Limitation of actions — Negligence — Valuation — Non-transaction mortgage loan — Whether claim statute-barred — Whether losses incurred prior to commencement of limitation period
In May 1983
the defendant firm of valuers provided the plaintiff with a valuation of £4.4m
of a lease of an area of land when proposed development on it had been
completed. The plaintiffs, who advanced some £2.6m in reliance on that
valuation, issued a writ on March 20 1990 claiming that the valuation was
negligent and that they would not have entered into the loan agreement had they
known of the true value of the lease (alleged to be £2.7m). The plaintiffs’
claim in contract was statute-barred and section 14A of the Limitation Act 1980
does not apply to contractual claims. In hearing a preliminary issue, in which
it was assumed for that purpose that the defendants owed a duty of care in tort
and were in breach of it in May 1983, Judge David Smith QC had accepted the
principal submissions on behalf of the defendants that on the evidence the
financing deal that the plaintiffs had made in 1983 was of substantially less
value in money terms as an investment than it would have been had the valuation
of £4.4m been accurate, so that by reason of the negligence the plaintiffs
sustained an actual loss in 1983 of this difference in values; the Limitation
Act 1980 applied and the claim was statute-barred. The plaintiffs appealed,
contending that by virtue of section 14A of the 1980 Act their writ had been
issued within six years from the date the cause of action accrued, or, if not,
less than three years from the earliest date on which they first had both
knowledge required for bringing an action for damages and a right to bring such
an action.
financing deal secured by property negligently valued at £4.4m and its value
secured by property correctly valued at £2.7m was not a loss of the kind which
is recognised as flowing from an assumed breach of duty; had the defendants
performed that duty and provided a non-negligent valuation the plaintiffs would
not have entered into the loan transaction at all. The plaintiffs’ losses,
within the principles in Swingcastle Ltd v Alastair Gibson (a firm) [1991]
EGLR 157, were not sustained more than six years before the issue of the writ
because, on the plaintiffs’ pleaded case, the total of advances made did not
exceed the recoveries obtained. Accordingly, although the first advance was
made in July 1983 it was not at that date a loss. The losses claimed by the plaintiffs
were in respect of losses which accrued later and within the limitation period.
The following
cases are referred to in this report.
Bell v Peter Browne & Co [1990] 2 QB 495; [1990] 3 WLR 510;
[1990] 3 All ER 124, CA
Cartledge v E Jopling & Sons Ltd [1963] AC 758; [1963] 2 WLR 210;
[1963] 1 All ER 341, HL
Forster v Outred & Co [1982] 1 WLR 86; [1982] 2 All ER 753, CA
Iron
Trade Mutual Insurance Co Ltd v JK Buckenham Ltd
[1990] 1 All ER 808; [1989] 2 Lloyd’s Rep 85
Société
Commerciale de Réassurance v Eras International
(formerly Eras (UK)) [1992] 2 All ER 82; [1992] 1 Lloyd’s Rep 570, CA
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
UBAF Ltd v European American Banking Corporation [1984] QB 713;
[1984] 2 WLR 508; [1984] 2 All ER 226; [1984] 1 Lloyd’s Rep 258, CA
Wardley
Australia Ltd v State of Western Australia
(1992) 109 ALR 247
This was an
appeal by the plaintiffs, First National Commercial Bank plc, from a decision
of Judge David Smith QC, who, on the hearing of a preliminary issue, had
dismissed the plaintiffs’ claim for damages against the defendants, Humberts.
James Townend
QC and Clive Newton (instructed by Stewarts) appeared for the plaintiffs;
Michael Lewer QC and David Tucker (instructed by Kennedys) represented the
defendants.
Giving the
first judgment at the invitation of Neill LJ, Saville LJ said: In this appeal the question is whether
the plaintiffs are barred by limitation from bringing an action in tort for
negligence against the defendants. This question was considered at the trial of
a preliminary issue by Judge David Smith QC, sitting as a judge of the Queen’s
Bench Division, and answered in favour of the defendants. The plaintiffs now
appeal against that ruling.
