Valuations for mortgage lenders — Negligence — Assessment of damages — Whether damages in no-transaction mortgage lending cases included losses attributable to fall in property values
In all six appeals
the plaintiffs lent money secured by mortgages on the properties concerned. In
each case the mortgagee defaulted and the respective plaintiff obtained
possession and sold the property at a price less than the sum advanced,
property values having fallen between the date of the advance and date of sale.
In the first five appeals the claims were against valuers for negligently
overvaluing the land in question. In the sixth appeal the claim was against the
solicitors for breach of a duty to report to the lenders information which came
into their possession which cast doubt on the accuracy of the valuation
prepared by the valuer. In each case there was a finding of negligence or
breach of duty. The common issue on appeal was whether damages recoverable for negligence
in these circumstances included losses due to the fall in property values.
Held: Such
losses were recoverable.
1. The duty: A valuer’s dub in contract
or tort to a lender is to take reasonable care to give a reliable and informed
opinion on the open market value of the land in question at the date of
valuation. In the present appeals the valuers were not simply wrong, which
gives rise to no liability, but that in each case the valuer expressed an
opinion that the land was worth more than any careful and competent valuer
would have advised. In the absence of special instructions, it is no part of a
valuer’s duty to advise on future movements in property prices; his valuation
is not sought to protect the lender against a future decline in property prices.
2. The loss: In each appeal there was a
finding by the trial judge that, had the valuer provided a non-negligent
valuation, no loan transaction would have occurred. Accordingly, on an
application of the restitutionary principle, the lender is entitled to recover
as damages: (a) the sum advanced; (b) the costs, if any, of borrowing the money
or, if he did not, the income he would have earned by investing elsewhere; and
(c) the costs of repossession and realising his security. Against those items
the lender must give credit for any sums received by way of interest and the
price obtained on sale.
3. Causation: Where a valuer’s negligence
causes a lender to make a loan transaction he would not otherwise have made,
the valuer is liable for all the loss which the lender suffers unless too
remote or it is the result of a new intervening cause. It is commercially
unrealistic to seek to separate the risk of negligent overvaluation and the
risk of a fall in the market and to ascribe different causes to each. Certain
general conclusions can be drawn from the decided English and Commonwealth
authorities on negligent valuations. (1) Where a buyer of a property is
claiming damages for negligence in a successful-transaction case the diminution
in value rule (normally assessed at the date of the breach) ordinarily provides
an accurate measure of the buyer’s loss. (2) In a no-transaction purchase case
effect will be given to the restitutionary principle by awarding the buyer all
he has paid out less what he has recovered. (3) A mortgage loan differs from a purchase because the lender is
concerned to be repaid and with interest, the lender may not realise his
security unless the borrower defaults and the lender is interested in the
property only as security. Accordingly, even with a negligent valuation and an
excessive loan, the lender may suffer no loss; a measure of the recoverable
damages by reference to the diminution in value of the security as opposed to
the amount of the loan not recovered cannot, except coincidentally, be the
measure of the damages sustained by the lender. (4) In successful-transaction
mortgage lending cases where the lender does realise his security, the practice
has been to treat the difference between what was advanced and what would have
been advanced on a proper valuation as the upper limit of what a lender can
recover in damages. Within that upper limit the element of a lender’s loss
attributable to a fall in the property market is not to be separated out and
disallowed. (5) In no-transaction mortgage lending cases the practice has been
to award the lender his net loss; if a rise in the market contributed to the
amount recoverable on resale, that contribution will not be ignored. (6) If in
such a case a fall in the property market occurs which contributes to the
lender’s overall loss sustained as a result of entering into the transaction,
on an application of the restitutionary principle the lender should be able to
recover that element of loss against the negligent party. (7) Since the
valuer’s negligence caused the lender to enter into the transaction, which he
would not otherwise have done, that negligence is the effective cause of the
loss; the market fall is not a new intervening cause which has broken the link
between the valuer’s negligence and the damage suffered.
4. Remoteness: It was plainly
foreseeable that if, on the strength of an overvaluation by a valuer, a lender
entered into a mortgage transaction he would not otherwise have entertained,
his risk of loss would be increased if the market moved downwards or reduced if
it moved upwards.
5. Policy: The Court of Appeal was not
asked to rule that a lender is disentitled on policy grounds to recover that
part of his loss which is attributable to the fall in the property market and
it did not do so.
The following
cases are referred to in this report.
Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310
Aveo
Financial Services v Holstein (1980) 109 DLR
(3d) 128
Banque
Financière de la Cité SA v Westgate Insurance Co
Ltd, sub nom Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990]
1 QB 665; [1989] 3 WLR 25; [1989] 2 All ER 952, CA; [1991] 2 AC 249; [1990] 3
WLR 364; [1990] 2 All ER 947, HL
Baxter v F W Gapp & Co Ltd [1938] 4 All ER 457; [1939] 2 KB
271; [1939] 2 All ER 752; (1939) 55 TLR 739, CA
British
Westinghouse Electric & Manufacturing Co Ltd v Underground
Electric Railways Co of London Ltd [1912] AC 673; (1912) 81 LJKB 1132; 107
LT 325
Caparo
Industries plc v Dickman [1990] 2 AC 605;
[1990] 2 WLR 358; [1990] 1 All ER 568, HL
Corisand
Investments Ltd v Druce & Co [1978] EGD
769; (1978) 248 EG 315, 407, 504
County
Personnel (Employment Agency) Ltd v Alan R
Pulver & Co [1987] 1 WLR 916; [1987] 1 All ER 289; [1986] 2 EGLR 246,
CA
Duncan
& Weller Pty Ltd v Mendelson [1989] VR
386
Dunkirk
Colliery Co v Lever (1878) 9 ChD 20
Eagle
Star Insurance Co Ltd v Gale & Power (1955)
166 EG 37
First
National Commercial Bank plc v Humberts
[1995] 1 EGLR 142; [1995] 14 EG 140
Ford v White & Co [1964] 1 WLR 885; [1964] 2 All ER 755;
[1964] EGD 283; (1964) 190 EG 595
Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360, CA
Hayes v James & Charles Dodd (a firm) [1990] 2 All ER 815
Iron
& Steel Holding & Realisation Agency v Compensation
Appeal Tribunal [1966] 1 WLR 480; [1966] 1 All ER 769, DC
Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, HL
London
& South of England Building Society v Stone [1983]
1 WLR 1242; [1983] 3 All ER 105; [1983] EGD 921; (1983) 267 EG 69
Lowenburg,
Harris & Co v Wolley (1895) 25 SCR 51
March v E&MH Stramare Pty Ltd (1991) 171 CLR 506
McElroy
Milne v Commercial Electronics Ltd [1993] 1
NZLR 39
Perry v Sidney Phillips & Son [1982] 1 WLR 1297; [1982] 3 All
ER 705; [1982] EGD 412; (1982) 263 EG 888, CA
Philips v Ward [1956] 1 WLR 471; [1956] 1 All ER 874, CA
Pilkington v Wood [1953] Ch 770; [1953] 3 WLR 522; [1953] 2 All ER 810
Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370; [1966] 2 WLR
1017; [1966] 2 All ER 283, CA
Raylon
Investment Ltd v Bear Realty Ltd (1981) 20
RPR 288
Robinson v Harman (1848) 1 Exch 850, [1843–60] All ER Rep 383, 18 LJ
Ex 202, 13 LTOS 141
Royscott
Trust Ltd v Rogerson [1991] 2 QB 297; [1991]
3 WLR 57; [1991] 3 All ER 294, CA
Rumsey v Owen White & Catlin [1978] EGD 730; (1978) 245 EG 225,
CA
Scholes v Brook (1891) 63 LT 837; 7 TLR 214; affd 64 LT 674
Seeway
Mortgage Investment Corporation v First Citizens
Financial Corporation (1983) 45 BCLR 87
Singer
& Friedlander Ltd v John D Wood & Co [1977]
EGD 569; (1977) 243 EG 212 & 295
Swingcastle
Ltd v Alastair Gibson (a firm) [1990] 1 WLR
1223; [1990] 3 All ER 463; [1990] 2 EGLR 149; [1990] 34 EG 49, CA; [1991] 2 AC
223; [1991] 2 WLR 1091; [1991] 1 EGLR 157; [1991] 17 EG 83, HL
Trade
Credits Ltd v Baillieu Knight Frank (NSW) Pty
Ltd (1988) 12 NSWLR 670
Watts v Morrow [1991] 1 WLR 1421; [1991] 4 All ER 937; [1991] 2
EGLR 152; [1991] 43 EG 121; 26 Con LR 98
Yorkshire
Dale Steamship Co Ltd v Minister of War
Transport [1942] AC 691
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co Ltd
The appeal of
Eagle Star Insurance Co Ltd, who had provided mortgage indemnity cover to the
plaintiff lenders, in their claim for damages against the valuers concerned,
was allowed and their damages increased by £2.374m: see [1994] 2 EGLR 108;
[1994] 31 EG 68 and 32 EG 89.
United
Bank of Kuwait plc v Prudential Property Services Ltd
The defendant
valuers’ appeal against an award of damages, which included an element for the
fall in the property market, was dismissed: see [1994] 2 EGLR 100; [1994] 30 EG
103.
Nykredit
Mortgage Bank plc v Edward Erdman Group Ltd
Subject to a
pending appeal challenging certain findings of fact by the trial judge, the
defendant valuers’ appeal against an award of damages was dismissed.
BNP
Mortgages Ltd v Key Surveyors Nationwide Ltd
BNP
Mortgages Ltd v Goadsby & Harding Ltd [1994] 2
EGLR 169, [1994] 42 EG 150
The plaintiff
lender’s appeals from decisions of Judge Fox-Andrews QC, an official referee,
who had deducted sums on account of the fall of the property market, were
allowed.
Mortgage
Express Ltd v Bowerman & Partners
The plaintiff
lender’s appeal from the decision of Arden J, who had found the defendant
solicitors negligent in failing to inform the lender of information which cast
doubt on the accuracy of a valuation and had deducted from the losses
recoverable an element due to the fall in the market, was allowed in respect of
that deduction: see [1994] 2 EGLR 156; [1994] 34 EG 116.
