Negligence – Surveyor – Valuation – Causation – Appropriation of debt payment – Surveyor valuing property for purpose of further advance by lender to borrower – Borrower defaulting and property sold – Proceeds of sale insufficient to pay both original loan and further advance – Claim against surveyor for negligent valuation – Whether lender appropriating sale proceeds to repay further advance – Whether lender having cause of action against surveyor
In 2004, the defendant surveyor valued a residential property for the claimant lender in connection with a mortgage loan of £93,400. In 2005, the claimant made a further advance of £19,492 to the borrower on the strength of a new valuation of £135,000 by the defendant. The borrower defaulted on repayments. The claimant took possession of the property in 2007 and sold it in December 2009 for £87,000, which left a shortfall after the funds were applied to the outstanding loan accounts.
The claimant brought an action against the defendant for damages for negligence in relation to the 2005 valuation. A preliminary issue was tried as to whether, assuming negligence to be proved, the claimant had any cause of action against the defendant. The parties’ arguments turned on the application of the principles relating to appropriation of debt payments. The defendant contended that the claimant had suffered no loss in relation to the 2005 advance, for which the valuation had been provided, since that advance had been repaid in full. It relied on the claimant’s own documents and schedules, sent to it in the context of the proceedings, indicating that the net proceeds of sale had first been used to repay the further advance and had then been applied to reduce the main 2004 loan.
The claimant contended that: (i) the documentation in question did not demonstrate any relevant appropriation since it resulted solely from a mechanical exercise effected by its computer system as a matter of internal record-keeping; (ii) any purported appropriation was not effective until it was communicated to the debtor, which had not occurred; and (iii) even if the sale proceeds had been appropriated to pay off the further advance in full, the claimant had still suffered loss on the ground that the security for its total lending was, contrary to the defendant’s advice, insufficient to cover the further advance.
Held: The claim was dismissed. (1) The proceeds of sale of the property had been appropriated to the repayment of the account for the 2005 further advance. Carrying the payment to that account was prima facie sufficient to make the relevant appropriation, which, once made, was not reversible. It was irrelevant that the claimant’s computer system had performed that action automatically. The way the computer system was set up reflected a human decision as to how payments were to be appropriated and that was sufficient to inject any necessary element of deliberateness into the appropriation. Moreover, the claimant had regarded the computer entries as recording its intentions in that respect. (2) Communication of the appropriation to the debtor is not absolutely necessary to complete an appropriation by the creditor, although it is likely to be the way in which it communicates its “final answer” on that issue. The creditor must do something from which it can be sufficiently inferred that it has made the relevant election to appropriate. Communication to a party who is not the debtor, but who has an interest in the appropriation, will suffice. Since the defendant had an interest in how the payments were appropriated, and the schedules sent to it were intended to operate as the claimant’s statement of its position, that was sufficient to make final the relevant appropriation. By its act of appropriation, the claimant had treated itself as having recovered the debt under the further advance; accordingly, it had eliminated any loss on that account and suffered no damage under it. (3) The extent of liability for negligent valuation depends on the scope of the relevant transaction. A valuer is not liable for matters that are not caused by the lender entering into the particular transaction on the basis of wrong information. The claimant’s alleged loss recorded against the main loan account did not give rise to liability since, in making the 2005 valuation in connection with the further advance, the defendant owed no duty of care with regard to protecting the claimant from loss on the earlier loan. The loss on the main account did not flow directly from the 2005 loan, as a consequence of entering into it, but had been caused by the claimant’s election to treat that further advance as paid. That was not an act carried out in reliance on the defendant’s assumed negligent valuation. It followed that the claimant’s particulars of claim disclosed no reasonable cause of action.
The following cases are referred to in this report.
Deeley v Lloyds Bank Ltd [1912] AC 756
Cory Bros & Co Ltd v Owners of the Turkish Steamship “Mecca” [1897] AC 286
Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627
Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336
Seymour v Pickett [1905] 1KB 715
Simson v Ingham [1823] 2 B&C 65
South Australian Asset Management Corporation v York Montague Ltd [1997] AC 191
This was the trial of a preliminary issue in a claim by the claimant, Capital Home Loans Ltd, against the defendant, Countrywide Surveyors Ltd, for negligence in the valuation of residential property for the purposes of a mortgage advance.
Robert Christie (instructed by Slater Rhodes, of Yeovil) appeared for the claimant; Thomas Grant (instructed by Beachcroft LLP, of Leeds) represented the defendant.
Giving judgment, HH Judge Hazel Marshall QC said:
Introduction
1. This is the trial of a preliminary issue, coupled with certain other applications, in a professional negligence claim, brought by a mortgage lender against a property valuer. It raises an interesting and apparently novel point as to whether, in the events which have happened, the Claimant (“Capital”) can claim to have suffered any loss as a result of an alleged negligent valuation of property by the Defendant (“Countrywide”) at the time of a further advance made to the borrower. The dispute arises out of the way in which Capital has, or is alleged to have, applied the proceeds of sale of the property when it was sold after repossession, as will be explained later.
2. This preliminary issue came before me on 31st March 2011, at which time I heard the small amount of factual evidence relevant to it. Either out of an abundance of caution, or because it had complaints about the way the quantum of the claim had been pleaded which were not swept up on the preliminary issue, Countrywide had also made a specific application to strike out the claim, or part of it, for disclosing no reasonable cause of action, or for summary judgment. Capital was by this time also seeking permission to amend its Particulars of Claim. However, Countrywide were of the view that the then proposed amendments still did not disclose a cause of action, or plead Capital’s claimed loss correctly or sufficiently clearly, in the light of the principles of assessment laid down in the “SAAMCo” case (South Australian Asset Management Corporation v York Montague Ltd [1997] AC 191, often also known as the “BBL case”).
3. Owing to lack of court time, the matter was part heard on 31st March 2011 and was then adjourned until 11th August 2011. By this time, Capital had revised its pleaded claim further, and, very shortly before the hearing, made a formal application to amend its Particulars of Claim in this new form. Countrywide still objects to this pleading, for the same reasons. For practicality, I have ultimately, considered the matter on the basis of its proposed revised pleading.