The
plaintiffs’ case is that in about July 1983 they agreed to provide and
thereafter did provide finance to enable a company or companies controlled by a
Mr Hanna to develop land at West Quay Road, which was to be leased from
Southampton City Council, the advances to be secured (among other things) on
the lease; and that they made this agreement (and advanced some £2.6m under it)
in reliance upon on a valuation of what the lease would be worth when the
development was completed, which had been provided at their request by the
defendants (who are valuers) in May 1983.
The valuation
was in the sum of £4.4m. The plaintiffs allege that this valuation was made
negligently, that a proper valuation would have been only £2.7m and that if a
proper valuation had been made they would not have entered into the loan
agreement or made any of the advances. The borrowers are now insolvent and the
security taken for the advances has proved insufficient to recoup the amounts
owed by the borrowers. The plaintiffs issued a writ against the defendants on
March 20 1990. Their submission is that this is within the limitation periods
stipulated by section 14A of the Limitation Act 1980, since this date was
either less than six years from the date when their cause of action accrued,
or, if not, less than three years from the earliest date on which they first
had both the knowledge required for bringing an action for damages in respect
of the relevant damage and a right to bring such an action, within the meaning
of the section.
For the
purposes of the preliminary issue, it is to be assumed that the defendants owed
a duty of care to the plaintiffs and were in May 1983 in breach of that duty in
the respects alleged.
It is the law
that a cause of action for the tort of negligence only arises when there has
been a breach of duty resulting in actual (as opposed to potential or prospective)
loss or damage of a kind recognised by the law. In Forster v Outred
& Co [1982] 1 WLR 86, this court accepted the submission of Mr Stuart
Smith (as he then was) that actual damage meant any detriment, liability or
loss capable of assessment in money terms. Thus, the first question in this
case is when the plaintiffs sustained legally recognised loss or damage capable
of assessment in money terms from the assumed breach of duty.
The principal
submission of the defendants, which seems to have been accepted by the trial
judge, was that on the evidence the financing deal that the plaintiffs had made
in 1983 was of substantially less value in money terms as an investment than it
would have been had the valuation of £4.4m been accurate, so that by reason of the
negligence the plaintiffs sustained an actual loss in 1983 of this difference
in values.
In my
judgment, this submission is incorrect, since in the circumstances outlined
above loss of this kind is not recognised by the law as flowing from the
assumed breach of duty. Had the defendants performed that duty (ie provided an
accurate valuation of £2.7m), the plaintiffs would not have entered into the
transaction at all. The primary legal rule for damages for negligence is
(subject to considerations of remoteness, etc) to put the injured party in the
position that would have been occupied had there been no breach of duty.
Applying this rule the plaintiffs have not, as a mater of law, lost the
difference in value between a transaction secured by property worth £4.4m and
one secured by property worth only £2.7m, for had there been no breach of duty
a valuation of £4.4m would not have been given (but only a valuation of £2.7m)
and the plaintiffs (on their own case) would not have entered into the
transaction at the lower valuation. Thus, they could hardly claim (and indeed
do not claim) that the negligence has deprived them of the benefits of a
transaction at the higher valuation, for ex hypothesi this is one they
would not have made in the absence of the assumed breach of duty.
It seems to me
to be for precisely the same reason that the House of Lords, in Swingcastle
Ltd v Alastair Gibson (a firm) [1991] 2 AC 223*, held that the
mortgagees in that case (who would not have advanced money to the mortgagor,
but for a negligently high valuation) could not recover from the valuers the
outstanding interest due from the mortgagors, for in the absence of the
negligence, there would have been no mortgage.
*Editor’s
note: Also reported at [1991] 1 EGLR 157.
The
alternative submission advanced by the defendants is that the plaintiffs must
have incurred expenditure in and about entering into the financing deal, in the
form of the legal and administrative costs of doing so. Since on the
plaintiffs’ own case they would not have entered into the deal had there been
no breach of duty, these expenses constitute an actual loss, quantifiable in
money terms, sustained by the plaintiffs in or about July 1983 and which flowed
from the assumed breach of duty, from which it follows that a cause of action
for that breach accrued at that time.
