Negligence — Valuers — Mortgage loan — Property valued different from property the subject-matter of loan — Whether valuers liable for negligent valuation — Whether negligent valuation causative of loss
The plaintiff
bank advanced a loan to a mortgagor in three tranches secured on a specific
property. The defendant valuers provided valuations for each tranche; in the
case of a valuation for the third tranche, this included a property called
Bookbinders. Bookbinders was excluded from the security for the loan. The
bank’s claim that the valuers provided negligent valuations was allowed, in
part, in the court below, where judgment was given to the bank less a deduction
of 20% for contributory negligence. The bank and the valuers appealed and
cross-appealed respectively.
inferences drawn by the trial judge are ones that it was perfectly proper to
draw, the Court of Appeal will not exercise its independent judgment so as to
interfere with his decision unless there is real reason for doing so. If the
difference between the property that the valuers valued and the property relied
upon by the lender for the purposes of making a loan is of sufficient significance,
it will mean that the lender has ventured beyond the scope of the duty that it
is owed by the valuers. The difference between the properties must be of a
degree that means the purpose for which the valuation was used was outside the
purposes for which the valuers should have reasonably contemplated the
valuation would be used. A useful working test would be to ask what would be a
reasonable response of a valuer to the question: can the valuation still be
relied on, notwithstanding the difference between the property he valued and
the property that was actually the subject-matter of the loan? In relation to
the valuation provided by the valuers and the factual situation, it would not
be right to interfere with the judge’s decision that the purpose for which the
valuers intended their valuation to be used was not so different from that for
which it was used. The reasonable valuer would have said that the valuation
could be used for a loan on the securities without Bookbinders in relation to a
loan of the third tranche. The bank was not entitled to damages to reflect the
value of the loss of the opportunity or chance to remedy its lack of security
that a correct valuation would have disclosed was necessary in relation to the
first and second tranches.
The following
cases are referred to in this report.
Benmax v Austin Motor Co Ltd [1955] AC 370; [1955] 2 WLR 418;
[1955] 1 All ER 326, HL
Caparo
Industries plc v Dickman [1990] 2 AC 605;
[1990] 2 WLR 358; [1990] 1 All ER 568, 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
South
Pacific Manufacturing Co Ltd v New Zealand
Security Consultants & Investigations Ltd [1992] 2 NZLR 282
Stovin v Wise [1996] AC 923; [1996] 3 WLR 388; [1996] 3 All ER 801,
HL(E)
This was an
appeal by Western Trust & Savings Ltd and a cross-appeal by Strutt &
Parker against a decision of Judge Jack QC in proceedings for damages for
negligence.
Christopher
Gibson QC and Charles Douthwaite (instructed by Laytons, Saint Bartholomews
Lewis Mead, of Bristol) appeared for the appellant; Simon Berry QC and Julian
Matthews (instructed by Barlow Lyde & Gilbert) represented the respondents.
Giving the
judgment of the court, LORD WOOLF MR said: This is another
appeal concerning the extent of the liability of a valuer who negligently gives
a valuation on the instructions of a client, which he knows is required by a
bank or similar financial institution in connection with a loan. The
transactions giving rise to the appeal have the following unusual features:
(i) The
property that was taken as security for the loan did not include the whole of
the property that was valued by the valuers.
(ii) The
lender seeks to recover damages from the valuers not only for the loss on the
loan for which the valuation was prepared but also on loans that were made both
prior to and months after the date of the valuation.
(iii) The
borrower and the valuers did not give evidence, so there was very limited
evidence available as to the instructions that were given to the valuers as to
the precise purpose for which the valuation was required.
The facts
The appeal is
from a judgment given by Judge Raymond Jack QC at Bristol Mercantile Court on
February 6 1997. The cross-appeal is by the defendants, the well known
surveyors Strutt & Parker (the valuers). There is also an appeal by the
plaintiff, Western Trust & Savings Ltd (the bank). The judge gave judgment
for the bank in the sum of £230,000, less a deduction of 20% for contributory
negligence, making £184,000 plus interest, a total of £220,735.
The findings
of the judge are set out with admirable clarity in his judgment, and it is that
judgment to which I refer, primarily for the history of the events that give
rise to this appeal. The history has to be set out in some detail as both
parties are challenging inferences that the judge drew from his primary findings
of fact.
