Negligence — Valuation for mortgage purposes — Reliance — Whether defendant liable for collapse in property market — Whether plaintiff mitigated its losses — Whether contributory negligence
On February 17
1989 Planform AB, a Swedish company, agreed to purchase Cuthbert Heath House,
an office premises in the City of London, for £23.5m, through a subsidiary. On
February 28 1989 Mrs Jennifer Branscombe [FRICS] of Jackson-Stops & Staff
valued the property for mortgage lending purposes at £30.5m. The plaintiff then
loaned the purchaser £21m. The purchaser defaulted on loan repayments and the
property was eventually resold in July 1992 for £3.1m. The plaintiff claimed
damages in contract and tort against the defendant being the successor in title
to Jackson-Stops & Staff. The damages claimed included losses attributable
to the collapse in the property market after 1989. The defendant admitted that
the valuation was in excess of the highest figure which a reasonably competent
surveyor could have provided at the material time, alleged that the plaintiff
did not rely on the valuation in making the loan and alleged contributory
negligence on the part of the plaintiff in making the loan based on 90% of the
purchase price. The defendant also contended that the plaintiff failed to
mitigate its losses by an earlier sale of the property.
substantial part in inducing the plaintiff to make the loan. On the evidence
the highest non-negligent valuation at the material time would have been
£23.5m; had the plaintiff received that valuation there would have been no loan
transaction. The plaintiff was contributorily negligent to the extent of 20% of
the damages suffered by making the loan of 90% of the purchase price by not
properly satisfying itself as to the reliability of the valuation. Applying Banque
Bruxelles Lambert SA v Eagle Star Insurance Co Ltd the defendant’s
valuation was the cause of the plaintiff’s loss, and this loss did not include that
attributable to the collapse in the property market. The amount of the loss
attributable to the collapse of the property market was the difference between
the highest non-negligent valuation of £23.5m and a proper sale price of £5.7m.
Damages awarded included loss of interest paid by the plaintiff in borrowing to
refinance the loan and out-of-pocket expenses. The plaintiff had failed to
accept an offer to purchase at a price of £17m and its losses should be limited
to loss sustained on the basis of a sale at that price in August 1990 even if
there were no liability for the losses attributable to the collapse of the
market.
The following
cases are referred to in this report.
Banco de
Portugal v Waterlow & Sons Ltd [1932] AC
452
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co
Ltd [1994] 2 EGLR 108; [1994] 31 EG 68 and 32 EG 89
Banque
Financiere de la Cite 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
Corisand
Investments Ltd v Druce & Co [1978] EGD
769; (1978) 248 EG 315, 407, 504
Galoo Ltd
v Bright Grahame Murray unreported, December
21 1993, CA
Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964]
AC 465; [1963] 3 WLR 101; [1963] 2 All ER 575; [1963] 1 Lloyd’s Rep 485, HL
HIT
Finance Ltd v Lewis & Tucker Ltd [1993]
2 EGLR 231; [1993] 9 PNR 33
JEB
Fasteners Ltd v Marks Bloom & Co [1983]
1 All ER 583, CA
Kenney v Hall Pain & Foster [1976] EGD 629; (1976) 239 EG 355,
[1976] 2 EGLR 29
London
& South of England Building Society v Stone [1983]
1 WLR 1242; [1983] 3 All ER 105; [1983] EGD 921; (1983) 267 EG 69, [1983] 2
EGLR 131
Lowenburg,
Harris & Co v Wolley (1895) 25 SCR 51
Philips v Ward [1956] 1 WLR 471; [1956] 1 All ER 874, CA
Radford v De Froberville [1977] 1 WLR 1262; [1978] 1 All ER 33;
(1977) 35 P&CR 316
Roe v Minister of Health [1954] 2 QB 66; [1954] 1 WLR 128 & 2
WLR 915; [1954] 2 All ER 131, CA
Saif Ali v Sydney Mitchell & Co [1980] AC 198; [1978] 3 WLR 849;
[1978] 3 All ER 1033, HL
Scholes v Brook (1891) 63 LT 837; 7 TLR 214; affd 64 LT 674
Singer
& Friedlander Ltd v John D Wood & Co [1977]
EGD 569; (1977) 243 EG 212 & 295, [1977] 2 EGLR 84
Swingcastle
Ltd v Alastair Gibson (a firm) [1991] 2 AC
223; [1991] 2 WLR 1091; [1991] 2 All ER 353; [1991] 1 EGLR 157; [1991] 17 EG
83, HL
United
Bank of Kuwait v Prudential Property Services
Ltd [1994] 2 EGLR 100; [1994] 30 EG 103
Westminster
(Duke of) v Swinton [1948] 1 KB 524; [1948]
1 All ER 248
Yorkshire
Dale Steamship Co Ltd v Minister of War
Transport [1942] AC 691
This was a
claim by the plaintiff, Nyckeln Finance Co Ltd, for damages for negligent
breach of contract or in tort against the defendant, Stumpbrook Continuation
Ltd.
Roger Ter Haar
QC and Michael Kent (instructed by Wilde Sapte) appeared for the plaintiff;
Christopher Symons QC and Janet Turner (instructed by Herbert Smith)
represented the defendant.
Giving
judgment, JUDGE FAWCUS said: Monopoly is a game which has been enjoyed
by countless children — and adults — over the last 50 years in which large sums
of paper money change hands on the acquisition of properties situate in the
West End of London. This case has translated that game into the real life of
property dealing in the City of London during the years 1988-1992 — years of
boom followed by catastrophic decline.
Cuthbert Heath
House’s place on the monopoly board is in the Minories. In February 1989 a sale
of it was agreed in the sum of £23.5m. In May 1989 that sale was in large part
financed by a loan of £21m. Between those two dates it was valued at £30.5m. In
July 1992 it was resold for £3.1m. It is the task of this court to decide who
are the winners and who are the losers in this ‘game’.
Background
Cuthbert Heath
House was, at the outset of this story, in the owner-occupation of the
well-known firm of insurance brokers, C E Heath plc. In early 1988 Heath was
minded to find a new property from which to carry on its business and
accordingly instructed selling agents Baker Harris Saunders (‘BHS’) to find a
purchaser who was prepared to acquire it subject to a short-term leaseback in
favour of Heath, doubtless to cover the transitional period during which it
would be seeking and establishing itself into alternative accommodation. I
heard evidence from Mr Michael Dix [FRICS] of BHS as to the steps he took on
behalf of Heath to achieve a sale. None such having been achieved by October
1988 the firm of Jones Lang Wootton (‘JLW’) were appointed as joint agents and
I heard evidence from Mr David Bushe [ARICS] of JLW.
Following a
joint meeting between Heath, BHS and JLW on January 24 1989, at which there was
a review of the interest shown by prospective purchasers to date, a Swedish
company, Planform AB, came on the scene and on February 17 agreed to purchase
at a price of £23.5m. The purchase was to be effected through the medium of its
purpose-made Dutch subsidiary, Bjerka Real Estate II (‘Bjerka’). Planform was a
company owned and/or directed by two gentlemen, by name Mr Claes Holmquist and
Mr Ulf Haggstrom, who at the material time were represented in London by a Mr
Strom. I heard no oral evidence from any of these, but there was before me a
Civil Evidence Act statement from Mr Haggstrom which I took into account. Mr
Holmquist appears to be the sole-named director of Bjerka.
Four days
later Jackson-Stops & Staff (‘JSS’), through the head of their valuation
department, a Mrs Jennifer Branscombe [FRICS], inspected the property and then,
on February 28, submitted a valuation report for mortgage lending purposes to
Mr Holmquist in the sum of £30.5m.
At the stage
of their agreement to purchase, a financial analysis of Planform shows that it
had tangible fixed assets valued at about £20m with further investments of
about £1.2m, as against existing borrowings of £22.5m. Financing of this new
purchase was, therefore, clearly required. To that end Planform approached a
company in Sweden called Finans AB Nyckeln, of which a Mr Hans Lettberger was a
director. It appears that the initial approach was made by Mr Holmquist to Mr
Lettberger who, as he says in his supplementary
Nyckeln should not increase its exposure to this borrower’. The explanation for
that attitude lies in the fact that in December 1988 Finans AB Nyckeln lent
SKr96.8 (about £8.8m) to Planform for the purpose of its acquisition of a
property in Oslo called Karl Johansgate 16, then valued at SKr240 (about £22m)
and this was followed by a further loan in April 1989 of about £10.9m for
Planform’s acquisition, via Bjerka Real Estate I, of a London West End property
at 10-11 Grosvenor Place, secured by a further charge on the Oslo property,
personal guarantees by Messrs Holmquist, Haggstrom and Strom and, of course, a
charge on 10-11 Grosvenor Place itself, which JSS had valued at £11.5m.
This latter
loan was made by Finans AB Nyckeln’s London subsidiary, Nyckeln Finance Co Ltd
(NFCL), who is the plaintiff in the present action.
However,
following Mr Lettberger’s rebuff, a Mr Claes Werkell of Provisor AB, who was a
valued client of Nyckeln in Sweden, and who at one stage had apparently
contemplated joining in with Planform as an investor in Cuthbert Heath House,
approached Mr Mans Palmstiema, the financial director of Finans AB Nyckeln and
a board director of NFCL to seek a loan of 75%-80% of the valuation on that
property. To the best of Mr Palmstierna’s recollection this approach was about
the end of April, by which stage, of course, Planform had the JSS valuation at
£30.5m, so that the suggested loan percentage bracketed the purchase price. Mr
Palmstierna agreed to lend £21m after receiving a faxed copy of the JSS
valuation, ie 70% of valuation, and notified NFCL in London of his intention.
The relevant members of NFCL in London were Mr Ross Tanner, managing director,
who had a considerable banking background, particularly in Scandinavia, Mr
Michael Friend, company secretary, a solicitor with experience in the
commercial property field, and Mr Robert Barnes, whose background was also in
commercial property. I heard from the two former in the course of the evidence,
but not the latter.
Before
progressing the story on Cuthbert Heath House further I turn aside for a moment
to refer to the loan on 10-11 Grosvenor Place because, although not the
subject-matter of the present litigation, it forms an important part of the
context within which NFCL came eventually to advance the loan of £21m on
Cuthbert Heath House. There is no doubt that JSS became involved in this
transaction at an early stage through Mr Nick Hanson [ASVA, ARICS], who was an
associate director of its investment and fund management department. Precisely
when JSS were engaged by Planform is not clear (I received no evidence whatever
in this case either from Mrs Branscombe or Mr Hanson): but it must have been at
latest by January 1989 because the document at C1-31 headed ‘Investments
In-House Requirements List’ refers to Planform as being a Swedish company keen
to build an English portfolio, who had recently retained JSS as sole UK
advisers with an investment ability up to £25m. On February 6 a Mr Robinson of
JSS produced a valuation for Mr Holmquist on Grosvenor Place in the sum of
£11.5m, but that had been preceded by Mr Hanson, according to his diary note
for January 24, looking at not only Grosvenor Place but also Cuthbert Heath House
and I accept what was submitted to me in opening by Mr Roger Ter Haar QC that
it is a reasonable inference to draw that Mr Hanson’s role was to find and
suggest properties for Planform investment. On February 21 Mr Friend is
informed that he is to expect a visit from Mr Lettberger to discuss a deal with
Mr Holmquist. From the accompanying pages it is clear that the matter was one
of great urgency — it appears because Planform had agreed to pay about £1m for
an option on Grosvenor Place. The letter from Planform’s solicitor of February
22 requests Mr Holmquist to supply the balance of the option moneys as a matter
of great urgency. These were provided by way of initial loan from NFCL on
February 23 that loan being authorised by Mr Friend and included, inter alia,
an arrangement fee of £150,000 for NFCL. It is clear that Mr Friend was not
overly impressed with Planform’s London representative, Mr Strom — initially at
any rate, because he had not appreciated that Planform stood to lose some
£269,000 as the deposit on the option agreement if the option on Grosvenor
Place was not taken up. Mr Friend contacted Mr Lettberger, who told him that
Planform were good clients and that there would be no problem in lending to
Bjerka I to enable exchange of contracts to take place, once personal
guarantees had been received from Messrs Holmquist and Haggstrom, who were
both, apparently, men of considerable substance financially.