To my mind,
the difficulty with this argument is that the factual premise on which it is
based is unsupported by evidence. Our attention was drawn to the terms of the
loan facility, under which the plaintiffs stipulated that they made no charge
for the services of their own legal department. Thus, it is suggested that the
time occupied by that department in drawing up and executing the deal could be valued
and represented a loss sustained by the plaintiffs in the summer of 1983. This,
however, is to ignore the fact that under the deal the plaintiffs credited
themselves in July 1993 with a commitment fee of £26,000 from the funds they
made available under the facility. This credit is one that would not have been
made, but for the deal. To my mind, it would be wrong simply to take the debit
side of the deal and to describe it as loss or damage flowing from the breach
of duty without taking into account the credit side of the deal. The reason for
this is that the inquiry is as to what loss or damage (if any) has been
sustained through making the deal and when such loss or damage has been
incurred. On this basis, on the evidence I am quite unpersuaded that in July
1983 the plaintiffs were, to put it colloquially, out of pocket in respect of
these expenses as a result of making the deal. They had no doubt incurred some
expenditure, but they had also received some benefit and there is nothing to
show that the former exceeded the latter.
It is
convenient at this point to consider what loss and damage the plaintiffs assert
they suffered as the result of the assumed negligence. This is put in the
following way in the reamended statement of claim.
The plaintiffs
first calculate the amounts they say they have advanced and expended under the
financing deal. Against this they set the amounts they say they have recovered.
On these figures the recoveries exceed the outlay, but the plaintiffs claim
that they have sustained a loss on one of two bases. As I understand it the
first of these is founded on their assertion that but for the negligence they
would have employed that outlay profitably by lending to others, that that
profit would have been substantially greater than the amount by which their
recoveries exceeded their actual outlay and that accordingly they have lost the
difference between that amount and the profit they would have made. The second
basis is to add to the outlay the cost to the plaintiffs of borrowing the money
to fund the deal, which results in the recoveries falling short of the total
expenditure of the plaintiffs; and to claim this shortfall as the loss
sustained.
If these bases
or either of them represent the legally correct method of calculating what loss
or damage the plaintiffs sustained from the
incurred.
In the Court
of Appeal in Swingcastle v Alastair Gibson [1990] 1 WLR 1223*,
Neill LJ suggested that the prima facie measure of damages in a case
where the advance would not have been made, if a proper valuation had been
given, is the difference between the amount advanced and the amount that would
have been advanced. Since the latter is nil, prima facie the whole advance
can be claimed, less of course any recoveries actually made. If the lender
could show that he had sustained other losses these are also recoverable. Thus,
given evidence, the lender could claim lost expenditure, what he would have
made on other deals, or (as the case might be) the interest that would have
been earned by putting the money on deposit, or the value of lost opportunities
to invest the money elsewhere. This analysis of the correct measure of damages
was expressly approved when the case reached the House of Lords.
*Editor’s
note: Also reported at [1990] 2 EGLR 149.
It seems to me
that in the present case, given the plaintiffs can establish the factual basis
for one or other of their claims, the loss allegedly sustained is of a kind
legally recognised as flowing from the assumed breach of duty, since it seems
to me to come within the principles discussed by Neill LJ in the Swingcastle
decision.
This leads
then to the question when such losses began to accrue.
The plaintiffs
submit that until after March 1984 (ie until less than six years before the
issue of their writ) no such loss or damage as claimed had been suffered by
them. Up to and at that date their then outlay, together with either the cost
of borrowing or the notional profit that could have been obtained elsewhere,
was less than the value of the security put up for the deal. Accordingly, until
after March 1984 the plaintiffs could not show a cause of action against the
valuers, for the assumed breach of duty had not caused them any actual loss or
damage.