Start of
the relationship
The bank, at
the relevant times, was active in the residential mortgage market. Its head
office was in Plymouth. The borrower was a Mr Andrew Davis. Mr Davis was a
property developer. Initially, he
last and, in 1993, he was declared bankrupt. By that time he had been lent a
substantial sum of money by the bank, which clearly had a high regard for his
business acumen and financial probity. The loans commenced in 1986 when Mr
Davis was 22. The bank then lent Mr Davis £250,000 for the restoration of
Bridwell Park. Bridwell Park is a Regency mansion that was the main house of
the Bridwell Estate of which Old Bridwell formed a part. At that time a
valuation was obtained from a Mr Bileki, a valuer often used by the bank. The
bank also received information as to Mr Davis’ income from a chartered
secretary, who appears to have acted as Mr Davis’ accountant and financial
adviser. In addition, satisfactory references were received. Between then and
August 1988 two further loans were made by the bank relying on the valuations
of Mr Bileki. However, the total loans of £750,000 were repaid in full on
October 31 1988. The bank was told that this was because the property was being
placed in a family trust. It appears, however, that the property was
remortgaged.
In November
1988 Mr Davis approached the bank for a loan of £1m to be drawn down in three
stages over six months and repayable over 15 years. This loan was to be secured
on Old Bridwell and its purpose was for the conversion of Old Bridwell to a
complex of holiday cottages. At that time Old Bridwell consisted of a
collection of old farm buildings surrounded by a wall. A loan proposal was
prepared, which stated that 15 three- and four-bedroom units were to be built
with an indoor swimming pool and garages. The interest rate was to be 2.5% over
base. On the figures the anticipated income would not cover the interest. The
loan was to be made in three tranches. The first tranche was to be of £500,000,
or 45% of the forced sale valuation of the current development, the second and
third tranches were each to be of £250,000, or 45% of the increase in the
forced sale valuation. The properties were to be self-contained with separate
titles so that they could be sold as individual units. A reference was to be
obtained from Mr Davis’ banker and his personal financial details were to be
updated by his accountant.
On January 30
1989 the bank sent Mr Davis a proposal, but this referred to 14 rather than 15
units. It indicated that the loan of £1m, or 45% of the forced sale valuation
of the properties, was to ‘assist with the development of 14 holiday cottages
at Old Bridwell’. The security was to be a first legal charge over the
properties and the assignment of an endowment policy. There was to be a
detailed survey and valuation by the bank’s valuers at the date of each
payment.
First
tranche
The reference
was obtained together with a report on Mr Davis’ financial position. Mr Davis
accepted the proposal on February 14 1989. A valuation dated February 21 1989
was obtained from Mr Adamson, a partner of Mr Bileki. On examination, the
valuation makes clear that one of the 15 properties to be developed, namely the
largest, Bookbinders, was not included in the valuation. If the valuation was
accurate, this meant that the bank would only have security over 14 properties.
A value of £125,000 was put on each of the properties when completed, making a
total of £1.75m. The development in its then condition was valued at £1m. The
valuation concluded by stating:
We would
stress that our valuation is based upon the plots being sold on individual
basis under reasonable market conditions.
There was no
reference to a forced sale in the valuation. A further valuation by Mr Bileki
dated March 1 1989 also emphasised that the valuation was based upon the value
of the individual houses.
The bank did
not instruct its own solicitors but instructed Munns & Co, who were already
Mr Davis’ solicitors. Mr Munns was a sole practitioner. He gave a clean report
on title to the bank.
On April 4
1989 the first tranche of the loan was advanced. It should have been for not
more than £450,000, being 45% of the valuation, but in fact £500,000 was
advanced.
Second
tranche
A further
valuation dated June 30 1989 was obtained from Mr Adamson. He gave a total
value of £1.46m for the site in its then condition. A completed value was given
in the region of £140,000 per house and £1.96m for the whole site of 14 properties.
No reference was made to a forced sale basis of valuation.
In accordance
with the valuation £207,000 should have been advanced. As to this the judge
states:
By an error
£270,000 was advanced, which Mr Davis found inconvenient to return. [The bank]
had thus advanced £770,000, when 45% of the valuation was £657,000.
Third
tranche
On August 24
1990 Mr Leybourne, of the bank, met Mr Davis to discuss the final tranche of
the loan. Mr Leybourne indicated that a ‘good valuation’ was required before
the facility became long term. Mr Sellar, a partner in Strutt & Parker, was
instructed. He did not give evidence. This was because he had suffered a severe
stroke. In addition, neither Mr Leybourne nor Mr Davis gave evidence. In these
circumstances, the judge states:
It must be a
matter of surmise what Mr Davis told Mr Sellar as to what was required and why.