Eventually, on
April 20, the JSS valuation at £11.5m was addressed to Mr Friend at NFCL and on
April 21 NFCL agreed to advance a total sum of about £10.8m for the acquisition
by Bjerka I of Grosvenor Place (which subsumed the February loan of just under
£1m) on the basis of the JSS valuation and with security to which I have
already referred. It is to be observed that NFCL in London did not approve this
loan and left the responsibility for it entirely in Sweden’s hands — see the
notes to the loan request form where it is stated:
This is not a
transaction that we would normally recommend without a profit share and we are
relying entirely on Hans Lettberger’s knowledge of the people behind the
company and his recommendation that we should make the facility available.
At this point
it is appropriate to say a little more about NFCL in London. It was incorporated
in 1987 as a subsidiary of Nyckeln Holdings AB. Mr Tanner was ‘head-hunted’
from a Finnish Bank in the same year and took up the post of managing director
in January 1988: Mr Friend joined in March as company secretary. In early 1988,
after less than a year in business, NFCL had a portfolio of between £20m and
£30m, with the majority of its transactions being in the £500,000 to £1m
bracket. Subsequently that increased to a level of about £2m. The loan on
Grosvenor Place was, therefore, by far and away the biggest transaction to date
(Mr Friend recollected one other transaction of about £3m). Mr Tanner, upon
taking up his post, took on the task of formulating a formal lending policy, of
introducing a written lending procedure including the taking of security and of
establishing a panel of valuers approved by NFCL. The first of these was
achieved by May 1988, the second by August.
The general
policy was to lend ‘only against satisfactory security which has been valued
professionally by an independent and qualified valuer’, in normal cases up to
70% but in certain cases up to 75% dependent upon the quality of the collateral
or borrower, sometimes even above that, but then generally only if NFCL took an
equity or a profit share in the property. However, it is clear that these
‘policies’ were guidelines only and not ‘writ in stone’ as I think one witness
said. As to the establishment of a panel of valuers, JSS were appointed as one
such. It was also made clear by both Mr Friend and Mr Tanner that the ultimate
decision in relation to any loan lay with Sweden (viz: transcript where Mr
Friend agreed with Mr Christopher Symons QC’s suggestion that ‘you were more
the London Office of a Swedish company than anything else’). The position was
therefore that even if London approved a loan it had to be approved by either
Mr Palmstierna or Mr Ennarson (the latter being a co-director of Nyckeln in
Sweden): furthermore, Sweden could make a loan without reference to London save
to the extent that NFCL was made the vehicle for such a loan and carried the
legal responsibility for it. NFCL, of course, had the backing of Nyckeln
Holding AB.
I return now
to the loan the subject of this litigation, which, as I have said, was notified
to London by Mr Palmstierna about the end of April. It can be seen that the two
transactions on Grosvenor Place and Cuthbert Heath House were progressing
almost in parallel. Mr Friend sets out in the course of his cross-examination
how he came to hear of Mr Palmstierna’s proposal. Mr Tanner took the telephone
call from Mr Palmstierna: a reference to the Minories rang a bell with Mr
Friend. In fact, in his first statement he said he became aware of Planform’s
interest in it through Mr Strom in February: even at that stage he was aware of
its exposure to the market, via his friend Mr Tony Gibbon of Lambert Smith
Hampton. At that stage he said:
I felt that
the project was too large to be considered by Nyckeln and therefore did not
send details to Sweden.
That feeling
is important when one comes on to consider how Mr Friend, at least, approached
the suggestion of a loan by Mr Palmstierna. At all events, when he heard of the
JSS valuation in April he expressed surprise and suggested ringing Mr Gibbon to
obtain an informal opinion of value from him — as he put it at para 11 of his
first statement p7, ‘his most optimistic valuation’. The response was £21m to
£23m. This was reported back to Mr Palmstierna via Mr Tanner in Mr Friend’s
presence, from whence it became apparent that Mr Palmstierna wanted another
view. Mr Friend says he then rang Mr Michael Bokenham [FRICS] of Connell
Collier Madge, who effectively confirmed what Mr Gibbon had said.
I should say
at this stage of the story that I have reached a position where there appear to
be some discrepancies between the recollections of the witnesses. It is
therefore appropriate for me to state my view of them and of the evidence which
they gave in relation to events both leading up to the loan and in the months
thereafter. Mr Friend was the first of these. He was in the witness seat for
the longest and was most impressive. Not only was he clearly a witness of truth
but also he had, in my judgment, a very good and accurate recollection of
material events, nor did he in any way seek to exaggerate the position as he
saw it at any particular time. Unusually in this type of case I did not find
any element of ex post facto justification of either his personal
involvement or that of his company. It is pertinent that he eventually left
NFCL on March 31 1991 to take up a new job — this being some months after the
administrators came into NFCL. Where he has an account or a recollection of events
which differs from or exceeds those of others, I unhesitatingly accept his
version.
I also found
Mr Tanner to be an impressive witness. He had less direct involvement in these
transactions than Mr Friend and his detailed recollection was more hazy: he tendered
his resignation from NFCL at the board meeting in July 1990. However, in so far
as his evidence went I found him a reliable witness. I also heard oral evidence
from both Mr Palmstierna and Mr Lettberger. I bear in mind that English is
their second language, but, although Mr Palmstierna occasionally asked for
questions to be repeated and stumbled over the odd word (‘inconceivable’ being
one such — which then appeared to become the ‘buzz’ word for both Mr Symons and
Mr Ter Haar!), I consider he had a very good understanding of what was being
put to him. He was very deliberate in his answers and thought carefully before
giving them — but that fits in very well with Mr Friend’s description of him,
‘Mans is a little more ponderous than that. He always takes things in and
listens . . .’. His recollection of events, while under cross-examination, was
very often thin in the extreme. This may have been partly due to his perception
of Mr Symons being ‘on the other side’. However, I have no reason to consider that
he was being deliberately dishonest in his answers. I have already said that
where his recollection differs from Mr Friend’s I prefer the latter’s. As to
whether some of the assertions that he made as to his state of mind are
accurate or not I deal with when I come to the issues in this case. As to Mr
Lettberger he added very little orally to the short written statements he
submitted. I do not accept his assertion, contrary as it is to Mr Friend and Mr
Tanner, that the credit committee of NFCL in London made the decision to lend —
if that was intended to refer to the loan on Cuthbert Heath House.
I return to
the history of the loan. At about this period, ie end of April, Mr Hanson wrote
to Planform informing it that the property in its then condition, let on a full
market lease, was valued in the region of £35m, but that if redeveloped upon
vacant possession would expect to attain in excess of £50m. At the same time,
on April 27 Mrs Branscombe sent unsolicited to Mr Tanner a copy of JSS March
Investment Report. From his diary note of April 28 it appears that Mr Hanson
was in touch with both Mr Tanner and Mr Friend by this time. On May 11 Mrs
Branscombe’s report, with minor variations, was relayed to NFCL in London and
that same day NFCL made an offer of loan to Bjerka II of £21m for a period of
three months from May 12 1989. The offer referred to a valuation in the sum of
£31.5m (accepted by the parties to be an error) and was subject to additional
security by way of: (i) guarantee from Nyckeln Holding in Sweden in the sum of
NKr40m; (ii) a second charge in favour of the holding company to be taken on
the Oslo property; (iii) such further security as might be required by the
holding company up to a maximum of NKr40m; and (iv) an assignment of the
benefit of the rental income and a legal charge on such income in favour of
Nyckeln.
Prior to that
offer being made Mr Friend, because of his concern as to the accuracy of Mrs
Branscombe’s valuation (reinforced by the opinions of Mr Gibbon and Mr
Bokenham), decided to telephone her. It was not a short conversation: its
purpose, so Mr Friend told me, was to make her aware of NFCL’s unease at the
valuation and give her the opportunity to change her mind. However, she was, he
said, ‘extremely positive and unequivocal in standing by her valuation’. He
repeated that in cross-examination. It is worthy of note here that that
conversation was put in issue in the defence to the extent that no admissions
were made as to it. However, as I have said, I heard no evidence from Mrs Branscombe
on this point and I accept entirely Mr Friend’s recollection as accurate.
Following the
offer of the loan, on May 12 NFCL refinanced it by themselves taking a
three-month loan from Den Norske Creditbank in Sweden and a lease was then
entered into between Heath and Bjerka II.
In due course
Bjerka II defaulted on the loan repayment, it having been unable within the
three-month period to make the substantial profit that it no doubt anticipated
by resale or refinancing. In fact, Mr Haggstrom in his statement says: ‘I had
intended to redevelop the property once C E Heath had given up vacant
possession but would have been prepared to sell if I had received an attractive
offer.’ He goes on to say that, once Mr
Werkell and his colleague withdrew, he decided that the transaction was too big
for Bjerka/Planform alone and that JSS were instructed to resell ‘as soon as
possible’. That default put NFCL in difficulties in turn with Den Norske
Creditbank. It transpired that no sale of the property was effected at a price
which would have enabled Bjerka to settle its liability to NFCL and hence for
it to do likewise to Den Norske Creditbank. It was marketed over a protracted
period between August 1989 and July 1992, the details of which I shall refer to
when I come to deal with the issues between the parties, and was eventually
sold at that latter date to a subsidiary of NFCL, Wimpole Hotel Properties Ltd,
a firm known as Ouvah Highfields Ltd taking a lease thereon.
Claim
As I have
said, NFCL is the plaintiff in this action and is currently in administration
pursuant to an order of the court dated October 10 1990. The firm of
accountants Grant Thornton, through two of its partners, acts as administrators
and, accordingly, has had the conduct and control over attempts to sell since
that time. The defendant, itself in liquidation, is the successor in title to
JSS. The plaintiff claims damages in contract and tort, which it alleges have
been occasioned to it by reason of its reliance upon a negligent valuation by
Mrs Branscombe in making the loan on Cuthbert Heath House to Bjerka II, such
damages being the loss of the loan moneys plus interest less rent receipts from
Heath while in occupation and credit for the sum achieved on eventual sale.
Although
negligence and breach of contract were initially denied by its amended defence
of November 12 1993, JSS admits that the figure of £30.5m was in excess of the
highest figure which a reasonably competent surveyor could have provided at the
material time as the property’s open market value. It is denied that any duty
was owed in tort, but admits an implied term to exercise reasonable skill and
care in contract. It was not suggested by Mr Symons that the existence or
non-existence of a duty in tort made any significant difference to the outcome
of this case. For what it is worth I accept Mr Ter Haar’s submission that the
facts of this case fall squarely within the principles established in Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
Notwithstanding
the defendant’s admission of a negligent valuation there are a large number of
issues, both factual and legal, which fall to be decided.
