montague Ltd [1996] 2 EGLR 93 — the SAAMCO
principle.
Thorndon dissenting: Because of the SAAMCO principle, the valuer
is not liable to the lender for the full loss of £611,748, but only for the
overvaluation of £500,000; this latter sum was the ‘damage’ for the purposes of
section 1(1) of the 1945 Act and from which the contributory negligence
percentage of 20% should be deducted.
The following cases are
referred to in this report.
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] QB 375; [1995] 2 WLR
607; [1995] 2 All ER 769; [1995] 1 EGLR 129; [1995] 12 EG 144, CA
Caparo Industries plc v Dickman [1990] 2 AC 605; [1990] 2 WLR 358; [1990] 1 All ER
568, HL
County Ltd v Girozentrale
Securities [1996] 3 All ER 834
Drinkwater v Kimber
[1952] 2 QB 281; [1952] 1 All ER 701; [1952] 1 Lloyd’s Rep 159; [1952] 1
TLR 1486, CA
Froom v Butcher
[1976] QB 286; [1975] 3 WLR 379; [1975] 3 All ER 520; [1975] 2 Lloyd’s Rep
478, CA
Hadley v Baxendale
(1854) 9 Exch 341
MGICA (1992) Ltd
v Kenny & Good Pty Ltd (1996) 140 ALR 313
Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627; [1998] 1
EGLR 99; [1998] 05 EG 150, HL
Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) [1961]
AC 388; [1961] 2 WLR 126; [1961] 1 All ER 404; [1961] 1 Lloyd’s Rep 1
Platform Home Loans Ltd v Oyston Shipways Ltd [1998] Ch 466; [1998] 1 EGLR 108;
[1998] 13 EG 148
Platform Home Loans Ltd v Oyston Shipways Ltd [1996] 2 EGLR 110; [1996] 49 EG 112
Polemis & Furness Withy & Co, Re [1921] 3 KB 560
Smith v Eric S
Bush (a firm) [1990] 1 AC 831; [1989] 2 WLR 790; [1989] 2 All ER 514;
(1989) 87 LGR 685; [1989] 1 EGLR 169; [1989] 17 EG 68 & 18 EG 99, HL
South Australia Asset Management Corporation v York Montague Ltd; United Bank of Kuwait plc v Prudential
Property Services Ltd; Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997]
AC 191; [1996] 3 WLR 87; [1996] 3 All ER 365; [1996] 2 EGLR 93; [1996] 27 EG
125, HL
Sutherland Shire Council v Heyman (1985) 60 ALR 1; [1985] 59 ALJR 564; 2 Const LJ
150; 157 CLR 424
This was an appeal by the plaintiff, Platform Home Loans Ltd, from a
decision of the Court of Appeal ([1998] 1 EGLR 108), which had dismissed an
appeal by the plaintiff and allowed a cross-appeal by the defendants, Oyston
Shipways Ltd, Bernard Thorpe (a firm), David Browning Allen and Steven John
Kitchen (partners in Bernard Thorpe), from a decision of Jacob J ([1996] 2 EGLR
110) in proceedings by the plaintiff for damages for negligence.
Nicholas Patten QC
and Andrew Walker (instructed by Rosling King) appeared for the plaintiff;
Simon Berry QC and Timothy Harry (instructed by Williams Davies Meltzer)
represented the first defendant and (instructed by Dibb Lupton Alsop, of
Birmingham) the second, third and fourth defendants.
LORD LLOYD OF BERWICK: My lords, I have had the advantage of reading in draft the speeches
prepared by my noble and learned friends, Lord Hobhouse of Woodborough and Lord
Millett. For the reasons that they have given I would allow the appeal.
LORD COOKE OF THORNDON: My lords, the scheme of the Law Reform (Contributory Negligence) Act
1945 is that where damage has been caused by fault on the part of both
defendant and plaintiff, the court may, in its discretion, apportion
responsibility between them. The Act was passed to overcome the common law
principle that a plaintiff who had contributed to his damage by his own fault
was totally debarred from recovering damages from a defendant whose fault had
also contributed. It was no part of the purpose of the Act to impose any
liability on a defendant whose fault had not contributed to a plaintiff’s
damage. It is in these commonplaces that, as I see it, the answer to the
present case is readily to be found.
Section 1(1) of the
Act states its basic provision as just summarised and is complemented by
section 1(2), whereby, when damages are recoverable subject to reduction by
virtue of the first subsection, the court is required to find and record the
total damages that would have been recoverable if the claimant had not been at
fault. In full the material part of section 1(1) reads:
(1) Where any
person suffers damage as the result partly of his own fault and partly of the
fault of any other person or persons, a claim in respect of that damage shall
not be defeated by reason of the fault of the person suffering the damage, but
the damages recoverable in respect thereof shall be reduced to such extent as
the court thinks just and equitable having regard to the claimant’s share in the
responsibility for the damage…
A relatively early
and well-known authority on the Act is Drinkwater v Kimber [1952]
2 QB 281. The female plaintiff had been injured in a collision caused by the
concurrent negligence of her husband and the defendant. As the law then stood
the wife would not have succeeded in a negligence action against her husband,
so the defendant could not recover under the Law Reform (Married Women and
Tortfeasors) Act 1935 any contribution to the damages awarded against the
defendant to the wife. To overcome this difficulty, by a counterclaim against
the husband the defendant sought a contribution under the Act of 1945. It was
held that the defendant could not recover under the 1945 Act because that Act
gave the defendant no claim against the husband in respect of the wife’s
injuries, and the defendant’s liability to the wife was not ‘damage’ suffered
by him within the meaning of section 1(1). Morris LJ said at pp292-294 that the
Act did not give the defendant a
variety of claim; and it seemed clear that the word ‘damage’ referred to that
which was suffered, and for which a ‘claim’ might be made and for which
‘damages’ are recoverable. Both he and Singleton LJ at pp294 and 290
respectively, pointed out that, if the section applied, the court would have to
record the total damages that would have been recoverable by the defendant from
the husband if the defendant had not been at fault. If the defendant had not
been negligent the total damages recoverable would have been nil. As Morris LJ
put it, to award £135, being the contribution claimed from the husband, would
have been ‘a strange phenomenon of contraction’.
Similarly, in his Joint
Torts and Contributory Negligence (1951), Glanville Williams said at p118
that, in short, the word ‘damage’ in section 1(1) ‘comprises any item of loss
that would have been recoverable as damages at common law apart from the
claimant’s own fault’. He repeated the proposition at p317.
The present case
calls for the application of these familiar provisions to a claim by a lender
against a valuer who has negligently overvalued the property taken as a
security as a result of the valuation. The lender and the borrower agreed, in
September 1990, on a loan of £1,050,195 secured by a first registered charge on
the property. In 1993 the borrower fell into difficulties in making repayments.
The lender sold the property on 12 February 1994 for £435,000. A bankruptcy
order was subsequently made against the borrower; apparently his covenant was
worthless, except to the extent that he had in fact made payments to the
lender. After allowing for the payments made by the borrower, and £40,000 for
certain failures by the lender to mitigate its loss, it is accepted that the
lender’s overall loss in the transaction was, in round figures, £611,748. On
the facts of this case, that is the loss proved by what Lord Nicholls of
Birkenhead calls ‘the basic comparison’: Nykredit Mortgage Bank plc v Edward
Erdman Group Ltd (No 2) [1997] 1 WLR 1627* at p1631H.