Michael
Lyndon-Stanford QC, Mark Hapgood QC and Richard Morgan (instructed by Lovell
White Durrant) appeared for Eagle Star; John D Wood Commercial Ltd did not
appear and was not represented; Roger Toulson QC and Daniel Pearce-Higgins
(instructed by Clifford Chance) appeared for United Bank of Kuwait; Ronald
Walker QC and Vincent Moran (instructed by Cameron Markby Hewitt) appeared for
Prudential Property Services; Michael Briggs QC and David Blayney (instructed
by Clifford Chance) appeared for Nykredit Mortgage Bank plc; Michael de Navarro
QC and Jonathan Ferris (instructed by Williams Davies Meltzer) appeared for
Edward Erdman Group; Romie Tager and Ingrid Newman (instructed by Eversheds
Phillips & Buck, of Cardiff) appeared for BNP Mortgages Ltd; Michael Harvey
QC and Simon Brown (instructed by Davies Arnold Cooper) appeared for Key
Surveyors Nationwide Ltd; Walter Aylen QC and Nigel Jones (instructed by
Eversheds Phillips & Buck, of Cardiff) appeared for BNP; Christopher Gibson
and Fiona Sinclair (instructed by Davies Arnold Cooper) appeared for Goadsby
& Harding; Nicholas Patten QC and Timothy Harry (instructed by Rosling
King) appeared for Mortgage Express; Genevra Caws QC and Ben Patten (instructed
by Pinsent & Co, of Birmingham) appeared for Bowerman & Partners.
Giving the
judgment of the court, Sir Thomas
Bingham MR said: This is the judgment of the court, to which all
three members have substantially contributed.
The court is
concerned in these cases with a very familiar, everyday transaction: the
lending of money by a commercial lender to a borrower on a mortgage of real
property. In such a transaction the lender looks to the borrower to repay the
principal sum lent, with interest sufficient to give the lender a commercial
return. Before entering into the transaction the prudent lender will take steps
to satisfy himself that the borrower will be able to repay. But the lender does
not rely on the borrower’s payment covenant alone. He obtains additional
security by taking a charge on the land itself. Before advancing money he will
wish to satisfy himself that the land provides acceptable security for the loan
to be made. To that end the lender will ordinarily turn to a professional
valuer for his opinion on the value of the land.
In five of the
cases before the court the relevant claim is a claim in negligence against a valuer.
(The sixth claim is against a solicitor.) In each case the complaint is the
same: that the valuer negligently overvalued the land in question. In each case
in which there has been a decision that complaint was upheld; in one of them
that finding is challenged, but the appeal against that finding is not now
before us. (A finding of negligence was also made in the solicitor’s case; and
there also it is challenged.)
So the
question arises: to what damages is the lender entitled against the negligent
valuer? The general answer given by authority is clear. If the claim is in
contract it is given by Parke B in Robinson v Harman (1848) 1
Exch 850 at p855:
The rule of
the common law is, that where a party sustains a loss by reason of a breach of
contract, he is, so far as money can do it, to be placed in the same situation,
with respect to damages, as if the contract had been performed.
If the claim
is in tort the answer is given by Lord Blackburn in Livingstone v Rawyards
Coal Co (1880) 5 App Cas 25 at p39:
I do not
think there is any difference of opinion as to its being a general rule that,
where any injury is to be compensated by damages, in settling the sum of money
to be given for reparation of damages you should as nearly as possible get at
that sum of money which will put the party who has been injured, or who has
suffered, in the same position as he would have been in if he had not sustained
the wrong for which he is now getting his compensation or reparation.
It is not
suggested that for present purposes there is any practical difference between
these two tests.
In British
Westinghouse Electric & Manufacturing Co Ltd v Underground Electric
Railways Co of London Ltd [1912] AC 673 at p688 Viscount Haldane LC said:
In order to
come to a conclusion on the question as to damages thus raised, it is essential
to bear in mind certain propositions which I think are well established. In
some of the cases there are expressions as to the principles governing the
measure of general damages which at first sight seem difficult to harmonize.
The apparent discrepancies are, however, mainly due to the varying nature of
the particular questions submitted for decision. The quantum of damage is a
question of fact, and the only guidance the law can give is to lay down general
principles which afford at times but scanty assistance in dealing with
particular cases. The judges who give guidance to juries in these cases have
necessarily to look at their special character, and to mould, for the purposes
of different kinds of claim, the expression of the general principles which
apply to them, and this is apt to give rise to an appearance of ambiguity.
Subject to
these observations I think that there are certain broad principles which are
quite well settled. The first is that, as far as possible, he who has proved a
breach of a bargain to supply what he contracted to get is to be placed, as far
as money can do it, in as good a situation as if the contract had been
performed.
The
fundamental basis is thus compensation for pecuniary loss naturally flowing
from the breach; but this first principle is qualified by a second, which
imposes on a plaintiff the duty of taking all reasonable steps to mitigate the
loss consequent on the breach, and debars him from claiming any part of the
damage which is due to his neglect to take such steps. In the words of James LJ
in Dunkirk Colliery Co v Lever [(1878) 9 ChD 20 at p25],
‘The person
who has broken the contract is not to be exposed to additional cost by reason
of the plaintiffs not doing what they ought to have done as reasonable men, and
the plaintiffs not being under any obligation to do anything otherwise than in
the ordinary course of business’.
As James LJ
indicates, this second principle does not impose on the plaintiff an obligation
to take any step which a reasonable and prudent man would not ordinarily take
in the course of his business. But when in the course of his business he has
taken action arising out of the transaction, which action has diminished his
loss, the effect in actual diminution of the loss he has
These
unimpeachable statements of principle are the necessary point of departure in
considering any novel issue of damages in contract or tort not involving fraud
or intentional wrongdoing. But their practical application calls for observance
of other rules. An injured claimant may be compensated only for loss which is
held, on investigation of the facts, to have been effectively caused by the
breach. He may not be compensated for losses which though caused by the breach
are too remote, as being outside the reasonable contemplation of the parties at
the relevant time as a consequence of the breach. And there are certain heads
of damage which, even if they satisfy the tests already listed, are treated by
law as irrecoverable: the innocent victim of a breach of contract cannot, for
example, be compensated in the ordinary way for the anguish or vexation he
suffers as a result of the breach, however direct and foreseeable these
consequences may be.
In order to
analyse the questions which arise in these appeals, and before turning to the
facts of the particular cases, it is convenient to assume some hypothetical but
not unrepresentative facts:
(1) A valuer
(V) negligently advises a lender (L) that the value of a property is £1m.
(2) L’s policy
is to lend 80% of valuation on mortgage.
(3) So L lends
the borrower (B) £800,000 in reliance on the valuation on terms that it is
repayable on default or at some future date or over some future period with
interest payable in the meantime.
(4) In fact
the market value of the property at the date of valuation was £500,000.
(5) Had V so
advised no loan would have been made.
(6) B defaults
in repayment and L repossesses and sells the land.
(7) By this
time there has been a sharp fall in the property market.
(8) L sells
for the best available price: £300,000.
What is the
measure of L’s damage recoverable against V? The main answers advanced are: (a)
£300,000 (£800,000 minus £500,000) plus the costs of realisation, reasonable
interest etc; and (b) £500,000 (£800,000 minus £300,000) plus the costs of
realisation reasonable interest etc. The crucial difference between these
measures is the loss resulting from the fall in the property market, by which
we mean that part of the debt not repaid which is equal to the diminution in
value of the security attributable to the fall in the property market. At the
heart of these appeals lies the question whether this element of loss is
recoverable by L against V or not.
On these facts
the following major questions arise:
(1) What is
the duty which V has broken?
(2) What is
the loss for which L claims to be compensated?
(3) Did V’s
said breach of duty cause L’s said loss?
(4) Are the
damages which L claims too remote?
(5) Is there
any reason of policy why L should not recover the compensation to which he
would otherwise be entitled?
Question
(1): the duty
In the absence
of special conditions, and whether the duty is contractual or tortious, V’s
duty to L is the same: to take reasonable care to give a reliable and informed
opinion on the open market value of the land in question at the date of
valuation. In the ordinary way V does not warrant that the land would fetch on
the open market the value he puts on it, any more than a medical practitioner
warrants that he will cure a patient of illness. In each case the duty is to
exercise a reasonable standard of professional care in the circumstances, no
more and no less. It is not, as was argued in the United Bank of Kuwait,
a duty limited to safeguarding L against loss amounting to the difference
between the overvaluation figure and the true value of the property. The
complaint made and upheld against the valuers in these cases is accordingly not
that they were wrong. A professional opinion may be wrong without being
negligent. The complaint in each case is that the valuer expressed an opinion
that the land was worth more than any careful and competent valuer would have
advised.
V knows that L
seeks and obtains his valuation in order to guide him in deciding whether he
will lend on the security of the land in question and, if so, how much he will
lend. Both of them appreciate that if V overvalues the land L may lend more
than he would have been willing to lend if the land had been correctly valued.
The valuation is given so that L knows the current value of the land offered as
security. The risk both have in mind is the risk that L will either lend when
otherwise he would not or that he will lend more than he would be willing to
lend on a correct valuation of the land offered as security for the loan.
In the absence
of special instructions it is no part of V’s duty to advise L on future movements
in property prices, whether nationally or locally. The belief among buyers and
sellers that prices are likely to move upwards or downwards may have an effect
on current prices, and to that extent such belief may be reflected by V in his
valuation. But his concern is with current value only. He is not asked to
predict what will happen in future. His valuation is not sought to protect L
against a future decline in property prices. In no sense is he a guarantor of
L’s investment decision.
Question
(2): the loss
In Hayes
v James & Charles Dodd (a firm) [1990] 2 All ER 815 at pp818–9
Staughton LJ distinguished two methods of assessing loss. One he called the
‘no-transaction method’, the other the ‘successful transaction’ method. The
first method applies in cases where, if the professional adviser had not
advised negligently, there would have been no transaction whether because the
buyer would not have bought or the lender would not have lent or because the
seller would not have sold or the borrower have borrowed. The second method
applies in cases where, if the professional adviser had not advised
negligently, there would have been a transaction, but on different terms: there
would still have been a sale or a loan, but at a lower price or of a smaller sum.
The facts
assumed above are those of a no-transaction case. Had V not negligently
overvalued the land no loan would have been made. All the cases before the
court rest on a finding to that effect.
L accordingly
claims, on a straightforward application of the restitutionary principle, to be
indemnified against all the loss he has suffered as a result of entering into
the transaction. Thus on the debit side L claims the sum which he advanced to
B; the cost to him (L) of borrowing that money, if he borrowed it, and if he
did not the income he would have earned by investing it elsewhere; and the
costs of repossessing the land and realising his security. On the credit side,
as L accepts, must be set any sums which L receives from B by way of interest
or otherwise and any sum received on sale of the property. L claims as damages
the net debit which remains to him after giving credit for these items and any
other credit items there may be.
The general
correctness of this approach to a no-transaction case is not in doubt.
Controversy focuses on one element: that part of L’s loss which is attributable
to a fall in the property market. That element, V argues, should be excluded
from the calculation of L’s loss on the ground that it is not a loss caused by
the breach of any duty which V undertook. So the central issue (save in the United
Bank of Kuwait case, in which the defendants put the matter on the basis of
duty) is one of causation, the subject of question (3). Since questions (4) and
(5) may be shortly and uncontroversially answered it is convenient to answer
them before returning to the major issue relevant to these appeals.