Reliance
It is the
defendant’s case that the plaintiff did not rely on the JSS valuation in
deciding to make the loan on the Cuthbert Heath House acquisition. As a
subsidiary contention it is argued that, if it did, such reliance was
unreasonable: and in either event, therefore, the valuation could not be said
to be causative of the plaintiff’s loss.
I am satisfied
on Mr Friend’s evidence that the decision-making in relation to this loan was
wholly in Sweden, through Mr Palmstierna and Mr Ennarson. On the question of
reliance or no reliance I am therefore dependent solely upon Mr Palmstierna’s
evidence. He said, both in his witness statement and his oral evidence, that he
did rely on the valuation — because he knew of JSS as a reputable firm, who
were on the NFCL panel of approved valuers. Mr Symons suggested that it was
inconceivable that he was relying on it given the concern expressed by the
English end of NFCL. However, I accept what Mr Palmstierna told me. Whether
such reliance was reasonable is, of course, another question. Mr Symons
submitted with considerable force that such reliance was wholly unreasonable
given Mr Palmstierna’s concessions in cross-examination, first, that there was
no one within the group in Sweden who had a background in property or who could
hold himself out as a specialist in London commercial property, and, second,
that the London directors were expressing concern about the valuation. Mr
Palmstierna said that he had no recollection of being told that £23m was the
top valuation that could be placed on that property and that that opinion had
been expressed by both the valuers whom Mr Friend had approached. I am satisfied
that he was so told and that he must have had it in mind at the time he made
the decision to make the loan. However, although Mr Friend eventually agreed
with Mr Symons that he thought the valuation was wrong, that has to be viewed
in the overall context of his evidence.
Initially he
said he found the JSS valuation surprising, but his attitude was not ‘I’m an
instant property expert, never having walked round it, so I’ll make a decision
it’s only worth this’: his attitude was to check his instant reaction with a
friend. His instant reaction was, indeed, confirmed twice. A little later he
said, referring back to his view that the valuation was wrong: ‘One should
perhaps say at that stage one always regards the fact when one asks somebody
who is not completely involved with it that they didn’t have the full facts of
the building, that you have to treat with a degree of circumspection what they
say and that really you do then need to look into everything in the precise
details that everyone has the full knowledge of what the building is and what
they are looking at.’ He was clearly
referring there to Mr Gibbon and Mr Bokenham. Because their views caused him
seriously to doubt the valuation he decided to ring Mrs Branscombe; what he
then had in mind is set out at transcript 13.1 p55 11 50-57: in summary he was
giving her the chance to back down a bit, but she did not — quite the opposite.
At p57 he said: ‘I really was very surprised that Mrs Branscombe was very
bullish, she did not back off one bit during the conversation. She did not give
me one chink that one could say that I could go back to Mr Palmstierna and say
‘look, maybe they think it is toppy’.’
On the previous page, when asked if he thought still after speaking to
Mrs Branscombe that the valuation was wrong he said: ‘I think once again that
is quite a difficult one to sort of give definite answers. I was very nervous
about the loan. I wasn’t happy with it. I had done the best I could by phoning
up and inquiring and asking what I thought were all the right questions and
reporting back accordingly.’
I was referred
by counsel to two decisions in particular on this question of reliance. The
first was Kenney v Hall Pain & Foster (1976) 239 EG 355,
[1976] 2 EGLR 29 a decision of Goff J, as he then was. That was a case in which
the plaintiff wished to move house and obtained a valuation of his present
house in order to help to decide whether he could afford to buy another house
upon which he had his eye. The valuation was negligent: in fact the plaintiff had
himself formed the view that it was too high, but proceeded to go ahead with
his purchase of the other house in the belief that its cost would be more than
covered by the sale of the old one. He was then left holding two houses in a
falling residential property market. In the course of his judgment, at p433,
Goff J said:
Certainly by
August 6th he had come to suspect that Mr Bannister’s valuation was rather
high; he was also exercising his own judgment, in the light of all the factors
known to him, but one of those factors remained Mr Bannister’s advice, and I am
satisfied that the Plaintiff was still relying substantially on that advice . .
. He felt that, in the light of the advice he had received from Mr Bannister,
even allowing that his valuation might have been rather high, this was a risk
[ie purchasing the new house] that he could safely take.
The second
case was JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER
583 a case of alleged reliance by the plaintiffs, on a prospective take-over of
a company, upon the audited accounts of that company produced by the
defendants. In the headnote it is stated: ‘The Plaintiffs . . . knew that the
accounts were inaccurate but did not appreciate the full extent of the
inaccuracy.’ The trial judge found that,
although the plaintiffs had relied on the accounts in the sense of having
studied them to the extent that the picture presented by them encouraged them
to proceed with the take-over, their motive for so proceeding was to obtain the
services of the company’s two directors and, because they had formed their own
view as to the value of the stock, they could have proceeded with the take-over
in any event. He accordingly found that the negligent valuation was not a cause
of the plaintiffs’ loss. The Court of Appeal, while being critical of the way
in which the trial judge had used the words ‘reliance’ and ‘relied on’, in
upholding his decision, said, per Sir Sebag Shaw at p587, after quoting
that part of the judgment which stated:
I have
therefore come to the conclusion that before the acquisition, Mr Bufton knew
there was something seriously wrong with the stock valuation
continued:
This is
wholly incompatible with any reliance by Mr Bufton on the auditor’s certificate
which was belied by his own direct information’
and, a little
later
What the
judge is really stating as his underlying meaning is that, while the content of
the accounts was observed and considered . . . it did not in any material
degree affect their judgment . . .
(Emphasis
supplied.) Then, per Stephenson
LJ at p589:
But as long
as a misrepresentation plays a real and substantial part, though not by
itself a decisive part, in inducing a Plaintiff to act, it is a cause of his
loss and he relies on it, no matter how strong or how many are the other matters
which play their part in inducing him to act.
(Again,
emphasis supplied.)
It is clear
that both these decisions were reached and are supportable on their own
particular facts and, to that extent, do not really help a decision in the
present case. But the principle to be extracted from them, which I do not think
is at issue between the parties, is that the valuation must, in the words of
Stephenson LJ, play a real and substantial part in inducing the plaintiff to
act — and the inference is that it was reasonable in the particular
circumstances that it should have done so.
Mr Ter Haar
also invited me to take as a starting-point in reaching my decision on this
issue the words of Wright J in the recent case of HIT Finance Ltd v Lewis
& Tucker Ltd July 31 1991*:
On any view,
in my judgment, one of the elements of the scheme of protection that a lender
sets up when negotiating an advance of this kind, in order to protect himself
against loss should the borrower default, is an assurance as to the value of
his security. It would only be in a most exceptional set of circumstances that
the negligent valuer would not be at least in part responsible for the
consequential loss suffered by the lender upon the failure of the borrower to
honour his obligations . . .
*Editor’s
note: Reported at [1993] 2 EGLR 231.
I entirely
agree with that approach as being apposite in the present case. In the final
analysis, then, the question to be answered is, is this a case where there is a
most exceptional set of circumstances: or, put in
the valuation a real and substantial part of his reason for lending — and was
that reasonable.
Mr Palmstierna
was clearly not enthusiastic about lending as much as 75%-80% of the valuation
when first approached by Mr Werkel. Mr Lettberger was not happy about lending
at all, but that was because in his view it would have made Nyckeln
over-exposed in the light of the earlier loan on Grosvenor Place. The principal
opposition from the London end was because of the size of the loan — both Mr
Friend and Mr Tanner said that: a subsidiary reason, as far as Mr Friend was
concerned, being his mistrust of Planform and Mr Strom in particular, arising
out of the way in which they had approached the Grosvenor Place loan; the
over-valuation (in their eyes) was simply an added reason for them to want to
have nothing to do with it. On the other hand, Mr Werkel was a valued client of
Nyckeln in Sweden and Planform were valued clients of Mr Lettberger, with
directors of some financial standing, and there would, therefore, have been a
desire from the Swedish end to accommodate their clients. In that context it is
not irrelevant that Planform itself must have been very bullish in the light of
the various signals as to value coming from JSS in the context of their
purchase price of £23.5m. Mr Symons submitted that what in reality happened was
that NFCL jettisoned, as it were, the JSS valuation and then took the purchase
price of £23.5m as a starting-point and took 70% of that, ie £16.45m and then
‘topped’ that up to £21m on the basis of the extra security on the Oslo
property. I cannot accept that: first, Mr Friend said that he would not have lent
more than £14m-£15m if he had been prepared to lend at all (which he was not);
second, the extra security on the Oslo property, whether on the basis of
Norwegian or Swedish Kroner, did not bring it up to £21m; and, third, there
were not in this transaction, unlike the Grosvenor Place one, any personal
guarantees from Planform directors. In my judgment, the taking of extra
security was most probably the Swedish end taking account of the concerns
expressed by London as to the valuation — a ‘belt and braces’ operation —
furthermore, the very fact that they had made an exception to their general
lending policy in respect of Grosvenor Place is a very good reason for them not
being prepared to over extend themselves again with the same client. In all
those circumstances, I consider that, although this is a borderline decision, I
am persuaded that, on the balance of probabilities, the plaintiff has proved
that the JSS valuation was a real and substantial influence in its decision to
lend. I am further prepared to accept, in those circumstances, Mr Ter Haar’s
submission that it lies ill in the mouth of a professional valuer, who is
giving a valuation for mortgage lending purposes, to say that it was
unreasonable for the party to whom such valuation was given to rely on it.
Transaction
or non-transaction
Mr Symons in
his closing submissions put the issue here in this way: would NFCL have lent
the same or some lesser sum if the valuation given had been the highest
non-negligent valuation? However, I
think the issue is more accurately stated in this way: given a non-negligent
valuation of the property, would there have been a transaction of loan between
NFCL and Planform/Bjerka?
To an extent
the answer to this may depend upon whether I accept as a starting-point the figure
given by Mr Castle, the defendant’s expert valuer, of £27.5m as being the
highest non-negligent valuation, or the figure of £23.5m being the correct
valuation figure according to Mr Ellis, the plaintiff’s expert valuer.
Accordingly, I propose to deal with their evidence on this point first.
Both these
gentlemen are very experienced valuers. Mr Ellis, from whom I heard first, is a
partner in the well-known and long-established firm of Richard Ellis, which
specialises in all aspects of commercial real estate. He has 19 years of
experience in general valuation work and has been an FRICS since 1991. Since
1988 he has been partner in charge of the firm’s City valuation section working
extensively with financiers to the property sector. Mr Castle is the senior
partner of Dron & Wright, chartered surveyors, with a city office at 5
Burgon Street, St Andrews Hill. He has been in practice since 1961 on a very
broad front with a number of firms and has been an FRICS since 1973. It seems
to me probable that Mr Ellis perhaps has the edge on Mr Castle in relation to
detailed knowledge of the Square Mile of the City in 1988-89.