*Editor’s note: Also reported at [1998] 1 EGLR 99
Although, in a
sense, that full loss was caused by the negligent overvaluation, it is now
established in English law, by the decision of your lordships’ House in South
Australia Asset Management Corporation v York Montague Ltd [1997] AC
191†, confirmed and applied by the House in Nykredit (supra),
that a negligent valuer is not necessarily liable for the whole of the loss in
such circumstances. The correct approach has been held to be to ascertain what
element of loss suffered as a result of the transaction was attributable to the
inaccuracy of the information supplied by the valuer. For this purpose, the
valuation negligently provided is to be compared with the figure that a
reasonable valuer, using the information available at the relevant time, would
have put forward as its most likely open market value. Thus, the valuer may
escape liability for a subsequent fall in market values. Typically, as Lord
Nicholls of Birkenhead says in Nykredit at p1632A, the valuer’s
liability is limited to the extent of the overvaluation.
†Editor’s note: Also reported at [1996] 2 EGLR 93
The architect of
this development of English law has been Lord Hoffmann. For an authoritative
explanation of it, one can do no better than quote a substantial passage from
his speech in Nykredit at pp1638C-1639D:
In order to decide
when the cause of action arose, it is first necessary to recall, by reference
to your Lordships’ earlier judgment, precisely what the cause of action was. It
was for breach of the duty of care owed by the valuer to the lender, which
existed concurrently in contract and in tort. Your Lordships identified the
duty as being in respect of any loss which the lender might suffer by reason of
the security which had been valued being worth less than the sum which the
valuer had advised. The principle approved by the House was that the valuer
owes no duty of care to the lender in respect of his entering into the
transaction as such and that it is therefore insufficient, for the purpose of
establishing liability on the part of the valuer, to prove that the lender is
worse off than he would have been if he had not lent the money at all. What he
must show is that he is worse off as a lender than he would have been if the
security had been worth what the valuer said. It is of course also the case
that the lender cannot recover if he is, on balance, in a better or no worse
position than if he had not entered into the transaction at all. He will have
suffered no loss. The valuer does not warrant the accuracy of his valuation and
the lender cannot therefore complain that he would have made more profit if the
valuation had been correct. But in order to establish a cause of action in
negligence he must show that his loss is attributable to the overvaluation,
that is, that he is worse off than he would have been if it had been correct.
It is important to
emphasise that this is a consequence of the limited way in which the House
defined the valuer’s duty of care and has nothing to do with questions of
causation or any limit or ‘cap’ imposed upon damages which would otherwise be
recoverable. It was accepted that the whole loss suffered by reason of the fall
in the property market was, as a matter of causation, properly attributable to
the lender having entered into the transaction and that, but for the negligent
valuation, he would not have done so. It was not suggested that the possibility
of a fall in the market was unforeseeable or that there was any other factor
which negatived the casual connection between lending and losing the money.
There was, for example, no evidence that if the lender had not made the advance
in question he would have lost his money in some other way. Nor, if one started
from the proposition that the valuer was responsible for the consequences of
the loan being made, could there be any logical basis for limiting the
recoverable damages to the amount of the overvaluation. The essence of the
decision was that this is not where one starts and that the valuer is
responsible only for the consequences of the lender having too little security.
Proof of loss attributable
to a breach of the relevant duty of care is an essential element in a cause of
action for the tort of negligence. Given that there has been negligence, the
cause of action will therefore arise when the plaintiff has suffered loss in
respect of which the duty was owed. It follows that in the present case such
loss will be suffered when the lender can show that he is worse off than he
would have been if the security had been worth the sum advised by the valuer.
The comparison is between the lender’s actual position and what it would have
been if the valuation had been correct.
There may be cases
in which it is possible to demonstrate that such loss is suffered immediately
upon the loan being made. The lender may be able to show that the rights which
he has acquired as lender are worth less in the open market than they would
have been if the security had not been overvalued. But I think that this would
be difficult to prove in a case in which the lender’s personal covenant still
appears good and interest payments are being duly made. On the other hand, loss
will easily be demonstrable if the borrower has defaulted, so that the lender’s
recovery has become dependent upon the realisation of his security and that
security is inadequate. On the other hand, I do not accept Mr Berry’s
submission that no loss can be shown until the security has actually been
realised. Relevant loss is suffered when the lender is financially worse off by
reason of a breach of the duty of care than he would otherwise have been.
The decision of this
House in the case known variously as South Australia Asset Management or
SAAMCO has been controversial. In the Federal Court of Australia it was
not followed by Lindgren J in MGICA (1992) Ltd v Kenny & Good Pty
Ltd (1996) 140 ALR 313 at pp362-374. It was criticised in a note by
Professor Stapleton in (1997) 113 LQR 1. But before the appellate committee in
the present case counsel for the lender took the position that he could not
seek to persuade your lordships to depart from it, and it is on that footing
that the case must be approached.
The relevant facts
as to overvaluation and contributory negligence are simple enough. The
respondent valuer valued the property at £1.5m. The trial judge, Jacob J, found
that the true market value at the time (which was treated as the figure at
which a reasonable valuer would have arrived) was £1m. But the loan was for as
much as £1,050,195, being 70% of the valuation. Further, the lender had not
required the borrower to answer the question in the lender’s application form
‘Purchase price £ . If already owned, please state date of purchase:’ In fact,
the borrower had purchased the property two years earlier, in a dilapidated
condition, for £375,000. The judge found that the cumulative effect of lending as
high a percentage and not insisting on being informed of the earlier purchase
price was that the lender was contributorily negligent to the extent of 20% of
responsibility for the damage ‘across the board’. By that I understand him to
have found that whatever damages would be recoverable otherwise by the lender
from the valuer were to be reduced by 20%; the appeal to your lordships’ House
was argued on the basis that such was his finding.
On these facts, and
applying the principles already stated, the short answer to the case appears to
me to be that, by English law as declared in SAAMCO and Nykredit,
apart from any question of contributory negligence, the valuer is not liable to
the lender for the full loss of
valuation of £1.5m and the figure that a reasonably careful valuation would
have produced, ie £1m. That £500,000 is the damage suffered as the result
partly of the lender’s fault and partly of the valuer’s fault. On the recent
authorities, the balance of the loss, £111,748, was not suffered, even in part,
as a result of the valuer’s fault, because of the limited way in which this
House has defined the valuer’s duty of care. In other words, the balance of the
loss was not ‘damage’ within the meaning of section 1(1) of the 1945 Act, and
does not fall to be apportioned. As in Drinkwater v Kimber, this
is brought out very clearly when section 1(2) is considered. If the whole
£611,748 were apportionable, the court would have to record that amount as the
total damages that would have been recoverable if the claimant had not been at
fault. But to say as much would be flatly contrary to SAAMCO and Nykredit.
