Negligence — Valuation report — Whether disclaimer effective against unknown lender — Whether duty of care negatived — Whether disclaimer satisfied reasonableness test under Unfair Contract Terms Act 1977
In July 1991 N
Ltd sought a loan from the first plaintiff, who requested the second plaintiff
bank to participate in providing part of the advance. At the first plaintiff’s
request, the defendant valuers provided a retyped copy of a valuation report
they had prepared in January of three short leasehold interests owned by N Ltd
and to be provided as security. The report made clear that it was for the first
for private and confidential use of the clients for whom the report was undertaken,
that it should not be reproduced or relied on by third parties for any use
whatsoever without express authority. The defendant valuers were not informed
that the second plaintiffs would rely on the report. N Ltd defaulted on the
loan. The plaintiffs claimed that the valuation was negligent. On the hearing
of an application by the defendant valuers under RSC Ord 14A, Morland J held
that they owed a duty of care to the second plaintiff, that that duty was
negatived by the disclaimer, but the disclaimer did not satisfy the test of
reasonableness under the Unfair Contract Terms Act 1977. The valuers appealed.
disclaimer, and no duty of care could be implied on behalf of the defendant
valuers to the second plaintiff, as an unknown lender. The disclaimer notice
was effective as against the second plaintiff; they were not the valuers’
client, however close the relationship was between the two plaintiffs. The
valuers were entitled to know who their clients were and to whom the duty was
owed. They were entitled to refuse to assume liability to any known lender to
whom they had not agreed, and entitled to increase the fee. The disclaimer was
not unfair, it was not unreasonable, it was fatal to the second plaintiff’s
claim; there was no public policy objection to the disclaimer under the terms
of the Unfair Contract Terms Act; the conclusion the judge reached was outside
the margin of appreciation afforded to him.
The following
cases are referred to in this report.
Candler v Crane, Christmas & Co [1951] 2 KB 164; [1951] 1 All ER
426, CA
Caparo
Industries plc v Dickman [1990] 2 AC 605;
[1990] 2 WLR 358; [1990] 1 All ER 568, HL
Galoo Ltd
v Bright Grahame Murray (a firm) [1994] 1
WLR 1360; [1995] 1 All ER 16, CA
Goodwill v British Pregnancy Advisory Service [1966] 1 WLR 1397;
[1996] 2 All ER 161, CA
Hedley
Byrne & Co Ltd v Heller & Partners Ltd
[1964] AC 465; [1963] 3 WLR 101; [1963] 2 All ER 575; [1963] 1 Lloyd’s Rep 485,
HL
Henderson
v Merrett Syndicates Ltd [1995] 2 AC 145;
[1994] 3 WLR 761, HL
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
White v Jones [1995] 2 AC 207; [1995] 2 WLR 187; [1995] 1 All ER
691, HL
This was an
appeal by the second defendants, Barker & Co, from a decision of Morland J,
who had given judgment for the plaintiffs, Omega Trust Co Ltd and Banque
Finindus, on a summons issued by the second defendants under RSC Ord 14A in proceedings
by the plaintiffs against the first defendants, Wright Son & Pepper, and
the second defendants for damages for negligence.
Rupert Jackson
QC and Alison Millar (instructed by Cameron Markby Hewitt) appeared for the
appellant second defendants; Roger Smith (instructed by Hugh Cartwright &
Amin) represented the second plaintiff; Michael Gadd (instructed by Ince &
Co) represented the first defendant; the first plaintiffs, Wright Son &
Pepper, did not appear and was not represented.
Giving first
judgment at the invitation of Leggatt LJ, Henry
LJ said: Nantell plc owned three short leasehold interests in small
supermarkets in central London. Mr Sharif controlled Nantell and he became the
guarantor of certain loans made to Nantell secured on those three properties.
Mr Barker frics, was a partner in
the second defendants, Barker & Co, who were professional valuers. In
connection with the indebtedness of the company to the bank, he was instructed
by the company’s clearing bank to value these short leasehold interests on the
three properties on an open market bricks and mortar basis. He had previously
valued certain residential properties for Mr Sharif. He was instructed by the
bank (this was in January 1991) that the valuations were to be sent to the bank
and that the invoice was to be sent to Mr Sharif.
On January 15
1991 he performed the task. He valued the properties together at £945,000 and
he sent a valuation, expressed to be for Nantell plc, containing a disclaimer,
the terms of which must be examined later, as those terms are attacked under
the provisions of the Unfair Contract Terms Act 1977.