At section 11
of his report of October 25 1993 Mr Ellis sets out what he perceives as the
basis of valuation for loan security purposes. The starting-point is the
guidance notes issued by the Assets Valuation Standard Committee of the RICS,
the 2nd ed of which was current to May 1989. The basis of valuation for loan
security purposes is open market value which is defined as
the best price
at which an interest in the property might reasonably be expected to be sold at
the date of valuation assuming:–
(a) a willing seller,
(b) a reasonable period in which to negotiate the
sale taking into account the nature of the property and the state of the market;
(c) that values will remain static during that
period;
(d) that the property will be freely exposed to
the open market; and
(e) that no account will be taken of any
additional bid by a purchaser with special interest.
He goes on to
say that in respect of Cuthbert Heath House, being an income-producing office
building with potential for redevelopment, two valuation approaches should be
used, the first on an investment basis and the second using a residual or
development appraisal. As to the latter, he agreed with Mr Symons that, once it
was established that the residual valuation figure was lower, which all agree
it was, it becomes irrelevant. Then he describes the investment basis by
reference to a published book on the subject and he cites: ‘The basic principle
is that an investor wishes to invest capital to obtain an annual return thereon
in the form of a net income which represents an acceptable rate of yield.’
The task of
the valuer is to determine what is the net income a property will produce, establish
the rate of return the investor will expect in percentage terms (or ‘yield’),
then capitalise the net income by multiplying it by the reciprocal of the rate
of return. That will produce a figure termed ‘years’ purchase, which is then
multiplied by the net income figure to produce the capital value.
The rate of
return adopted is to be arrived at by considering comparable market evidence,
market trends and the attractiveness of the property in relation to the overall
market at the time. Finally, it is customary to deduct the acquisition costs
(ie, stamp duty, professional and legal fees) from the final figure.
I have set out
the above in some little detail not because there was any issue between Mr
Ellis and Mr Castle as to the approach to valuation in principle, but simply to
illustrate what has been said time and again in this type of case, namely that
valuation is an art not a science: the mathematical calculations will be the
same in every case, but the base figures for such calculations are liable to
vary depending upon the perception of the individual valuer — which may vary by
a factor of plus or minus 10% of a mean figure.
Mr Ellis had a
certain amount of background information when preparing his valuation as at May
11 1989, obtained from the investment section of his firm. That included
knowledge that the property had been marketed by Baker Harris Saunders in May
1988 at a figure of £30m, that Richard Ellis had no interested clients but
knowledge in June 1988 of a proposed offer of just over £19m from Rosehaugh
plc, that the asking price had been reduced to £23m in October 1988 whereupon
one client expressed interest at £20m and that in March 1989 it was still under
offer at circa £23m. Finally, his information included knowledge of the sale to
Planform at £23.5m with a five-year leaseback to Heath together with a tenant’s
option to break on 12 months’ notice from the end of the second year, the
leaseback rent being £1.975m pa.
At section 11
he describes the property as being situated ‘on the fringe of the traditional
insurance sector . . . subject to much redevelopment . . . creating acceptable
office areas outside the traditional definitions of the City boundary’. A
description of the property itself in section 12 indicates that much of the
office accommodation was below modern requirements for its floor-to-ceiling
height. There was some issue on this and I was referred to photographs: in my
judgment, the issue was unimportant, it being common ground that it would not
have been practicable to install the sort of raised flooring required to hide
the multitudinous leads running from computers and such-like office equipment.
At section 14 he observes that any successor tenant to Heath or new occupier of
a redeveloped building would be liable for the full rate burden which was
likely to increase above May 1989 levels under the new rating system. At
section 15 its condition was described as ‘dated in appearance and would have
benefitted from redecoration’.
At section 18
Mr Ellis turns to general market conditions, the principal features of which
were significant levels of rent increases throughout 1987-88, which were
expected to level off and not increase in 1989, a short-term easing of demand
for office accommodation due to Government economic policy in raising interest
rates to curb inflation and the likelihood of some financial firms putting
requirements for large units of office space on hold, ‘due to the climate of
caution in the securities sector following the stock market crash’. As to
supply and demand it was anticipated that there would be a wide choice of
secondhand office units during 1989 as existing occupiers moved into new
developments, but that requirements for large units were still in active
existence ‘especially amongst the major professional firms’. Mr Ellis’
conclusions as to rental values, based on five comparables set out in section
18.4.5, was a figure lying between £36-£41 psf. He initially put Cuthbert Heath
House, because of its size and relatively basic quality at £37 psf, but took the
leaseback rental figure of approximately £38-£50 in the defendant’s favour. On
the basis of redevelopment and by reference to five further comparables, he
assessed the rental figure attainable at £47-£50. He then turned his attention
to yields. Having prefaced his remarks by observing that, despite the slowdown
in the rate of rental growth, confidence in the city office market remained
high and that during the first quarter of 1987 60% of transactions were in the
£20m-£50m bracket and that funds available for investment were over twice the
1988 figure, he stated that he would have had regard to recent capital
transactions in preparing a report in April/May 1989, of which his office had
detailed knowledge. He then set out a number of comparables to all of which he
stated as his view that Cuthbert Heath House was inferior, which led him
therefore to a relatively higher yield required which he put at 8%.
Then at
section 19 of his report he sets out his valuation considerations, which are
largely repetitive of what had gone before, but which included consideration of
the fact that the property had been on the market since spring 1988 at an
initial asking price of £30m and that a sale had been agreed at £23.5m. At
section 20 he sets out his valuation approach to the property first as a
standing investment, on the basis of which he arrives at a figure of £23.4m
rounded up to £23.5m to reflect the agreed sale price, the calculation of which
appears in his appendix X and he concludes by saying that the property, being
subject to a sale and leaseback, offered a slightly unusual investment
situation and at 20.1.8 he provides an alternative analysis in which the figure
of £23.5m could be arrived at by taking a rental value of £37 and a yield of
7.75%, thus falling within the parameters of comparable transactions. The
remainder of his report deals with the residual valuation (with which I think
it was agreed I am not really concerned — save perhaps to the extent that it
‘underpinned’ the investment valuation) and criticisms of the JSS valuation.
Mr Castle’s
perception of the market at the relevant time does not significantly differ
from that of Mr Ellis as disclosed in his report at section 10, at the
conclusion of which he gave the view that ‘because of the divergence of views
as to the future demand and supply of offices in the City valuers had to make
their own assessment of the market sentiment’ and ‘would reach a wide range of
opinion at this time’, an expression of opinion from which Mr Ellis did not
dissent. He points out the risks of valuing with hindsight as to what actually
happened, stating that ‘there was a general view that the state of the market
would not deteriorate significantly’.
In section 12
he deals with the basis of valuation in which he refers to the same guidance
notes as Mr Ellis and then refers to the importance of investigating the sale
price and background of the sale where there is a great difference between that
and the figure arrived at by the valuer, which exercise would have thrown up
the fact that the property had been on the market since March 1988 and there
had been an offer of £26.5m. He also gave the view that the purchasers
considered that they had purchased at a low price — but of course they would
do, armed with the information emanating from JSS, and I do not consider that
that factor should influence a competent valuer in taking the view that the
sale price was low as at spring 1989. Mr Castle’s figure was in the region of
£24.75m. He then goes on to give a bracket for rental value at the material
time of between £35 and £38 psf and a yield of between 7% and 7.5%, the
reasoning in support of which is set out at sections 14 and 15. Then in section
17 he considers a range of values which he considers any competent valuer might
fall within and gives a bracket between £23.13m and £27.5m, the calculations
for which are set out in appendix 6 to his report. Both experts relied on
comparables and at the early stages of this trial produced a joint schedule of
agreed facts relating to rental values and yields used as comparables to
support their opinions: the schedule did not purport to reflect any agreement
as to the suitability of any particular property therein for use as a reliable
comparable and Mr Ellis submitted a further document which was a resume of the
extent of such agreement and making comments on the differences between the
comparables and Cuthbert Heath House.
In his
evidence-in-chief Mr Ellis said he considered that it is wrong for a valuer to
place a value upon property which is above the purchase price — the acid test,
he said, is the market. However, in cross-examination he agreed that one cannot
abrogate responsibility for arriving at the best price (which is what open
market value is) by merely looking at the sale price; but the sale price is
evidence of value. As to spoiling the market, he said: ‘If you spoil the
market, you will get a different price but that, then, unfortunately, will
become the market value’ and a little later he explained how and why he
considered that poor marketing may influence, and be a relevant consideration
in assessing, the open market value on the day in question. Later, he returned
to this theme and said:
If as a
result of that marketing it has been over-exposed to the market rather than
under-exposed you came to a figure the market will pay. For a valuer to
therefore say the market will pay more than the market has paid I think can
only be justified when it has not been fully marketed so that there’s some
premium value left in there for that purchaser.
Pausing there,
it is right to say that Mr Ellis was pressed very hard by Mr Symons on this
aspect, but did not waver in his view; and I must say that the logic of his
approach impressed me. When Mr Castle was cross-examined on this point he
agreed with Mr Ter Haar that if the market was spoilt the best price you could
reasonably expect on the open market is likely to be driven down. It is true
that later he appears to resile somewhat from that proposition. In
re-examination, when asked to interpret the Red Book guide requirements,
particularly in relation to the words ‘the state of the market’ he at first
seemed to suggest there was no disagreement between him and Mr Ellis, but then
a moment later reverted to the proposition ‘it’s the state of the market at the
time, not how badly the property or well the property has been marketed’. I
found it difficult to follow precisely what his stance was on this: but, as I
have said, the logic of Mr Ellis’ approach impressed me and I accept it.
It was clear
from Mr Ellis’ evidence that he attached great importance to the sale price in
relation to open market value; not, however, in isolation, but in conjunction
with the evidence shown by his comparables — all of which were, in his eyes,
better bets than Cuthbert Heath House because of the unique feature of the
latter that with the five-year lease back and break clause after two years it
did not offer an investor a secure income-flow. When it was put to him
that at the time it was not envisaged there was going to be a huge problem in
reletting he said, ‘I actually think that on the fringe and for accommodation
like that, market sentiment was that that sort of accommodation would be
problematical’. When asked his view of Mr Dix’s evidence relating to values
between £25m and £27.5m as at spring 1989, bearing in mind that there had been
very little change in rental values and yields over the ensuing 12 months, he
expressed the view that in the light of the sale price and other offers in that
area in spring 1989 Mr Dix was probably a bit high, but explained this by
pointing out that, at that date, the value was strongly underpinned by its
potential redevelopment value — which, by early 1989, was no longer the case.
He criticised
Mr Mark Creamer’s [ARICS, a valuer for Planform] assessment in July 1989 at a
figure of £26.5m on the basis that he had not reflected in it an interruption
of income flow or the evidence from his rental partners that the rent was too
high. He came through a gruelling and searching (but perfectly proper)
cross-examination by Mr Symons, steadfast in his view that 8% was not an
excessive yield to place upon this very individual property and rejected the
suggestion that he had reached that yield by starting with a rental figure,
looking at the sale price and picking a yield which would tie in with that
price. I pause to say here that that would have been a wholly improper way for
a valuer to approach his task. He stuck to his figure of £23.5m not on the
basis that anyone else who valued at a higher figure was incompetent, but that
that was a figure at the top end of his own bracket of figures: but he accepted
Mr Dix’s view that there could be a relatively wide range of views on yield in
the unusual situation of this property.