He must have told him that a valuation was required to be addressed to [the
bank]. He must have told him that it was required for the purposes of lending
by [the bank] on the security of the property. It is likely that he told him
that it was needed urgently. For Mr Sellar wrote with a draft on Saturday
September 29 suggesting they speak over the weekend, and the final report was
dated October 1, the following Monday. Whether Mr Davis told Mr Sellar any more
about the function of the report is unknown.
Mr Sellar was
not instructed by the bank but by Mr Davis. On September 29 1990 he sent to Mr
Davis a draft valuation indicating a price range of £110,000 to £140,000 for 13
units and a price of £200,000 for Bookbinders, which was the most substantial
property and had a large garden. He placed a value on the 14 properties of
£1.825m: 13 times £125,000 plus £200,000. When sending Mr Davis the draft
valuation, Mr Sellar wrote that if Mr Davis wished ‘to pad it out’, Mr Davis
should provide the detail. The final report addressed to the bank substantially
followed the draft, but there were changes that were probably suggested by Mr
Davis.
The report to
the bank was dated October 1 1990. It was addressed to Mr Leybourne. It was
short. It records that it was being sent on the instructions of the bank’s
customer, Mr Davis. It indicated that the site had been inspected and that it
was a ‘unique and most impressive courtyard development of 14 cottages with
garages’. A schedule giving brief details of the properties was included. It
showed Bookbinders as no 14. It described the development as exceptional and
referred to its high specification. Both the draft and the final valuation
indicated that it was Mr Davis’ intention to retain ‘this unique development
and let individual cottages’. The valuation, but not the draft, indicated that
the lettings would be ‘for holiday accommodation’. The valuation, but not the
draft, also indicated that the venture would be extremely successful.
The final
paragraph of the draft was amended so that the valuation included a reference
to ‘forced sale’. The draft gave the ‘current value of the entire development
of 14 cottages with vacant possession’ as £2.2m, whereas the valuation stated
that the ‘forced sale value of the entire development of 14 cottages with
vacant possession’ would be ‘£2.2 million to £2.3 million’ on completion of two
unfinished units.
The judge had
no doubt that the valuations were based on the cottages being able to be sold
as permanent rather than holiday homes. This was supported by certain very
brief handwritten jottings, which were part of the evidence at the trial.
The report was
silent as to planning permission. In fact there was a serious planning problem.
The judge assumed that Mr Sellar did not know of this and did not make
inquiries of the local authority as to the planning position. The judge held
that if he had done so he would have discovered the true position, which was
that the development had taken place with little regard for the requirement of
planning consent
there was about to be a consolidated application for planning permission that
was ‘likely to result in conditional permission being granted’, which is what
in fact happened. The condition stated that the units ‘shall not be occupied at
any time as permanent residential units without first obtaining the written
consent of the local planning authority’. The reason for the condition was that
‘the concept and design of this holiday concept is not considered suitable for
permanent residential occupation’.
Relying on the
valuation, the bank advanced as the third tranche the sum required to reach the
figure of £1m. The judge points out that 45% of the value of £2.2m would be
£990,000. He also indicates that a forced sale valuation should have been lower
than an open market value. When the final tranche was paid, a Mr Gilbert was
handling the transaction on behalf of the bank and he was unaware of the
exclusion of Bookbinders from the security. The judge accepted that Mr Gilbert
had not looked at the earlier valuations. If he had appreciated that
Bookbinders was not included, then he would have realised that the valuation
was, in any event, at too high a figure for the properties over which the bank
had security.
Swimming
pool loan
In February
1991 Mr Gilbert visited Old Bridwell. The properties were virtually complete.
Mr Davis wished to borrow a further £500,000 (the pool advance) to build a
swimming pool, sauna and small café. At that stage Mr Gilbert recorded that a
property, which must be Bookbinders, could, if necessary, when the swimming
pool had been built, be sold ‘as a … detached house with a swimming pool’.
Mr Davis and
the bank then discussed replacing the existing facility of £1m by a new
facility of £1.5m. At this time, Mr Gilbert made a note that referred to the
valuation by Strutt & Parker, and indicated that a further valuation was not
required at that stage. The transaction was approved. It had an additional
requirement that Mr Davis should provide contractors’ invoices to establish
that the additional sum was being used for the purposes identified, but when
the facility letter was accepted by Mr Davis on April 2 1991 this last
requirement was omitted. This was because Mr Davis wanted the funds before the
end of the tax year and to enable this to be done the balance needed to bring
the amount outstanding up to the amount of £1.5m, namely £505,138, was advanced
on April 4 1991.