Question
(4): remoteness
It is trite
law that a plaintiff may not recover damages which are held to be too remote
from the breach of duty of which he complains. Somewhat different language has
been used to define the test in contract and tort, but the essence of the test
is the same in each case. The test is whether, at the date of the contract or
tort, damage of the kind for which the plaintiff claims compensation was a
reasonably foreseeable consequence of the breach of contract or tortious
conduct of which the plaintiff complains. If the kind of damage was
reasonably foreseeable it is immaterial that the extent of the damage was not.
These
principles call for no detailed consideration or analysis in these appeals
since it has not been argued that L’s claim for any part of his loss, including
that part attributable to the fall in the property market, is too remote. The
reason is obvious. L and V know, as everyone knows, that in any market prices
may move upwards or downwards. That is the essence of a market. No one in
recent times has expected property prices to remain stable over a prolonged
period. It was plainly foreseeable that if, on the strength of an overvaluation
by V, L entered into a mortgage transaction he would not otherwise have
entertained, his risk of loss would be increased if the market moved downwards
or reduced if it moved upwards.
Question
(5): policy
There are, as
already noted, some cases in which a plaintiff is precluded from recovering
certain heads of damage on grounds of policy: Hayes v Dodd, above,
at p824 per Staughton LJ. Considerations of policy may also be relied on
in holding that one party owes no duty of care to another. But here it is
common ground that V owes a duty of care to L, and the content of that duty has
already been defined. While occasional reference has been made in general terms
to policy considerations, it has not been argued that L should be denied
compensation otherwise recoverable on policy grounds. Nor has any rule or
principle of policy been identified. If any judicial decision is to be founded
on policy considerations it is desirable, perhaps even necessary, that those
considerations should be expressly described. We have not been asked to rule
that L is disentitled on policy grounds to recover that part of his loss which
is attributable to the fall in the property market and we do not do so.
Question
(3): causation
The approach
of the courts to issues of causation is in principle simple, pragmatic and
commonsensical. In Yorkshire Dale Steamship Co Ltd v Minister of War
Transport [1942] AC 691 at p698 Viscount Simon LC said:
It seems to
me that there is no abstract proposition, the application of which will provide
the answer in every case, except this: one has to ask oneself what was the
effective and predominant cause of the accident that happened, whatever the
nature of that accident may be.
At p706 Lord
Wright added:
This choice
of the real or efficient cause from out of the whole complex of the facts must
be made by applying commonsense standards. Causation is to be understood as the
man in the street, and not as either the scientist or the metaphysician, would
understand it.
This was said
in the context of whether the loss was caused by the risk insured and, although
it remains a guiding principle as to the application of commonsense, is
qualified in the present field by the further principle that the event which
the plaintiff alleges to be causative need not be the only or even the main
cause of the result complained of; it is enough if it is an effective
cause. It is also plain that an event is not regarded in law as causative if it
does no more than provide the occasion for the result complained of: Quinn
v Burch Bros (Builders) Ltd [1966] 2 QB 370; Alexander v Cambridge
Credit Corporation Ltd (1987) 9 NSWLR 310; March v E & M H
Stramare Pty Ltd (1991) 171 CLR 506; Galoo Ltd v Bright Grahame
Murray [1994] 1 WLR 1360. This is not a proposition which requires the
dignity of the Latin tongue to sustain it. If X assaults a fellow guest Y at a
party given by Z, it is plain that Z’s invitation of X provides the occasion
for the assault. But for his invitation the assault would not have occurred.
But it could not possibly be said, without more, that Z caused the assault.
In the present
appeals the argument on causation is limited. It is not said that V’s negligent
overvaluation did not cause L to advance money to B. It is accepted that it
did. The argument is that it did not cause that part of L’s loss which is
attributable to the fall in the property market. That makes it apposite to
recognise the point neatly made by Cooke P in McElroy Milne v Commercial
Electronics Ltd [1993] 1 NZLR 39 at p41:
… the
ultimate question as to compensatory damages is whether the particular damage
claimed is sufficiently linked to the breach of the particular duty to merit
recovery in all the circumstances.
V argues that
on the assumed facts that test is not satisfied. He had no duty to advise on
future movements of the market, or to protect L against the risk of a fall. He
did not, Prospero-like, cause the fall in the market. L’s loss was caused by
market forces, not the negligence of V, and cannot therefore be laid at V’s
door.
To this
contention L gives two answers, one short, one longer. The short answer is
this. Once it is accepted, as it is, that V’s negligence caused L to enter into
a transaction he would not otherwise have entertained and from which he cannot
escape at will, V is liable for all the loss which L suffered as a result
unless it is too remote or the result of a new intervening cause or of a
failure by L to take reasonable steps to mitigate his own loss. There is here
no question of remoteness or failure to mitigate. The fall in the market, being
readily foreseeable, was not a new intervening cause; if the extent of the fall
was a surprise the fact of a fall was not.
The longer
answer is that it is commercially unrealistic to seek to separate the risk of
negligent overvaluation and the risk of a fall in the market and to ascribe
different causes to each. 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.
In seeking to
choose between these arguments we must seek such help as is obtainable from
authority.
English
authority
In many of the
reported cases involving surveyors and solicitors rather than valuers, damages
have been assessed according to the successful-transaction method. In such
cases the correct measure of damages has usually been held to be the difference
between the open market value of the asset acquired as it actually was and the
lower of the price paid and the open market value of the asset in the state in
which, as a result of the negligent advice, it was thought to be. Examples are
to be found in such cases as: Philips v Ward [1956] 1 WLR 471; Pilkington
v Wood [1953] Ch 770; Ford v White & Co [1964] 1 WLR
885; Perry v Sidney Phillips & Son [1982] 1 WLR 1297*; and Watts
v Morrow [1991] 1 WLR 1421†. In Corisand Investments Ltd v Druce
& Co [1978] EGD 769 at pp807–811 Ralph Gibson J adopted a similar
approach in what he held to be a successful-transaction case involving a
valuer: he based his award of damages on the difference between what the lender
advanced on the strength of a negligent overvaluation and what he would have
advanced had he been correctly advised on value. A similar approach was agreed
between counsel in Singer & Friedlander Ltd v John D Wood &
Co (1977) 243 EG 212. In a successful-transaction case this is accepted as
the correct approach, at least in the ordinary way. In a no-transaction case
the correct approach is not necessarily the same because the underlying premise
is not that the lender or buyer would have entered into the transaction on more
advantageous terms, but that he would not have entered into it at all.
*Editor’s
note: Also reported at (1982) 263 EG 888.
†Editor’s
note: Also reported at [1991] 2 EGLR 152.
Baxter v F W Gapp & Co Ltd [1938] 4 All ER 457; [1939] 2 KB
271; [1939] 2 All ER 752 was tried at first instance by Goddard LJ
and an appeal against his decision was dismissed by MacKinnon and du Parcq LJJ
and Macnaghten J. (References to the Court of Appeal decision are hereafter given
in the All England report, which is fuller.) The facts were that the
defendant valuer negligently overvalued a house at £1,800. In reliance on that
valuation the plaintiff, a private lender, made an initial advance of £1,200.
When the borrower made default, and the house was sold, the best offer
obtainable was £850.
On damages
Goddard LJ said [at p465]:
I now turn to
the question of what damages the plaintiff is entitled to recover. The
plaintiff says: ‘My measure of damage is this: if you had given me careful
information, made a careful valuation, this property would have been valued at
a considerably lower sum. I should never have entered into this transaction at
all.’ That is to say (I ignore the £150 for this purpose): ‘I should never have
entered into that first mortgage transaction under which I advanced £1,200.
Whether I should have entered into another transaction advancing £1,000, or
whether I should have advanced £800, I do not know, but I should never have
advanced this £1,200. I therefore entered into a transaction into which, but
for your advice, I should never have entered. Therefore, if I show that I have
a cause of action, my damage is the damage I have sustained through entering
into this transaction.’ That seems to be right, unless, of course, some
different measure has to be applied in ascertaining the actual damage he has
sustained through the negligent valuation.
Having added
to the capital loss the lender had suffered a sum for loss of interest,
insurance premiums, expenses of sale ‘and one thing and another’, and given
credit for the sum raised on sale of the house, the judge reached a net figure
for which he gave judgment.
On appeal it
was argued that the damages should be limited to the difference between the
value advised by the valuer and the correct value at that time (p753F). This
argument was rejected and the judge’s decision affirmed. The lender was
entitled to recover the whole loss he had suffered owing to the valuer’s breach
of duty (pp757G, 760C, 760H). In neither court was a finding made as to the
true value at the valuation date. Such a finding was not necessary on the
approach adopted. It is, however, clear that the case did not proceed on the
basis that there had been a fall in the property market: this was a fact expressly
mentioned by MacKinnon LJ (at p755G) and Macnaghten J (at p760E), although in
each case with reference to liability not quantum.
In Eagle
Star Insurance Co Ltd v Gale & Power (1955) 166 EG 37 the
defendants negligently failed to report structural defects in a house and as a
result overvalued it. Mortgagees, who had made a loan on the strength of the
report and valuation, claimed damages, which they intended to use to pay for
repairs. It was not, it would seem, a no-transaction case, since their witness
said that if the mortgagees had known the true value and condition of the
property they would not have made such a large loan. But Devlin J concluded
that the market value of the house (if realised) and the borrower’s payments
would more than cover the sum which the mortgagees had advanced. He accordingly
awarded them a small sum to indemnify them against the risk that the borrower
would not pay and the cost of later surveys and reports.
In Rumsey
v Owen White & Catlin [1978] EGD 730 a vendor acting on the advice
of solicitors agreed to sell three shops with vacant possession. The sale price
was £120,000 payable in four equal instalments, the last of them on completion.
After the buyer had paid £90,000 but before completion it became clear that the
vendor could not, for legal reasons about which the solicitors had negligently
advised him, give vacant possession. To overcome this problem a further
agreement was made: the shops were to be conveyed at once; and the last
instalment was to be paid on completion, by which date there was to be vacant
possession; but if the buyers did not on that date obtain vacant possession the
vendor was to repurchase the shops for £90,000, the sum he had already
received. Vacant possession was not obtained by the completion date. The vendor
accordingly became obliged to repurchase for £90,000. By this time, as Lord
Denning MR put it (at p733), ‘the property market had fallen to the very
bottom’. He had become subject to an obligation to repurchase for £90,000 what
was now worth £58,000. He had no money to repurchase and sued his solicitors
for damages for negligence, which was in due course admitted. It was held that
if the solicitors had given the correct advice the appropriate purchase price
at the outset would have been £112,000. Since he had received only £90,000 his
primary damage was held to be £22,000. But he was held to be entitled, in
addition, to a further sum to represent his proper liability to the buyers,
which would be affected by changes in the current value of the shops. Roskill
LJ observed (at p740):
It seems to
me that it would be quite unrealistic to try to break this case down into
separate compartments and say that one part of the loss flows and the other
part of the loss does not. The entirety of the loss, in my view, flows from the
original wrong advice and the exposure of Mr Rumsey [the vendor] by that wrong
advice to a contract he should never have been allowed to enter into.