The damages to be
reduced are therefore £500,000, so the amount for which it is just and
equitable that the lender should have judgment is £400,000, together with
appropriate interest. This is the figure arrived at by the Court of Appeal,
albeit by a more complicated route, including some steps with which I am unable
to agree. It would not conduce to simplicity to lengthen this speech by
embarking on an analysis of a line of reasoning that I am not adopting.
As to the result,
regrettably I differ from my noble and learned friends, Lord Hobhouse of
Woodborough and Lord Millett, whose speeches I have had the advantage of
reading in draft. I hope that my reasons sufficiently appear from what I have
already said. Perhaps it should be repeated, however, that, in my view, the
‘damage’ referred to four times in section 1(1) of the 1945 Act is the damage
for which, but for the Act, the claimant’s action would be defeated by reason
of his own fault: it does not extend to damage for which his claim would be
defeated by reason of a limit upon the other person’s duty of care. The 1945
Act does not enlarge the scope of a defendant’s duty of care. If any anomalies
or inequities be thought to arise from approaching the present case in this
way, they will be attributable to the limit of a valuer’s duty of care, and
consequent liability, imposed by your lordships’ House in SAAMCO and Nykredit,
decisions that your lordships were not asked to reconsider on this occasion.
For these reasons I
would dismiss the appeal.
LORD HOPE OF CRAIGHEAD: My lords, I have had the advantage of reading in draft the speeches
that have been prepared by my noble and learned friends, Lord Hobhouse of
Woodborough and Lord Millett. I agree with them, and, for the reasons that they
have given, I also would allow the appeal.
LORD HOBHOUSE OF WOODBOROUGH: My lords, section 1(1) of the Law Reform
(Contributory Negligence) Act 1945 provides:
Where any person
suffers damage as the result partly of his own fault and partly of the fault of
any other person or persons, a claim in respect of that damage shall not be
defeated by reason of the fault of the person suffering the damage, but the
damages recoverable in respect thereof shall be reduced to such extent as the
court thinks just and equitable having regard to the claimant’s share in the
responsibility for the damage…
The question raised
by this appeal concerns the application of that provision to cases of
professional negligence in the context of the principles laid down by your
lordship’s House in the Banque Bruxelles litigation, reported under the
name South Australia Asset Management Corporation v York Montague Ltd
[1997] AC 191 (apparently known to the legal profession by the acronym SAAMCO),
and Nykredit Mortgage Bank plc v Edward Erdman (No 2) [1997] 1
WLR 1627.
Typically, the
plaintiff is a mortgage lender and the defendant is a surveyor or valuer that
has advised the plaintiff upon the value of a property that is to be taken as
security for a loan to a borrower. If the property has been negligently
overvalued, that may affect the conduct of the lender. Often, without the
overvaluation, no loan would have been made to the borrower or, if there were a
loan, it would have been smaller and on different terms. Later, if the borrower
defaults, the property quite probably will be an inadequate security for the
obligations of the borrower. The inadequacy of the security may meanwhile have
been exacerbated by falls in the market. Thus, the loss eventually suffered by
the lender may be attributable not only to the original negligence of the
valuer but also to the subsequent fall in market values. Whether this situation
should qualify the right of the lender to recover his loss in full from the
valuer was the subject of the SAAMCO case.
The present case injects an additional factor,
contributory negligence on the part of the lender. There has been a wide
divergence of judicial opinion on the significance of this point. In the
present case, there was a difference of opinion between the trial judge, Jacob
J, and the Court of Appeal. In his judgment in the Court of Appeal (agreed to
by Thorpe and Potter LJJ), reported at [1998] Ch 466, Morritt LJ refers to the
division of opinion among first instance judges (p474). Your lordships have not
been referred to those cases, some of which are not reported, as it is
recognised that the answer to the present appeal must be found in a proper
understanding of the speeches in the SAAMCO and Nykredit cases in
conjunction with a proper application of section 1(1) of the 1945 Act.
In the Nykredit
case, Lord Nicholls of Birkenhead summarised the effect of the SAAMCO
decision at pp1631D-1632:
It is axiomatic that
in assessing loss caused by the defendant’s negligence the basic measure is the
comparison between (a) what the plaintiff’s position would have been if the
defendant had fulfilled his duty of care and (b) the plaintiff’s actual
position. Frequently, but not always, the plaintiff would not have entered into
the relevant transaction had the defendant fulfilled his duty of care and
advised the plaintiff, for instance, of the true value of the property. When
this is so, a professional negligence claim calls for a comparison between the
plaintiff’s position had he not entered into the transaction in question and his
position under the transaction. That is the basic comparison. Thus, typically
in the case of a negligent valuation of an intended loan security, the basic
comparison called for is between (a) the amount of money lent by the plaintiff,
which he would still have had in the absence of the loan transaction, plus
interest at a proper rate, and (b) the value of the rights acquired, namely the
borrower’s covenant and the true value of the overvalued property.
However, for the
reasons spelled out by my noble and learned friend, Lord Hoffmann, in the
substantive judgments in this case [1997] AC 191, a defendant valuer is not
liable for all the consequences which flow from the lender entering into the
transaction. He is not even liable for all the foreseeable consequences. He is
not liable for consequences which would have arisen even if the advice had been
correct. He is not liable for these because they are the consequences of risks
the lender would have taken upon himself if the valuation advice had been sound.
As such they are not within the scope of the duty owed to the lender by the
valuer.
For what, then, is
the valuer liable? The valuer is liable for the adverse consequences, flowing
from entering into the transaction, which are attributable to the deficiency in
the valuation. This principle of liability, easier to formulate than to apply,
has next to be translated into practical terms. As to this, the basic
comparison remains in point, as the means of identifying whether the lender has
suffered any loss in consequence of entering into the transaction. If he has
not, then currently he has no cause of action against the valuer. The
deficiency in security has, in practice, caused him no damage. However, if the
basic comparison throws up a loss, then it is necessary to inquire further and
see what part of the loss is the consequence of the deficiency in the security.
Typically, the
answer to this further inquiry will correspond with the amount of the loss as
shown by the basic comparison, for the lender would not have entered into the
transaction had he been properly advised, but limited to the extent of the
overvaluation. This was the measure applied in the present case. [The
plaintiff]… suffered a loss, including unpaid interest of over £3m. Of this
loss the amount attributable to [the defendant’s]… incorrect valuation was
£1.4m, being the extent of the over-valuation.
Thus, the first step
is to establish what was the basic loss of the lender. The second step is to
see whether that basic loss exceeds the amount of the overvaluation, and, if it
does, the lender’s right of recovery from the valuer is limited to the extent
of the overvaluation. The issue in the present case is whether the reduction in
the plaintiff’s damages on account of its contributory negligence, here as
usual expressed as a percentage, should have been applied to the plaintiff’s
basic loss or to its loss as limited by the application of the SAAMCO
principle (Lord Nicholls’ second step). It will be appreciated that in all
cases where the SAAMCO principle is applicable, because the plaintiff’s
basic loss
and may have substantial financial consequences. In the present case, Jacob J
found that there was 20% contributory negligence, but held (because of the way
he allocated interest) that it did not affect the outcome of the SAAMCO
calculation. The Court of Appeal held that the SAAMCO calculation must
be done first and the plaintiff’s recoverable damages then be reduced by a
further 20%.