Prior to
making the pool advance, the bank instructed its own solicitors, who advised Mr
Gilbert. On March 25 1991 the bank received the title deeds from Munns &
Co. On the same day its solicitors acknowledged they were holding a charge
certificate, 11 conveyances and two copy plans. Munns & Co confirmed that
14 units were situated on the filed plan of the title charged to the bank.
(This was only the position if Bookbinders was included, which it was not.)
They also stated that the pool and, perhaps, the other facilities were to be
built on other land, but offered an undertaking by Mr Davis to charge this land
at a future date. They also enclosed the consolidated planning permission,
which was subject to the condition restricting the use of the units.
On April 3
1991 the bank’s solicitors, having spoken to Mr Gilbert, wrote enclosing a plan
showing the land currently mortgaged to the bank. The letter also stated that
the solicitors understood from Mr Gilbert that the holiday cottages were
constructed entirely within the boundaries of this land.
This was not
the position. First of all Bookbinders was not included and, second, three of
the cottages had been built partly outside the charged land. The judge
concluded that the bank’s solicitors ‘were simply unable to check what the
position was and so spoke to Mr Gilbert. He assured them that all was well in
this regard’. On April 4 1991 the bank’s solicitors wrote that having seen the
planning permission, ‘reversion to permanent residential units maybe somewhat
more difficult than originally envisaged’. The solicitors noted Mr Gilbert was
‘happy with regards to arrangement for payments due under the mortgage and that
your valuation was in fact on the basis of the premises being used as a holiday
accommodation complex’.
The next event
was a request by Mr Davis in November 1991 for an additional £180,000. Again,
the facility approval memorandum, which was dated November 27 1991, referred to
the Strutt & Parker valuation and the absence of a need for a fresh
valuation. It also referred to the excellent relations that the bank had with
Mr Davis and his proven ability to carry out his commitments. The additional
advance was made on December 12 1991. That brought the total of the advances up
to £1.68m, some 76% of £2.2m. At this time nothing had been done to construct
the swimming pool and other facilities for which the £505,138 had been
advanced.
Mr Davis
failed to pay an instalment that was due to the bank in December 1992, and on
May 6 1993 the bank gave notice of default. This was followed by a receiver
being appointed on May 21 1993.
On May 28 1993
the 13 units at Old Bridwell were valued on the open market for mortgage
purposes at £597,000 (forced sale £530,000); with permission for permanent
residential use at £795,000 (forced sale valuation £715,000). On December 20
1995 Old Bridwell, including Bookbinders, was sold for £570,000. The purchaser
could well have been a company in which Mr Davis had an interest. In order to
achieve that sale the bank had to purchase Bookbinders and the land necessary
to complete their title to the three houses that were partly built outside the
land that was the subject of the charge.
Conclusions
of the judge
The judge came
to the following conclusions, which are particularly important in relation to
the outcome of this appeal:
(i) Mr Sellar
was negligent in that he arrived at a valuation that was far too high and
because he failed to check the situation as to planning consent, which would
have revealed that a condition restricting the occupation of the properties
would be imposed.
(ii) Mr Sellar
knew that the valuation was required for the purposes of an advance to be
secured on Old Bridwell and that the advance was intended to be made in the
near future.
(iii) The
property that Mr Sellar valued and that which was secured were not sufficiently
different to prevent Mr Sellar owing a duty to the bank in relation to the
security that was actually provided to the bank.
(iv) The pool
advance was a not a transaction for which the valuation had been made and was
outside the scope of the duty that Mr Sellar owed to the bank.
(v) Mr Gilbert
was negligent in continuing to rely on the valuation when making the subsequent
loans, but that negligence was not sufficient to break the chain of causation
between the negligent valuation and the loss suffered by the bank.
(vi) Mr Sellar
could not foresee that the bank might rely on his valuation in relation to any
prior advances, and so he owed no duty to the bank in respect of the first and
second tranches.
(vii) The bank
was negligent in using Mr Davis’ solicitor and a solicitor who was a sole practitioner.
The bank was also negligent in failing to give Mr Sellar direct instructions as
to the property he was to value and as to the purpose for which the valuation
was required.
(viii) Even if
Mr Sellar had reduced the valuation that he had given, for example to £1.5m,
the bank would still have advanced the third tranche.
(ix) The
bank’s own negligence was 20% responsible for the damage flowing from the
advance of the third tranche of £230,000.
(x) If the
valuers had been liable to the bank in relation to the pool advance, then, in
respect of that liability, the bank, because of its own negligence, would be
60% responsible for any further loss resulting from the pool advance.