In June 1991
Mr Sharif applied on Nantell’s behalf for a loan from the first plaintiffs,
Omega Trust Co Ltd (‘Omega’). He intended to consolidate his existing
borrowings from the National Westminster and Barclays with this new loan which
was to replace them. The second plaintiffs, a bank called Finindus, were
closely linked with Omega. They were linked through a Mr Dubois who was a
director of both and the chairman of one. In the past (though of course the
valuers knew none of this) they had participated together in making loans,
those loans being called syndicated loans in the sense of having two or more
financiers to lend the money to the borrower.
In July of
that year Omega asked the Finindus bank to participate in the loan. The bank
agreed subject to obtaining an independent valuation (this is what they told
Omega), valuing the three properties at not less than £750,000. The proposed
division of the loan was that 40%, or £150,000 should be lent by Omega, and the
remaining £200,000 by the bank. That loan was agreed subject to valuation. On
July 30 Omega rang Barker & Co to ask to be provided with the valuation. They
did not say anything about Banque Finindus. Barker & Co knew the purpose
and the terms of the loan, but they had no actual knowledge of Banque Finindus
nor of any lender other than the first plaintiff, Omega, nor did they know of
any connection between Omega and Finindus.
The valuation
that had originally been prepared for the clearing bank was retyped; a
paragraph relating solely to requirements of the bank was omitted; the heading
was changed; it was now made clear that the valuation was ‘for Omega’ and the disclaimer
stood in exactly the same terms as before, namely it said:
This report
shall be for private and confidential use of the clients for whom the report is
undertaken and should not be reproduced in whole or in part or relied upon by
third parties for any use whatsoever without the express written authority of
the surveyors.
As part of the
transaction whereby Omega were made the client, they were invoiced for some £30
plus VAT, and the loans were completed on October 28. It was pleaded on the
plaintiffs’ behalf that at that date the security was insufficient, indeed it
was pleaded that the securities were valueless, and shortly thereafter the
company went into liquidation without repaying any of the loan; the securities
proved valueless and the lenders sought to recover their loss from two
defendants (and we are only concerned here with the valuers) alleging
negligence against them.
The valuers
applied under RSC Ord 14A, on the question as to whether they owed a duty of
care to the undisclosed lender, Finindus. The judge at first instance, Morland
J, after a contested hearing, agreed that it was a proper case for Ord 14A, and
the parties went on to argue that point as to whether a duty was owed by the
second defendants, the valuers to the bank.
There were
three issues raised before the judge. The first issue was: absent an effective
disclaimer, did the valuers owe a duty of care to the bank in respect of the
three valuation reports sent to Omega? The judge found that they did owe such a
duty. The second issue related to the disclaimer: would the disclaimer, if
effective, negative such a duty of care? The judge found that it would. The
third issue was: does the disclaimer notice satisfy the requirement of
reasonableness under the Unfair Contract Terms Act 1977? The judge found that
it did not. He was not satisfied that the disclaimer was fair and reasonable
and therefore the disclaimer notice was not effective.
In relation to
the first issue, the duty of care, we are of opinion that as, in our judgment,
there was a good and effective disclaimer in this case, it is hypothetical as
to whether a Hedley Byrne duty would have been owed to the unknown
lender in the absence of such a disclaimer, because, as the headnote in Hedley
Byrne puts it, ‘we find there to have been an express and effective
disclaimer. No duty can be
why there would not in any event have been a duty made by Mr Rupert Jackson QC
on behalf of the valuers in this case.
The judge
found that there was such a duty in the following passage. He first made the
point that the second defendants were professional valuers, valuing to bankers:
… whom they
knew would rely upon them for the express purpose of which they knew in deciding
whether to grant loans with an upper limit of £750,000 to their clients,
Nantell Plc, controlled by Mr Sharif, who was also in effect their client.
He then
continued in this way:
Viewed
objectively the second defendants ought to have foreseen the reasonable possibility
that the grant of the loans might not be made solely by the first plaintiffs
but might have been syndicated by them or made in association with another bank
whom the second defendants ought to have foreseen would rely upon the
valuations for the express and very same purpose for which they were provided
to the first plaintiffs. In my judgment, it is immaterial that the second
defendants did not know the name of the second plaintiffs or even the actual
existence of the second plaintiffs. What is material is that they should have
foreseen the existence of some such bank whom they ought to have known would be
likely to have relied upon the valuations for the purpose for which they were
provided.
(Emphasis
supplied.)
Mr Jackson
submitted that as a matter of law, the bare possibility that the first
plaintiffs’ loan might not be made solely by the first plaintiffs was not
enough. He submitted that under the Hedley Byrne test there had to be a
probability that the grant of the loans might not be made solely by the first
plaintiffs. He addressed us with a forcible and sustained submission on that
point, and it may be useful for any future occasion when the point may be
considered, simply to refer to the authorities he cited: Candler v Crane,
Christmas & Co [1951] 2 KB 164; Hedley Byrne & Co Ltd v Heller
& Partners Ltd [1964] AC 465; Smith v Eric S Bush (a firm)
[1990] 1 AC 831*; Caparo Industries plc v Dickman [1990] 2 AC
605; Galoo Ltd v Bright Grahame Murray (a firm) [1994] 1 WLR
1360; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145; White
v Jones [1995] 2 AC 207; Goodwill v British Pregnancy Advisory
Service [1996] 1 WLR 1397.