Facts
The plaintiff in the
present action, the appellant in your lordship’s House, is Platform Home Loans
Ltd. Its business was to advance money upon the mortgage of real property. In
1990, in common with a number of other lenders, it was operating a system of
non-status loans. As described by the judge, the general idea was to lend
against the security of the subject property alone, without making any
substantial investigations into the status of the borrower. The theory was that
provided one did not lend too high a proportion of the value, then the loan
would be recoverable out of the proceeds of sale even if the borrower
defaulted. Thus, given enough of a ‘cushion’, (ie a low enough loan-to-value
ratio: LTV), the ability of the borrower to service the loan was not treated as
significant as compared with the standard mortgage. If the borrower paid, then
the lender would make his profit. If he did not, then the lender would get his
money back, including interest and expenses, by repossession and sale.
In June 1990 a Mr
Hussain proposed to the plaintiff a remortgage transaction for his home at 9
Carpenter Road, Edgbaston, Birmingham. He had exhausted the limit of what his
existing mortgagees were prepared to lend him, and, therefore, he approached
the plaintiff with a view to obtaining from it a loan of sufficient size not
only to pay off his existing mortgage but leave him a worthwhile surplus on top
so as to justify the new transaction. Mr Hussain said that his property was
worth £1.5m. The normal percentage that the plaintiff was prepared to lend on a
non-status loan was 70% of the value of the property. A loan of £1.05m was
sufficient for this purpose, and he asked the plaintiff to lend him that sum.
It was the practice
of the plaintiff, where non-status loans were proposed, to obtain independently
from two valuers separate valuations of the relevant property. The defendants
in the action were the two firms of valuers instructed by the plaintiff to give
it valuations. Each of the defendants valued the property at 9 Carpenter Road
at £1.5m. The judge held that these valuations were negligent and that the true
value of the property at the relevant time in August 1990 was £1m only. If they
had valued the property at £1m, the maximum amount that the plaintiff would
have lent to Mr Hussain would have been £700,000. The judge found that Mr
Hussain would not have proceeded with the transaction if the plaintiff had only
been prepared to lend him £700,000. He therefore held that it was what is
called a ‘no transaction’ case: the result of the defendant’s negligence was
that the plaintiff entered into a transaction that the plaintiff would not
otherwise have entered into.
On 12 October 1990
the transaction was completed. The plaintiff advanced to Mr Hussain a sum
totalling £1,050,195 secured by a first registered charge over the property.
The liability of Mr Hussain under the loan contract was to make periodic
payments of interest. He had difficulty in making these payments, and by early
1993 had fallen seriously into arrear. The plaintiff commenced proceedings
against Mr Hussain, and, having obtained possession, exercised its power of
sale in February 1994. The price obtained was £435,000. The issues at the trial
included factual issues of the assessment of the plaintiff’s loss. The figures
that the judge found were set out in a schedule. They correspond to Lord
Nicholls’ basic loss. The plaintiff had borrowed money on the market in order
to finance its loan to Mr Hussain. It therefore included in its computation the
cost to it of borrowing this money, and set off against it the aggregate of the
interest payments that Mr Hussain had in fact made between 1990 and 1993. On
the debit side of the account, the sum of the loan made (£1.05m) plus interest
expended and costs came to £1,419,073. On the credit side, the payments made by
Mr Hussain and the net proceeds of the sale of the property came to £651,748.
The judge, for reasons that it is not necessary to elaborate and that are not
now challenged, held that the plaintiff had failed adequately to mitigate its
loss, and that if it had taken the proper steps in mitigation, its loss would
have been reduced by £40,000. Accordingly, he arrived at the figure of
£611,748.51 to represent the plaintiff’s basic loss through having entered into
the transaction. This appeal has been argued upon the basis, agreed to by both
sides, that this figure is the plaintiff’s basic loss.
On the judge’s
finding, the overvaluation of the property by the defendants amounted to
£500,000. Applying the SAAMCO principle, the plaintiff’s recoverable
damages fall to be reduced to £500,000. The judge made a finding of 20%
contributory negligence. The basic loss less 20% is £489,398.81, ie less than
£500,000. But, £500,000 less 20% is £400,000. The Court of Appeal held that the
plaintiff’s damages should be reduced pursuant to the 1945 Act to £400,000. It
is against that decision that the plaintiff has appealed.
The trial
It is necessary to
refer to two things that went wrong at the trial. The first was the treatment
of contributory negligence by the judge. Instead of making his findings in what
might be regarded as a logical order, starting with the allegations of
negligence against the defendants and the question of causation, he started
with the issues of contributory negligence. He found that want of reasonable
care on the part of the plaintiff was proved in two respects. The first was
that Mr Hussain had not fully filled in his application form and had failed to
say how much he had purchased the property for. He had in fact purchased it two
years previously in a dilapidated condition for £375,000. The judge held that
the plaintiff ought to have followed up the omission, and that the disclosure
of the purchase price would have put it on inquiry as to the value of the
property in 1990. The second aspect involved the criticism of the plaintiff’s
policy of lending 70% of the value of the property. The judge found that this
was an unreasonably incautious approach where high values were involved. He made
no finding as to what would have been a reasonable percentage.
Thus, the judge did
not make complete findings as to the seriousness of the faults of the plaintiff
nor did he make findings that identified properly their causative relevance.
This deficiency is most easily appreciated in relation to the lending policy
point. Suppose the judge’s view was that two-thirds would have been a prudent
lending policy in the circumstances, the causative effect of the difference
between advancing 70% and advancing two-thirds would have been capable of
further elucidation and could have been expressed in money terms. Instead, the
judge, who at this stage of his judgment had yet to consider what, if any,
findings of fault he was going to make against the defendants, and what
findings of causation he was going to make, contented himself with saying at
p12 of the transcript:
Taking both
findings of contributory negligence together I assess the total contribution at
20%. There remains the fact that the real determining factor for the level of
the loan was the valuations themselves.
The problems that
this approach creates for the proper application of section 1 of the 1945 Act,
if not already obvious, will become apparent from what I say later in this
speech.
The second aspect
where the trial went wrong was in the treatment of interest. The judge, in a
way that the plaintiff did not seek to defend in the Court of Appeal or before
your lordships, engaged in an exercise of adding interest to the plaintiff’s
basic loss and to the SAAMCO figure. He apparently did this for the
purpose of seeing whether or not there was a SAAMCO limit applicable to
the plaintiff’s claim. The result of his exercise was that there was not, and
he therefore arrived at a figure that corresponded to the plaintiff’s basic
loss less 20% (the £489,398.81 figure).
A further
complication then arose with regard to the award of statutory interest. At the
time that Jacob J gave his judgment the decision in your lordships’ House in
the Nykredit case had not been delivered. That decision required a
different approach to the calculation of interest to that adopted by the judge.
Therefore, when the case got to the Court of Appeal, it was agreed that a
remission was necessary in order to
need say no more about it.