The dispute
4. For the purpose of the preliminary issue only, Countrywide admits the relevant negligence. However, (and this is the essence of the preliminary issue) Countrywide says that Capital cannot claim to have suffered any loss because the advance which it made on the faith of Countrywide’s valuation has been paid off.
5. Capital, through Mr Robert Christie of Counsel (who was not responsible for its first pleaded case) has produced the latest revised draft Particulars of Claim, in the knowledge of Countrywide’s arguments advanced at the first hearing. He submits that this new Particulars of Claim does plead a viable cause of action, and a proper formulation of Capital’s loss.
6. Countrywide disputes this through Mr Tom Grant of counsel. As a secondary point, he also argues that, even if some form of reasonable cause of action is found to be disclosed in principle by the draft Amended Particulars of Claim, the claim of loss as currently formulated is now so opaque that it should not be permitted to proceed in that form, at least. He submits that it neither sets out a comprehensible formulaic construction nor pleads what the amount of the claim is (and bearing in mind that the property was sold in December 2009, it must now be possible to quantify Capital’s claim, if it has one). For those reasons his second argument is that on any basis this form of pleading is unsatisfactory and permission to amend in this form should be refused.
The facts
7. These are relatively straightforward. In May 2004, the borrower, Mr Sheikh, applied to Capital to remortgage a residential property at 73 St Thomas Road, Erdington, Birmingham. Capital instructed Countrywide to provide a mortgage valuation. That valuation, dated 19th May 2004, ascribed to the property a current value of £110,000.
8. On the strength of this, on 8th June 2004, Capital loaned £93,400 (net of fees) to Mr Sheikh and this was secured by a first charge on the Property. The charge was expressed to secure, also, further advances. This loan was repayable in 18 years on an interest-only basis at a rate of 5.49%. In its records, Capital allocated the number 0903879109 to this loan (“the 2004 Loan”).
9. A year later, in May 2005, Mr Sheikh applied for a further loan of £21,250 from Capital. They again instructed Countrywide to carry out a mortgage valuation. By a report dated 25th May 2005, Countrywide valued the property at £135,000.
10. On the strength of this, on 26th June 2005, Capital made a further loan to Mr Sheikh, of £19,492 (net of fees) (“the 2005 Loan”). At around this time, three different numbers were apparently attributed to this loan in Capital’s internal records and correspondence, namely 800960410 when the cheque for the advance was sent to Mr Sheikh, 64482 in the “Acceptance of Additional Borrowing” documentation which he signed, and 905868008 in Capital’s internal “Offer check and Dispatch” document.
11. When applying for the further advance, Mr Sheikh requested to have the interest rate on the 2004 Loan (the balance outstanding on which was then £94,788.53) made the same as the 2005 Loan. Capital granted this request. The interest rate for both loans was then 4.75%.
12. After completion of the 2005 Loan, the mortgage statements issued to Mr Sheikh used the single account No 903879109, but in the section for “Interest Rate History” they listed the 2004 Loan and the 2005 Loan separately as “Part 1” and “Part 2” and gave the balances outstanding on each separately. Although they now had the same interest rate, the 2004 Loan had a one month longer term than the 2005 Loan.
13. In October 2007, Mr Sheikh began to default on his payments. He voluntarily gave possession to Capital in April 2008.
14. In July 2009, Capital intimated a claim against Countrywide. Initially, they asserted negligence in respect of both valuations, having received advice that the value at the time of the 2004 valuation was £95,000 (in contrast to Countrywide’s valuation of £110,000) and the value at the time of the 2005 valuation was £105,000 (in contrast to Countrywide’s valuation of £135,000). They asserted that
“the property was over-valued by the sum of £30,000 and our clients are looking to you for reimbursement of that sum [sic] plus interest from the date of the advance”
15. Capital eventually sold the property in December 2009, for £87,000, and on 17 December 2009 it received £86,552.75 from its conveyancing solicitors. On a Redemption Checklist dated 18th December 2009, Capital record this in relation to Account No 903879109 as leaving a closing balance and shortfall of £45,593.69. It is not quite clear on what basis this was calculated, but plainly this related to the aggregate of both loans.
16. However, on the same day, Capital’s litigation solicitors, Slater Rhodes, were writing to Countrywide (by now through their solicitors, Beachcroft LLP, hereafter referred to as “Beachcrofts”) serving documents which should have included “LIBOR calculations for the main account and the further advance” amongst other material. In fact these were omitted and only provided by a letter of 12th January 2009. They were separate schedules, dealing with each loan individually, and showing a debit balance as at December 2009 of £103,565.66 on “903879109 – 73 St Thomas Road – Sheikh”, and one of £21,344.84 on “Further Advance – 903879109″. They did not show any credit for the proceeds of sale of the property.
17. I should say at this point that the ensuing correspondence dealt with very many matters of dispute and difference between the parties with regard to negligence, contributory negligence, right to sue and factual matters. I refer below only to statements which are material to the issues now before me, but the scope of all the dispute in the case potentially ranges very much wider.
18. By a letter of 9th February 2010, Beachcrofts responded to the intimated claim, making various objections on liability and contributory negligence, and also saying that Schedules of Loss were still awaited, emphasising that the measure of damage was the lower of the basic loss” (subject to contributory negligence and mitigation) and the “SAAMCo” cap.
19. Arguments were traded between solicitors over the following few weeks. On 9th March 2010, Slater Rhodes wrote to Beachcrofts:
“You have been aware since our letter of clam that our client claims £30,000 plus interest. A schedule of the loss on the main account and further advance account on a cost of funding basis was then sent to you as long ago as 18th December 20[09] [sic]. The property has now sold and we are asking our clients to update this schedule.”
20. On 19th March 2010, Slater Rhodes sent “a copy of the updated schedule of loss which gives credit for the proceeds of sale”. This Schedule referred to “903879109 – 73 St Thomas Road”, gave a closing debit balance of £40,999.79 up to March 2010, and credited only £64,496.80 to the account in December 2009.