*Editor’s
note: Also reported at [1989] 1 EGLR 169
Those were the
authorities that he relied on. That point is for decision another day. On the
findings we have made it does not become a live issue in this case.
Turning to the
second issue, the effect of the disclaimer, it is submitted by Mr Roger Smith
for the bank, is that there was no breach of the disclaimer in this case. That
submission turns on a proper construction of the disclaimer. He submits that,
properly construed, ‘clients’ must be taken to mean not only Omega, but any
closely related party to Omega, and would only be excluded in relation to a
total stranger. He makes the point that there was a close relationship between
Omega and the bank, as I have already summarised, and therefore they came
within the ambit of clients. But the bank was a separate legal entity; the
borrower was entirely ignorant of it. As a matter of construction, the only
clients in relation to the valuation were the clients named as the clients (who
the valuation was for), that is to say, Omega. On the facts of this case, a
lender unknown to the valuer is not the valuer’s client, however close his
relationship with the known lender client (Omega) might have been. Accordingly,
in relation to the second issue, the disclaimer notice, it effectively would
negative any duty of care that there might be.
The next
question relates to whether the disclaimer notice satisfied the requirements of
reasonableness under the Unfair Contract Terms Act 1977. That was an Act
imposing limits on the extent to which liability for, inter alia, breach
of contract could be avoided by contractual terms. The context set by the Act
in section 1(3)(a) is in relation to things done by a person in the course of a
business. We are here concerned with negligent liability under section 2(2)
which reads:
In the case
of other loss or damage, a person cannot so exclude or restrict his liability
for negligence except in so far as the term or notice satisfies the requirement
of reasonableness.
The
reasonableness test is dealt with in section 11(3) which reads as follows:
In relation
to a notice (not being a notice having contractual effect) the requirement of
reasonableness under this Act is that it should be fair and reasonable to allow
reliance on it, having regard to all the circumstances obtaining when the
liability arose or (but for the notice) would have arisen.
That then is
the statutory background.
The next
matter is to distinguish the commercial setting between commercial bodies in
this case from the ordinary domestic householder purchasing his home such as
was considered in Smith v Bush to which I have already referred.
There Lord Griffiths in his speech at p859 said:
But I
expressly reserve my position in respect of valuations of quite different types
of property for mortgage purposes, such as industrial property, large blocks of
flats or very expensive houses. In such cases it may well be that the general
expectation of the behaviour of the purchaser is quite different. With very
large sums of money at stake prudence would seem to demand that the purchaser
obtain his own structural survey to guide him in his purchase and, in such
circumstances with very much larger sums of money at stake, it may be
reasonable for the surveyors valuing on behalf of those who are providing the
finance either to exclude or limit their liability to the purchaser.
The point made
on behalf of the second plaintiff to us was that Lord Griffiths was there
dealing with a lender/purchaser situation and so that passage does not apply by
way of analogy in this case. In my judgment it does. The point that Lord
Griffiths was making was that in a transaction involving a lot of money in a
commercial context, both parties are well able to look after themselves, and it
is not necessary to have any statutory protection for them. It is that point
which, in my judgment, distinguishes this commercial case from those purchases
of domestic houses with which other cases have dealt.
Lord Griffiths
in his speech dealt with various matters for and against that the court would
need to take into consideration. The judge considered them. He pointed out,
rightly, that the burden of proof to sustain the exemption clause was on the
valuer. Next he found that the parties were of equal bargaining power. That
conclusion is not challenged. In a commercial context, it would seem to me to
point to upholding the exclusion clause rather than not.
The next point
raised by Lord Griffiths and considered by the court was whether it would have
been reasonably practicable for the bank to have obtained a valuation for
themselves. Obviously it would have been. It would have been the easiest thing
in the world either to go and get their own independent advice, or to do what
the disclaimer would, in the ordinary course of business, prompt them to do,
that is to say, to get in touch with the valuer and ask the valuer as to
whether they too could rely on the valuation given. Accordingly, the judge
found that it was reasonably practicable and that, in my judgment, would also
be another pointer in relation to the valuer’s assertion in submissions in
support of this clause.
Next, here
there was no hurry or cost imperative that would point against that conclusion.
The fourth point is that this valuation was a straightforward, easily
duplicated task. There could be no question of the bank being unable to get a
valuation done, and done in the time.