(xi) The sum
recovered on the sale (£570,000) was to be credited to the earlier advances and
therefore did not reduce the amount due to the bank from the valuers due to
their negligence in relation to the third tranche.
(xii) The bank
was not entitled to recover the costs of buying Bookbinders and other land to
complete their security. This allowed for the exclusion of Bookbinders and the
other land from the security.
Role of
the Court of Appeal
I have found
it by no means easy to determine this appeal. It is therefore helpful, before I
set out my conclusions, to consider the role of this court on an appeal of this
nature. To a substantial extent the outcome of the appeal depends on the proper
inferences to be drawn from the primary facts that have been found by the judge
in his particularly careful and detailed judgment. The Court of Appeal is
entitled to form an independent opinion in relation to what are the proper
inferences to be drawn from facts found by a judge and interfere with his
decision without having to come to the conclusion that he was wrong to
draw the inference that he did: see Benmax v Austin Motor Co Ltd
[1955] AC 370. None the less, before this court does so, it is important that
it bears in mind that the judge who has the responsibility of hearing the
witnesses and finding the facts in the first place will normally be in a better
position to form an overall view of those facts than is an appellate court. For
this reason, in this situation, if the inferences drawn by the trial judge are
ones that it was perfectly proper to draw, this court will not exercise its independent
judgment so as to interfere with his decision unless there is real reason for
doing so. This is the approach that I propose to adopt in determining this
appeal. If the inferences that the judge drew were ones that it was perfectly
proper to draw, then they should stand absent any reason to interfere with
them. I will now deal with the issues in turn.
Scope of
the duty owed by the valuers
Although it
was the bank that was first to appeal the judgment of the judge, it is
convenient to deal initially with the cross-appeal of the valuers. This is
because if the valuers are right in their first contention, that will determine
the outcome of this appeal. Their first contention is that because of the
difference between the property that was the subject of the valuation and the
property that was the subject of the security, they are under no liability to
the bank in respect of any of the loans. Mr Simon Berry QC, on behalf of the
valuers, develops his submissions under two heads. The first being that the difference
between the properties means that what is accepted to have been a negligent
valuation was not causative of the loss. The second is that the fact that the
property that was the subject of the valuation was larger than the property
that was taken as the security, means that the chain of causation was broken.
I have already
set out the approach of the judge on this issue. He did not regard the
difference between the size of the two properties as being significant. I
understand him to mean by this that the difference in size was not sufficiently
significant to result in the loan of the third tranche being outside the scope
of the duty that the valuers owed the bank. Was he justified in coming to this
conclusion?
It is now
clearly established that, but for the differences between the properties, in
situations such as this a duty is owed by a valuer to a bank. The relevant
principles are fulfilled. There can be no dispute that there is sufficient
proximity between the valuer and a bank. Equally, there can be no issue that
but for the difference between the property valued and the property that was
taken as security, it would be fair, just and reasonable for a duty to exist.
Although we have not been referred to any case where this problem has been
previously considered, this is not a situation where the court has to ask
itself ‘whether there are considerations of analogy, policy, fairness and
justice for extending … [the duty] to cover a new situation …’: Stovin v
Wise [1996] AC 923; [1996] 3 WLR 388 at p411B.
The principles
of proximity and reasonableness are, however, not only relevant in deciding
whether the valuers owed any duty to the bank but also in determining the
different question that is in issue here, namely was the transaction that
actually caused the loss within the scope of the duty that the valuers
undoubtedly owed to the bank. The answer to this question depends on whether,
despite the differences in the property sizes, the necessary relationship of
proximity remains and it is still reasonable to impose liability.
Mr Berry
submits that ‘the transaction’, the taking of the security for the third
tranche, was one that was outside the scope of the duty owed by the valuers,
because it was not ‘the transaction’ that the valuer knew ‘would be very likely’
to be one for which the bank would rely on the valuation. He prays in support
of this submission the well known passage in Lord Bridge of Harwich’s speech in
Caparo Industries plc v Dickman [1990] 2 AC 605 at pp620H–621F.
