by Gilead Cooper
The principles governing the measure of damages recoverable from a negligent surveyor are well established; the plaintiff should be put in as good a position as if the surveying contract had been properly fulfilled: Philips v Ward [6] 1 WLR 471. Sometimes the formula is stated differently: the damages are such as could fairly and reasonably be considered as resulting naturally from the failure of the defendant to report as he should have done. These are, of course, no more than restatements of the general rule for damages for breach of contract. If the claim is brought in tort, the plaintiff is entitled to recover the loss which he has sustained as a result of acting in reliance on the negligent valuation. Yet these apparently simple principles are capable of leading to conclusions which sometimes appear paradoxical and the courts do not always find it easy to apply them consistently.
One such case recently came before the House of Lords. In Swingcastle Ltd v Gibson [1] 17 EG 83 a mortgagee had advanced £10,000 on the basis of a negligent over-valuation of the security. Interest on the loan was payable at a rate of 37%, with a default rate of 45%. The mortgagors defaulted; the mortgagees obtained possession and eventually sold the house for £12,000. This left a shortfall — including interest at the default rate and the costs of the sale — of £7,136, which the mortgagees claimed as damages from the valuer. The crucial question was whether the plaintiffs were entitled to interest at the default rate specified in the mortgage, or whether they were limited to interest at the normal commercial rate (ie under section 35A of the Supreme Court Act 1981). The mortgagees succeeded in their claim for the higher rate before the judge at first instance, and the Court of Appeal upheld his award [1990] 2 EGLR 149; [1990] 34 EG 49, considering itself bound by its own previous decision in Baxter v F W Gapp & Co Ltd [1939] 2 KB 271.
At first sight this may look like the right result: the whole of the shortfall could reasonably and fairly be said to have resulted from the valuer’s negligence. This was, indeed, the view taken by one of the judges in the Court of Appeal, Sir John Megaw. Thus in Baxter v Gapp, MacKinnon LJ said that “… the measure of damages in such a case as the present is that which the plaintiff has lost by being led into a disastrous investment …”. As a result of the deficiency in the value of their security, the mortgagees were unable to recover part of the money due to them under the mortgage, and the valuers were liable to restore this shortfall.
However, this analysis rests on a logical fallacy and is irreconcilable with general principles. Indeed, two of the judges in the Court of Appeal, Neill LJ and Farquharson LJ, indicated that, had they not regarded themselves as bound by authority, they might have decided the case differently and that “the authorities are not entirely satisfactory in resolving the question whether a mortgagee in these circumstances is entitled to recover loss of contractual interest under the mortgage from the negligent valuer”. The House of Lords has now reversed the Court of Appeal’s decision and, without explicitly overruling Baxter v Gapp, has made it clear that the principle which it was thought to represent is not good law.
Mortgagee and purchaser
As the law stood before the House of Lords ruling in Swingcastle, the lender who advanced money on the strength of a negligent over-valuation was treated differently from a purchaser who bought the property. In Philips v Ward Morris LJ distinguished Baxter v Gapp on the basis that the plaintiff in Baxter v Gapp had been a lender rather than a purchaser. However, it is difficult to see why the same principle should not apply to both purchasers and lenders: in neither case does the valuer give a warranty that the property is worth the amount stated in his valuation. If a purchaser pays too much for a property in reliance on a negligent valuation, his damages are the difference between the purchase price and the true value of the property at the date of purchase: Perry v Sidney Phillips & Son (1982) 263 EG 888. The loss he has suffered as a result of the valuer’s negligence is the amount of his overpayment, not the difference between what he paid and what the property would have been worth if the valuer’s report had been true, and he cannot recover instead the costs of putting the property into repair, even if these are greater.
On the other hand, where the plaintiff is a lender rather than a purchaser, the position is more complicated. The textbooks draw a distinction between two types of case: in the first type, the lender would still have lent money even if the valuation had been properly carried out, but he would only have lent a smaller amount; in the second type, there would, of course, have been no loan at all. In both cases the prima facie measure of damages is the difference between the amount of the loan and the amount that would have been lent had the valuation been made properly. If no loan had been made, the second figure would, of course, have been nil: the lender recovers the whole of his loan. In both cases credit must, of course, be given for any money actually received in the form of repayments by the borrower or the net proceeds of sale.(1) However, Baxter v Gapp had apparently decided that in the second type of case (where no loan would have been made if the valuation had not been negligent) the lender could recover the entire shortfall due under the mortgage.
In Swingcastle v Gibson, Lord Lowry (with whose speech the other Law Lords all agreed) subjected Baxter v Gapp to detailed scrutiny. Although the issue throughout that case had been the measure of damages recoverable from the valuer, it was not at all clear from the reports that the crucial question of interest had been properly addressed. Lord Lowry concluded:
My Lords, Baxter v Gapp is not an attractive precedent. For one thing, it does not clearly exemplify the proposition contended for by the lenders, even if that proposition can be teased out of it; secondly, the dispute was about all the plaintiff’s consequential damages and the pecuniary effect of the difference in interest rates (say, 1/2% in relation to the initial advance of £1,200 and 3 1/2% in relation to the initial advance of £150) was relatively insignificant; and, thirdly and most important, the aggrieved party was entitled to be placed in the same position as if the wrong had not occurred, and not to receive from the wrongdoer compensation for lost interest at the rate which the borrower had contracted to observe.