Court of Appeal
The position in the
Court of Appeal was complicated by the fact that both sides appealed. Leaving
on one side the interest point to which I have just referred, the plaintiff
appealed contending that, on a proper construction of the 1945 Act, the
contributory negligence should have been left out of the account altogether or,
if it were to be taken into account, it should have been confined to a
percentage, say 5%, that the plaintiff suggested was an appropriate figure in
respect of the application form point. It submitted that the lending policy
point was irrelevant, since it arose from matters outside the scope of the duty
owed by the valuers to the plaintiff: since the plaintiff could only recover in
respect of that part of its loss that fell within the scope of the defendants’
duty of care, that is to say within the limit of the £500,000 overvaluation,
the relevant damage for the purposes of section 1 of the 1945 Act did not
extend so as to make such fault on the part of the plaintiff relevant.
A major part of the
judgment of Morritt LJ is taken up with discussing and rejecting this argument.
He accepted the submission of the defendants that the use in the subsection of
the word ‘damage’ on four occasions must be distinguished from, and contrasted
with, the reference to ‘damages’ in that part of the subsection that provides
for their reduction. Jacob J had accepted this argument, and so did Morritt LJ.
It was effectively covered by a number of previous Court of Appeal decisions,
in particular that in Froom v Butcher [1976] QB 286. That case
concerned the question of what reduction, if any, should be made to a
plaintiff’s damages whose injuries had been caused not only by the defendant’s
negligent driving but also by the failure of the plaintiff to wear a seat belt.
It had been submitted that, since the defendant was not responsible for the
failure of the plaintiff to wear a seat belt, the question should be looked at
purely as a matter of causation, not as a matter of contributory negligence.
Lord Denning MR pointed out that the section was not drafted by reference to
some incident, such as an accident or a collision, but rather by reference to
the damage suffered by the plaintiff. He said at p292G:
The question is not
what was the cause of the accident. It is rather what was the cause of the
damage… The damage is caused in part by the bad driving of the
defendant, and in part by the failure of the plaintiff to wear a seat belt. If
the plaintiff was to blame in not wearing a seat belt, the damage is in part
the result of his own fault. He must bear some share in the responsibility for
the damage: and his damages fall to be reduced to such extent as the court
thinks just and equitable.
Morritt LJ also
rejected the plaintiff’s submission based upon a subdivision of the plaintiff’s
loss so as to purport to identify some distinct part of it that was solely
caused by the plaintiff’s lending policy and not by the defendants’ fault. On
this argument, the ‘contributory negligence’ (say 15%) attributable to this
part of the plaintiff’s loss would also be excluded, and the corresponding
reduction of the plaintiff’s SAAMCO damages likewise avoided. The
difficulty with this submission was that both Lord Hoffmann and Lord Nicholls
in SAAMCO and Nykredit recognised and affirmed that the whole of
the plaintiffs’ loss was caused by the defendants’ fault. The plaintiff’s
appeal was dismissed.
The reason why the
Court of Appeal awarded to the plaintiff a lower sum than that awarded by Jacob
J was that the Court of Appeal allowed the appeal of the defendants that the
20% reduction should be applied to the reduced sum of damages that the
plaintiff could recover after taking into account the SAAMCO principle.
The judgment of Morritt LJ does not separately address this point, and it only
emerges in a later section of his judgment, dealing primarily with the question
of interest, that he considers that the sum upon which interest should be calculated
is £400,000, not £500,000. He says that in order to ascertain the date from
which statutory interest should be calculated in accordance with the Nykredit
decision it is necessary to ascertain ‘when the loss to the lender reaches the
limit of the valuer’s liability’. He continues at p480G:
The limit is the
difference between the amount of the valuation and the true value, namely
£500,000. At that point the liability of the valuers is crystallised at
£500,000. From that figure 20 per cent is deducted for the contributory
negligence of [the plaintiffs]. To the resultant figure of £400,000 statutory
interest is added from the date of crystallisation to the date of the judgment.
It would appear that
Morritt LJ considered that this conclusion followed from his earlier decision
upon the correct construction of the 1945 Act.
Appeal to your
lordships’ House
The plaintiff has
appealed. It puts its case in three ways. The first is that contributory
negligence is wholly irrelevant where a limitation is being imposed under the SAAMCO
principle. Second, it submits that, if it is relevant, it should be confined to
the ‘application form’ point, to which it would give a significance of 5% at
most, and that therefore its recoverable damages should be assessed at £475,000.
A third way in which it puts its case is that if the whole of the contributory
negligence is to be taken into account against it the appropriate figure is the
£489,398 awarded by the judge, the contributory negligence being deducted before
applying the SAAMCO cap.
The first and second
ways of putting its case deploy the same arguments as were fully discussed in
the Court of Appeal. I consider that the Court of Appeal was right to reject
them: they misconstrue the 1945 Act and fail fully to reflect the decision of
the House of Lords in the SAAMCO case. The point that requires
consideration is its third point. For this purpose, it will be necessary to
look more closely at the SAAMCO principle and how it affects the
application of the 1945 Act. Once this exercise has been undertaken, it will,
in my judgment, provide the answer to the dispute between the parties to this
appeal. The respondents to this appeal submit that the £400,000 figure should
be upheld.
Banque Bruxelles
litigation
This litigation, by
the time it got to the Court of Appeal, involved a number of separate actions
(including the Nykredit case). The Banque Bruxelles case was the
lead case. That action was tried by Phillips J and his judgment is reported at Banque
Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER
769. Phillips J attempted to evaluate in money terms the extent to which the
plaintiffs’ losses were attributable to the defendants’ negligence on the one
hand and the collapse of the market on the other. He thus approached the
problem by making a causative attribution arrived at not by applying any legal
principle but on the facts by an examination of the evidence. This could be
described as a scientific approach.
In the Court of
Appeal [1995] QB 375*, the lenders challenged the scientific approach as
commercially unrealistic. They pointed out the complexity of the situation at
p407C:
It is one
transaction and one loss. If, in the case of commercial property, V overvalues
the land he is likely to overvalue the revenue which B will draw from it. In
the case of domestic property V’s overvaluation will have the result that B
commits himself to pay more by way of interest than he otherwise would. If, in
either case, the overvaluation is such that L, even after deducting a percentage
from the valuation figure, advances more than the sale price, B may be able to
avoid committing any of his own funds to the purchase of the land. In any of
these events, the risk of default by B is enhanced, the protective effect of
any deduction made by L in advancing his loan is reduced and the prospective
loss to L, in the foreseeable event of a market fall, increased.
*Editor’s note: Also reported at [1995] 1 EGLR
129
As part of their
disagreement with Phillips J, the Court of Appeal (at pp421-422) rejected the
scientific approach, which attempted to analyse the causation factually. They
pointed out the complexity of any such treatment of causation, particularly
where more than one adviser was involved. It appears that they accepted the
argument of the lender, to which I have referred.
In the House of
Lords (by which time Banque Bruxelles and Eagle Star Insurance Co had settled
their differences and dropped out of the
scientific approach. It certainly received no support from Lord Hoffmann, who
gave the judgment with which the other members of the House agreed. At the
outset of his speech, at p210C, he identified the two common features of the
cases:
The first is that if
the lender had known the true value of the property, he would not have lent.