In that passage Lord Bridge refers to a series of cases in which the defendant
was, or ought to have been, held liable. Of those cases, Lord Bridge says:
The salient
feature of all these cases is that the defendant giving advice or information
was fully aware of the nature of the transaction which the plaintiff had
in contemplation, knew that the advice or information would be communicated to
him directly or indirectly and knew that it was very likely that the
plaintiff would rely on that advice or information in deciding whether or not
to engage in the transaction in contemplation. In these circumstances
the defendant could clearly be expected, subject always to the effect of any
disclaimer of responsibility, specifically to anticipate that the plaintiff
would rely on the advice or information given by the defendant for the very
purpose for which he did in the event rely on it. So also the plaintiff,
subject again to the effect of any disclaimer, would in that situation
reasonably suppose that he was entitled to rely on the advice or information
communicated to him for the very purpose for which he required it … I should
expect to find that the ‘limit or control mechanism … imposed upon the
liability of a wrongdoer towards those who have suffered economic damage in
consequence of his negligence’ rested in the necessity to prove, in this
category of the tort of negligence, as an essential ingredient of the
‘proximity’ between the plaintiff and the defendant, that the defendant knew
that his statement would be communicated to the plaintiff, either as an
individual or as a member of an identifiable class, specifically in connection
with a particular transaction or transactions of a particular kind (eg in a
prospectus inviting investment) and that the plaintiff would be very likely to rely
on it for the purpose of deciding whether or not to enter upon that transaction
or upon a transaction of that kind …
(Emphasis
supplied.)
Mr Berry
submits, and has to submit, that, because of the difference in the property,
the transaction that took place between the bank and Mr Davis was not a
particular transaction, or one of the transactions of a particular kind, which
Mr Sellar would have had in contemplation when he gave his valuation. Mr Berry
also relies on Lord Roskill’s speech at p629B and Lord Oliver’s speech at
p638C–E.
It is to be
noted that Lord Oliver referred to the advice being ‘required for a purpose
whether particularly specified or generally described, which is made known,
either actually or inferentially, to the adviser at the time when the advice is
given’, and Lord Bridge of Harwich also said in Caparo (at p627D):
It is never
sufficient to ask simply whether A owes B a duty of care. It is always
necessary to determine the scope of the duty by reference to the kind of damage
from which A must take care to save B less harm.
In addition,
Mr Berry relies upon South Australia Asset Management Corporation v York
Montague Ltd [1997] AC 191*. He submits that the approach to establishing
what is the loss caused by a breach of duty in cases of this nature, which Lord
Hoffmann laid down in the SAAMCO case, cannot be applied to the facts of
this case and that this establishes that what occurred in this case is beyond
the scope of the valuers’ responsibility to the bank. How, he asks, can you
apply the SAAMCO ‘cap’ to a situation where the judge did not make and
could not make a finding as to the value of the land that was the subject of
the security?
*Editor’s
note: Also reported at [1996] 2 EGLR 93
As to these
submissions, I accept that if the difference between the property that the
valuers valued and the property relied upon by the lender for the purposes of
making a loan is of sufficient significance, it will mean that the lender has
ventured beyond the scope of the duty that he is owed by the valuers. However,
for this to be the case, the difference between the properties must be of a
degree that means the purpose for which the valuation was used was outside the
purposes for which the valuers should have reasonably contemplated the
valuation would be used. Whether this is the situation or not depends on all
the circumstances in which the valuation came to be made. The instructions
given to the valuers are important. So are the terms in which the valuation is
expressed. If the instructions to the valuers precisely identify the
transaction that the lender required the valuation for, this may be
determinative. In the absence of precise instructions, the position would be
more open. A useful working test would be to ask what would be a reasonable
response of a valuer to the question: can the valuation still be relied on
notwithstanding the difference between the property he valued and the property
that was actually the subject-matter of the loan. If, for example, the
valuation was of a number of identical properties but the loan was made in
relation to only some of the properties, you would expect the reasonable valuer
to respond that the difference did not matter, because the value of the lesser
number of properties could be deduced by dividing the value given so as to
reflect the reduction in the number of properties. If, however, no such
calculation would be possible because the property being valued and the
property that was the subject of the loan were significantly different, you
would expect the response of the reasonable valuer to be otherwise. The answers
in the intervening situations you would expect to be very much a matter fact
and degree with some cases falling either side of the line.