This was
treated as a successful-transaction case, and the argument was whether the
second agreement broke the chain of causation. It was held that it did not. On
that basis the court held the solicitors potentially liable for any loss the
vendor might suffer as a result of his increased exposure to the buyers caused
by the market fall. The court appears to have assumed, in the absence of
specific argument, that this element of loss was properly recoverable against
the solicitors although they had not caused the fall in the market.
The
correctness of Eagle Star Insurance Co Ltd v Gale & Power was
questioned by O’Connor LJ in London & South of England Building Society
v Stone [1983] 1 WLR 1242*. In that case counsel agreed (p1260D)
*Editor’s
note: Also reported at (1983) 267 EG 69.
that the true
measure of damages for the breach of a defendant surveyor’s duty to value a
property mortgaged to a plaintiff building society is the difference between
the sum the plaintiff advanced on the false valuation, which the defendant
carelessly and unskilfully put upon the property, and the sum the plaintiff
would have advanced on the true valuation, which a careful and skilful surveyor
would have put upon it.
Since this was
a no-transaction case (pp1256H, 1258D), it followed that no advance would have
been made on a correct valuation. Subject to recoveries, the lender’s loss was
accordingly the whole of his advance and this is what the lender was held to be
entitled to recover by a majority of the court. The main issue in the appeal
was whether the trial judge had been right to make a deduction to reflect the
value of the borrower’s covenant which the lender could have but had not
enforced; on this issue Sir Denys Buckley dissented. The suggestion that Baxter
v Gapp was decided per incuriam was rejected; it was held to be
binding on the Court of Appeal.
County
Personnel (Employment Agency) Ltd v Alan R
Pulver & Co [1987] 1 WLR 916* was a no-transaction case (p926E)
concerning negligent advice by a solicitor. The court held that it was
inappropriate to apply the diminution in value rule, and ruled that the
plaintiffs were entitled at least to recover the cost of extricating themselves
from the predicament into which the solicitor’s negligence had led them. No
change in market value was involved.
*Editor’s
note: Also reported at [1986] 2 EGLR 246.
Hayes v Dodd, above, was a claim against solicitors, but for whose
negligence there would have been no transaction (p818h). Staughton LJ said (at
p820b):
I am quite
satisfied that Hirst J was entitled to award damages in this case on the
no-transaction basis, and that he was right to do so … So they should recover
all the money which they spent, less anything which they subsequently
recovered, provided always that they acted reasonably in mitigating their loss.
But they were quite properly denied any sum for the profit which they would
have made if they had operated their business successfully.
In this case
there was an increase in market value. The plaintiffs bought (among other
things) a freehold maisonette for an effective price of £45,000. This exceeded
by £20,000 its true value at that time. When the plaintiffs came to sell,
however, the maisonette fetched £38,000, presumably because the market had risen.
The court gave credit to the solicitors for 80% of the difference between
£25,000 and
caused by the solicitors it is hard to see how this credit could have been
appropriate.
In
Swingcastle Ltd v Alastair Gibson (a firm)* the plaintiff
moneylenders advanced £10,000 to borrowers on the security of a house
negligently valued by the defendant at £18,000. A very high rate of interest
was payable by the borrowers and provision was made for payment of an even
higher rate on default. The borrowers defaulted, the moneylenders took
possession and the house was sold for £12,000. The moneylenders claimed and the
county court judge awarded the whole loss suffered by the moneylenders as a result
of entering into the transaction including the outstanding sums owed by the
borrowers. It was by concession a no-transaction case.
*Editor’s
note: Reported at [1990] 2 EGLR 149.
In the Court
of Appeal ([1990] 1 WLR 1223) Neill LJ concluded that Baxter v Gapp was
binding on the court and conclusive in favour of the judge’s decision (p1230A).
He did, however, helpfully review a number of the authorities referred to
above, observing (p1231E) that in a no-transaction case the lender would be
awarded: (a) the amount advanced less the aggregate of any sum recovered from
the borrower and any sum recovered on the realisation of the security; and (b)
any expenses incurred by the lender in realising the security or in maintaining
the value of the security until disposal.
The main issue
on appeal concerned the moneylenders’ entitlement to recover as damages against
the valuer the contractual interest due from but unpaid by the borrowers. Neill
LJ said (at p1231G):
A number of
approaches are possible, including the following. (a) The lender could be
awarded the unpaid interest owed by the borrower at the date when the security
was realised. This was the method adopted in Baxter v F W Gapp &
Co Ltd [1939] 2 KB 271. But to award damages on this basis is in effect to
treat the valuer as the guarantor of the contract of loan. In the absence of
authority I would for my part reject this solution. (b) The lender could be
awarded a sum equivalent to the amount he would have earned by way of interest
on another loan if he had had the money available for this purpose. In my view,
however, such an award should not be made in the absence of evidence that the
money lent would have been used for another transaction. This evidence would
have to be directed to proving an unsatisfied demand for loans and I anticipate
that such evidence might seldom be forthcoming. Moreover, even if evidence of a
lost transaction were available, I see no reason why the interest should be at
the default rate rather than at the ordinary rate provided for in a standard
contract for this type of business. (c) The lender could be awarded a sum
equivalent to the interest which would have been earned if the sum had been
placed on deposit. (d) The lender could be awarded a sum to represent the loss
of the opportunity to invest the money elsewhere. This was the solution adopted
by the Supreme Court of British Columbia in Seeway Mortgage Investment
Corporation v First Citizens Financial Corporation (1983) 45 BCLR
87, where it was said, at p 101: ‘What the plaintiff lost then was the
opportunity to invest its $50,000 in a security which had the same risks except
that the appraisal would be accurate.’
The lord
justice expressed no concluded view about the last three methods of assessment,
although suggesting that none would necessarily be right in all cases (p1232B).
Farquharson LJ
recognised the force of the argument that if the moneylenders were to be placed
in the same position as they would have been in if they had never entered into
the mortgage contract they could not recover money payable only under that
contract (p1233D), but felt bound by authority to reject it (p1235B).
Sir John Megaw
also regarded Baxter v Gapp as binding and conclusive (p1235C).
He did not accept that the method of assessment varied, depending on whether it
was a no-transaction or a successful-transaction case (p1236B). In his view the
lender’s loss was to be assessed when it was incurred (p1235H), but subject to
a qualification that the valuer should not be liable for an amount greater than
the amount of his original overestimate of value (p1236E).
In the House
of Lords, all their lordships agreed with the speech of Lord Lowry: [1991] 2 AC
223. The ratio of the decision is found in the following paragraph:
My Lords, it
is clear that the lenders ought to have presented their claim on the basis
that, if the valuer had advised properly, they would not have lent the money.
Where they went wrong was to claim, not only correctly that they had to spend
all the money which they did, but incorrectly that the valuer by his negligence
deprived them of the interest which they would have received from the borrowers
if the borrowers had paid up. The security for the loan was the property but
the lenders did not have a further security consisting of a guarantee by the
valuer that the borrowers would pay everything, or indeed anything, that was
due from them to the lenders at the date, whenever it occurred, on which the
loan transaction terminated. The fallacy of the lenders’ case is that they have
been trying to obtain from the valuer compensation for the borrowers’ failure
and not the proper damages for the valuer’s negligence.
From that
paragraph, and from his citation with apparent approval of a passage from Clerk
and Lindsell on Torts (p232E), it appears that he accepted the distinction
between no-transaction and successful-transaction cases. He described Baxter
v Gapp as ‘not an attractive precedent’ (p236G), in particular because
there was doubt about the lender’s contention, there had been little argument
about interest and it was contrary to principle to award a plaintiff in a
no-transaction case interest which he could have earned only under the
contract. He does not, however, as we understand him, throw doubt on the broad
thrust of that decision. His speech is irreconcilable with the view that the
lender’s claim is limited to the difference between the valuation figure and
the true value of the property at that time. He throws no direct light on a
fall in the market, which was not in issue in the case.
Much reliance
was placed in argument in this court on the decision of the House of Lords in Banque
Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1991] 2 AC 249, a
decision also heavily relied on in some of the cases under appeal. The facts of
that case do not lend themselves to pithy summary, but the bare outline is
this. Banks agreed to make advances to a borrower on the security of gemstones
and credit insurance policies. Their agent misled them into believing that
insurance policies were in force at a stage when they were not. The
underwriters learned that the banks had been misled by their agent, but did not
tell them. The advances were made, the borrowers defaulted and absconded, the
gemstones proved valueless and the loss fell within a fraud exception in the
insurance policies. The banks sued the underwriters for loss allegedly
sustained as a result of their breach of duty in failing to alert the banks to
the fraud of their agent which, they said, would have caused them to back out
of the transaction. The claim failed on two main grounds. The first was that
the underwriters owed the banks no relevant duty and so were guilty of no
actionable breach. The second was that the banks’ loss was caused not by the
underwriters’ conduct but by the unforeseeable fraud of the borrower, against
which the banks would have enjoyed no insurance cover in any event (because of
the fraud exception).
In argument
particular reliance was placed on the speech of Lord Templeman who at p279B,
with reference to the second ground, criticised the banks’ argument as
confusing the cause of the advance and the cause of the loss of the advance. At
p279D he said:
The fraud of
[the broker] which caused the advance to be made did not affect the rights of
the banks to recover their loss and therefore did not cause the loss of the
advance. The policies of insurance did not or would not have protected the
banks against the fraud of [the borrower] and his fraud was causative of the
loss of the advance. Accordingly, the failure by [the underwriters] to inform
the banks of the fraud of [the broker] was not causative of the banks’ loss.
The House
regarded the unforeseeable fraud of the borrower as breaking any chain of
causation there might otherwise have been between the underwriters’ silence and
the banks’ loss. This would appear, in this respect, to have been an
application of familiar principles to the unusual and complicated facts of that
case.
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co
Ltd (unreported December 21 1993*, Phillips J) is one of the cases under
appeal before us. It is convenient to consider it at this stage since it
addresses the market-fall issue more directly than any of the other
decided cases and it has been relied on as determinative of some of the other
cases subject to the present appeals.
*Editor’s
note: Reported at [1994] 2 EGLR 108.
The plaintiff
(‘BBL’) on April 24 1989 lent £39.915m to a single-purpose vehicle company (the
wholly-owned subsidiary of a substantial property company) principally on the
security of an office block in Westminster, Trevelyan House. The sum advanced
was 90% of a valuation of the block made by John D Wood Commercial Ltd (the
fifth defendant in the action brought by BBL) on April 12 1989, when they had
valued it at £44.35m. Eagle Star (the first defendant in the action) insured
BBL against possible loss of the money advanced. Phillips J held this valuation
to be negligent. He found that the open market valuation at the date of
valuation was £27.5m. BBL sued Eagle Star for the loss which it had suffered.