The second is that a fall in the property market after the date of the
valuation greatly increased the loss which the lender eventually suffered.
At pp216 and 221 he
affirmed that the premise from which the debate proceeds is that the causation
test has been satisfied, and that there is a basic loss caused by the plaintiff
having entered into the relevant transaction, which satisfies the prima
facie criteria for recoverability. I have already quoted from the summary
of Lord Nicholls in the Nykredit case. And, in the same case, Lord
Hoffmann at p1638F reaffirmed that the SAAMCO principle ‘has nothing to
do with questions of causation’.
I have stressed this
aspect of the Banque Bruxelles litigation and the way in which it
arrived at your lordships’ House because it shows that the SAAMCO principle
is not derived from any application of mathematics. The loss suffered by a
lender in the event of a market fall may not be directly proportionate or
equivalent to the original overvaluation. The SAAMCO principle is
essentially a legal rule that is applied in a robust way without the need for
fine-tuning or a detailed investigation of causation.
The other feature of
the Banque Bruxelles litigation to which I wish to draw attention is the
fact that the question of contributory negligence was raised by the facts of
one of those cases, but was not thought to give rise to any special problem or to
the legal issues that have been debated in the present case.
At the conclusion of
his speech at p222B, Lord Hoffmann applied his statements of the law to the
individual cases. Taking, first, the SAAMCO case itself, he said:
the lenders on 3
August 1990 advanced £11m on a property valued at £15m. May J found that the
actual value at the time was £5m. On 5 August 1994 the property was sold for
£2,477,000. May J quantified the loss at £9,753,927.99 and deducted 25% for the
plaintiff’s contributory negligence. The consequence of the valuation being
wrong was that the plaintiffs had £10m less security than they thought. If they
had had this margin, they would have suffered no loss. The whole loss was
therefore within the scope of the defendants’ duty. It follows that the appeal
must be dismissed.
It is to be observed
that this approach applies the percentage reduction in the lender’s damages to
the lender’s basic loss, the £9,753,927.99, not to the cap. Arithmetically, the
two approaches did not give the same answer in the SAAMCO case. The
judgment that was upheld was for the sum of £7.3m: 25% off £10m would be £7.5m.
The point was not argued, but it is not insignificant that both the parties and
Lord Hoffmann assumed that the right way to take into account contributory
negligence was to apply the reduction to the basic loss, which, apart from the SAAMCO
principle, would be the damages recoverable by the lender.
The SAAMCO
principle
As emphasised by
Lord Hoffmann and Lord Nicholls, and as I have already observed, the SAAMCO
principle does not involve any question of factual causation. It involves a
question that arises subsequent to the ascertainment of the lender’s basic loss
arising from the valuer’s breach of duty. Further, as I also observed, it does
not involve an approach of scientific apportionment. Although the speeches of
Lord Hoffmann include the word ‘attributable,’ it is not used as a factual
concept, but as a legal one. If an analogy is required, one can be found in the
concept of remoteness of damage, for example the damages recoverable under the
rules in Hadley v Baxendale (1854) 9 Exch 341 for breach of
contract. As has been pointed out in a number of cases (eg County Ltd v Girozentrale
Securities [1996] 3 All ER 834; and see McGregor on Damages 16th
ed, (1997), para 241 et seq), there is a close relationship between the
application of such concepts as remoteness, contributory negligence and
causation (and, for that matter, scope of duty of care). The same result can
often be justified or formulated in any of these three ways.
The principle drawn
upon by Lord Hoffmann in the SAAMCO case is stated in terms of, and
defined by reference to, the scope of the duty of care. This is a distinct
legal concept, but is sometimes referred to in the language of remoteness of
damage. The decision of the Privy Council in Overseas Tankship (UK) Ltd
v Morts Dock & Engineering Co Ltd (The Wagon Mound) [1961] AC 388 is
commonly referred to as having revised and restated the law of remoteness of
damage in the tort of negligence (disapproving Re Polemis & Furness
Withy & Co [1921] 3 KB 560). But the actual decision from which this
consequence flowed was expressed in terms of the scope of the tort of
negligence. In that case, the defendant had been responsible for a spillage of
oil that had caused some damage that was foreseeable and some that was not. It was
held that the defendant was only liable in the tort of negligence for the
foreseeable damage. In the words of the headnote:
There is not one
criterion for determining culpability (or liability) and another for
determining compensation; unforeseeability of damage is relevant to liability
or compensation — there can be no liability until the damage has been done; it
is not the act but the consequences on which tortious liability is founded.
Thus, it is the
scope of the tort that determines the extent of the remedy to which the injured
party is entitled.
This approach was
developed in the speech of Lord Oliver in Caparo Industries plc v Dickman
[1990] 2 AC 605. That was the case in which it was held that the statutory
auditor of a company did not owe a duty of care to investors. That it was
foreseeable that investors might place reliance upon the auditor’s certificate
and suffer a loss as a result did not suffice to establish liability to them in
the tort of negligence since that was outside the scope of the function that
statutory auditors were performing: cf Smith v Eric S Bush (a firm)
[1990] 1 AC 831*. Lord Oliver of Aylmerton said at p654D:
To widen the scope
of the duty to include loss caused to an individual by reliance upon the
accounts for a purpose for which they were not supplied and were not intended
would be to extend it beyond the limits which are so far deducible from the
decisions of this House.
*Editor’s note: Also reported at [1989] 1 EGLR
169
Lord Oliver,
adopting a statement of the law by Brennan J in the High Court of Australia in Sutherland
Shire Council v Heyman (1985) 60 ALR 1 at p48, which followed The
Wagon Mound, said at p651F:
It has to be borne
in mind that the duty of care is inseparable from the damage which the
plaintiff claims to have suffered from its breach. It is not a duty to take
care in the abstract but a duty to avoid causing to the particular plaintiff
damage of the particular kind which he has in fact sustained.
It was on statements
such as this that Lord Hoffmann founded his reasoning in the SAAMCO
case: see particularly [1997] AC 191 at pp211-212.
The development of
this reasoning in the SAAMCO case was that Lord Hoffmann, instead of
applying it to kinds or categories of damage, applied it to the quantification
of damage. Lord Hoffmann said at p212E:
The scope of the
duty, in the sense of the consequences for which the valuer is responsible, is
that which the law regards as best giving effect to the express obligations
assumed by the valuer: neither cutting them down so that the lender obtains
less than he was reasonably entitled to expect, nor extending them so as to
impose on the valuer a liability greater than he could reasonably have thought
he was undertaking.
What therefore
should be the extent of the valuer’s liability?
He answered this
question by formulating the principle at p213C:
Normally the law
limits liability to those consequences which are attributable to that which
make the act wrongful. In the case of liability in negligence for providing
inaccurate information, this would mean liability for the consequences of the
information being inaccurate.
It was by this route
that he arrived at the point that made it necessary to ask ‘what element of
this loss is attributable to the inaccuracy of the
case, there would be a ‘cap’ on the amount of the damages that the lender could
recover from the valuer, being the amount of the overvaluation. However, Lord
Hoffmann was at pains to explain that he was not adopting a theory that simply
had placed a ‘cap’ on the lender’s recoverable damages. He said at pp219G-220:
An alternative
theory was that the lender should be entitled to recover the whole of his loss,
subject to a ‘cap’ limiting his recovery to the amount of the overvaluation.