The House of Lords’ ruling brings the damages recoverable in the Baxter v Gapp type of case into line with the cases of the first type, where the loan would have been of a smaller amount. Examples of the correct approach may be found in Singer & Friedlander Ltd v John D Wood & Co (1977) 243 EG 212 and in Corisand Investments Ltd v Druce & Co (1978) 248 EG 315, which were both cases where loans of a smaller amount would have been made if the valuation had not been negligent. In London & South of England Building Society v Stone, O’Connor LJ said that he did not understand why Gibson J in Corisand had disallowed the claim for contractual interest, and this remark (strictly obiter) was quoted by Farquharson LJ in Swingcastle. However, the exclusion of contractual interest necessarily follows from the general rule. The lender is restored to the position he would have been in given a proper valuation.
The surprising consequence of this rule is that the lenders may actually lose more than they are able to recover. In both Singer & Friedlander and Corisand Investments, for example, the losses sustained were greater than the sums awarded, as was recognised by Neill LJ: “In the Singer & Friedlander case the security was worth £900,000 less than the sum lent. In the Corisand case the security was worthless to the lenders because on the borrowers’ default the property had been taken by the first mortgagees.” Nevertheless, it is important to appreciate that these are losses that would have been suffered anyway. The effect of making the valuers liable for the additional loss would be to treat them not merely as warranting the value stated in their report but warranting that the property would continue to hold that value during the entire period of the mortgage (or at least until the period of limitation for any action against the valuers had expired). This argument was forcefully expressed in the Canadian case, Lowenburg Harris & Co v Wooley (1895) 25 SCR 51:
The effect of this judgment would be to make the appellants not only responsible for such damages as were caused by the negligent performance of their duty as the respondent’s agents, in over-valuing the mortgaged property, but also for any depreciation (if any there has been) in the actual value of the property subsequent to the loan.
Although the lender cannot look to the valuer for his “lost” interest — in reality a profit which he has failed to make rather than a loss — he may be able to put forward positive evidence that he could have lent the same money at the same rate of interest to another borrower who would not have defaulted. This possibility was considered by Neill LJ: “This evidence would have to be directed to proving an unsatisfied demand for loans and I anticipate that such evidence might seldom be forthcoming.” However, there was no cut and dried solution to the problem of calculating damages in every type of case.
Neill LJ’s reasoning was quoted extensively by Lord Lowry in the House of Lords. Since the lenders would have made the loan in any event, any losses attributable to the default of the borrowers were not caused by the negligence of the valuers. As Lord Lowry put it: “The fallacy of the lenders’ case is that they have been trying to obtain from the valuer compensation for the borrower’s failure and not the proper damages for the valuer’s negligence.” The legal costs of entering into the mortgage and the costs incidental to realising the security would have been incurred by the lenders in any event.
Limitation period
The lender suffers damage as soon as the mortgage is executed, since the value of his security is less than it ought to have been. This is so even though the damage will materialise in the form of financial loss only if the mortgagor defaults and the net proceeds of sale from the property are insufficient. The point is important when one comes to consider the question of limitation of actions, since the limitation period in tort runs from the date on which the damage occurs. Thus where the mortgagee has lent money in reliance on a negligent overvaluation, time begins to run at the moment when the advance is made on the strength of inadequate security.
However, it was said by Sir John Megaw in the Court of Appeal that “the loss is incurred if and when the lender, validly under the loan contract, realises the security, and the amount realised is less than the amount due under the loan contract, including expenses properly incurred, and allowing for all payments made by the borrower.”
This passage was quoted, without apparent disapproval, by Lord Lowry in the House of Lords. However, it is submitted that this is entirely irreconcilable with Court of Appeal authorities on limitation such as Forster v Oughtred & Co [2] 1 WLR 86 and Bell v Peter Browne & Co [1990] 2 QB 495 which hold that the damage occurs as soon as the negligent advice is acted on. The limitation period was not in issue in Swingcastle, and it cannot have been the intention of the House of Lords to overrule Forster v Oughtred.
Other arguments
In Swingcastle v Gibson no point seems to have been taken on the two different rates of interest due under the mortgages, the ordinary rate and the default rate. Both were unusually high, since the mortgage was a so-called “non-status” (ie high-risk) mortgage. There are old authorities to the effect that provisions of this kind, requiring the payment of a higher rate of interest on default, are normally void as penalty clauses, although it is possible to achieve the effect of a default rate of interest in a mortgage by specifying the higher rate as the normal rate, and then providing for a discount for prompt payment.(2) However, there is no indication in the report that the mortgage in Swingcastle was in this form. It may be that the supposed rule about penalties is not sound.
Another question which sometimes arises is whether any attention should be given to the liability of the borrower. In most cases of this type, the borrower is ex hypothesi unable to pay. However, it has sometimes been argued on behalf of the valuer that his own liability should be reduced by an amount assessed by the court as the value of the borrower’s covenant to pay. This happened in London & South of England Building Society v Stone, where the lenders had expressly elected not to try to recover money from the borrower. Russell J made a discount of £3,000 but was reversed on appeal by the Court of Appeal. It is not clear from the report why the valuers did not join the borrower as a third party, claiming a contribution under the Civil Liability (Contribution) Act 1978, and it is suggested that this may be the appropriate course for the valuer in a suitable case.
Conclusion
The House of Lords’ recent ruling is to be welcomed. The liability of valuers towards lenders has been brought back into line with their liability towards purchasers, and the cases are now treated consistently whether or not there would have been a loan in any event. It might, perhaps, have been simpler for the House of Lords to declare that Baxter v Gapp was wrongly decided, but in practical terms the result is the same.
(1) For reasons that are not all clear, a small repayment of capital was disregarded by the Court of Appeal in London & South of England Building Society v Stone [3] 1 WLR 1242, per O’Connor LJ, even though the lenders had apparently conceded that the sum should be credited in favour of the valuer (per Sir Denys Buckley (dissenting)).
(2) See Fisber & Lightwood on the The Law of Mortgages (1988) 10th ed, p 654, where this proposition is described as “a well-settled, if not an intelligible rule”.
