● Building societies can sue valuation firms for negligence, but not an individual director
● Merrett v Babb applies only to employees
In Merrett v Babb [2001] EWCA Civ 214; [2001] 1 EGLR 145, the Court of Appeal held that a house buyer who complained of a negligent mortgage valuation was entitled to sue, not only the firm of valuers that the building society had employed but also the employee who had carried it out. This was harsh because the owner of the firm (a sole trader) had become bankrupt and the professional indemnity insurance policy that covered its employees had been cancelled.
This week, we draw attention to Bradford & Bingley plc v Hayes Dunphy & Hayes Ltd, decided on 25 July 2001, but unaccountably overlooked by law reporters. Here, a High Court judge ruled that, whatever harm Merrett may have done to employees, it does not extend to individual company directors.
Hayes concerned a 1991 mortgage valuation, commissioned by the claimants from Dunphys (West London) Ltd. The first defendant, Mr Hayes, a director of the company, carried out the inspection. He signed the valuation report in his own name, adding the usual certification that he was not disqualified under the Building Societies Act from making the report.
The flat had an unusual layout, being situated on the ground floor and the basement of a converted Victorian town house. There was considerable doubt as to whether the basement bedroom complied with local authority requirements as to natural light and ventilation.
However, Hayes valued the property, as a one-bedroom flat, at £130,000, apparently on the basis that the local authority might not intervene and, even if they did, further works could ensure compliance.
The judge held that the valuation was negligent. The property should have been valued as a studio flat, for which the appropriate value would have been around £95,000. It followed that the company was legally responsible for this negligence, and damages of £35,000 were awarded against it.
Quite why the claimants were keen to impose liability upon Hayes personally is not clear from the judgment. But keen they were, and the judge dealt with this issue first.
The claimants agreed that they had had no contract with Hayes, and that any liability on his part must arise under the law of tort. As to this, they argued that, having signed the valuation report in his own name, the valuer had assumed personal responsibility for its contents. This argument was supported by evidence from the claimants’ service manager, who said that he would always check to see who had signed a report and what his or her qualifications were.
Hayes’ counter-argument emphasised the fact that the claimants had instructed the company, not an individual. The report made clear on its face that it was provided by the company; the invoice was issued by the company; and it was to the company that the claimants addressed re-instructions. As to the signature, Hayes claimed that this was merely to assure the claimants that he was not disqualified. The claimants had, in effect, relied upon the company’s expertise.
In seeking support for this argument, Hayes looked to the House of Lords decision in Williams v Natural Life Health Foods Ltd [1998] 2 All ER 557. There, it was held that the managing director and main shareholder of a franchising company owed no personal duty of care to a prospective franchisee in respect of advice that he had given on behalf of the company. Such a duty could arise only if the director, as an individual, had voluntarily assumed personal responsibility for his words, and that the other party had relied upon this, rather than upon the expertise of the company itself.
Following the hearing in Bradford & Bingley, McKinnon J was inclined to follow Williams, and drafted a judgment to that effect. Before this could be delivered, the Court of Appeal decided Merrett. Counsel put in further submissions to deal with the new authority. The claimants argued that Merrett was decisive in their favour, and that it was irrelevant that the valuation practice in their case was a limited company. Hayes, however, pointed to passages in Merrett and Williams suggesting that, where a company director is concerned, an assumption of responsibility requires overt and direct dealings between that director and the claimant. He also pointed out that a building society in a case of this kind needed no rights against an individual valuer; its contract with the company gave it sufficient protection.
McKinnon J saw no reason to change his view; to impose personal liability upon an individual director would undermine the cornerstone of company law the separate legal personality of the company. In the present case, no direct dealings had taken place between the claimants and Hayes, and the latter was accordingly not liable.
Valuers will be delighted, but serious questions remain. To say that the claimants were adequately protected by their rights against the company begs the question: what happens if the company has become insolvent (the corporate equivalent of Merrett)? The question of whether an individual owes a personal duty of care can surely not turn upon the subsequent financial fate of the employer.
Second, an odd effect of the decisions is to give stronger rights to a non-client (the house purchaser in Merrett) than to the client who is paying for a service (the building society here). And, third, Bradford & Bingley reinforces the unpalatable result of Merrett and Williams combined: the law gives greater protection to company directors than to mere employees.
John Murdoch, professor of law, Reading University