21. Beachcrofts therefore requested “a schedule incorporating the additional loan” and taking account of certain further payments they believed had been made.
22. On 12th April 2010, Slater Rhodes replied:
“We enclose the schedule relating to the further advance account, with apologies for the omission. This shows, of course, a pro rata credit for the proceeds of sale.”
23. This Schedule indeed showed a credit to “800960410 – 73 St Thomas Road” (the original number given to the further advance account) of proceeds of sale of £22,072.82. It is not clear to me what this sum was “pro rata” with, but that does not matter. This credit in fact brought the account into a credit balance of £737.62 at that time, increasing to £738.61 as at March 2010.
24. Beachcrofts immediately responded, on 20th April, first that
“Your client claims a loss of £30,000 plus interest. Please explain how loss at this level is predicated, and recoverable, by reference to the basic loss and/or the SAAMCO cap.”
and, second, to the effect that it was apparent from the schedules that the proceeds of sale of the property were primarily applied to discharge the shortfall on the additional loan account, that Countrywide had therefore recovered all its losses on the 2005 Loan (and ought to have credited the credit shown on the 2005 Loan account to the 2004 Loan account) and that, without admission of liability, its claims must be limited to any claim on that latter account.
25. Slater Rhodes responded on 22nd April 2010. They did not answer the first question. They complained that
“It ill behoves your clients to seek to use the fact that our client has chosen (and they need not have done so) to apply the proceeds of sale pro rata as suggesting that our client has suffered no loss.”
They enclosed a calculation which showed the position “had our client maintained a single account”. On a combined account, and attributing the whole of the proceeds of sale, this produced a shortfall of £42,883.56. They also sent a schedule showing the position on the first account if the second loan had not been made.
The proceedings
26. Capital issued these proceedings on 22nd July 2010 and, rather surprisingly (in view of the fact that the amount claimed was between £15,000 and £50,000) in the High Court.
27. Crucially, for present purposes, it alleged that only the second, 2005, valuation had been negligent. (It will be observed that in respect of the 2004 valuation, the percentage variation from the actual value reported to Capital by its second report – about 15% – was significantly less than that in respect of the 2005 valuation – about 28.5%.)
28. They alleged that the true value of the property in May 2005 had been £105,000 as against the allegedly negligent valuation of £135,000. They pleaded that they had relied on this in making a further advance (unspecified) to the Borrower. They pleaded that the Borrower had defaulted and the property repossessed and sold, “leaving a shortfall on the mortgage account of £45,593.69”. They did not actually plead the fact or amount of the 2004 Loan. At Paragraph 13, they claimed loss and damage of
“the difference between the valuation of the Property and the actual value thereof at the date of valuation: £30,000”
plus interest.
29. I need not consider the deficiencies in this pleading even on the case the Claimants were making, because matters have moved on from there.
30. Countrywide’s lengthy defence raised many and various issues of law, and factual points, which there has been no need to set out. However, at Paragraph 14, it pleaded that the Claimant’s own documents showed that it had utilised the net proceeds of sale, firstly to redeem the 2005 Loan, and then as to the balance, applying that to the 2004 Loan to give the “shortfall” amount mentioned. It then pleaded that, accordingly, the 2005 Loan had been fully redeemed, and the Claimant had therefore suffered no loss in reliance on the valuation report which led to the making of the 2005 Loan; all its losses were attributable to the 2004 Loan, which was made before that report and not in reliance on it.
31. In September 2009, the case was transferred to this court, and at a case management conference on 12th November 2009, I ordered that
“The issue as to whether in the events which have happened, the Claimant has sustained or can maintain it has sustained, any loss flowing from the 2005 Valuation be tried as a Preliminary Issue”
I did so because I was of the view that this was a sufficiently short and discrete point, with a sufficiently real prospect of possible success, that it was appropriate to hive it off in this way. Directions were given for the exchange of witness statements with regard to the relevant facts, namely Capital’s application of monies and management of the loans.
32. As stated above, the issue was listed for trial on 31st March 2011, and I have noted the other applications which both the Defendant and Claimant had by then issued.
Oral evidence
33. At that hearing, I heard evidence from Miss Helen Leather in the Customer Services Department of Capital, with regard to the internal practices of Capital.
34. She frankly explained that she had not been involved in the matter before December 2010, when she carried out the manual override exercise on the Claimant’s computerised account records, as mentioned in paragraph 37 below. She had about nine years’ experience working for Capital, and most of her evidence was from her general knowledge of their systems and working practices, and from looking at the records in this particular case.
35. She explained that where a borrower is given a further advance, a further account number will be used for ease of administration. Typically, original advances had a number commencing “90” and further advances “80”. She also explained that mortgage administration was outsourced to a company called “Home Loan Management Ltd” whose IT systems were used to administer the mortgage and record the transactions.
36. She explained that when a property is sold, or a mortgage repaid, and the mortgage is “to be redeemed in full (whether or not there is a shortfall)” – which I take to mean where there is a final payment to crystallise the account – the operative had a single available button to click on in relation to this transaction, and the IT system would allocate the funds automatically. It would also automatically do this, first, to the further advance and then to the main account, because the system could not cope with doing it any other way.
37. She said that, in December 2010, she had manually overridden the systems to show “redemption of the main account and a shortfall in respect of the further advance”.
38. I took the thrust of her evidence to be, therefore, that the allocation of the proceeds of sale of the property first to the further advance and with the balance going to the original advance, was the product of the way the IT systems worked, rather than a deliberate allocation decision. She said in her witness statement
“I suspect that the way in which matters are handled is also dictated, to an extent by the way in which that system is structured”.
However, she confirmed, in oral evidence, that “the people who make the substantive decisions are CHL”.
Issues and argument
39. It will be gleaned from the above that the central point in the preliminary issue, framed as it is as being “whether Capital has sustained, or can maintain that it has sustained, any loss flowing from the 2005 valuation”, depends on the effects of the rules regarding appropriation of payments to the facts of this case.
40. Mr Grant, for Countrywide, suggested that there were two sub-issues, namely whether
(1) Capital suffered loss as pleaded in paragraph 13 of the (original) Particulars of Claim (cited above); and
(2) Whether Capital incurred any loss as a result of the alleged breaches.