Applying the
principles set out in Swingcastle, the starting point in a case
such as the present is the advance made by the claimants, which prima facie represents
the measure of their loss. The first advance made by the plaintiffs was in July
1983. This does not mean, however, that the advance or any part of it was
actually lost at that time. The fact that the prima facie loss is to be
measured in the way described in Swingcastle does not entail that it
necessarily occurs when the advance is made, for when the advance is made there
may be readily available means of recouping it. As at July 1983 and until after
March 1984 the plaintiffs would, in my judgment, have been quite unable to establish
that they had lost the whole or any part of their advance, since, as they have
themselves demonstrated, the security they had exceeded the advances. Thus, to
my mind, the advances themselves cannot be treated as creating an actual loss
sustained more than six years before the issue of the writ. For the same
reasons, it seems to me that the same conclusion follows with regard to the
cost of borrowing or alternative lending claims.
There is, of
course, another way in which the matter might have been put, though I did not
understand the defendants to advance it in the present case. For the reasons
given above, it is illegitimate, in cases where no advance would have been
made, to claim a loss based on the difference between the value of the
transaction as an investment had the valuation given been accurate and the
value of the transaction as an investment in fact. If, however, it could be
demonstrated that the value of the transaction in fact was less than the
investment value of a transaction or transactions which the claimants would
otherwise have made, then it seems to me that it could be said that the
claimants had suffered a legally recognised loss capable of assessment in money
terms at the time they made the transaction they did, in the form of this
difference in investment values.
In Swingcastle
[1990] 1 WLR 1223 at p1231, Neill LJ made clear that in order to recover for
loss sustained through inability to employ funds on other transactions, the
claimant had to establish that the money would have been used in that way. This
indeed the plaintiffs assert in the present case. What they do not assert,
however, and what there is no evidence to establish, is that such other
transactions would, more than six years before the issue of the writ, have been
of greater investment value than the transaction which they in fact made. On
the material before the court the losses the plaintiffs allege they have
sustained appear to have accrued (ie come into existence) within the limitation
period. It is thus for the defendants to demonstrate that this is in fact not
the case and that in truth the tort was complete so that the cause of action
accrued at an earlier time: see Cartledge v E Jopling & Sons Ltd [1963]
AC 758 at p784.
In this
connection it is noteworthy that another argument that was developed by the
defendants in the present case was to the effect that the plaintiffs, had they
discovered the alleged negligence in 1983, would have sought to resile from the
deal and incurred expenses or liabilities in doing so. Thus, it is argued, a
cause of action would have come into existence then. The answer to such
submissions is simply that this did not happen, that this suggested loss or
damage was never sustained and that accordingly there was not in fact on this
basis a completed cause of action at this time.
At the hearing
and in the judgment much reliance was placed on the cases where the claimant
entered into a transaction which through a breach of duty owed to the claimant
provided the claimant with less rights than should have been secured or imposed
liabilities or obligations on the claimant which should not have been imposed:
examples of these cases are Forster v Outred (supra);
Iron Trade Mutual Insurance Co Ltd v J K Buckenham Ltd [1990] 1 All
ER 808; and Bell v Peter Browne & Co [1990] 2 QB 495. In all
those cases, however, the court was able to conclude that the transaction then
and there caused the claimant loss, on the basis that if the injured party had
been put in the position he would have occupied but for the breach of duty, the
transaction in question would have provided greater rights, or imposed lesser
liabilities or obligations than was the case; and that the difference between
these two states of affairs could be quantified in money terms at the date of
the transaction. By contrast, in the present case, as in UBAF Ltd v European
American Banking Corporation [1984] QB 713 (and indeed Wardley Australia
Ltd v State of Western Australia (1992) 109 ALR 247) it seems to me
that whichever of the legally recognised kinds of loss is examined, it is
impossible on the material available to conclude that the plaintiffs suffered
such loss at any time more than six years from the date of their writ. For the
reasons given, it has not been shown that they lost the amount of their
advances at that time, or incurred expenses in respect of which they were out
of pocket at that time; or at that time lost other transactions or the
opportunity to make other transactions of a value greater than the deal they
made.
Finally, it is
not suggested that the plaintiffs lost the interest they would have made by
depositing the money, doubtless because not only was there no evidence to
suggest that they had funds which they could and would have deposited, but also
because it is the plaintiffs’ unchallenged case that they borrowed the money to
finance the deal.