This theory will ordinarily produce the same result as the requirement that
loss should be a consequence of the valuation being wrong, because the usual such
consequence is that the lender makes an advance which he thinks is secured to a
correspondingly greater extent. But I would not wish to exclude the possibility
that other kinds of loss may flow from the valuation being wrong and in any
case, as Mr Sumption said on behalf of the defendants York Montague Ltd, it
seems odd to start by choosing the wrong measure of damages (the whole loss)
and then correct the error by imposing a cap. The appearance of a cap is
actually the result of the plaintiff having to satisfy two separate
requirements: first, to prove that he has suffered loss, and, secondly, to
establish that the loss fell within the scope of the duty he was owed.
A result of this
reasoning is that the damages that, in the present case, the plaintiff can
recover are confined to that part of the plaintiff’s basic loss caused by the
defendants’ negligence, which can be equated in money terms to the amount of
the defendants’ overvaluation.
The SAAMCO
principle and contributory negligence
As I have already pointed
out, in the SAAMCO case itself it was not thought that this question of
application gave rise to any separate problem. Nor, in my judgment, should it.
Section 1(1) of the 1945 Act can be divided into three parts. The first part
identifies a situation: where a claimant suffers damage as the result partly of
his own fault and partly of the fault of another. The second part provides that
that fact shall not defeat the claim of the former against the latter. The
third part provides that the damages recoverable by the claimant in respect of
such damage shall be reduced to such an extent as the court thinks just and
equitable, having regard to the claimant’s share in the responsibility for the
damage. As previously explained, I do not accept the plaintiff’s argument that
the damage, its basic loss, falls to be subdivided. In accordance with
the decisions of the judge and the Court of Appeal in the present case, Froom
v Butcher (supra) and the formulation of Lord Hoffmann, the
totality of the plaintiff’s loss was partly caused by the defendants’ fault
and, therefore, the present case comes within the scope of section 1(1) of the
1945 Act. But that is not the end of the matter. It is still necessary to
consider the third part of the statutory provision.
The third part of
section 1(1) requires the court to form a view as to what it thinks is just and
equitable having regard to the plaintiff’s share in the responsibility for the
damage, and to reduce the plaintiff’s recoverable damages accordingly. It is at
this point that the court has to ask itself whether, and, if so, to what
extent, a further reduction in the plaintiff’s basic loss is to be made beyond
that already required by the application of the SAAMCO principle.
Is it just and
equitable that a plaintiff, which has suffered damage in the sum (using round
figures) of £612,000, partly as a result of the defendants’ fault and partly as
the result of its own, should have its recoverable damages reduced below the
sum of £500,000? The answer that I give to this question, in accordance with
the findings of contributory negligence that were made by the judge at the
trial, is that there should be a further reduction in the plaintiff’s
recoverable damages. Assume that the overvaluation had been of the order of
£615,000: the SAAMCO principle, on the figures, would have been
irrelevant, but the plaintiff’s recoverable damages would nevertheless have
fallen to be reduced by 20% so as to arrive at the figure, £489,000. On the
judge’s findings as to contributory negligence, the plaintiff would not recover
more than that figure under the 1945 Act.
The next question
is: does it make a difference that the starting point exceeded the amount of
the overvaluation? The answer that I would give to this question, on the facts
of this case, is that it does not. It is not just and equitable to make any
further reduction. The resultant figure is within the scope of the duty of care
that the judge has found that the defendants have breached. This approach, in
effect, accommodates and recognises the arguments that the plaintiff has
advanced in criticism of the decision of the Court of Appeal. It is not just
and equitable that the plaintiff’s recoverable damages be reduced to £400,000
on account of contributory negligence that is already fully taken into account
by reducing them to £489,000. The primary element in the judge’s assessment of
contributory negligence, the overlending point, is something that, both
mathematically and logically, can be said to have made a different contribution
to the plaintiff’s overall loss to that made by the defendants’ overvaluation.
It is easy to
demonstrate that the decision of the Court of Appeal can give rise to
unacceptable results. My noble and learned friend Lord Millett, whose speech I
have read in draft, already comments on this feature. It can also be said that
their decision departs from the approach of Lord Hoffmann adopted by your
lordships’ House in the SAAMCO and Nykredit cases, and would
attempt to revert to something akin to the scientific approach of Phillips J,
which was not adopted by the Court of Appeal or the House of Lords in the SAAMCO
case. The decision of the Court of Appeal in the present case in effect makes
the same deduction twice over. The SAAMCO principle already involves an
exercise of attribution in relation to the extent of the defendants’ legal
responsibility for the plaintiff’s basic loss. That fact must be taken into
account in deciding what further, if any, reduction in the plaintiff’s
recoverable damages is just and equitable.
My conclusion,
therefore, is that just as Lord Hoffmann has formulated a general principle
that is easy of application in all save exceptional cases, so also will the
right answer on the application of section 1(1) of the 1945 Act be arrived at
by applying the traditional percentage reduction to the lender’s basic loss
before making any further deduction on account of the SAAMCO principle.
I stress that these are rules of thumb; to adopt the language of Lord Nicholls,
the principle has to be translated into practical terms. They do not aspire to
mathematical precision nor is it desirable that any attempt be made in the
ordinary run of cases to make them mathematically precise, since the data (the
evidence) will not normally, given the complexity of the situation, be
sufficient to justify such precision: see the Court of Appeal in Banque
Bruxelles [1995] QB 375. The task of the court is to make a just and
equitable assessment.
In my judgment, this
appeal should be allowed. It was not just and equitable for the Court of Appeal
to reduce the plaintiff’s recoverable damages to £400,000. The just and
equitable figure was £489,398.81. The question of what statutory interest
should be added to that figure, in accordance with the judgment of your
lordships’ House in the Nykredit case, will have to be considered by a
judge in compliance with the remission ordered by the Court of Appeal.
LORD MILLETT:
My lords, in 1990 the appellant advanced £1.05m on the security of land valued
by the respondents at £1.5m. The advance represented 70% of valuation. The
judge found that the land had been negligently overvalued, and that the true
value of the land at the date of the advance was only £1m. In 1994, following a
catastrophic collapse of the property market, the appellant realised its
security for £435,000, thereby incurring a loss of £615,000. After taking into
account interest paid by the appellant and payments received from the borrower
together with a sum of £40,000, which the appellant conceded was deductible
because of a failure on its part to mitigate its loss, the overall loss on the
transaction amounted to £611,748. The amount of the overvaluation (£500,000)
was less than this, and, accordingly, this latter sum would have represented
the amount of damages recoverable by the appellant in the absence of
contributory negligence on its part: see South Australia Asset Management
Corporation v York Montague Ltd [1997] AC 191 and Nykredit
Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR
1627.
The judge made two
findings of contributory negligence. He found that the appellant was negligent
in making the loan without having obtained from the borrower information
required by its own form. The judge also found that the appellant was imprudent
in advancing as much as 70% of valuation. He did not make any finding on the
amount that a
but he expressed himself in terms that showed that, of the two items of
contributory negligence, he considered the overlending to be much the more
potent cause of loss.