41. Although he argued these issues in the above order, I prefer to take them the other way around. This is because it seems to me that the first is really a pleading point, and the second issue underlies the more broad point of principle. If it is decided in Countrywide’s favour, the first issue does not arise in practice.
(1) Has Capital suffered any loss as a result of the (assumed) negligent 2005 valuation?
Defendant’s argument
42. Mr Grant cites Cory Bros & Co Ltd v Owners of the Turkish Steamship “Mecca” [1897] AC 286, and in particular the speech of Lord MacNaghten at pp 293-4 as to the rights of appropriation of payments as between debtor and creditor:
“When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor it has long been held and it is now quite settled that the creditor has the right of election ‘up to the very last moment’, and he is not bound to declare his election in express terms. He may declare it by bringing an action or in any other way that makes his meaning and intention plain. Where the election is with the creditor, it is always his intention expressed or implied or presumed, and not any rigid rule of law that governs the application of the money. The presumed intention of the creditor may no doubt be gathered from a statement of account, or anything else which indicates an intention one way or the other and is communicated to the debtor, provided there are no circumstances pointing in an opposite direction.”
43. Mr Grant submitted that the right of appropriation in this case had clearly devolved on Capital, as the creditor, because Mr Sheikh had made none. The Schedules served by it on 19th March 2010 and 12th April 2010 showed that when it received the proceeds of sale, it had applied these as to £22,072.82 to the 2005 Loan (thus extinguishing it) and as to £64,496.80 to the 2004 Loan, reducing the outstanding balance, but leaving a shortfall. He submitted that this was consistent with Miss Leather’s evidence of how the receipt of the payments was dealt with by Capital’s computer systems at the time, and actually supported by that evidence.
44. He submitted that Capital could not argue that this apparent appropriation was not effective, or had never been effected. He pointed out that the way in which Capital had described and dealt with the payments was consistent only with a belief and understanding held by them that the payments had indeed been appropriated, effectively, in the way in which the computerised entries recorded, and that it required some kind of change, or “reversal” of a previously existing state of account to produce any apparent loss on the 2005 Loan account. Thus, he said, it was not that Capital did not regard themselves as having initially effected a valid appropriation to the 2005 Loan account, at all – they obviously did, and had – but that they believed that they could change their minds and change this appropriation having once made it. This was wrong.
45. He relied on Deeley v Lloyds Bank Ltd [1912] AC 756, (pp783-4 per Lord Shaw) that
“having been made, it is made once for all, and it does not lie in the mouth of the creditor afterwards to seek to vary that appropriation”.
46. He says, therefore, that it was not open to Capital either to ignore the appropriation it had in fact made, and later to treat this as if it had not happened, or to “reverse” it and change it, manually or otherwise, as it now claimed to have done in December 2010.
47. It followed, he submitted, that Capital had received repayment of the advance which it had made in reliance on the 2005 valuation and could not be heard to say otherwise. They had therefore suffered no loss as a result of any reliance on the (assumed) negligent valuation, and their claim must be struck out, or judgment entered for the Defendant.
48. Mr Grant also relied on Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336. I think he went so far as to submit that it was really on all fours with this case, but if so, in my judgment, that was putting it too high.
49. In that case an advance was made to the borrower on strength of a valuation from the defendants. The borrower had later requested a further advance. A second valuation report was then obtained from a different valuer, and a further advance was made. However, this had been effected (the judge found) by the mechanism of a remortgage, and the granting of a single new larger advance which was then used in the books of the lender to repay the first advance (that account being closed), and a new replacement mortgage deed was executed. The claimants here sued the first valuers in negligence.
50. The Court of Appeal held that the transaction with which those valuers had been concerned was the first loan, and on the facts, this had been repaid, so that no loss had been suffered. It rejected an argument that in reality there was no remortgage, but only a further advance in circumstances which in no way affected the original valuation, and that the documentation was simply an internal book-keeping exercise, so that the defendant’s liability for negligence continued. It also rejected the argument that the claimants suffered loss when they entered into the first loan transaction on the basis of the original report, by receiving less security then than they should have had, and that that liability continued.
51. The court treated the transactions as taking place exactly in the manner they had been effected and recorded. The result was that the first loan had been paid off, in full and the first mortgage redeemed. The second argument was rejected on the grounds that the scope of the relevant duty of care was “determined by the transaction itself” (see Preferred Mortgages at [29]); that was the first loan transaction, and, no loss had been suffered by the claimants in respect of that because it was fully redeemed.
52. Mr Grant argues that the transaction in respect of which the impugned valuation report was given here was the further advance which, as previously submitted, has been paid off in full, on the facts. Whilst there are similar features to Preferred Mortgages in this case, it will be seen, though, that the facts are somewhat different, and I am therefore not satisfied that it can be applied directly here, although I certainly find it helpful.
Claimant’s argument
53. As mentioned, Mr Christie, on behalf of Capital had applied for permission to amend the Particulars of Claim to overcome any alleged deficiencies with regard to disclosing a cause of action and any other matters. He dealt with the causation points made by Mr Grant, as these effectively are, in Paragraphs 15, 16 and 17 of the new draft. These recorded the facts which he relied on in support of the following arguments, and I need not set them out.
54. Mr Christie first submitted that there had not, in fact, been any appropriation of the proceeds of sale to the 2005 Loan made by Capital at all until Miss Leather effected this in December 2010, in the way which Capital now sought to rely on. This was for two reasons: first the way in which the payments were initially dealt with was the product of a purely mechanical exercise effected by a computer system, with no human thought driving it, and, second, because it had been nothing but an internal exercise of convenient record keeping on Capital’s part anyway, and therefore was not an appropriation.
55. He cited Chitty on Contracts 30th Edition at para 21-061, to the effect that a creditor can appropriate up to the very last moment, and need not do so until something happens which makes it inequitable for him to exercise his right; short of that, the creditor could appropriate at any time, and even as late as when giving evidence in the witness box: Seymour v Pickett [1905] 1KB 715. Mr Christie therefore submitted that a creditor need not make his election until it is necessary to do so in the circumstances of the case.