That claim was compromised during the trial. A claim by Eagle Star against John
D Wood Commercial Ltd continued. As at March 31 1993, the relevant date for the
assessment of damages, Trevelyan House was agreed to be worth £20m. The decline
of £7.5m from £27.5m to £20m was due to a general fall in the commercial
property market. It was a no-transaction case and one of the issues was whether
BBL’s damages against Eagle Star and Eagle Star’s damages against John D Wood
Commercial Ltd could include losses attributable to the fall in the property
market. Phillips J held that they could not.
In the course
of a long and admirably clear judgment, the judge first held that the risk of a
fall in the property market was not one in respect of which BBL were placing
reliance on John D Wood Commercial Ltd’s valuation. Turning to the basic
principle of assessment, the judge quoted an observation of Morris LJ in Philips
v Ward [1956] 1 WLR 471 at p475 that the damages to be assessed were:
such as could
fairly and reasonably be considered as resulting naturally from the failure of
the defendant to report as he should have done.
He commented:
I find this a
compelling statement of the basic principle that should be adopted in a case
such as the present. If it is open to me to apply it, BBL will not recover as
damages that part of their loss which is attributable to the collapse of the property
market. It does not seem to me that such loss can fairly and reasonably be
considered as resulting naturally from John D Wood Commercial Ltd’s failure to
report as they should have done. Where a party is contemplating a commercial
venture that involves a number of heads of risk and obtains professional advice
in respect of one head of risk before embarking on the adventure, I do not see
why negligent advice in respect of that head of risk should, in effect, make
the adviser the underwriter of the entire adventure. More particularly, where
the negligent advice relates to the existence or amount of some security
against risk in the adventure, I do not see why the adviser should be liable
for all the consequences of the adventure, whether or not the security in
question would have protected against them.
For BBL it was
argued that once it was established that John D Wood Commercial Ltd’s
negligence had caused them to enter into a loan transaction it followed as a
matter of law that the negligence was at least a contributory cause of all the
adverse consequences of that loan transaction. To the judge this argument
resembled the banks’ unsuccessful argument in Skandia. The judge then
considered that case in some detail, concluding:
I have cited
from this decision at length because, despite the submissions to the contrary
of Mr Mark Cran QC, for Eagle Star, I consider it to be highly relevant in the
present context. In Skandia the plaintiff banks were induced by the
defendants’ breach of duty to enter into a loan transaction on the premise that
they had insurance cover in relation to the risk when they did not. But had the
cover been in place it would not have protected them against the loss which
resulted from the loan transaction. For this reason, the House of Lords held
that the breach of duty was not causative of the loss. A two-stage approach was
adopted. Did the breach of duty induce the loan? If so, did the breach of duty
cause the loss of the sum loaned? Because there was no causal nexus between the
breach of duty and the loss of the loan the Plaintiffs’ claim failed.
In Skandia
the cause of the loss of the loan — the fraud of Ballestero — was not
reasonably foreseeable, but I do not consider that fact to have been essential
to the result. As I read the speech of Lord Templeman, had the insurance
policies not been subject to the fraud exception, causation of (at least some)
loss would have been established, albeit that the fraud of Ballestero would
have been no more foreseeable. Whether the cause of the loss of an advance is
clearly foreseen or not reasonably foreseeable I do not see how the negligent
adviser can fairly be said to have caused that loss unless his advice has been
relied upon as providing protection against the risk of that loss. In my judgment,
the decision in Skandia lends strong support to the submission that John
D Wood Commercial Ltd’s negligence did not cause that part of BBL’s loss which
resulted from the collapse of the property market. It is necessary, however, to
consider the other authorities in the field to see whether they preclude me
from accepting this submission.
The judge then
considered Swingcastle, Livingstone v Rawyards Coal Co, Lowenburg and
other Canadian cases (see below), Scholes v Brook (1891) 64 LT
674 and Baxter v Gapp. Of this last case he said (at p134J):
The decision
of the Court of Appeal to permit the plaintiff to recover contractual interest
was held in Swingcastle to be wrong in principle. Having regard to this
and to subsequent developments in this field of law, I do not consider that Baxter
v Gapp can any longer be relied upon as governing the principles to be
applied to the assessment of damages in a case such as this. At the same time,
contractual interest apart, the losses suffered by the plaintiff were losses
against which he would reasonably have relied upon the value of the security to
protect him and they could naturally be considered as resulting from the
negligent valuation. I can see no reason to question the inclusion of those
losses in the damages awarded.
The judge then
discussed Stone and a number of other authorities including Swingcastle
before expressing his conclusion (at p135H):
This analysis
of the authorities leaves me persuaded that I am not constrained to award to
BBL that part of their loss which was caused by the collapse of the property
market. For the reasons that I have given I do not consider that John D Wood
Commercial Ltd should be held liable for that loss. In the case of Trevelyan
House I find that the loss attributable to the collapse of the property market
was £7.5m, being the difference between the value of the property at the time
of valuation, £27.5m, and the agreed value as at the date of assessment of
damages of £20m.
There was an
issue before the judge as to the interest which BBL could recover against John
D Wood Commercial Ltd. For the valuers it was argued that BBL’s damages should
not include interest on that part of the capital advanced by BBL which had been
lost as a result of the collapse in the property market. The judge rejected
this. He held that BBL were entitled to recover damages by way of interest on
the premise that John D Wood Commercial Ltd’s negligence caused them to lose
the use of the whole of the sums that they advanced from the dates of the
advances to the dates when the properties securing the loans were sold.
The
correctness of this decision is the central issue in these appeals, and is discussed
below.
Canadian
authority
In Lowenburg,
Harris & Co v Wolley (1895) 25 SCR 51 a lender sued his agents
who had negligently advanced his money on the security of land which had been
overvalued. The borrower defaulted and the land proved impossible to sell. The
trial judge ordered judgment to be given for the whole amount of the loan and
interest upon the plaintiff executing an assignment of the security to the
agents. This decision was upheld by a majority of the Supreme Court of British
Columbia (1894) 3 BCR 416, but reversed by a majority of the Supreme Court of
Canada. The Chief Justice of Canada, giving the judgment of the majority, said
(at p56):
I am of
opinion that this was not a correct disposition of the case. 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. It is manifest that any loss in this respect should be borne by the
respondent himself inasmuch as it cannot be attributed to the neglect of the
appellants. All that the appellants can possibly be liable for is the loss
occasioned by the over-valuation adopted and acted on by them.
Gwynne J,
dissenting, agreed with the trial judge save as to interest: in his view, the
lender was entitled to return of his money with interest:
The wrong to
be redressed was theirs, and the burden to reinstate the plaintiff in the
position in which, but for their wrong he would be, lies upon them.
In regarding
the majority decision as consistent with his own in Baxter v Gapp,
MacKinnon LJ plainly misapprehended its effect, as O’Connor LJ held in Stone
at p1255C.
The plaintiff
lender in Avco Financial Services v Holstein (1980) 109 DLR (3d)
128 advanced $17,200 on an overvaluation of real property which by the date of
trial was found to be worth $3,000. In addition the lender had incurred
additional expenses which he claimed against the negligent valuer. It was a
no-transaction case, and in reliance on Lowenburg it was argued for the
valuer that he could not be liable for any decrease in value after the date
when the borrower had abandoned the property. The judge interpreted Lowenburg
as referring only to loss in consequence of market fluctuation as distinct
from loss in consequence of physical deterioration. He attributed the latter
loss to negligence of the valuer in failing to look after the property and
awarded as damages the full outstanding balance of the loan plus ancillary
expenses, subject to a deduction of $3,000 representing the current value of
the property.
Raylon
Investment Ltd v Bear Realty Ltd (1981) 20
RPR 288 was also a claim made by a mortgage lender against a valuer based on a
negligent overvaluation. The judge treated Lowenburg as precluding
recovery only of a decrease in value owing to fluctuations in market value. He
accordingly awarded the lender most of what it claimed, although he treated
some part of the loss as due to its delay in enforcing its security.
The plaintiff
in Seeway Mortgage Investment Corporation v First Citizens Financial
Corporation (1983) 45 BCLR 87 bought a fourth mortgage of a house which two
defendants negligently overvalued at $260,000 when its true value was $190,000.
The judge was unable to decide whether it was a no-transaction or a
successful-transaction case (p101). After the valuation the market went down
and the house was burned down. The court held that the plaintiff should be
compensated for loss of the chance to turn down the mortgage, and divided his
loss equally between him and the two defendants on a juridical basis which is
not entirely clear.
Following the
Supreme Court decision in Lowenburg, it seems clear that Canadian courts
will not allow a mortgage lender in a no-transaction case to recover damages
for loss attributable to a fall in the market.
Australian
authority
In Australia
it appears that a different rule prevails. Trade Credits Ltd v Baillieu
Knight Frank (NSW) Pty Ltd (1988) 12 NSWLR 670 involved a claim by a
mortgage lender against a valuer who had overvalued one of three properties on
the security of which the lender had lent money which he would not otherwise
have done. It was a no-transaction case (p671G). It was argued for the valuer
that the lender was restricted in its damages to the difference between the
amount loaned and the amount it would have advanced upon the basis of the true
value (p672E). This argument was rejected. It was held, applying Baxter
v Gapp, that the lender was entitled to claim the loss flowing from its
entry into the transaction and was not limited in its damages to the difference
between the amount it loaned and the amount it would have advanced upon the
basis of an accurate valuation (p673B).
The valuer in Duncan
& Weller Pty Ltd v Mendelson [1989] VR 386 made two valuations,
one of the current market value of a partially completed building, the second
of the cost of completion. The second valuation was negligent, the first was
not. It was a successful-transaction case. The trial judge awarded the lender
the full loss it had suffered as a result of advancing money on the faith of
these valuations. This measure was held to be applicable where the lender would
not, properly advised, have entered into the transaction at all (pp390, 398,
399). But where he would, properly advised, have lent a lesser sum the measure
of the lender’s loss was the difference between the amount advanced by the
lender in reliance on the valuer’s negligent valuation and the amount the
lender would have advanced on a valuation made with due skill and care (pp391,
398, 399).
New
Zealand
In New Zealand
it appears that the rule is similar to that in Australia.