The next and
important point to be considered is the practical consequences of the matter
one way or the other. Viewed at the moment of breach under section 13(3) when
the liability, but for the notice, would have arisen, at that time the valuers
would have discovered for the first time that there was a second lender, that
that lender had taken responsibility for 60% of the loan without either getting
in touch with them or anyone notifying them or seeking their permission, or
making any payment to them. But for that lender appearing on the scene, the
valuer’s liability if negligent would have been to Omega alone, but that liability
would have been for the same sum of money whether there was one lender or two.
At this moment
it is necessary to look at the purpose of the disclaimer. The first and obvious
purpose of the disclaimer, as obtained by construction of the document, is to
limit the assumption of responsibility to Omega and to no one else. It was
clearly entered into to assure clarity, to assure transparency and to assure
certainty. The valuer was entitled to do all that could be done to prevent
himself having to fight a difficult law suit as to whether he owed a duty to an
unknown lender. If his disclaimer had been complied with by either Omega or by
the bank, that would have been the position. If his document had been complied
with and consent from him had been sought, he could, had he wished, have
declined to assume the additional responsibility. It can, in certain
circumstances, be more onerous in fact to face potential claims from two
plaintiffs who may be separately represented, and in relation to whom there may
be two measures of damage appropriate, than to face claims from one, though
that point pales into insignificance beside the point that what he had been
deprived of was a position where everything would have been clear and certain
and he had, through no fault of his own, a position where he could only rely on
the terms of the disclaimer after fighting a difficult law suit in relation to
it.
Against this
the bank submits that this is simply an uncovenanted benefit to the valuer, and
it would be unreasonable to let him rely on it. Unreasonable because, had in
fact they asked permission of him, he probably would have granted permission.
As to whether he would have granted permission or not, we will never know
because he was never asked. Certain it was that no fee was paid to him and that
he would have been entitled to a fee had permission been sought of him.
It seems to me
that this professional valuer, valuing expensive properties in a commercial
context, was entitled to know who his client was and to whom his duty was owed.
He was entitled, it seems to me, to refuse to assume liability to any unknown
lender, indeed, I would go further and say that he is entitled to refuse to
assume liability to any known lender to whom he had not agreed. He was entitled
to increase the fee (or would have been) as a term of permitting the second
lender to rely on the valuation because, as I have said, potentially it can be
more expensive to be sued by two lenders rather than one. And if the second
lender was not prepared to pay what is asked, it seems to me that the valuer
would have been entitled to refuse to assume that liability to the bank, and
the 1977 Act would not have required the contract to be rewritten. Here it may
be said by way of comment that Omega themselves when they were introduced
recognised the valuer’s right to know who his client was. They acted properly,
sought his permission and became clients. They received his report and the
disclaimer; they never objected to the terms of the disclaimer; they never
asked for permission to disclose it to their co-lenders; they were prepared to
approbate the contract in the sense of acting and relying on the disclaimer,
but they seem to have reprobated it by disclosing it to their co-lenders
without having obtained the permission of the valuers first. If they had raised
the question with the valuers, the bank could have been accepted as clients and
risk could have been assumed to them: but only if the valuers were prepared to
assume responsibility, and not otherwise.
It seems to me
prima facie that Omega were only entitled to put the valuation before
the bank for reliance if they had sought permission from the borrowers, and the
fact they did not would, on the face of it, seem to be a prima facie
breach of contract on their part unless the clause was unlawful under the Act.
On the basis
of all those considerations, I am satisfied: first that the disclaimer is not
unfair; second, that the disclaimer is not unreasonable; third, that the
disclaimer is fatal to the bank’s claim; fourth, that there is no public policy
objection to the disclaimer under the terms of the Unfair Contract Terms Act or
otherwise; and, fifth, (though this is a matter of balancing conflicting
interests and the appreciation of that balance is first and foremost to the
trial judge) that the conclusion that the judge here reached was outside the
margin of appreciation that is afforded to him, and in the circumstances, in my
judgment, wrong. Therefore, for those reasons, I would allow this appeal.
Hutchison LJ
agreed and did not add anything.
Also agreeing,
Leggatt LJ said: In my
judgment, the appellants, by the words which each of their valuation reports
contain, effectively disclaimed any assumption of a duty of care in relation to
any person other than Omega. I have no doubt that, having regard to all the
circumstances specified by Henry LJ, it is fair and reasonable to allow
reliance on the disclaimer. The appeal will therefore be allowed. We will
declare that Barker & Co owed no duty of care to the bank in respect of the
valuation reports, and unless cause be shown to the contrary, the bank’s claim
against Barker & Co will be dismissed with costs.
Appeal
allowed.