56. He argued that prior to Miss Leather’s appropriation, nothing done by Capital had amounted to an election to appropriate in any particular fashion. The computerised records in Capital’s systems were simply an internal matter of their private accounts. As a matter of fact, the systems recorded the transactions in the way they did, in two tranches, but Capital effectively treated the whole indebtedness as one account; it was, of course, the total lending to the borrower which was important to it.
57. He submitted therefore, that the paperwork generated by the computerised systems likewise evidenced no intention to appropriate, and indeed, even the Schedules transmitted to Countrywide in January, March and April 2010 could not be regarded as the expression of an intention to appropriate, because there was none; this was simply giving figures.
58. He referred to the passage in Deeley (above) and its preceding passage, namely
“if there is nothing more than this, that there is a current account kept by the creditor, or a particular account kept by the creditor, and he carries the money to that particular account, then the Court concludes that the appropriation has been made.”
and submitted that this was referring to the case where neither party had made an appropriation, so that it was then possible to look simply at evidence of how the payments had been treated in accounts or other records. Here, he said, there had been an express appropriation, namely Miss Leather’s, so that this approach did not apply. The position had been that the borrower had made no appropriation, and therefore the creditor retained the residual right up to the “last minute” to make an appropriation, which it had not done until December 2010, everything before that being only an “internal” matter of private records and convenience. He relied on Simson v Ingham [1823] 2 B&C 65 at p73 as showing that this was the correct analysis.
59. In further support of the submission that it was Miss Leather’s act which constituted the relevant appropriation, he argued also that there was nothing inequitable in permitting Capital to treat that as its appropriation. He submitted that, viewed objectively, Capital had plainly suffered loss in reliance on the (assumed) negligent second valuation because it had increased its exposure and there was, in the end, insufficient money to meet that. How Capital might at first have recorded the receipt of the proceeds of sale made no practical difference to that overall position, and was purely fortuitous as regards the Defendant.
60. Mr Christie’s second line of argument was that a purported appropriation of a payment was not, in any event, actually effective until it was communicated to the debtor, and there had been no such communication. He relied on the passage in The Mecca (above) cited by Mr Grant that
“The presumed intention of the creditor may no doubt be gathered from a statement of account, or anything else which indicates an intention one way or the other and is communicated to the debtor” (emphasis added)
He submitted that the communication to the debtor was a vital part of a valid and effective appropriation, because, as between creditor and debtor, the debtor had a right to know where he stood as to how his money was being applied.
61. Mr Christie argued, therefore, that only such a communication would do, and consequently, Capital’s right to appropriate continued to exist up until the crucial allocation made by Miss Leather in December 2010, because the borrower had in fact disappeared after surrendering the property to Capital and no notification of any appropriation of the proceeds of sale between different accounts had ever been communicated to him.
62. Mr Christie’s third point was a new one, appearing only in his latest draft pleading. It was to the effect that even if all the above were wrong and there had been a valid and effective appropriation of the net proceeds of sale in law which paid off the further advance, nevertheless, Capital could still show that they had sustained loss as a result of the (assumed) negligent valuation in support of the further advance.
63. This was pleaded as follows:
“the Claimant has nevertheless suffered loss because the security provided by the property for the Claimant’s total lending was (contrary to the Defendants’ valuation) insufficient to cover the extra lending incurred; therefore the shortfall in any separate account for the first advance is significantly higher than it would have been if the Claimant had not made the further advance. That extra shortfall flows from and is the direct result of the further advance made in reliance on the Defendants’ negligent valuation.”
64. Mr Christie referred me to Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627, at page 1631 where, after succinctly reformulating the principles of assessment of the “basic loss” in a negligent valuation claim at F, Lord Nicholls went on, at H, to deal with the second part of the assessment of quantum liability, namely determining what part of the loss consequences flowing from the ill-fated transaction was “within the scope of the duty owed to the lender by the valuer”. He said:
“The valuer is liable for the adverse consequences, flowing from entering into the transaction, which are attributable to the deficiency in the valuation”.
65. Mr Christie submitted that applying this test involves taking the overall position into account. Viewed as such, and having regard to the deficiency in the security rights which Capital in fact obtained as against those which it should have obtained if the second valuation had not been negligent, it can be seen that the loss on the main loan account was increased by the making of the second loan, on the strength of the (assumed) negligent valuation. This increase was, therefore, an adverse consequence directly flowing from entering into the transaction (the further advance) and attributable to reliance on the deficient valuation.
Defendant’s response
66. Mr Grant’s brief response to the additional points raised by Mr Christie above was to the effect, first, that if any communication of an appropriation was required (which he did not accept) then it did not have to be communication to the debtor, and communication to any party with an interest would suffice. Countrywide was such a party.
67. With regard to the new point on causation on the assumption that there had been an effective appropriation to the 2005 Loan account, Mr Grant argued, first, that the proposed draft pleading was entirely inadequate to raise such a point as it did not plead any duty of care which comprehended loss on the 2004 Loan account.
68. On the more general point of principle, however, he submitted that loss on the 2004 Loan account was simply impossible to attribute to the making of the 2005 Loan, in the light of the only negligence being alleged (ie in giving the 2005 valuation), because that valuation post dated the 2004 Loan. In any event, Preferred Mortgages was clear authority that it was not permissible to look at the matter as if the two loans had been a single loan transaction, and one must analyse the position according to how the parties actually dealt with the two, separate, transactions, with the causation flowing accordingly.
Discussion and conclusion
69. With regard to the issue whether there was an effective act of appropriation of the proceeds of sale to the repayment of the 2005 Loan account at all before December 2010, I prefer the arguments of Mr Grant. In my judgment, there was.
(1) No appropriation?
70. The basis of Mr Christie’s first proposition that there was none rests on the argument that the computerised entries made by Capital’s IT systems, which produced the schedules showing such an apparent appropriation, were not a deliberate act in the sense required for appropriation because they were automatic, and without human input, and/or they were purely for convenient internal administration.