The plaintiffs
in McElroy Milne v Commercial Electronics Ltd, above, were
developers. They proposed to buy land and on it erect a number of buildings to
meet the requirements of a specific tenant, to whom the development was to be
let. The tenant’s obligations under the proposed lease were to be guaranteed by
its principal shareholder. The development was then to be sold with the benefit
of the lease and the guarantee. Through the negligence of the defendant
solicitors, the principal shareholder was not made a party to the agreement to
lease, and in the event the proposed tenant repudiated the agreement and there
was no claim against the principal shareholder. The trial judge found that if
the lease had been executed and guaranteed the developers would have been able
to sell the development by January 1989 for $5.25m. By the date of trial the
judge assessed its value at $4m. He assessed damages by taking the difference
between $5.25m and $4m as the primary loss and adding holding costs until trial
(basically the difference between interest on borrowed money, rates, etc and
rent and compensation received), but discounting the total so achieved by 25%
to allow for contingencies. The correctness of this measure was the central issue
on appeal. It was argued for the solicitors that the correct measure was the
difference in the value of the development with and without the guarantee. It
was also argued that factors other than the solicitors’ negligence had caused
the developers’ loss, including in particular the share-market crash and the
serious decline in the property market which, it was said, could not have been
in the contemplation of the parties at the material time. This challenge
failed. Cooke P held (p44) that the link between the solicitors’ breach of duty
and the developers’ inability to market the development in mid-1988 was very
evident. He accepted that there might be cases where a depressed market could
not be said to be sufficiently clearly and strongly or naturally related to the
breach, but this was not one of them. The other members of the Court of Appeal
agreed. The solicitors’ unsuccessful argument was devoted to foreseeability and
remoteness: once these issues were resolved against them it does not appear to
have been thought that the solicitors’ negligence was other than causative of
the damage.
General
conclusions
1. Where a
buyer is claiming damages for negligence in a successful-transaction case the
diminution in value rule ordinarily provides an accurate measure of the buyer’s
loss. As the cases show, to award (for example) the full cost of repairs will
usually lead to overcompensation. The assessment will ordinarily be made as at
the date of breach, for there is no other appropriate date. The same rule will
usually be applied where the buyer decides to keep the property with knowledge
of its defective condition or overvaluation even if, with that knowledge, he
would not have bought in the first place. In such a case no account is taken of
later fluctuations in the market, for the buyer remains the owner of the
property as a result of his own independent decision and not of the negligence
of the valuer or surveyor.
2. In a
no-transaction purchase case, it seems clear on English authority that effect
will be given to the restitutionary principle by awarding the buyer all he has
paid out less what (acting reasonably to cut his losses, including selling the
property) he has recovered. In no case before BBL has any head of
foreseeable damage been excluded from the calculation.
3. A mortgage
loan on facts such as those now assumed differs from a purchase in a number of
important respects. First, the lender is concerned to be repaid with interest
at the time or over the period the mortgage prescribes. Second, unless and
until the borrower defaults
in the property as security; he will never become the owner of it unless he
obtains the relatively unusual order of foreclosure. Thus, even assuming an
excessive advance made on a negligent overvaluation the lender may suffer no
actual loss on making the loan or at any other time since the borrower may
repay the loan with interest in accordance with the terms of the transaction: First
National Commercial Bank plc v Humberts Court of Appeal unreported
January 13 1995*. But the lender is at risk all the time for he cannot seek
repayment of the loan except in accordance with the terms, he cannot sell the
security even if he becomes aware of the overvaluation unless and until the
borrower defaults and he cannot sell the mortgage loan either, for there is no
evidence of any market in individual mortgages. Accordingly, a measure of the
recoverable damages by reference to the diminution in value of the security as
opposed to the amount of the loan not recovered cannot except coincidentally be
the measure of the damage sustained by the lender.
*Editor’s
note: [1995] 1 EGLR 142.
4. In
successful-transaction mortgage lending cases the practice has been to treat
the difference between what was advanced and what would have been advanced on a
proper valuation as the upper limit of what the lender can recover in damages.
The lower limit is nil: for the borrower may make due payment, and even if he
does not the land may raise enough when sold to reimburse the lender. If the
land raises enough when sold to reimburse the lender because of a rise in the
property market after the date of the transaction, the valuer must indirectly
be entitled to the benefit of this: the lender will have received his money
back with contractual interest and that will leave him with no net loss to
claim against the valuer. It would be contrary to the commonsense which is
intended to reign in this field to ignore the rise in the property market and
pretend that the lender has suffered a net loss when in fact he has not. By
parity of approach, if in such a case the lender suffers loss (within the upper
limit already mentioned) because, when the borrower defaults and the security
is realised, the sum raised does not reimburse him, in part because of a fall
in the property market, that element of his loss is not to be separated out and
disallowed. He cannot recover damages beyond the limit, because ex hypothesi
he would have been lending and so vulnerable to a fall in the market
anyway, but he would not have been lending at that level and there appears to
be no reason to deny him recovery of damages which are not too remote within
the amount of his excessive advance. In successful-transaction mortgage-lending
cases the lender’s cause of action against the valuer will arise, as in other
cases, on V’s breach of contract or L’s first suffering actual damage, but it
may be impossible to assess the lender’s loss otherwise than predictively until
the financial out-turn of the transaction to him is known.
5. In
no-transaction mortgage lending cases it has been the practice since Baxter
v Gapp to award the lender his net loss sustained as a result of entering
into the transaction, which may be expressed as the difference between what the
lender advanced and what the lender would have advanced if properly advised
(which is always nil) plus related expenses of sale and realisation less sums
recovered. It may also, depending on the facts, be relevant to take account of
a mortgage loan the lender would have made if he had not made it to the
borrower. If, in assessing the lender’s damages in such a case, it appears that
he has suffered no loss because he has received the capital sum advanced with
reasonable interest, he will have no more than a nominal claim against the
valuer. Should a rise in the market have contributed to that outcome then, as
in the successful-transaction case, that contribution will not be ignored so as
to treat the lender as sustaining a financial loss which in fact he has not
sustained.
6. If in such
a case a fall in the property market between the date of the transaction and
the date of realisation contributes to the lender’s overall loss sustained as a
result of entering into the transaction, it would seem to us, on a
straightforward application of the restitutionary principle, that the lender
should be entitled to recover that element of his loss against the negligent
party. If the market fall were of modest proportions — say, 5% — it is hard to
think that the point would be regarded as arguable. But once a fall in the
market is accepted, inevitably, as foreseeable, nothing can in the ordinary way
turn on the extent of the fall. Any distinction between large and small market
falls would lack any basis in principle.
7. Since the
valuer’s negligence caused the lender to enter into the transaction, which he
would not otherwise have done and because he cannot escape from the transaction
at will, we regard that negligence as the effective cause of the loss which the
lender suffered as a result. The market fall cannot realistically be seen as a
new intervening cause. In Iron & Steel Holding & Realisation Agency
v Compensation Appeal Tribunal [1966] 1 WLR 480 at p492 and Royscott
Trust Ltd v Rogerson [1991] 2 QB 297 at p307 the foreseeability of a
cause was treated as a strong indication that that cause was not to be treated
as a new intervening cause. In the result, we do not think that a fall in the
market can be said to have broken the link between the valuer’s negligence and
the damage which the lender has suffered.
8. We differ
from Phillips J’s decision in BBL for these reasons.
(1) It does
not appear to us that the authority of Baxter v Gapp is in any
way impaired by subsequent authority save in so far as it dealt with
contractual interest. Except in that regard, the effect of the decision was, as
we understand, upheld by the House of Lords in Swingcastle. The decision
has been held to be binding on the Court of Appeal, and we must apply the
principle it laid down. We do not know what ‘subsequent developments in this
field of law’ the judge had in mind as undermining its authority.
(2) We do not
gain the help which the judge did from Skandia. The unforeseeable fraud
of the borrower in that case was understandably held not to have been caused by
any negligence of the underwriters. The whole loss sustained by L on the facts
here assumed was, in our view, caused by the negligence of V, since L was
induced by it to make a loan he would not otherwise have made and became
involved in a transaction from which he could not escape at will. He thereby
became vulnerable to a market fall which would not otherwise have injured him.
(3) We do not
think the judge was right to distinguish between the risk of overvaluation and
the risk of market fall and between the valuer’s duty in relation to each. V’s
duty was as we have defined it above. If V overvalued the land it was
foreseeable that L would lend on inadequate security, perhaps in circumstances
where (properly advised) he would not lend at all. It was foreseeable that B
might default, and if he did L’s recovery would depend on what the land might
fetch at the time of realisation. This would, foreseeably, depend on how the
market moved. We agree, of course, that V in no sense guaranteed or underwrote
L’s business investment. Had V valued the land competently, he would have been
under no liability to L no matter how disastrous the investment proved. But
once it is established that V’s negligence led L to make a loan he would not
otherwise have made it seems to us that L is entitled to be compensated for all
the damage he has suffered. If the market moves upwards, V reaps the benefit;
if it moves downwards, he stands the loss.
(4) As the
lenders submitted, it would give rise to artificial distinctions if the loss
attributable to the consequences of one element of the single decision whether
or not to lend could be divided up as the valuers suggest in considering the
liability of the advisers to the lender. In many cases there will be more than
one source of advice which goes to the final decision, namely the
creditworthiness of the borrower from some credit reference agency, the
prospects for the economy both local and national from a merchant banker and
the value of the securities offered. If all three were negligent it would lead
to untold and unnecessary complication if it were necessary for the lender to
establish separate losses against each of them. At present the lender would
recover the whole of his loss only once, but from any one of the three, and it
would be left to the three negligent advisers to take contribution proceedings
against each other. It would then be for the court to deal with the matter on the
basis of what is ‘just and equitable having regard to the extent of that
person’s responsibility for the
(5) We regard
the judge’s decision on interest as consistent with our view rather than his.
If part of BBL’s loss was to be disallowed, we can see no basis for awarding
interest on that part. As it is, we conclude that the judge’s decision on
interest was right and his disallowance wrong.
(6) We accept
that Lowenburg and the Canadian decisions based on it give some support
to the judge’s view. It does not, however, seem to us that his view is
supported by any English authority, or by the Australian and New Zealand cases
we have mentioned. We regard general principle and also the clear trend of
English authority as favouring the view we have reached.
We now turn to
the six cases under appeal.
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co Ltd
[1994] 2 EGLR
108; [1994] 31 EG 68 and 32 EG 89
Reference has
already been made to the facts of this case and to the judgment of Phillips J.
BBL’s claim
against Eagle Star was for £23,490,091. During the trial Eagle Star settled
this claim for £7,437,220, which Eagle Star sought to recover against John D
Wood Commercial Ltd. Eagle Star was at the relevant time a large provider of
mortgage indemnity cover to lenders in the property market. The purpose of this
cover was to protect the lender if the market fell and the proceeds of sale of
land taken as security proved insufficient to reimburse the lender on default
by the borrower. BBL relied on John D Wood Commercial Ltd’s valuation in
agreeing to lend £39.915m to the borrower, and but for the valuers’ negligent
overvaluation there would have been no transaction. Eagle Star also relied on the
negligent valuation in agreeing to cover BBL for the whole of the sum advanced.
In fact, unknown to BBL and Eagle Star, the buyer bought Trevelyan House for
£25.5m: thus the purchase was made without the buyer having to contribute at
all, and it was left with a cash sum in hand. Had Eagle Star known this it
would not have granted cover.