Before turning
to Mr Castle’s evidence I next consider what Mr Mark Creamer had to say. He is
an equity partner in Hillier Parker, who were instructed by Planform in June
1989 to value the property and he reported with a valuation as at July 10. His
valuation of £26.5m was based on a rent of £38 psf on the office accommodation
save for the ground floor, which he put at £35 psf and a yield of 7.25%. In
cross-examination he said his recollection was that his firm had been
instructed because Mr Strom wanted him to verify that he had a good buy;
further that he was getting instructions about the property from Mr Hanson of
JSS and that the valuation was required as a matter of urgency. He also
accepted that he was not valuing for the purpose of a bank lending money
against the property — the inference, I suppose, being that such a valuation
might be more conservative. Unlike Mr Ellis, he viewed the break clause as a
potential advantage, giving rise to an opportunity for redevelopment or
refurbishment. However, he was not aware, until he was told, that this was a
case where there was agreement that the redevelopment value did not underpin
the investment value. He then referred to the yield he had chosen as being ‘the
all-risk yield’. He accepted that, in general terms, the best evidence of open
market value is the manner in which the market has reacted to the property —
but that was not something that he had investigated in this case. He accepted
that the investment market had probably not improved significantly between
March and July 1989, although asserting that there was still a good demand ‘for
certain types of property’. He also agreed that if the property had been fully
marketed the best evidence of market value was what had actually been agreed.
Mr Creamer, it should be noted, was then practising from his firm’s West End
office and was relying on the expertise of his partners in their City office. I
do not find anything in Mr Creamer’s evidence which gives me cause to reject Mr
Ellis’ views as to market value in the spring of 1989.
But what about
Mr Castle’s evidence on this aspect?
Apart from the question of yield, his main point was that it was
necessary, in a case based on a valuer’s negligence, not just to reach one’s
own best estimate of market value but to look then at what might be the highest
non-negligent valuation: that is, of course, a somewhat different exercise,
but, in my judgment, that must be the correct approach by a court when it comes
to assess the damage which flows from a negligent valuation. In other words,
one must analyse the position from the top end of the acceptable bracket —
which, as I have already observed, is agreed to be about 10% on either side of
a mean figure (and it may not always be that easy to say what is a mean figure
in any given case!). Mr Castle agreed that a valuer needs to acquaint himself
with the sale price and then question why there is a difference, if there is,
between that figure and the valuer’s own initial assessment; that the weight to
be attached to the sale price depends first upon the extent to which the market
had been tested. He seemed to place some importance on the redevelopment
potential. When cross-examined he professed not to accept Mr Dix’s view that
the development potential had ceased to have any attraction by the end of 1988
due to the increase in interest rates, but my overall assessment of his replies
in subsequent cross-examination on this point was that he was prepared to push
this factor more into the background, while not abandoning it altogether. He,
in his turn, was vigorously cross-examined on his yield figure of 7% which gave
rise to his top non-negligent figure of £27.5m. I found his responses less than
convincing, particularly when put in the context of his somewhat grudging
acceptance of the suggestion put to him that the overwhelming majority of
surveyors in early 1989 were saying that the best price one could reasonably
expect to achieve was in the order of £23m.
To return to
the question I posed at the outset of this, I regret, somewhat lengthy analysis
of the expert evidence as to valuation, namely whether the starting-point for
consideration of transaction or non-transaction is £27.5m or £23.5m, in my
judgment it should be the latter figure. I accept Mr Ellis’ evidence because my
remark that in terms of knowledge of the City Square Mile he perhaps had the
edge was borne out by hearing both him and Mr Castle in evidence — and Mr
Ellis’ view is undoubtedly supported by a body of contemporaneous opinion.
However, bearing in mind that I accept in principle the proposition that the
starting-point must be the highest non-negligent figure and that this is
a case where it is common ground that there could be a wide variation, I am
prepared to say that that could be 10% above Mr Ellis’ original figure of
£23.4m (which he rounded up to £23.5m). That would give a figure of £25.75m.
Would there
have been a loan transaction between NFCL and Planform/Bjerka on a valuation at
that figure? In my judgment, clearly
not. I accept that, in the light of the pre-existing loan on Grosvenor Place
and the size of the loan being sought here, NFCL would not have contemplated
lending more than 70%. This is, in round figures, £18m, which means that
Planform would have had to find £5.5m (or, at any rate, £3m more than they
found for the purpose of their actual purchase). Mr Haggstrom, in his Civil
Evidence Act statement, said that a valuation of £27.5m would not have been
sufficiently attractive for Planform: a fortiori, a valuation of £25.75m
would not have tempted them. But in any event, it is difficult to see from what
source they would have found the extra funds required if one considers the
accounts of Planform as set out in bundle F, which were unchallenged. It is not
insignificant in this context that they were not even able to find a much lesser
sum to finance the acquisition of Grosvenor Place.
Contributory
negligence
It is the
defendant’s contention that even if I find, as I do, that NFCL reasonably
relied on the JSS valuation, NFCL nevertheless substantially contributed to
their damage by lending £21m given the factual background of advice from the
London end not to proceed, the actual purchase price and the views to two
respected city valuers (which, to an extent, underpinned London’s advice). It
might at first blush seem conceptually difficult to envisage a finding that a
particular course of conduct was reasonable and at the same time to attribute
fault, in the sense of negligence, to the person taking that reasonable course.
However, there is clearly a distinction between a finding that a person
reasonably relies on a valuation, and a consideration of whether that person is
then at fault in lending a particular sum of money in the light of that
valuation. The provision of the Law Reform (Contributory Negligence) Act 1945
as to the court’s power to reduce a plaintiff’s damages in proportion to the
degree of fault which can be attributed to him, envisage not a breach of any
duty owed by him to the defendant, but a failure by him to use reasonable care
to protect his own interests
Insurance Co Ltd* pp146H-147A of the transcript of his judgment delivered
on December 21 last, which is included in the folder of authorities before me
(hereinafter referred to as BBL)). At all events, Mr Ter Haar, while
reserving his right to argue elsewhere the question of whether the 1945 Act
applies in a contractual situation (a question not open to debate in this
court), makes his submissions on this issue on the basis that such a finding
would be theoretically open to me. I accept that the test that I should apply
is that approved by Phillips J in BBL, citing Lord Diplock in Saif
Ali v Sydney Mitchell & Co [1980] AC 198 at p220 to the effect
that the liability of a professional man for damage arises only where the error
he makes is ‘such as no reasonably well-informed and competent member of that
profession could have made’, and applying that dictum equally in the
context of contributory negligence. In BBL Phillips J heard expert
banking evidence on this issue. I have not, but I accept Mr Symons’ submissions
that on the facts of this case I am well able to come to proper conclusions
without the assistance of such evidence.
*Editor’s
note: Reported at [1994] 2 EGLR 108.
The facts in
the BBL case were considerably more complicated than in this case — and
in many respects very different. However, I found the way in which Phillips J
approached his consideration of this issue in general terms extremely helpful.
Under the heading ‘The approach to assessment’ he said:
In order to
evaluate the allegations it is first necessary to identify whether there were
features of the transactions which should have led a reasonably prudent
merchant bank, if aware of them, to decline to grant the facilities.
For ‘merchant
bank’ substitute ‘finance company’ in this case.
The first
point made by Mr Symons is that NFCL, when faced with a purchase price of
£23.5m and a valuation of £30.5m, should have inquired into the reason for this
and satisfied itself that there was a plausible explanation. I reject his
further submission that it did not do the first half of that. Mr Friend did
contact Mrs Branscombe by telephone and I have already referred to his account
of what passed between them. When asked the question in cross-examination as to
whether he had ever expressly asked her to explain the discrepancy between the
sale price and the valuation, he not surprisingly, after this length of time,
said he did not really recall the words used during the discussion. As I have
said, I did not have the advantage of hearing Mrs Branscombe’s evidence about
this telephone conversation: since in the pleadings no admission was made as to
its occurrence I draw the inference that she has no recollection of it.
However, in my judgment, it is inconceivable, bearing in mind the purpose for
which Mr Friend had contacted her, that the question of the difference between
the purchase price and the valuation was not raised and, indeed, it is very
likely that Mr Friend would, albeit in general terms only, have made mention of
the fact that he had had informal opinions given him which called into question
the reliability of her valuation. In the light of her ‘bullish’ response and in
the background of what Mr Hanson was saying about the property, it is difficult
to see what else NFCL could have done by way of inquiry, short of obtaining
another detailed valuation, say from either Mr Gibbon or Mr Bokelman. In view
of the very great difference, should it have done this? I do not think that I can improve on what
Phillips J said in BBL at p158B-F as to the general approach to the
question of contributory negligence: in relation to the specific question I
have posed, at p161 he deals with the failure, if any, of the bank to consider
the implications of the purchase price: at letters D-E he says:
It is less
easy to envisage, if a property has been exposed to the open market, how a
purchaser can succeed in paying significantly less than the open market value.
A competent bank will naturally wish to scrutinise any transaction where a
purchaser alleges that this is what he has achieved.
Then at
p163E-F he quotes from the report of a banking expert, a Mrs Craighead, whose
evidence he had earlier said he accepted, where she said:
If cost and
value differ significantly and if the banker wishes to have confidence that he
has a margin . . . between his loan amount and the amount which would be
realised by a sale of the properties, he will need to satisfy himself as to
whether there may be a satisfactory explanation of the difference.
That is the
second half of Mr Symons’ submission mentioned above, in effect. In considering
this issue in BBL Phillips J at p165 said:
If BBL
had been unable to obtain a satisfactory explanation they should have refused
to accept the valuation as satisfactory. I do not, however, accept that there
was nothing that BBL could do to check the valuation. A second opinion from a
competent valuer, informed of their concern about the difference between the purchase
price and valuation, would have demonstrated that there was no satisfactory
explanation and that . . . [the] valuation was unsound.
Mr Friend did
not get a satisfactory explanation, as such, from Mrs Branscombe: he had
already obtained two informal ‘second opinions’ and, after his telephone
conversation, remained concerned, but did not feel that he had further grounds
for going back to Mr Palmstierna. While I bear in mind that in BBL ‘the
cushion’ was only 10% between loan and valuation, whereas in the present case
it was 30%, I consider that Mr Palmstierna was foolhardy in pressing ahead with
a loan which, although it represented only 70% of the valuation, represented
90% of the sale price and of the ad hoc valuation obtained by Mr Friend
— particularly as he accepted that the London end of NFCL obviously were better
acquainted with the market situation in London and no one at the Swedish end
had any specialist knowledge of it.
In my
judgment, 90% was too much to be lending to Planform in the context of the
existing loan on Grosvenor Place — and it was clearly too much on Mr
Palmstierna’s and Mr Lettberger’s own assessments. Mr Ter Haar, in seeking to
defend the allegation of contributory negligence, asked me first to consider
the persons in NFCL whose decisions were being impugned. I do not consider that
to be particularly helpful because at the end of the day it is the corporate
decision I am concerned with, which is arrived at by input from a variety of
different people. I certainly agree that Mr Friend’s part in all this is beyond
criticism — and probably Mr Tanner’s also. Mr Ter Haar submitted that the
transcript 17.1 at p42 lines 35 onwards (part of Mr Friend’s cross-examination)
lent support to the evidence of Mr Palmstierna that he was not directly told in
terms that the valuation was wrong. I do not accept that: Mr Palmstierna’s
recollection of precisely what he was told was, as I have said, hazy in the
extreme, but I note that he made a somewhat curious reply at transcript 18.1
p411 33-37 during cross-examination: ‘I told you that Mr Friend told me that he
had received a second opinion but I do not know from whom, if it was from
JSS (sic) I do not know. I had the possibility to see the very first
valuation from JSS (sic).’