71. In my judgment, this misses the point, and is in fact wrong, for two reasons.
72. First, the setting up of the computer systems in this way in the first place was a human decision as to how Capital intended to appropriate any payments it received in these circumstances. Miss Leather’s evidence was that substantive decisions were made by CHL. It is therefore to be inferred that CHL either positively wished, or were in fact content, that payments received in this situation should be appropriated in this way, by the computer system. That is perfectly good enough, in my judgment, to inject any necessary element of deliberateness into the appropriation apparently effected by this means.
73. Second, and in any event, it seems to me that this proposition is not justified by the evidence. The evidence shows, I find, that CHL itself considered (and conveyed to its advisers that it considered) that the entries made by the computer system indeed did record its intention as to the allocation of payments received, thereby ratifying the allocation made by the system. This is shown by the terms of the correspondence. Slater Rhodes expressly treated the two accounts as discrete and as being dealt with separately, when they transmitted the “updated” Schedules in March and April 2010. By their letter of 22nd April 2010 they referred expressly to
“our clients [having] chosen (and they need not have done) to apply the proceeds of sale pro rata”
(emphasis added)
By their email of 9th December 2010, they asserted that Capital had the flexibility “to reverse” the apportionments made by the system, a statement which implicitly recognises that an apportionment has already been made.
74. Third, I find that Mr Grant’s proposition is supported by the dictum of Lord Shaw in Deeley (above). It seems to me that these actions are entirely akin to Lord Shaw’s earlier reference to “[carrying] the payment to a particular account”.
75. Prima facie, (and subject to the next question about communication) that is therefore enough to effect an appropriation, which, once effected is not reversible, as Lord Shaw then states.
76. Although Mr Christie submits, correctly, that the dictum in Deeley as to what is an appropriation is made in the context of a situation that neither debtor nor creditor has yet appropriated, his proposition that therefore the appropriation purportedly effected by Miss Leather in December 2010 was effective necessarily assumes, in his own favour, that the computer entries to which I have referred have not been an act of appropriation at all. However, I have held that they were. Once that is appreciated, the relevant question under the Deeley dictum would be whether there had been any act of appropriation before those computerised entries were made, but it is not suggested that there was.
(2) Necessity for communication
77. The next point, therefore, is Mr Christie’s further argument that it is necessary to communicate the appropriation of the payment to the debtor in order to make it complete and effective. If it has not been so communicated, it can be varied by the creditor if he wishes because the “last possible moment” has not arrived.
78. At first sight, this depends on who is correct about the true interpretation of the citation from Lord MacNaghten in The Mecca (above) that
“The presumed intention of the creditor may no doubt be gathered from a statement of account, or anything else which indicates an intention one way or the other and is communicated to the debtor.”
79. Mr Christie’s argument is that the reference to “communication” applies to the statement of account as well as “anything else”, and that in consequence no appropriation can in fact be final until the stated requirement of “communicat[ion] to the debtor” is complied with.
80. I observe that this argument seems, rather remarkably, to mean that even the “appropriation” of December 2010 by Miss Leather is not an appropriation, and/or not binding upon Capital, even now, because it has not been communicated to Mr Sheikh, either. To my mind this begins to suggest that this proposition proves too much.
81. Mr Grant contends, first, that a “statement of account” in the above citation comprehends any form of accounting record, and is one possible means of appropriation, and that “communication” refers only to the second limb of the requirement as “anything else”. He also argues that Mr Christie’s interpretation of The Mecca is at odds with the effect of Lord Shaw’s full dictum in Deeley already mentioned, and that since Lord MacNaghten was also on the bench in Deeley, and agreed with Lord Shaw’s judgment without demur, Mr Christie’s interpretation of his dictum in The Mecca cannot be right: Lord Shaw’s dictum in Deeley cannot have been intended to mean that a “communication to the debtor” of the appropriation is an indispensible requirement.
82. In any event, Mr Grant submits further that this dictum is really a proposition of evidence and not of legal requirement at all, the appropriation having been made by the relevant entries in accounts (or other matters). In other words, anything which provides sufficiently clear evidence that the creditor has made a definite decision as to how he is allocating the payment is a sufficient appropriation, which is then to be final and binding.
83. Finally, though, as mentioned above, he contends that, even if there is a requirement of communication, then it does not have to be to the debtor, and the true requirement could only be communication to a party with an interest in the appropriation being made. Countrywide, he submits, is such a person, in the present circumstances. Consequently, communication of the appropriation made by Slater Rhodes’ sending the separate account schedules in March and April 2010 was a sufficient communication to fulfil any such requirement and render the appropriation final.
84. Ultimately I prefer Mr Grant’s overall arguments on these points as well.
85. First, in my judgment communication of the appropriation to the debtor at the time may not be absolutely necessary to complete an appropriation by the creditor, but in practice, it seems to me that it is likely to be the way in which the creditor actually does declare his “final answer” intention to appropriate in the manner communicated. As a matter of practicality and evidence, an appropriation which remains secretly hidden from anyone else in the books of the creditor may be altered, if he rewrites the books, with no-one being any the wiser, and therefore not affected by it. This seems to be the ratio of Simons v Ingham (above) cited by Mr Christie, a very old case (1823) but cited in both The Mecca and Deeley without disapproval. I do not accept Mr Grant’s submission that it is inconsistent with those cases, although it does not seem to me, either, that those cases endorse it as the full embodiment of a rigid rule.
86. It may be that the true test for whether an appropriation has been finally made is that there must be some “overt act” by the creditor from which it can be sufficiently inferred that he has in fact made the relevant election to appropriate. Entries in his books of account, if, on the evidence, apparently intended to be such a final appropriation might suffice on their own, depending on the circumstances, but communication of the appropriation to the debtor would obviously be an even more convincing such act.