The judge held
that John D Wood Commercial Ltd owed Eagle Star a duty of care in valuing
Trevelyan House, that the valuers were negligent and that Eagle Star agreed to
grant full cover in respect of BBL’s loan of 90% of the valuation in reliance
on the valuation. He held that Eagle Star was entitled to recover the sum of
its compromise payment to BBL, subject to a deduction of £2,374,582. That
deduction represented the same percentage of Eagle Star’s claim against John D
Wood Commercial Ltd as the figure for which Eagle Star settled represented of
BBL’s claim against it. The judge’s reason for making that deduction appears at
pp180–181 of the judgment:
Causation
and measure of damage
Eagle Star
were providing 100% cover for the risks that the syndicate banks were accepting
when making the loan. Once again it is material to distinguish between the risk
that the sum advanced might be based on an overestimate of the value of the property
and the risk that the market value of the property might fall. Eagle Star were
no more relying on John D Wood Commercial Ltd’s valuation when considering
whether to accept the latter risk than were BBL.
Mr Buxton
[Eagle Star’s insurance manager] made this particularly clear [in] a passage of
his cross-examination by Mr Goldsmith. He said that ‘the whole raison d’être
for doing this business and the protection we had was that the property market
didn’t fall and it generally rose’. He went on to say that Eagle Star tried to
keep close to the market to detect trends in the market-place and not to check
valuations such as those given by John D Wood Commercial Ltd.
Eagle Star
relied on John D Wood Commercial Ltd to provide an accurate valuation of Trevelyan
House, but they relied on their own valuation of the likelihood of market
movements when deciding whether to risk a fall in value of that property. Their
decision to take that risk was not influenced by the amount of the valuation. I
have no doubt that Eagle Star would have been prepared to provide MIG cover at
a lower level had they received a lower valuation — albeit that the borrowers
would not have wished to proceed at that level.
In those
circumstances precisely the same approach to damages falls to be applied in the
case of Eagle Star’s claim as I have applied in considering BBL’s claim. Eagle
Star are not entitled to recover that part of their loss which is attributable
to the effect on the value of the security of the fall in the property market.
For reasons
that have already been given, we do not think the judge was right to deny BBL
recovery of loss attributable to a fall in the market and (like the judge) we
see no reason to adopt a different approach to Eagle Star’s claim over against
John D Wood Commercial Ltd.
Eagle Star
make the point that they should recover against John D Wood Commercial Ltd the
sum for which they reasonably settled with BBL even if the judge’s ruling on
the damages recoverable by BBL is correct. On the view we have taken this point
does not arise, but it remains open to Eagle Star hereafter if need arise.
Eagle Star
also challenge the judge’s finding that Eagle Star would have been willing to
offer BBL insurance cover at a lower level on a lower valuation. It is said,
first, that on a lower valuation the proposal would never have been put to
Eagle Star, because the borrowers would not have been willing to risk any money
of their own, which on an accurate valuation they would have had to do, and,
second, that Eagle Star would not have been willing to contemplate insuring a
loan when the borrower had no financial stake in the transaction. John D Wood
Commercial Ltd were only intermittently represented and called no evidence at
the trial. The firm has not been represented before us. Both these points seem
plausible. But, in our view, they add nothing to the finding that on a correct
valuation there would have been no loan: this was therefore a no-transaction
case.
Eagle Star’s
appeal will be allowed and their damages increased by the sum which was
deducted.
United
Bank of Kuwait plc v Prudential Property Services Ltd
[1994] 2 EGLR
100; [1994] 30 EG 103
In May 1990
Sallows Developments Ltd (‘Sallows’), a property development company, owed
about £1.6m to Lloyds Bank plc, secured by a first charge over a new
development, Coachman’s Court, Ipswich (‘the property’). Sallows applied to the
plaintiff for long-term finance to replace the Lloyds Bank lending, offering
the property as security.
In July 1990,
the plaintiff, subject to a satisfactory professional valuation of the
property, offered Sallows an advance, restricted to the lower of £1.75m or 70%
of the professional valuation, secured by a first charge.
In September
1990 the plaintiff instructed the defendant to prepare a valuation of the
property for mortgage purposes. On September 28 1990 the defendant valued the
property at £2.5m. The true value was found by Gage J to be either £1.8m to
£1.85m or £1.85m.
On October 19
1990 the plaintiff, having borrowed the money for this purpose, lent £1.75m to
Sallows, secured by a first charge over the property. That was 70% of the
defendant’s valuation figure; 70% of £1.85m would have been £1.295m which would
not have enabled Sallows to meet the plaintiff’s requirement of a first charge,
so there would have been no loan.
On December 28
1990 Sallows defaulted. The plaintiff enforced its security. On February 13
1992 the property was sold for £950,000, payment of £250,000 of which was
deferred to January 31 1995.
The plaintiff
claimed and the judge found that the defendant’s valuation was negligent and
allegations of contributory negligence were dismissed.
The plaintiff
sought damages for breach of contract and in tort. The judge, who was invited
to decide only the principle, held in a judgment delivered on December 10 1993
that it was a no-transaction case. He considered Baxter v Gapp,
London & South of England Building Society v Stone and Swingcastle
v Gibson and concluded that he was bound by the main principle in Baxter
v Gapp to hold that the measure of damages was the difference between
the sum advanced and the sum recovered on the sale of the property, plus any
consequential losses and expenses.
The defendant
appeals to this court challenging this approach and inviting the court to
prefer that of Phillips J in BBL. For the reasons
defendant that damages for market fall are irrecoverable not for want of
causation but because the defendant owed no duty in relation to such loss.
Reliance was placed on the speech of Lord Oliver in Caparo Industries plc
v Dickman [1990] 2 AC 605 particularly at p651E to F. But that case was
concerned with the extent of the duty owed by auditors who negligently reported
under the Companies Act 1985. It was held that this duty was to shareholders to
enable them to exercise their class rights and that the auditors owed no duty
to potential investors in the company. Seen in this context, we do not find
Lord Oliver’s speech of assistance in the type of no-transaction case which is
before this court where the extent of the duty is as we have defined it under
question (1) above. We are unpersuaded that this alternative approach compels
us to any different conclusion from those which we have already expressed.
Accordingly, Gage J was correct in deciding the principle as he did.
This appeal is
dismissed.
Nykredit
Mortgage Bank plc v Edward Erdman Group Ltd
In February
1990 the plaintiff was approached by property finance brokers, CLP, to advance
£2.6m to enable a property company to buy a development site, Warple Way, East
Acton (the property), for £3.7m. The plaintiff instructed the defendant valuers
to value the property, to comment on its potential saleability and to advise
whether the development costs were realistic.
On March 2
1990 the defendant valued the property at £3.5m and the plaintiff on March 12
advanced 70% of this, £2.45m, secured by a first charge on the property. The
judge (Judge Byrt QC) found there was no justification for a valuation in
excess of £2m. In June the borrowers failed to make the first interest payment
and the defendant gave an up-to-date valuation of £3.115m. In September 1990
the defendant was appointed receiver of the property. In February 1993 the
property was sold at auction for £345,000.
The plaintiff
claimed and the judge found that the defendant’s report and valuation were
negligent and allegations of contributory negligence were dismissed. The
plaintiff sought damages for breach of contract and in tort and the judge
awarded damages of £2.105m plus interest. He did so having found that the
plaintiff would not have made the loan had the valuation been proper and, in
the light of Swingcastle v Gibson, he concluded that damages were
to be assessed on the basis of the amount of the loan made, less the amount
recovered on the realisation of the security. His judgment, given on October 1
1993, was the first of the judgments presently under appeal and in consequence
neither BBL nor United Bank of Kuwait was cited to him.
The defendant
appeals to this court challenging Judge Byrt’s approach. The appeal has been
conducted on the basis that the judge’s findings of fact are correct although
these are challenged in a further, pending, appeal. For the reasons already
given the judge’s conclusion was, in our view, correct. This appeal is
dismissed.
BNP
Mortgages Ltd v Key Surveyors Nationwide Ltd
Mr Jakhu was
the owner of flat 10, Westfield Hall, Hagley Road, Edgbaston, which he had
bought in February 1989 with the assistance of a mortgage on which £68,000 was
still outstanding. He wished to remortgage it and applied to the plaintiffs
(‘BNP’), through a broker, for a loan of a sum in excess of £72,000 to be
secured on the flat. On behalf of BNP the broker instructed the defendants
(‘Key’) to value the flat. On March 13 1990 Key produced a report assessing the
value at £90,000. Mr Holloway of BNP suggested that there should be a spot
check on Mr Jakhu’s application, including a further valuation, but this was
not done. On May 3 1990 BNP offered two loans to Mr Jakhu in the total sum of
£72,000 (being 80% of the valuation) with a 5% interest deferral for two years
(that is to say that of the interest payable in the first two years the first
5% would be capitalised) to be secured by a first charge on the flat. The first
loan in the sum of £68,000 was to redeem the prior mortgage and the second was
for ‘improvements’ to the flat being the purpose of the loan as described by Mr
Jakhu in his application. This offer was accepted and the remortgage was
completed on May 31 1990.
BNP is a
‘centralised lender’, by which is meant that it does not have branch offices
and depends to a greater extent on its valuer’s advice as to the local
conditions. In addition to giving its opinion as to the value of the flat Key
expressed the view that residential values in the area were stable, that demand
was in balance but that a sale might take six months to achieve. The practice
of BNP was to borrow from its parent company, Banque Nationale de Paris, any
sum needed in order to make the agreed loan. Thus as part of the remortgage
transaction with Mr Jakhu BNP borrowed £72,000 from its parent.
Mr Jakhu did
not perform his obligations. Possession was obtained on February 14 1992. The
flat was ultimately sold with vacant possession on March 24 1993 for £45,000,
but not before it had been damaged by vandals.
Proceedings
were commenced by a writ issued on February 23 1993. BNP contended that in
March 1990 the true market value of the flat was only £72,000, that the
valuation was negligent and that had BNP known of the true value it would not
have lent any sum to Mr Jakhu.
The action
came before Judge Fox-Andrews QC, who on July 19 1994 gave judgment for BNP.
The judge concluded that the open market value in March 1990 was £72,500 and
that the defendants were negligent in valuing the property at £90,000. He
decided that in making the loan BNP relied on this valuation and but for the
valuation would not have made any loan to Mr Jakhu. But he also decided that
the general decline in the property market accounted for £12,500 of the loss
and, following Phillips J in BBL, deducted that sum from the
damages otherwise prima facie recoverable. It was common ground that BNP
had failed to mitigate its loss so that the sale of the flat should be treated
as having occurred in August 1992 in the sum of £60,000. He also decided that
BNP was guilty of contributory negligence and 25% to blame for its failure to
carry out the spot check, which Mr Holloway had suggested and he held that the
damage caused by the vandals was too remote to be recoverable from Key. In the
result he awarded BNP damages in the sum of £23,101 having deducted £10,473.89
on account of the decline in the property market.
BNP appeals on
the ground that the judge should not have deducted the £10,473.89 from the loss
for which he gave damages because the decision of Phillips J in BBL is
wrong and because even if right the advice given in the report about the local
conditions and state of the market was directed to future market conditions and
was therefore concerned with that risk.