Applying this
approach to the facts of this case, I accept, as Mr Berry submits, that
Bookbinders was capable of being a significant part of the property that was
valued. The significance was underlined because of the reference in the
valuation to ‘this unique and most impressive courtyard development of 14
cottages’. The omission of Bookbinders meant that there could be difficulties
over access and no sufficient easements in respect of gas and foul drainage to
the development as a whole. However, the situation was not one where Mr Davis
had no control over Bookbinders. On the evidence, the reason that Bookbinders
was not included in the security was because it was already charged to another
institution. There was no real risk of it being impossible for Mr Davis to
secure the access and easements. This was not a situation where, in order to
obtain control over the courtyard, it might have been necessary to pay a price
(a ‘blackmailing’ price) that reflected the strategic position of Bookbinders
to the development. In order to remedy the situation, all that was required was
that Mr Davis should pay the sum necessary to discharge the security, which
proved to be £60,000. This meant that the absence of Bookbinders was of less
significance in relation to the value of the development as a whole. In
addition, in preparation of the third tranche, the value of the remaining
properties would, on any sensible apportionment, be far greater than the sum to
be advanced. The fact that it is known that Mr Sellar, in his original
calculations, was working on the value of the individual properties and
multiplying the same value for each cottage to give the total value, underlines
this last point.
So far as the
cottages that were built partly outside the property that was subject to the
security, it is not clear how this came about. However, this was again of no
great significance having regard to the price that had to be paid in order to
remedy the defect in the land conveyed.
This being the
situation, I have come to the conclusion that it would not be right to
interfere with the judge’s decision that ‘the purpose for which Mr Sellar
intended his valuation to be used was not so different from that from which it
was used, that the actual use was outside the ambit of his duty to [the bank]’.
The reasonable valuer, if he had been asked, ‘Can the valuation be used for a
loan on the securities of the properties without Bookbinders, etc, in relation
to a loan of the third tranche?’ would have replied ‘yes’.
Furthermore,
it was not necessary for the judge to attempt to determine a value of the
development without Bookbinders. From the bank’s point of view the real
difference in value was the sum that the bank had to pay in order to secure
Bookbinders. While it is not entitled to recover this sum, or the other sums it
had to expend in order to perfect title, as damages from the valuers, since
this was not a loss that flowed from the negligent valuation, the fact that it
had this expenditure does not prevent it from recovering, as damages, the
amount of the third tranche from the valuers.
If the loss of
the bank as to the third tranche falls within the scope of the duty that was
owed by the valuers, then there could be no breach of the chain of causation in
relation to that loan.
Before leaving
this aspect of the appeal, I would draw attention to the comment of Cooke P,
with whom Hardie Boys J agreed, that:
(i) A broad
two-stage approach or any other approach is only a framework, a more or less
methodical way of tackling a problem. How it is formulated should not matter in
the end. Ultimately the exercise can only be a balancing one and the important
object is that all relevant factors be weighed. There is no escape from the
truth that, whatever formula be used, the outcome in a grey area case has to be
determined by judicial judgment. Formulae can help to organise thinking but
they cannot provide answers.
See South
Pacific Manufacturing Co Ltd v New Zealand Security Consultants &
Investigations Ltd [1992] 2 NZLR 282 at p294 [at line 45] and Jackson and
Powell on Professional Negligence 4th ed, para 162 et seq.
No loss
The next
argument relied upon by the valuers in support of their cross-appeal is that
the judge should have found that there was no loss. The judge was of the
opinion that if the property had been properly valued, its value would have
been £750,000, and not over £2m. The figure of £750,000 is for the development
confined to holiday use. It assumes that if Mr Sellar had inquired into the
planning position, he would have been informed that planning permission was
needed, and that the planning permission that would be granted would be likely
to be one that was subject to a planning condition restricting the houses to
holiday use.
The evidence
as to what would have been the response of the planning authority was provided
by Mr Valentine, who works in the planning department of the local planning
authority. Mr Berry submits that he was never asked the correct question in the
court below when he gave evidence. The correct question would have been: what
would be the nature of the permission that would be granted for the development
if there had been no mention of holiday use? Would the reply then have been
that a restriction on the user probably would be imposed? Neither side put this
question directly to Mr Valentine. However, having carefully considered the
transcript of Mr Valentine’s evidence, I have come to the conclusion that the
judge was entitled to infer that if Mr Sellar had inquired, as he should have
done, he would have been told that the permission would be conditional. There
is nothing in this point.
First and
second tranches
The bank
contends that if it had received a proper valuation, it would have taken steps
to either recover the first and second tranches already paid to Mr Davis or
attempted to obtain additional security. The bank therefore contends that, at
least, it should have been awarded damages to reflect the value of the loss of
the opportunity or chance to remedy its lack of security, which a correct
valuation would have disclosed was necessary.
Was the judge
entitled to reject this claim? First, because it was outside the scope of the
duty that Mr Sellar owed to the bank and, second, because the chance of the
bank being able to improve its position was ‘nil’, I consider the judge was so
entitled and I would not interfere with either of the judge’s conclusions.