Having found that
the appellant had itself contributed to the loss, the judge applied a broad
brush to the assessment of damages. Taking both findings of contributory
negligence together, he assessed their combined contribution to the loss at
20%. There is no appeal from this assessment, though it is to be observed that,
in respect of the second and more serious finding of contributory negligence,
there was no need to apply a broad brush; the consequences of advancing too
high a proportion of valuation can be precisely calculated: 5% of £1.5m is
£75,000; for every 5% of valuation that the appellant advanced in excess of
what was prudent it increased its loss by that amount.
Having thus found
that 20% of the loss or damage (£611,748) that the appellant had suffered as a
result of the transaction was the result of its own fault, the judge awarded
damages of £489,398. This figure represented 80% of £611,748, and, being less
than the amount of the overvaluation, represented a loss that was entirely
within the scope of the respondents’ duty of care.
The Court of Appeal
rejected the appellant’s argument that no imprudence in its lending policy
could constitute contributory negligence, and held that the judge was entitled
to find that the appellant was partly responsible for the overall loss of
£611,748 that it had incurred on the transaction. It accepted the judge’s
assessment of the contribution that the appellant’s own negligence made to the
loss at 20%, and held that he was entitled to apportion the damages
accordingly. But it varied the order made by the judge. Instead of awarding the
appellant damages of £489,398, representing the 80% of the overall loss of
£611,748 that was not attributable to its own fault, as the judge had done, it
reduced the award to £400,000, being 80% of the respondents’ overvaluation of
£500,000. The remarkable consequence is that, if the award stands, the
appellant will bear more than one-third of a loss for which it was only 20% to
blame.
It is necessary to
recapitulate what this House has laid down in relation to the assessment of
damages in cases of the present kind. Two calculations are required. The first
is a calculation of the loss incurred by the lender as a result of having
entered into the transaction. This is an exercise in causation. The main
component in the calculation is the difference between the amount of the loan
and the amount realised by enforcing the security.
The second
calculation has nothing to do with questions of causation: see Nykredit
at p1638 per Lord Hoffmann. It is designed to ascertain the maximum
amount of loss capable of falling within the valuer’s duty of care. The
resulting figure is the difference between the negligent valuation and the true
value of the property at the date of valuation. The recoverable damages are
limited to the lesser of the amounts produced by the two calculations.
It is to be observed
that neither amount is an element or component of the other. Either may be the
greater, for they are the results of completely different calculations. In
mathematical terms, they bear the same relationship to each other as a-b does
to c-d. The figure produced by the second calculation is simply the amount of
the overvaluation. It is not the loss or any part of it, and cannot be equated
with the amount of the loss sustained by the lender in consequence of the
overvaluation. The two are the same only in a case where the lender has
advanced 100% of valuation.
Section 1(1) of the
Law Reform (Contributory Negligence) Act 1945 applies ‘where any person suffers
damage as the result partly of his own fault and partly of the fault of
another’. The appellant submits that, as a result of the respondents’ negligent
overvaluation, it suffered damage of £500,000, and that it is inappropriate to
reduce the damages in order to reflect fault on its part that played no part in
their breach of duty.
Now, if the premise
were correct, viz that the £500,000 represented all or any part of the damage
suffered by the appellant, then the conclusion would follow. But, as I have
already pointed out, it is not correct. The £500,000 is merely the amount of
the overvaluation. The damage that the appellant suffered as a result of the
transaction that it entered into in consequence of the overvaluation is not
£500,000 but £611,748. This is the damage referred to in section 1(1). This
damage was due to the insufficiency of the security. The sufficiency of any
security, however, depends on a combination of two factors: the value of the
security and the amount of the advance. If the respondents had given a lower
valuation or if the appellant had lent a lower proportion of valuation, then,
in either case, the appellant’s loss would have been less. Accordingly, the loss
of £611,748 that the appellant suffered was partly as a result of its own fault
and partly of the fault of the respondents within the meaning of section 1(1)
of the Act.
Where the subsection
applies, ‘the damages recoverable in respect’ of that damage are to be reduced
‘to such extent as the court thinks just and equitable having regard to the
claimant’s share in the responsibility for the damage’. In the present case,
the damage in question was £611,748; the appellant’s share in the
responsibility for that damage was 20%, and the damages that would have been
recoverable if there had been no contributory negligence would have been
£500,000. The Court of Appeal seems to have assumed that if the appellant was
20% responsible for the damage of £611,748, it must be just and equitable to
reduce the amount of the damages that would otherwise be recoverable to the
same extent. Normally, no doubt, that is so; but, then, normally the amount of
the damages that would otherwise be recoverable and the amount of the damage
are the same. But, in the present case, this ignores the fact that the result
of the appellant’s own imprudence has been to cause it to suffer a measure of
irrecoverable loss. This ought to be reflected in the apportionment of the
overall loss. Deeper analysis shows that it may be appropriate to do this by
first reducing the amount of the irrecoverable damages until they are
exhausted, and only then reducing the amount of the recoverable damages.
As I have already
pointed out, 5% of £1.5m is £75,000. It follows that if a prudent lender would
have advanced only 65% of valuation instead of 70%, it would have suffered a
loss of (£611,748 – £75,000) = £536,748, and would have recovered damages of
£500,000. It cannot be right to award damages of £500,000 to a lender who
prudently lends 65% of valuation and yet reduce the damages to £425,000 to a
lender because he has imprudently lent more than 65% of valuation. It is
sufficient that he should bear the whole of the additional loss of £75,000
himself. Likewise, it cannot be right to award damages of (£611,748 – £150,000)
= £461,748 to a lender who has prudently lent only 60% of valuation and yet
reduce the damages to £350,000 to a lender because he has imprudently lent more
than 60% of valuation. In each case the lender has lent too much and he must
bear the whole of the resulting additional loss himself. This may result in his
suffering a reduction in the amount of the damages that can be recovered from
the valuer, but it need not do so.
Where the lender’s negligence
has caused or contributed directly to the overvaluation, then it may be
appropriate to apply the reduction to the amount of the overvaluation as well
to the overall loss. Where, however, the lender’s imprudence was partly
responsible for the overall loss but did not cause or contribute to the
overvaluation, it is the overall loss alone that should be reduced, possibly,
but not necessarily, leading to a consequential reduction in the damages. When
the consequences of the lender’s imprudence cannot be calculated, the judge
will have to do the best he can to assess the parties’ respective
contributions. But the court should not speculate when it can calculate.
In the present case,
the appellant was found to be at fault in two respects. Neither of them caused
or contributed to the overvaluation. The judge assessed the appellant’s share
in the responsibility for the overall damage at 20%, and reduced the damages to
£489,398 accordingly. In my opinion, this was the right approach. The amount of
damages that the judge awarded properly reflected the 80% of the overall loss
for which the respondents have been found to be responsible, and which, being
less than the amount of the overvaluation, fell wholly within the scope of
their duty of care.
I would allow the appeal and restore the award of
damages made by the judge.
Appeal allowed.