(Emphasis supplied.) If he
thought the second opinion came from JSS it could have involved only a resiling
from their original valuation — and that should certainly have caused NFCL to
stop in its tracks in progressing this particular loan. However, we know from
the evidence that this was not so. As to Mr Ter Haar’s remaining arguments
against a finding of contributory negligence, it seems to me, with respect to
him, that they relate more to the issue of reliance, which I have already
decided in his favour, than this issue. It follows that I accept Mr Symons’
submission that, given the background to the making of this loan, NFCL was to a
degree at fault in making it without properly satisfying itself as to the
reliability of the valuation and that that fault contributed to the loss that
it sustained, whatever I might hold that to be. Predictably, Mr Symons argued
for a higher finding than the 30% found by Phillips J in BBL, while Mr
Ter Haar argues that it should be lower. Mr Symons’ argument is based on the
fact that in this case the lender had actually been advised by independent
experts, ie Mr Gibbon and Mr Bokenham. That seems to me to overlook the points
made by Mr Friend about the extent of those gentlemen’s knowledge in detail of
this property and the fact that, faced as I find she probably was with those
opinions, Mrs Branscombe still adhered very firmly to her own valuation. I
prefer Mr Ter Haar’s arguments which relied on the fact that JSS had a track
record with NFCL, were on its panel of valuers,
Holdings AB, that the amount of the loan was less, as opposed to more, than the
purchase price, that the whole scheme emanated, through Mr Hanson, from JSS
and, finally, that JSS’ negligence was an important cause not only of initial
loss but also in preventing early steps to reduce that loss (I shall return to
this last matter when considering the issue in relation to instigation). I have
come to the conclusion that the appropriate deduction by way of contribution
should be 20%.
Measure of
damage
The next
question is what is the loss that flows from the defendant’s admitted
negligence. The principal issue argued under this head is whether or not the
defendant is, under normal principles, liable for what, it is common ground,
was a catastrophic and wholly unforeseeable collapse in the commercial property
market between 1989 and 1992. If it is, then, subject to issues of mitigation,
the loss claimed by the plaintiff is the difference between the sum advanced and
the sum recovered on the sale of the property, plus any consequential losses
and expenses (viz: the judgment of Wright J in HIT Finance Ltd v Lewis
& Tucker Ltd following the Court of Appeal decision in Baxter v F
W Gapp & Co Ltd [1939] 2 All ER 752). The figure on that basis is
£17,951,952.49 being the difference between the sum lent and the sum realised
on sale, to which the plaintiff adds a claim for simple interest which, as at
December 31 1993, amounted to a further £5,585,972.73.
The defendant
argues that the fall in the property market was not caused by its negligent
breach of contract: that, in any event, it is too remote a head of damage and
that it would be contrary to public policy to impose liability for such a loss
upon a valuer. Mr Symons relied very heavily on the judgment of Phillips J in BBL
in this context. At p121 when considering the basic principle, he took as his
starting-point the dictum 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’. Phillips J then went on:
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.
I wholly agree
with that approach and with the reasoning he used to justify it at letters B-E.
BBL is a persuasive authority, but it is not binding upon me: the
plaintiff argues that it was wrongly decided and that I should, rather, follow
the approach of Gage J in the case of United Bank of Kuwait v Prudential
Property Services Ltd whose judgment was given on December 10 1993*, 11
days before that in BBL. Gage J preferred to follow the decision in Baxter
v Gapp which, he held, had not been overruled by the more recent
decision of the House of Lords in Swingcastle Ltd v Alastair Gibson
(a firm) [1991] 2 AC 223† , at any rate on this point. Alternatively, the
plaintiff argues that BBL is distinguishable on its facts from the present
case.
*Editor’s
note: Reported at [1994] 2 EGLR 100.
† Editor’s
note: Also reported at [1991] 1 EGLR 157.
It is
therefore necessary for me to consider in some detail these two very recent
first instance authorities and relate them to the facts in this case. Phillips
J carried out a very thorough analysis of the relevant authorities and I do not
propose to carry out quite such an extensive exercise in the course of this
judgment. The relevant part of his judgment runs from p117E to 141E.
The
fundamental assumptions to which he referred at pp117-118 apply equally to NFCL
in this case, ie that the JSS valuation would be within 30% of the true market
value of the property at the time the loan was made (in BBL the
equivalent figure was 10% because they were lending 90% against valuation) and
that the property would at least retain its value up to the time when the loan
fell to be repaid (in this case that period was three months). In this case, as
in BBL, those assumptions proved to be ill-founded.
The difference
between the 10% ‘cushion’ in BBL and the 30% ‘cushion’ in this case is,
however, important. In BBL Phillips J held that:
If this were
a case of an ‘ordinary loan’ it would be necessary when assessing damages to
have regard to the loss of the cushion against the fall in value of the
security. On the facts of this case . . . The 10% margin was no more than
reasonable to cater for the margin of error to which a competent valuation
might be subject.
Now that may
well have been the evidence in BBL, or it may have been an inference
which Phillips J felt he could reasonably draw from it. However, it was not the
evidence in this case. Both Mr Friend and Mr Tanner were asked about the
‘cushion’. Mr Friend in terms expressly refuted the suggestion that that was
the purpose of the ‘cushion’. Mr Tanner gave two reasons for having what he
called ‘a fairly traditional conservative banking figure’: One was the time
factor in reselling a property subject to foreclosure leading to rolled-up
interest; the other was the difficulty in shifting such a property at its
nominal market value once it leaked out that there had been a foreclosure. He
did not disagree when Mr Symons put it to him that another factor was the
allowance for variation in valuations, but it was a far less relevant factor to
him than the other two.
There are
other factual differences between this case and BBL which Mr Ter Haar
pointed out in his closing submissions, which, in particular, relate to the
extent of JSS’ overall involvement. They were acting for both the purchaser and
the lender, through both their investment department (Mr Hanson) and their
valuation department (Mrs Branscombe) respectively. Indeed Mrs Branscombe’s
report was relied on not only by Planform in deciding to go ahead with the
purchase (bolstered up by Mr Hanson’s ‘bullish’ investment report) but also, as
I have found, by NFCL in deciding to lend. I also accept Mr Ter Haar’s
submission that, in the absence of any evidence to the contrary from JSS, it is
reasonable to infer that they were aware that this was a short-term loan and
that NFCL’s ‘exit route was going to be a re-financing’ (Mr Friend 17.1 p26 1
14). At bundle C2 pp416 A-E is to be seen JSS ‘Planform Portfolio Quarterly
Update and Policy Review’ for the summer quarter 1989, ie after the purchase of
Cuthbert Heath House. The question is whether any of these factual distinctions
affect a consideration of the legal issue as to whether the plaintiff can
recover a loss caused by the collapse of the commercial property market.
There are two
early decisions of the Court of Appeal which are relied upon by the plaintiff
as supporting its contention that it can recover such a loss from the
defendant. The first is the very short report in the case of Scholes v Brook
(1891) 64 LT 674 where the question of the measure of damage seems to have been
subsidiary to the main point at issue, which was were the defendant valuers
employed by the plaintiff. Lindley LJ at p675 said: ‘As to damages there was no
evidence that the Plaintiff had acted otherwise in respect of the premises than
an ordinary mortgagee was entitled to do; and he was therefore of
opinion that the mode of estimating damages adopted by the judge was correct’
(ie the whole loss he had sustained through the deficiency of the security). In
my judgment, that seems by reference to the use of the word ‘therefore’ which I
have emphasised, to relate only to the question of whether or not the plaintiff
had sought to mitigate his loss. It certainly comes nowhere near considering
the sort of factual situation that arises in this case or in BBL. The
second case is Baxter v F W Gapp & Co Ltd [1938] 4 All ER 457
(at first instance) and [1939] 2 All ER 752 (Court of Appeal). There again the
main issue considered at first instance seems to have been the question of
mitigation. Again, as is apparent from the judgment of Mackinnon LJ at p755
G-H, this was not a case where there had been evidence of any fall in the
property market, let alone a catastrophic one, so that the present issue did
not really fall for consideration. What it did decide was that the proper
measure of damage was not the difference between the actual value and
the negligent valuation, but, in the ordinary case,
repaid by the price paid by the subsequent purchaser. It is on the interest
point that the case was disapproved in Swingcastle v Gibson (post).
The next case
relied upon by the plaintiff in London & South of England Building
Society v Stone [1983] 1 WLR 1242 in which the Court of Appeal expressly
approved and followed, as binding upon it, the decision in Baxter v Gapp.
That was a case in which a negligent survey resulted in the valuation put upon
a residential property being worthless, in which, again, a question of
mitigation arose. O’Connor LJ, having considered the effect of the Canadian
case of Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51 on Baxter
v Gapp and having rejected the submission that damages were limited to
the difference between the sum loaned and the true value of the property at the
date of the transaction, then considered two first instance cases of Singer
& Friedlander Ltd v John D Wood & Co (1977) 243 EG 212,
[1977] 2 EGLR 84 and Corisand Investments Ltd v Druce & Co
(1978) 248 EG 315, and concluded by saying of them:
I do not
think any help is to be derived from these property boom and collapse cases; in
each case the lender would have suffered loss on the sums which the Court found
he would have lent against a proper valuation and it was appropriate to assess
that loss as the difference between the sum lent and that which would have been
lent. It is not a formula to govern all cases where money is lent on the faith
of a negligent valuation.
That seems to
be suggesting, first, that property boom and collapse cases are in a special
category and, second, that, perhaps, every case has to be looked at on its own
particular facts (as to which viz: Oliver J, as he then was, in Radford
v De Froberville [1977] 1 WLR 1262 at pp1269-70). The citation from
O’Connor LJ’s judgment is, of course, referring only to what may be termed the
‘transaction’ cases.
Swingcastle
Ltd v Alastair Gibson (a firm) [1991] 2 AC
223 is a decision of the House of Lords in which Baxter v Gapp
was considered. But it was considered only from the point of view of the
question which arose in the instant case, namely could the plaintiff recover as
part of his damages from the negligent valuer contractual interest due from the
borrower. The House of Lords said no and to that extent only does it appear
that Baxter v Gapp was disapproved. It appears to have been
accepted by the valuers in the county court that the measure of the lender’s
damages was to be arrived at by taking the amount of the loan, plus
professional costs incurred in selling the property, on the one hand; and the
amount realised on such sale plus receipts from the borrower on the other hand
— the shortfall, if any, on the latter being the amount recoverable: viz:
Lord Lowry at p229E-G. Lord Lowry’s speech in relation to the claim for
interest is perhaps encapsulated in what he says at p238H:
The fallacy
of the lender’s case is that they have been trying to obtain from the valuer
compensation for the borrower’s failure and not the proper damages for the
valuer’s negligence.