Obviously, there can be circumstances where a bank may want a valuation to
determine whether its existing security for prior loans is sufficient. The
judge was in the difficult situation that neither party chose to call Mr Davis,
and Mr Sellar was not in a position to give oral evidence. However, the judge
was entitled to draw the inference that Mr Sellar was made aware that the
valuation was urgently required. The development was still not complete. It
was, therefore, a reasonable inference that the valuation was required for a
further advance and not in relation to an earlier advance.
However, even
if the judge was taking a too restrictive view of the scope of the duty that Mr
Sellar owed, I would, on the evidence, come to exactly the same conclusion as
the judge: that the opportunity of the
history of the relationship between Mr Davis and the bank strongly confirms
that even if a non-negligent valuation had been provided, indicating a value of
£750,000, the bank would not have been able to improve its position. The bank
had as much interest as Mr Davis in allowing the development to continue. The
fact that Bookbinders was already providing security in relation to a different
loan suggests that Mr Davis would not have found it easy to provide additional
security. Furthermore, what happened in relation to the pool advance, which I
am about to consider, demonstrates the lax approach that the bank was prepared
to adopt when lending money to Mr Davis. I would therefore reject this ground
of appeal.
Pool
advance
The remarkable
features of this advance were that the bank was prepared to advance such a
substantial sum as £500,000 without insisting that the payment of that sum
should be linked to the building of the swimming pool, sauna and café. It is
also extraordinary that the bank ignored the warnings by its own solicitors,
especially as it had been pointed out that ‘reversion to permanent residential
units may be somewhat more difficult than originally envisaged’ and the
position with regard to the extent of the property secured was unclear. The
judge regarded these features as going to contributory negligence rather than
liability. It is therefore necessary to decide whether this court should
interfere with the finding of the judge that the pool advance was outside the
scope of the valuers’ duty.
Again, the
facts are important. There is the obvious time interval. There is also, again,
the fact that the judge found that it was likely that Mr Sellar was told that
the valuation was needed urgently, which indicates what was contemplated was an
immediate loan. In addition, the development was well advanced (there were only
two uncompleted units). There was no reason to think that Mr Sellars would have
any reason to expect further developments, including a café, for which a
further £500,000 loan would be warranted.
I accept the
submission on behalf of the bank that it is unreasonable and undesirable to
expect a lender to require a new valuation every time a further advance is
sought during a period when property values have not altered significantly.
None the less, in the particular circumstances of the pool advance, I would again
not interfere with the judge’s conclusion.
Contributory
negligence
Mr Berry
submits that here the bank should have been held up to 75% to blame. He
referred to a number of cases that he said supported such a finding. On the
other hand, it is argued on behalf of the bank that it cannot in itself be
negligent to employ a solicitor who is a sole practitioner and who also acts
for the borrower.
Here, in
particular, the precise circumstances are important. While, in relation to a
great many transactions, there would be nothing wrong in using a sole
practitioner for a transaction of this nature, here substantial sums of money
were being advanced to a developer who would clearly have a long-standing
relationship with his solicitor. The identity of the solicitor involved in the
transaction and the nature of the instructions that need to be given by a bank
are closely linked. If a bank is prepared to use a sole practitioner, then it
is particularly incumbent upon the bank to give clear instructions as to what
it requires. Here, as I understand the judge’s findings, he was combining the
fact that, and the manner in which, Munns & Co were instructed with the
failure to instruct Mr Sellar direct, and instead allowing Mr Davis to do this.
The failure to directly instruct either a fully independent solicitor or to
comprehensively instruct the valuers (especially failing to require a full
report of the position as to planning permission and title) certainly
contributed to the bank’s loss and, therefore, the judge was entitled to make a
finding of contributory negligence.
As to the
percentage of contributory negligence, I regard the bank as being fortunate in
only being held 20% to blame in relation to the third tranche, but none the
less would not interfere with the conclusion of the judge.
There is only
one other feature of this case to which I should refer. That is to the £570,000
that the bank was in fact able to recover as a result of Old Bridwell being
sold at auction. If there had been any question of the bank being able to
succeed in its claim in relation to the first and second tranches, that sum
would have been able to be taken into account in relation to that claim. As it
is, that sum can be ignored.
I set out
earlier the role of this court in relation to appeals of this nature. For the
reasons that I have given, I would not interfere with the judge’s conclusions
on the individual relevant issues. I am gratified that this is the position
because I am satisfied that the judge’s overall decision meets the justice of the
case. I would therefore dismiss this appeal.
Appeal
dismissed. Leave to appeal to the House of Lords refused.