For these
reasons I would allow this appeal. For the same reasons it is not necessary to
consider the question when the plaintiffs had the requisite knowledge for the
purposes of section 14A(4)(b) and (5) of the Limitation Act 1980, since,
in my judgment, the writ was issued within the six-year period stipulated in
section 14A(4)(a).
Agreeing,
NEILL LJ said: For the purpose of this appeal it is necessary to assume:
(1) that the
valuation of £4.4m was made negligently;
(2) that the
plaintiffs are entitled to make a claim both in contract and in tort.
The claim in
contract is statute-barred. The negligent breach, if any, occurred in May 1983
when the valuation was made. Section 14A of the Limitation Act 1980 does not
assist the plaintiffs, however, at any rate in this court, because it has been
held that section 14A cannot be applied to actions in contract: see Iron
Trade Mutual Insurance Co Ltd v Buckenham Ltd [1989] 2 Lloyd’s Rep
85; The Eras Eil Actions [1992] 1 Lloyd’s Rep 570. The question which
arises in this case is whether any claim which may exist in tort is similarly
barred. The
has attracted criticism. An example of this criticism is to be found in the
judgment of Mustill LJ. In The Eras Eil Actions (supra) at
p602 where he said:
The different
treatment for limitation purposes of claims in contract and in tort is …
Unsatisfactory because
1. Whatever
the legal logic, the fact that claims in contract and in tort between the same
parties arising out of the same facts become time barred on dates which may
well be years apart offends common sense.
2. The
existence of different rules for what may really be the same claims forces the
law into unnatural complications. Whatever the historical justification for
holding that there are concurrent rights of action in contract and in tort,
nobody we believe would trouble nowadays to insist on the difference, but for
the fact that one form of claim (usually the one in tort) offers procedural
advantages. This is not a sound basis for the development of a practical and
self consistent law of negligence.
3. So far as
limitation is concerned, the rules regarding the accrual of the cause of action
tend to push the evolution of substantive law in the wrong direction. In most
if not all cases the plaintiff would be better off by framing his action in
tort: Whereas, … If a contract is in existence this is the natural vehicle for
recourse.
As the law
stands at present, however, this difference in treatment has to be accepted.
In order to
establish a cause of action in negligence it is necessary for a plaintiff to
prove that he has suffered some actual damage. Prospective loss is not enough.
It is simpler, however, to state the rule than to apply it in practice.
As was
recognised by the High Court of Australia in Wardley Australia Ltd v State
of Western Australia (1992) 109 ALR 247 at p254 economic loss may take a variety
of forms, and the answer to the question when a cause of action for negligence
causing economic loss accrues may require consideration of the precise interest
infringed by the negligent act or omission. It may also require consideration
of the nature of the interference to which the interest is subjected. Some of
the cases to which we were referred in the course of argument, however,
demonstrate that the courts have been driven to draw narrow and some would say
unconvincing, distinctions between transactions where it has been held that the
loss was measurable when the relevant transaction was entered into and
transactions where it has been held that the loss occasioned by the
unsatisfactory bargain lay in the future.
In the present
case, however, it is clear that if there had been no breach the plaintiffs
would not have entered into the transaction at all. The damages are therefore
to be calculated in accordance with the principles which I discussed in my
judgment in Swingcastle Ltd v Alastair Gibson [1990] 1 WLR 1223
and which were subsequently approved by the House of Lords in the same case:
[1991] 2 AC 223. Furthermore, as Saville LJ has explained in his judgment,
which I have had the advantage of reading in draft, though the starting point
for calculating any loss was the date of the first advance in July 1983, the
plaintiffs could not have proved that they had suffered any actual loss
until some date subsequent to March 1984. Thus, in March 1984 the security
(calculated at the true figure of £2.7m) still exceeded the aggregate sums
advanced.
In these
circumstances, I am satisfied that this appeal should be allowed for the
reasons set out in the judgment of Saville LJ. On reflection I do not consider
that this is an appropriate case in which to examine more generally the impact
of the Limitation Act in situations where negligence has caused economic loss.
Waite LJ agreed
and did not add anything.