Once again
this case is in no way concerned with the factual situation that arises in the
present case, namely the fall in the property market, but it is to be noted
that Lord Lowry in the course of his speech approves certain general
propositions as to the approach to assessment of damages: for example, at
p237B: ‘There is, as Neil LJ perceived, no cut and dried solution to
calculating the amount of damages in cases of this kind. It depends on the
evidence’; and, on the same page, he quotes with approval the points made by
Oliver J in Radford v De Froberville to which I have already
referred and which include a reference to the dictum of Denning J (as he
then was) in Duke of Westminster v Swinton [1948] 1 KB 524 at
p534: ‘The real question in each case is: what damage has the Plaintiff really
suffered from the breach.’
That question,
it seems to me, is to be answered by applying the general principles relating
to the scope of duty, causation and remoteness. That in itself is dealt with
again by Denning LJ (as he had by then become) in Roe v Minister of
Health [1954] 2 QB 66 at p85:
The three
questions duty, causation and remoteness, run continually into one another. It
seems to me that they are simply three different ways of looking at one and the
same problem . . . Instead of asking three questions, I should have thought
that in many cases it would be simpler and better to ask the one question: is
the consequence within the risk? And to
answer it by applying ordinary, plain common sense.
Those words
have been echoed very recently in Galoo Ltd v Bright Grahame Murray,
a decision in the Court of Appeal in which judgment was given on December 21
last, by Glidewell LJ at p21 of the transcript at Tab 26 of the defendant’s
bundle of authorities, letters C-D where he says, ‘How does the Court decide
whether the breach of duty was the cause of the loss or merely the occasion for
the loss? The answer in my judgment [is]
supplied by the Australian cases to which I have referred . . . in the end is
‘By the application of the Court’s common sense”. It is true that a little
earlier in his judgment, p17B, he said, ‘. . . inevitably, not all judges
regard common sense as driving them to the same conclusion’.
Well, where
does common sense drive me in this case?
I have to say, in the same direction as it drove Phillips J in BBL.
I start with Mr Symons’ first proposition in his closing submissions under this
head: by agreeing to lend money to Bjerka II, NFCL accepted the risk that there
might be a fall in the property market such that the value of the
property would be inadequate security for their loan (my emphasis). Of course,
as I have already remarked, on the evidence of Mr Friend and Mr Tanner that was
not a risk protection against which the 30% cushion was sought — particularly
in the context of the loan being only for three months: nevertheless, it was a
risk that must have at least been apparent to anyone operating in the field of
commercial property, even if it were thought to be only a slight one. But, on
Mr Friend’s and Mr Tanner’s evidence, NFCL were not relying on JSS to protect
them from that risk. The risk of a fall in the property market, as Mr
Symons said, was a risk that every secondary bank in the market in the late
1980s was taking.
The primary
cause of NFCL’s loss was Planform/Bjerka II’s failure to make repayments under
their loan contract. When answering the question ‘What caused the loss?’ it is
as well to bear in mind what Lord Wright said in Yorkshire Dale Steamship Co
Ltd v Minister of War Transport [1942] AC 691, which concerned the
question as to what was the cause of the stranding of a ship engaged in a
convoy for the conveyance of war stores and in which, as appears from the
headnote, it was held that ‘the proximate cause of loss is not necessarily the
one which operates last, but is the effective and predominant cause, selected
from among co-operating causes’. He said at p706:
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,
understands it.
Whether or not
it is right, as Mr Symons suggested, that Mr Barnes could properly be viewed as
‘the man in the street’ it is of interest that he made a note in the margin of
a letter from Mr George Stallard [ARICS] of Connell Wilson dated February 12
1992, to Mr White, the joint administrator of NFCL which was for the purpose of
advising the administrators on marketing tactics on the property, to this
effect: ‘Surely we’re only suing for the difference between JSS and R Ellis
figures’. This comment echoes the view expressed by Sir John Megaw in the Court
of Appeal in Swingcastle, set out in Lord Lowry’s speech at p232 B-C,
that:
The valuer
should not be liable for a greater amount than the amount of his original
over-estimate of the value compared with the true market value as at the date
of the valuation. Any shortfall in the proceeds of the realisation above that
amount should not be regarded as being caused by the negligent valuation.
That
proposition gains academic support from an article by Professor Dugdale in the
June 1991 issue of Professional Negligence at p85, prior to the House of
Lords decision in Swingcastle, and again
the decision, in which it is interesting to note that, under the heading
‘Capping damages to the amount of the over-valuation’ he comments: ‘Capping to
the over-valuation might provide a fair limit to such claims. Unfortunately
Lord Lowry did not discuss the suggestion and it remains for future cases to
explore’.
I return to
what Phillips J said in BBL. With respect I entirely agree with his
approach set out at p122 of the transcript at letters C-E. Since I do not
consider I can improve on the way he puts it, there is nothing to be gained by
my quoting the passage at length here. Despite the strictness emanating from
some eminent quarters about the use of lawyers’ Latin these days, as a
committed classicist I cannot resist saying that this seems to me to be a prime
example of the situation where it can be rightly said that the negligence of
the valuer is a causa sine qua non of the loss sustained as a result of
the collapse of the property market, but not a causa causans — or, to
put it into basic English, it is the scene-setter, not the operative cause.
There is one
further case to which Mr Symons referred me and which is analysed at length by
Phillips J at pp123-127 of his judgment and which touches the issue of
causation. That is Banque Financiere de la Cite SA v Westgate
Insurance Co Ltd, sub nom Banque Keyser Ullmann SA v Skandia (UK)
Insurance Co Ltd [1991] 2 AC 249. Having carefully read the judgments in
that case, again I accept and adopt Phillips J’s analysis of it as supporting
Mr Symons’ submissions on causation in this case. I have considered the
Canadian authorities to which I was referred: in my judgment, it is not
necessary for me to rely upon them to support my decision in this case,
although I accept that the extract from Sir Henry Strong CJ’s judgment in Lowenburg,
Harris & Co v Wolley (1895) 25 SCR 51 at p56 lends support to
it.
There are two
further cases to which I should refer which were relied upon by Mr Ter Haar.
The first is HIT Finance Ltd v Lewis & Tucker, which I
mentioned in passing at the outset of this section of my judgment. In that
case, as in this, the issue related to the measure of damage on an admittedly
negligent over-valuation where there undoubtedly occurred a collapse in the
property market following the valuation. There is only a very brief reference
to the measure of damage as approved in Baxter v Gapp at p15 of
the transcript: counsel for the defendant conceded that the proper measure was
the difference between the sum advanced and the sum recovered on sale, plus
consequential losses and expenses, and Wright J said that the concession was
properly made. There was, therefore, no argument on whether or not Baxter v
Gapp can properly be applied to cases involving collapses in the
property market.
The other case
is United Bank of Kuwait v Prudential Property Services, to which
I have also referred above, and which is not referred to by Phillips J in BBL
— no doubt because Gage J only delivered his judgment in it 11 days earlier. In
that case, as in this, the findings are that it fell into the category of a
non-transaction case. At p34, he refers to the argument of the defendant’s
counsel that:
Any loss over
and above this difference (ie between the negligent valuation and the highest
non-negligent valuation) is attributable to the fall in the property market and
not the breach; alternatively such loss is not foreseeable.
Counsel sought
to argue that Baxter v Gapp, although on the face of it against
him, was either wrongly decided or had been overruled. Gage J, after
considering a number of the authorities to which I have referred in the course
of this judgment, rejected both those submissions and held himself bound by Baxter
v Gapp. The negligent over-valuation was £2.5m. Gage J found the correct
valuation to be in the region of £1.8m to £1.85m as at September 1990. The
property was eventually sold in February 1992 for £950,000 — a very
considerable percentage drop. So in general terms the cases are similar. It is
not clear how detailed was the argument on this point: certainly the
authorities are not subjected to the same detailed analysis as given by
Phillips J. If it comes to a question of choosing between them I have no doubt
that I find BBL the more persuasive precedent.
Do, then, the
factual distinctions between this case and BBL result in Mr Ter Haar
being able to persuade me that, even if I find that BBL was correctly
decided, which I do, it is distinguishable and therefore not necessarily to be
followed here. Since I have arrived at the conclusion that this case is
distinguishable from Baxter v Gapp (and therefore from the cases
which endorse it) on the grounds that it was not considering the factual
situation of a collapse in the property market, it is not necessary for me to
go as far as perhaps Phillips J was going when he said, at p135A-B:
Having regard
to this [ie Swingcastle] 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.
(Emphasis
supplied.) Of course his use of the
words ‘in a case such as this’ may mean that he, too, was merely distinguishing
Baxter v Gapp rather than declining to follow it (which latter he
was not entitled to do). If that is the correct approach then these cases must
be decided by reference to first principles in the manner I have described and,
viewed from a common-sense causation basis, I do not see that any of the
factual distinctions to which I have referred affect the end result, which is
that the defendant should not bear responsibility for that part of the
plaintiff’s loss attributable to the collapse of the market.
That gives
rise to the next question: what part of the plaintiff’s loss is attributable to
such collapse? Mr Symons submits that it
is represented by the difference between the open market value at the date of
the valuation and the sale price. While I have held that, in considering
whether this is a transaction or a non-transaction case, it is necessary to
take as a starting-point the highest non-negligent valuation, for the purpose
of the present exercise it is right that I should take what I consider to be the
open market value as the starting-point. I am satisfied on all the evidence,
and for the reasons that I have already given, that the figure is £23.5m. The
actual sale figure was £3.1m, but at the end of the expert evidence there was a
narrow issue between Mr Castle and Mr Ellis as to what the proper sale value
should have been on an arm’s length basis — and because the sale price was on
the basis of an unlet building, whereas in fact a firm called Ouvah Highfields
took a lease of the whole premises on the same date as the sale to Wimpole
Hotel Properties Ltd. The latter took the view that that value was £5.385m; the
former that it was in the region of £6m. Mr Castle was not, in fact,
cross-examined on this part of his evidence. Mr Ellis was and agreed with Mr
Symons’ suggestion that the difference between them was ‘probably within the
bounds of difference between valuers that you would expect’. That being so, I
shall adopt a mid-way figure between the two which in round figures is £5.7m.
That gives an end figure of £17.8m as the loss attributable to the fall in the
market. That being so, what is the loss directly attributable to the
defendant’s negligence? I have already
referred to how the plaintiff computes its loss: this, of course, is on a basis
which I have now rejected. Mr Symons at p50 of his closing submissions, under
subpara 4 says: ‘Until the Court has reached its conclusion on the primary
issues there are obviously many variations on the appropriate
calculation.’ This is obviously correct.
A number of alternatives were canvassed by Neill LJ in the Court of Appeal in
the Swingcastle case, which are conveniently set out at p230 of Lord
Lowry’s speech, letters D-H. Lord Lowry, at p237, then says:
The approach
of the valuer in this case and the analysis of Neill LJ which I have reproduced
above, seems to me to be correct. What the lenders lost, in addition to their
other damages, was the use of the £10,000 while it was perforce locked up in
the loan. I say ‘perforce’ because I do not overlook the duty of the injured
party to mitigate his loss or the fact that, once the borrowers had well and
truly defaulted, the lenders had access to their remedy and thereby to their
money.
This last
sentence is of importance when I come to consider the issue of mitigation, but
the first part is clearly relevant to what is the plaintiff’s loss which is not
attributable to the fall in the market. As to that I do not think I have had
any evidence and it may be that it requires further submission.