87. However, if I am wrong about the above, and some kind of “communication” is a general requirement, then I accept Mr Grant’s proposition that it is not necessarily communication to the debtor himself which is required, but communication to some person who has an interest in the appropriation. The point of such communication seems to me to be that the creditor is thereby making it clear what his decision is about his right to appropriate, and what rights, in the sense of the state of the relevant account, he is standing on, and he is doing it in a context where it matters, and therefore where he can be taken to have given it proper thought and to be expressing a final decision. Such a communication therefore clearly evidences an election by the creditor as to how he intends his rights to operate.
88. I hold therefore, that there has been such a communication in this case, since Countrywide plainly did have such an interest in how the payments were appropriated, on the facts of this case. Indeed, at the time it made that communication Capital was seeking to demonstrate to Countrywide the state of its accounts with Mr Sheikh, for the very purpose of demonstrating the possible extent of the liability it was asserting fell on Countrywide; it is therefore difficult to see how the information contained in the schedules transmitted in March/April 2010 cannot have been intended to operate as Capital’s statement of its position vis-à-vis Countrywide, in the circumstances. That transmission was therefore, in my judgment sufficient to make final the appropriation thereby made, even if none of Capital’s actions prior to that time had been sufficient to constitute a binding appropriation.
89. In my judgment, therefore, Capital made an appropriation of the net proceeds of sale of the property to the 2005 Loan account which extinguished the debt, by at the latest March/April 2010. It thereby treating itself as having recovered that debt. In doing so it eliminated any loss on that account and suffered no damage under it. It overtly recorded this and communicated it to Countrywide. It was not open to Capital subsequently to change that appropriation, whether by Miss Leather’s manual exercise or at all.
(3) Loss on 2004 Loan account still recoverable as part of overall loss
90. Whether, therefore, Capital can still sustain any claim against Countrywide based on the assumed negligent valuation of May 2005 depends on whether Mr Christie’s third argument now made is sustainable.
91. At first blush Countrywide’s position that it is not is somewhat unattractive. It is intuitive that Capital has suffered loss, and on the assumption that the second valuation was indeed negligent, (and ignoring other possible defences available to Countrywide) it feels as though Countrywide have thereby caused Capital loss at least to some extent. However, such amorphous perceptions do not represent law, and what is required is a proper analysis of the causation of any such loss, in the events which have happened.
92. Mr Christie relies on the Nykredit (No 2) case as mentioned above, that
“The valuer is liable for the adverse consequences, flowing from entering into the transaction, which are attributable to the deficiency in the valuation”
and at first sight this seems to assist him, as it literally covers the case. However, the quotation above needs to be seen in its full context. What Lord Nicholls has just said is that
“a defendant valuer is not liable for all the consequences which flow from the lender entering into the transaction. He is not even liable for all the foreseeable consequences. He is not liable for the consequences which would have arisen even if the advice had been correct He is not liable for these because they are consequences of risks the lender would have taken upon himself if the valuation advice had been sound.”
93. It is against that background that Lord Nicholls is considering the question “for what then is the valuer liable?” as mentioned above. It is clear, therefore, that his formulation, cited by Mr Christie, is in the context of the earlier passage, which is emphasising the bounds of liability, not their breadth. To repeat the phrase emphasised in the SAAMCo case itself (see eg at [1977] AC 191 at p214F and p221G per Lord Hoffmann) the valuer is liable for “all the foreseeable consequences of the information being wrong” but not further. This emphasises that the extent of liability depends on the scope of the subject transaction, ie the relevant loan transaction.
94. It seems to me that the tenor of this passage shows that what is being emphasised is that the valuer is not liable for matters which are not caused by the lender’s entering into the particular transaction on the faith of wrong information.
95. Nykredit was here repeating the propositions as to causation and measure of damage laid down in the SAAMCo case, in the context of determining when the cause of action arose, in order to make a judgment about appropriate liability for interest on damages. It was not, therefore, directly concerned with the point now before me, namely whether it is possible, or there is any scope, for arguing that Capital’s loss recorded against its main account can still, at least pro tanto be considered to have “flowed from entering into the transaction” [of the 2005 loan], and (and more narrowly) to be a “consequence of the information [in the 2005 valuation] being wrong.”
96. In my judgment, it cannot be so regarded; I again prefer Mr Grant’s argument in this regard.
97. First, it seems to me that Mr Grant is correct when he submits that Mr Christie’s pleading of this point fails to plead any duty of care aimed at this point, and that is probably because, in practice, none can be. A duty of care has to be formulated in relation to some consequence; it is not good enough just to assert it in a vacuum. Consequently, in my judgment, for it to be a sustainable proposition that the loss sustained on the 2004 Loan account (as this now, by definition) is recoverable by Capital in the circumstances of this case, Capital would have to be able to plead a duty of care in Countrywide’s making the 2005 valuation, with regard to protecting Capital from loss on the earlier 2004 Loan.
98. It does not seem to me that this can be done – and certainly there is nothing in the facts which have been advanced supporting any such connection. Even if Countrywide were given the information that the intention was to make some kind of further advance – which it may have been – that does not seem to me to be sufficient to enable loss in respect of the main advance, as contrasted with loss sustained by reason of the further advance itself, to be recoverable. It is not mere foreseeability which renders a loss recoverable, it is the underlying general principle as to the extent of a valuer’s liability for the identified breach of duty. In any event it is not suggested that Countrywide were given any information as to figures.
99. Second, in support of the view that this claim was available to the Claimants, Mr Christie submitted that “if necessary” one could regard the extra loss now suffered on the 2004 Loan account as being “consequential” financial loss. Mr Grant retorted that no such concept was recognised in law in financial cases such as this. I agree. This seems to me to be an attempt to avoid the problem that this loss cannot be demonstrated to flow directly from the 2005 loan, by describing it in legal terminology from other areas of law. I do not think that this concept assists as to whether or not the Claimant has a cause of action.
100. Third, although I do not think it right to describe the Preferred Mortgages case as being indistinguishable from this case – the facts found were to the effect that there had been a complete replacement lending transaction and replacement legal charge – nonetheless, I find that it provides very potent analogy.