In his
judgment the judge referred extensively to the judgment of Phillips J in BBL,
in particular to his references to a collapse in the property market. He said:
Assuming that
Baxter v Gapp save on contractual interest is still good law,
nevertheless I find that it can be distinguished where the facts establish that
there has been a significant collapse in the market. On my findings there was a
fall in a period of about two and a half years of about 16.5%. I find that to
amount to a significant collapse. I find therefore that Key Surveyors are not
responsible for the loss resulting from the fall in the market.
As we have
already concluded a distinction between large and small falls in the market
lacks any basis in principle. It follows that, in our view, the judgment of the
judge was inconsistent with Baxter v Gapp and wrong in law.
Moreover, as we consider the decision of Phillips J in BBL to be wrong
the alternative arguments based on the details of the advice given by Key and
to which we have referred do not arise.
Accordingly we
allow the appeal and increase the amount for which judgment was entered for BNP
by £10,473.89 together with corresponding increases in the interest
recoverable.
BNP
Mortgages Ltd v Goadsby & Harding Ltd
[1994] 2 EGLR
169; [1994] 42 EG 150
Mr Liddle was
the owner of 4 The Courtyard, Holt, nr Wimborne, Dorset, which was charged to
Halifax Building Society to secure £165,000. He wished to remortgage that
property and applied to the
property at £245,000. BNP instructed the defendants (‘G&H’) to value the
property on their behalf. On February 21 1990 G&H issued their valuation in
the sum of £245,000. In reliance on that valuation BNP lent to Mr Liddle the
sum of £196,215 representing approximately 80% of the valuation of which
£182,000 was needed to redeem the existing mortgage.
BNP is a
‘centralised lender’, by which is meant that it does not have branch offices
and depends to a greater extent on its valuer’s advice as to the local
conditions. In addition to giving its opinion as to the value of the flat
G&H expressed the view that residential values in the area were stable,
that there was a lack of demand and that a sale might take six months to
achieve. The practice of BNP was to borrow from its parent company, Banque
Nationale de Paris, any sum needed in order to make the agreed loan. Thus as
part of the remortgage transaction with Mr Liddle BNP borrowed £196,215 from
its parent.
In October
1990 Mr Liddle defaulted. BNP sold the property with vacant possession on June
30 1992 for £100,000. After deducting the costs of sale BNP recovered £95,854.
The action was
commenced by a writ issued on December 2 1992. BNP alleged that the property
had been worth £150,000 at the most, that the valuation was negligent and that
had the plaintiff known of the true value it would not have lent any sum to Mr
Liddle. The trial of a number of preliminary issues was ordered and came before
Judge Fox-Andrews QC, who gave judgment on them on June 17 1994. He concluded
that the valuation provided by G&H was negligent, that BNP relied on it in
lending £196,000 to Mr Liddle, that the true value of the property as at the
date of the valuation was £180,000 and that BNP would not have lent any sum to
Mr Liddle if they had known that true value because Mr Liddle would not have
been able to remortgage his property with 80% of such true value. But in answer
to the sixth issue the judge concluded that BNP could not recover that part of
their loss which is represented by the reduction in the value of the property
between the date of the valuation and the date of the sale. On that issue he
followed Phillips J in BBL.
BNP appeals.
It is contended that Phillips J was wrong in BBL so that the
decision of the judge on the sixth issue was wrong in law. It is also
submitted, if it matters, that the judge was wrong in deciding on the evidence
that the cushion of 20% was not at least in part intended to protect BNP from
all risks including the risk that the market might fall.
In his
judgment, the judge acknowledged that although Baxter v Gapp was
not regarded with much enthusiasm by the House of Lords in Swingcastle it
had not been overruled save in respect of the interest point. He continued:
But whereas
in many cases a court would be slow to distinguish a long-standing authority,
in this case it is somewhat easier to do so. I find the reasoning of Phillips J
on the issue I have to decide powerful. The plaintiffs did not look to the
defendants for advice as to the likely movement of the property market in the
coming months. In so far as the plaintiffs asked for some view as to the
existing state of the market and received an answer in the form, am not
satisfied that the answer affected their judgment in any way. I have reached
the conclusion that the answer to this issue is no.
It is apparent
from our decision on the main question that we do not agree with the reasoning
or the conclusion of the judge. Moreover, in the light of that decision the
second point argued on this appeal, namely the purpose of the 20% cushion, does
not arise.
In these
circumstances we allow the appeal and answer preliminary issue 6 in the affirmative.
Mortgage
Express Ltd v Bowerman & Partners
[1994] 2 EGLR
156; [1994] 34 EG 116
The central
facts giving rise to this appeal are the subject of agreement between the
parties.
The plaintiff
in the action is a mortgage lender and the defendant is a firm of solicitors.
On October 23 1990 a Mr Hadi applied to the lenders for a loan of £198,000 in
order to purchase a flat for £220,000. On October 25 1990 the premises were
valued by valuers instructed by the lenders at £199,000. The lenders’ policy
was to advance up to 90% of the lower of the purchase price or valuation when
making loans in this range. Consequently on October 25 1990 Mr Hadi made a
fresh application for a loan of £180,150. In the application he nominated the
solicitors to act for him. He had had no previous involvement with them.
Unknown to the
lenders or the solicitors the true open market value of the premises at October
25 1990 was £120,000.
The lenders
made a mortgage offer to Mr Hadi of £180,150. They also instructed the
solicitors to act on their behalf as well as his.
The registered
proprietor of the premises was a Mr Khedair. He had agreed to sell them to a Mr
Rasool. Mr Rasool had agreed to sell on to Mr Arrach, who in turn had agreed to
sell to Mr Hadi. On November 26 1990 the solicitors learned that Mr Rasool had
agreed to sell the premises to Mr Arrach for £150,000. The solicitors
immediately informed Mr Hadi that the purchase was to be by way of subsale and
informed him of the price that Mr Arrach was paying. Mr Hadi nevertheless decided
to proceed. The solicitors also learned that the property had recently been
sold to Mr Rasool by Mr Khedair, although they were unaware of the price. The
solicitors did not pass any of this information to the lenders. Mr Arrach and
Mr Hadi exchanged contracts. The solicitors made their report on title to the
lenders. The lenders advanced £180,150 to the solicitors on December 18 1990.
Completion then took place.
Mr Hadi
defaulted on his loan. Possession proceedings were commenced and in due course
the premises were sold. They realised £96,000. The difference between this
figure and the previous open market valuation of £120,000 was due to a general
fall in the property market.
It was not
alleged that the solicitors acted dishonestly or that any of the facts known to
them should have put them on inquiry as to the possibility of fraud by Mr Hadi.
However, the lenders submitted that the solicitors owed them a duty to report
to them information which came into their possession which cast doubt on the
accuracy of the valuation.
In a very
clear judgment handed down on May 11 1994 Arden J found that the solicitors
ought to have realised that the price paid by Mr Arrach cast doubt upon the
valuation of the property and that having been so put on inquiry they were
bound to inform the lenders of the relevant facts relating to the subsale. The
judge’s findings on liability are the subject of a cross-appeal, not now before
the court.
Loss and
damage were agreed save for that part of the lenders’ loss which was attributable
to the fall in the property market. The judge found that if the lenders had
known of the relevant facts they would have had the property revalued and that
such revaluation would have led them not to proceed with the loan. She also
found, however, that the lenders took the risk of a fall in market value after
valuation. Following the analysis of Phillips J in BBL, the judge
found that the solicitors were not liable for the loss resulting from the fall
in market value. The lenders challenge that decision.
The judge held
that the duty of the solicitors was clear:
to protect
the interests of the lender when carrying out his instructions
She also held:
In the same
way, when a solicitor who is acting for a purchaser becomes aware of any
information which puts him on inquiry as to the accuracy of a valuation
obtained for the purposes of making a loan for a purchase, he is, in my
judgment, bound to take some action. In my judgment, he is bound to take action
on behalf of both his clients, where he acts for both lender and borrower. He
owes a duty to each of them to protect their interests when carrying out their
instructions …
Thus, the
judge held that the solicitors were in breach of their duty to alert the
lenders to facts which they were entitled to know and which, if communicated to
them, would have caused them to direct a further valuation of the property,
which would have led to their
damages is different in this case from the cases involving valuers, since the
duty owed in the two cases is different. It is, however, to be observed,
accepting the judge’s ruling on the nature of the duty and its breach, that the
duty owed by the solicitors is wider than that of the valuer.
For the lenders,
counsel submitted that BBL had been wrongly decided and that, even if
that decision were right, the present case was distinguishable. The solicitors’
duty was to protect the interests of the lenders as their client, and as a
result of their failure to do so the lenders entered into a transaction they
would not otherwise have entered into and as a result suffered damage for which
the solicitors are liable. Once it was accepted that a fall in the market was
foreseeable, and the solicitors were found to be aware that in late 1990 the
property market was not rising and, if anything was falling, there was (it was
submitted) no legal basis upon which the lenders could be deprived of any part
of the damage they actually suffered.
For the
solicitors, counsel supported the correctness of BBL and further
submitted that there was no ground of distinction between that authority and
the present case. In argument, emphasis was laid on the independent decision of
the lenders to advance the loan which they did. They appreciated the risk that
the market might fall, it was said, and any damage they suffered as a result of
it doing so was the result of their own decision and not of any breach of duty
on the part of the solicitors.
It is of
course correct that the lenders would have had no ground of complaint against
the solicitors if they had entered into this transaction having received the
advice which they should have received and had thereafter suffered loss owing
to a fall in the market. But that is not this case. The essence of their
complaint is that they did not receive the advice which they should have
received and which would have meant that they did not suffer from the general
fall in the market; as it was, they entered into a transaction which they would
not have entered into, and did suffer damage. They did make their own
investment decision, but it was not a decision made after receiving proper
advice and not the decision which they would have made had they received proper
advice.
For reasons
already given we have concluded that the decision reached in BBL was not
correct and, in our view, the same reasoning governs this case also. The
lenders were, in our judgment, entitled to reimbursement of their loss without
deduction of such part of that loss as was attributable to the fall in the
market. In the course of her judgment the judge observed that:
it would be
extraordinary if in the same action, valuers and solicitors were both sued and
the valuers were not liable for loss attributable to the fall in market value
but the solicitors were.
This is a
result which could theoretically arise if their respective duties were
sufficiently different to cause different heads of resulting loss. But, in our
opinion, it does not arise here: the measure of damages against the solicitors
is the same as the measure would be against the valuers had they been sued.
We would allow
the lenders’ appeal, and declare that the damages recoverable by the lenders
should not be discounted by that part of the damages attributable to a fall in
the market. This decision is, however, subject to the decision of the court on
the solicitors’ cross-appeal, in which the judge’s finding of liability is
challenged.
Orders
accordingly.