In so far as
interest is claimed as part of the damages, as opposed to statutory interest, I
heard submissions from both counsel. Mr Ter Haar,
held), says the loss suffered by NFCL, apart from the amount borrowed by NFCL
and lent on to Bjerka, is: (i) interest paid by NFCL to Den Norske Creditbank;
(ii) interest not recovered from Bjerka (and none was); and (iii) out of pocket
expenses, against which credit must be given for rent received from CE Heath.
As to (ii) he accepts that I am bound by the decision in Swingcastle and
cannot award that as a head of damage. As to (iii) I do not think the principle
of recovery of that head is in issue: however, nor do I think that I heard
evidence on that. Indeed the amended statement of claim simply claims the
interest payable to DNC without quantifying it. The only evidence as to that
amount is set out in Mr White’s statement of January 18 1994. It is not in a
very satisfactory form: the calculation appears in the table B annexed to his
statement and gives an end figure, after giving credit for rent receipts, as at
December 31 1993, of £5,585,972.73. Mr Symons submits that any interest payable
to DNC is not recoverable because that loss was not caused by JSS’ negligent valuation
but by the borrower’s failure to pay the contractual interest. There can be no
doubt that had Bjerka paid the contractual interest, or even the balance owing
after transferring Heath’s rent payments in part satisfaction thereof, then
NFCL would have suffered no loss under this head: indeed, they would have
achieved the overall contractual profit they were seeking through their
short-term loan agreement. On the other hand if JSS had submitted a proper
valuation, no loan would have gone ahead and NFCL might have utilised the £21m
for investment in another similar loan transaction.
The factual
difference between this and other cases in this field is that here the lender
is not lending its own money but is going into the money market to obtain funds
to lend on. However, whether one looks at it as loss due to an inability to
invest the lender’s own money elsewhere at a profit or as loss caused by having
to pay interest on moneys borrowed for the purpose of onward loan, in both
cases the lender is put into that situation by reason of the negligent
valuation. The former situation is akin to Swingcastle where Lord Lowry
accepted that the lender’s loss which fell to be compensated was its loss of
use of the loan capital while ‘it was locked up in the loan’. I do not see that
any different consideration should apply in a case such as the present where
the lender is having to pay for the cost of obtaining funds used in the loan.
Accordingly, in my judgment, the plaintiff’s claim under this head succeeds,
subject to the question of mitigation, to which I now turn.
Mitigation
Under para 12
of the reamended defence are set out the particulars of the defendant’s
allegations against the plaintiff in this context. In summary they are that the
plaintiff failed unreasonably to avail itself of the opportunity to sell
Cuthbert Heath House earlier than it did and at a much more advantageous price,
and the scenario is viewed at various stages between May 1989 and July 1992,
the allegations being put in the alternative, with the earliest sale at the
highest price obviously leading and latest sale at the lowest price bringing up
the rear. In the context of my decision that the defendant is not responsible
for the loss caused by the drop in the market, it was suggested by Mr Symons
that it might not be necessary for me to consider any stage but the last.
However, since I have found that the defendant is liable for the interest
payments due to DNC while the money was locked into the loan it is necessary,
as Lord Lowry said, to consider for how long it should reasonably have remained
so locked.
Before
examining each stage relied upon, it is, I think, necessary to consider the
extent of a plaintiff’s duty to mitigate his loss in general terms. I agree
with Mr Ter Haar’s submission that the proper approach is best set out in the
speech of Lord Macmillan in Banco de Portugal v Waterlow & Sons
Ltd [1932] AC 452 at p506:
Where the
sufferer from a breach of contract finds himself in consequence of that breach
placed in a position of embarrassment the measures which he may be driven to
adopt in order to extricate himself ought not to be weighed in nice scales at
the instance of the party whose breach of contract has occasioned the
difficulty. It is often easy after an emergency has passed to criticize the
steps which have been taken to meet it, but such criticism does not come well
from those who have themselves created the emergency. The law is satisfied if
the party placed in a difficult situation by reason of the breach of a duty
owed to him has acted reasonably in the adoption of remedial measures, and he
will not be held disentitled to recover the cost of such measures merely
because the party in breach can suggest that other measures less burdensome to
him might have been taken.
Para 12 A 1-3
The allegation
here is that, by November 1989 at the latest, NFCL should have entered into
possession of the property under the terms of their mortgage, having had the
power to serve a default notice on Bjerka II from August, and that they would
then have been able to take up Aylesford’s offer of £22.5m on behalf of an
undisclosed client.
First, this
allegation needs to be considered in the context of Mr Hanson of JSS saying at
this stage that £27m was a price that could still be obtained. In the light of
that advice in October it seems to me to lie very ill in the defendant’s mouth
to say that NFCL should have sold for £22.5m in November. However, I am in any
event satisfied on the evidence that NFCL were not acting unreasonably in
declining to enforce their own strict contractual rights against
Planform/Bjerka, who were good clients of theirs, but instead were, as Mr
Friend said, ‘trying to resolve the group lending position’ and ‘doing
everything that we felt we were able to establish what the property/properties
were worth and then begin a sensible campaign for either re-financing them or
selling them’. That being so in November it was only Planform/Bjerka who could
make the decision to sell and, whatever may have been the views expressed at
the London end about the desirability of ‘getting out’, I agree with Mr Ter
Haar’s submission that NFCL were in some difficulty in persuading Planform to
sell, not only in the light of what Mr Hanson was saying, but in the light of
Mr Rupert Carr of Aylesfords’ (who had been instructed by Planform in October
to market both properties) advice set out in his letter of October 24 that
Planform should ‘consider any offer in excess of £24.5m’. What is more JSS were
still marketing the property themselves at £25m (viz: letter of October
27) despite having had their instructions withdrawn by letter of October 13
from Mr Friend to Mr Hanson. Not only did this make things difficult for Mr
Carr but, as Mr Castle agreed in evidence, it was spoiling the market (this
evidence is missing from the transcript, but I have a clear note of it).
Moreover, there was no question of Mr Carr ‘pushing’ the figure of £22.5m at
their subsequent meeting, which I accept was purely for the purpose of
discussing refinancing. In my judgment, therefore, this allegation against NFCL
is wholly without foundation.
Para 12 B1
This
allegation relates to the Sonnaire offer of £17m in July 1990. On April 26
there was a board meeting of NFCL which followed on from Mr Friend’s letter to
Planform of April 18 in which he referred to advice that he had received that
£17m was the maximum likely achievable price and that he would be recommending
to the board that action should be taken to enforce their security and ‘sell
the properties at whatever price can be achieved’. That recommendation was
accepted by the board on the basis that the loans were not repaid by mid-May.
NFCL then contacted the firms of Connell Collier Madge and Healey & Baker
in early May for advice on selling. The former, through Mr Bokenham, advised
that the bracket was £14m to £17m; the latter, in a report dated June 5, said
they felt ‘that Cuthbert Heath House would be a difficult proposition to sell
in the current climate at anything but a ‘bargain price” and gave a bracket of
£14.5m to £17.5m, advising serious consideration to any offer above the lower
figure. On June 20 the two firms produced a joint-strategy letter to Mr Friend
in which they said: ‘[we] must advise you that any sale of this kind which is promoted
in the current market climate is seen as a ‘distress’ sale’ and ‘we suggest you
should be prepared to consider any reasonable offer which is received’.
On July 12
1990 an offer to buy at £17m was sent to Mr Holmquist in Sweden from solicitors
acting for a Swiss company, Sonnaire Finance SA. Mr Barnes’ handwritten note on
that letter is dated July
him we consider this offer highly acceptable but cannot accept it without Holmquist
approval’. So, despite what was agreed at the April 26 board meeting, Planform
still seemed to be in control, through Mr Holmquist. On Connell Collier Madge’s
letter of July 19, in which they say ‘this is an extremely good offer in the
current market and one that we suggest is accepted’, there appears a further
handwritten note dated July 20 referring to a telephone call from Mr Ennarson
to the effect that they are unable to accept the offer without speaking to
Holmquist. Then on August 8 Connell Collier Madge wrote to Mr Friend to say
that Sonnaire have agreed to buy another property, but that it is still
interested and hopes ‘to confirm tomorrow that they will proceed at £17m’. Then
on August 10 Sonnaire’s solicitors again wrote expressing their clients’
willingness to proceed at £17m, but the offer to remain open for a further
seven days only because of the delay since they first made their offer. The
same day the offer is accepted on NFCL’s behalf, subject to contract. A
contract is sent out and, by letter of August 13, NFCL at long last called in
Bjerka II’s loan. Nothing further is heard from Sonnaire’s solicitors so that
on September 14 Connell Collier Madge wrote threatening to withdraw. There is
then silence: in his witness statement all Mr Friend says is: ‘Ultimately the
sale did not take place as Sonnaire Finance SA were unable to raise the finance
necessary to proceed.’ That is perhaps
not surprising after the initial period of delay in responding positively to
the offer during which it is apparent that Sonnaire had invested in another
property. It is noteworthy that when Mr Friend is asked about the timing of the
default notice to Bjerka he says ‘. . . so I imagine at that stage we decided
that Mr Holmquist wouldn’t be given the opportunity to stand in the way of a
sale again . . .’.
I have dealt
with the history of the Sonnaire offer in some detail because it is received
nearly a year after NFCL were in a position to serve a default notice and
nearly three months after Mr Friend’s indication to Planform of his
recommendation to the NFCL board. In the course of his closing submissions Mr
Ter Haar posed the question: is it not the action of a prudent bank to give a
borrower six months to try and sort out its problems? In my view, the answer to that is ‘yes’: in
fact NFCL gave Planform a great deal longer than six months; and yet, having
taken the decision to ‘call it a day’ at the board meeting of April 26, they
still, collectively, allowed Mr Holmquist to call the tune, despite the advice
they are getting from both experts they have instructed and in the context of a
market which they have seen to be steadily falling since late 1989.
In my
judgment, even allowing for the cautionary words of Lord Macmillan referred to
above, it was unreasonable from NFCL’s point of view to allow Planform further
time after the middle of May to try and dispose of its whole portfolio, which
is apparently what it was seeking to do in Sweden.
It follows
that, even if I am wrong on the question of liability for collapse in the
property market, the plaintiff’s claim should be limited to loss sustained on
the basis of a sale at £17m. In any event their claim for interest payable to
DNC should run only to a date when it might reasonably have expected that a
sale to Sonnaire, on their offer being promptly accepted, would have been
completed — say August 31 1990.
I do not find
it necessary, therefore, to analyse the position that arose after the date of
appointment of the administrators on October 10 1990, in relation to the allegations
at para 12 B 2 and 3, save to say that administrators are looking at the
question of sale through slightly different eyes to the lenders, and the
atmosphere in the property market had significantly altered by the autumn of
1990 and the perception was to put everything on hold because of the
uncertainties arising out of the Gulf War as both Mr Ellis and Mr Castle
agreed. Indeed, Mr Castle spoke of ‘sometimes you have to take a difficult
decision’: the plaintiff should not be criticised if, with the benefit of
hindsight, he turns out to have taken the wrong decision. In general I would
accept Mr Ter Haar’s submissions in relation to this part of the case as set
out at pp18-20 of his written submissions.
That, I
anticipate, concludes all the matters upon which it is necessary for me to
express a view at this stage. The parties, having considered this judgment,
will no doubt wish to have considered the mathematical calculations of both
contractual and statutory interest and also of any consequential expenses,
together with any question as to costs.