101. As a proposition that in reality this was all one lending transaction, or one continuing lending transaction, Mr Christie’s argument seems to me to be akin to Mr Tager QC’s unsuccessful proposition on behalf of the lender in Preferred Mortgages that “in reality” there had been a further advance rather than the repayment of one loan and the making of another. In fact, here, the two loans were not subsumed into a single lending anyway, because there was a one month difference in the length of their terms. This is recorded in the details maintained separately on the statements of account sent to Mr Sheikh. It is a small difference, and perhaps a small point, but it shows that these loans were still being treated by Capital as distinct transactions.
102. As a proposition that the loss on the 2004 Loan account was suffered through the inadequacy of the security rights obtained (by which Mr Christie means the true value of the property) on making the 2005 Loan, Mr Christie’s argument again appears akin (although in the reverse direction) to the other unsuccessful argument in Preferred Mortgages, namely that the lender there could be regarded as suffering some kind of enduring loss through taking the original extinguished loan on inadequate security .
103. In my judgment, Preferred Mortgages shows clearly that the proper approach to analysing causation is a rigorous determination of what actually happened in fact and in consequential legal effect, with the causation consequences being deduced accordingly.
104. Fourth, therefore, when this is done, it seems to me that the reason why Capital’s claim on this basis must fail becomes apparent. It is the extinguishment of the 2005 Loan – the Loan made in reliance on the relevant valuation – which has produced the result that Capital has not lost anything on this transaction. That was not an act done in reliance on Countrywide’s (assumed) negligent valuation at all.
105. Put more bluntly, perhaps, Capital’s loss as pleaded in this extended form (which is what I am here concerned with), and therefore its loss of any claim in these particular circumstances was caused by its own act in electing to treat the further advance as paid off in priority to the main advance. This loss was not a consequence of entering into the 2005 Loan at all, but of paying it off. The duty of care of Countrywide was in relation to protecting Capital from loss through lending the money on the strength of a culpably inaccurate valuation; it does not extend to protecting Capital from loss through choosing to pay that loan off.
106. Lastly, the validity of Mr Christie’s proposition can be tested by asking whether, if the valuer who gave the 2004 valuation had not been Countrywide, it would appear reasonable to hold that a duty of care of the scope implicit in Mr Christie’s proposition existed. Causation plainly cannot be dependent on the identity of the party. Looked at in this way, it seems to me to be immediately apparent that this basis for a claim cannot be sustained. If the circumstances had been the same as they are except for the fact that the 2004 valuation had been done by a different valuer, it is, to my mind immediately obvious that if the 2005 Loan is repaid in full, the valuer who gave a negligent valuation based on which it was made in the first place has no liability, albeit he may count himself fortunate.
107. This also explains why at first blush Mr Christie’s argument has some attraction; it is the fact that Countrywide were responsible for both valuations. The identity of the valuer is not on its own, however, a material fact in determining causation.
Decision
108. For the above reasons, therefore, I conclude that the Particulars of Claim in this case, whether in their original form or in their now proposed amended form, disclose no reasonable cause of action. I also conclude that this is not a pleading point which could be cured by yet another attempt at amending the claim. It arises because, in the events which have happened, Capital is unable to demonstrate any loss which it has suffered as a result of entering into the only transaction which it did enter into in reliance on the 2005 valuation by Countrywide, and it therefore has no reasonable cause of action (at any rate beyond possibly a purely nominal one, this claim being in contract and not simply tort).
109. In the circumstances, therefore, I will strike out the particulars of claim or alternatively give summary judgment in favour of the Defendant.
Further issues
110. That is enough to dispose of the matter. The second main issue identified by the parties concerned the pleading of loss by Mr Christie, in his latest draft amended Particulars of Claim, and in the circumstances it no longer arises. As it was argued, however, and just in case I were wrong on the first issue, I will indicate my views briefly.
111. Mr Grant’s complaint about the latest proposed draft amended Particulars of Claim is not just that it fails (as it does) to plead any duty of care adequate to support his Paragraph 17, (ie the unsuccessful claim to recover loss on the 2004 Loan account on the basis that it had been increased by the loss not taken on the 2005 Loan account). It had two other strands of substance, namely that (i) he simply could not understand the case he had to meet on the basis of Mr Christie’s formulation of how he claimed loss should be assessed (paragraphs 18.1.1.1 and 18.1.1.2) and (ii) that in any event, any such formulation should be quantified clearly, in actual figures. It was by now over a year since the property had been sold, and therefore Capital could not possibly claim that it was not in a position to quantify its claim, yet.
112. Mr Grant’s pressure for particularisation was, I am sure at least in part, prompted by what I consider to be the patent inadequacy of the initially pleaded case (for which Mr Christie was not responsible). This had pleaded the loss as simply being the alleged difference between the valuation and the alleged true value of the property, without any regard for a comparison calculation of the “basic loss” allegedly actually suffered by Capital. Despite it being pointed out several times by Beachcrofts that Capital’s formulation of loss was wrong and defective, this had never been properly addressed.
113. On the assumption that the present draft amended Particulars of Claim had disclosed a reasonable cause of action, I find Mr Grant’s complaints to be well justified, and I would not permit any amendment in that form.
114. I have dealt with the absence of any properly material plea of duty of care with regard to the “extended claim”.
115. I accept the further criticism that paragraph 18.1.1.2, in particular, is totally opaque. A pleading should enable the party reading it to understand reasonably readily what is being said against him. I have to say that I regard paragraph 18, and in particular paragraph 18.1.1.2 as not meeting this standard and consequently being “embarrassing”.
116. I also accept that, in any event, any pleaded loss can and should, in this situation, give an actual figure. If necessary, in order to illustrate and explain any formulaic description, this can and should be done as a worked example. It would then help explain what process of quantification is being relied on. I agree with Mr Grant that there can be no good reason, at this time, for Capital to be unable to state the actual amount of its claimed loss, and to include the calculations made in order to arrive at that claim.
117. For those reasons, had I not concluded that Capital has no claim against Countrywide which it can plead at all, I would not have given leave to amend the claim in the presently proposed form, and would have required Capital to produce a properly lucid draft, in accordance with the above requirements, and including a quantified figure for its claim. As already noted, however, this situation does not arise in view of my first conclusion.
Claim dismissed.
