Negligence — Mortgage valuation — Interest on damages — Section 35A of Supreme Court Act 1981 — Accrual of cause of action in tort — Whether plaintiff suffered damages at date of loan transaction or date of realisation of property
In Nykredit
Mortgage Bank plc v Edward Erdman Group Ltd [1996] 2 EGLR 93, the
House held that the respondent bank was entitled to recover damages from the
appellant valuers limited to an overvaluation of a property. The amount was
£1.4m. The House adjourned the question of what interest should be awarded upon
the damages. The appellant valuers contended that the cause of action did not
arise until the subject property was sold in February 1993; the respondent bank
claimed that the cause of action arose in March 1990, at the date of the loan
transaction. By December 1990, taking into account the continuing cost to the
bank of providing the money lent and the diminishing value of the property as
the market deteriorated, the bank suffered their full allowable loss of £1.4m.
paid on the £1.4m from December 1990. A lender sustains measurable relevant
loss when the relevant measure of loss is identified. In the case of a
negligent valuation of an intended loan security, the basic measure of loss is
the comparison between: (a) the amount of money lent by the plaintiff, which he
would still have had in the absence of the loan transaction, plus interest at a
proper rate; and (b) the value of the rights acquired, namely the borrower’s
covenant and the true value of the overvalued property. A valuer is liable for
the adverse consequences, flowing from entering into the transaction, which are
attributable to the deficiency in the valuation. Proof of loss attributable to
a breach of the relevant duty of care is an essential element in a cause of
action for the tort of negligence. The cause of action will arise when the
plaintiff has suffered a loss. In the present case such loss will be suffered
when the lender can show that he is worse off than he would have been if the
security had been worth the sum advised by the valuer; the comparison is
between the lender’s actual position and what it would have been if the
valuation had been correct. It is not necessary for the lender to first realise
his security before he can show that he has suffered a loss.
The following cases
are referred to in this report.
Baker v Ollard & Bentley (1982) 126 SJ 593
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co
Ltd [1995] QB 375; [1995] 2 WLR 607; [1995] 2 All ER 769; [1995] 1 EGLR
129; [1995] 12 EG 144, CA
Belgian
Grain & Produce Co Ltd v Cox & Co
(France) Ltd [1919] WN 308
Bell v Peter Browne & Co [1990] 2 QB 495; [1990] 3 WLR 510;
[1990] 3 All ER 124, CA
Covell
Matthews & Partners v French Woods Ltd
[1978] 1 WLR 1477; [1978] 2 All ER 800; (1977) 35 P&CR 107; [1978] 1 EGLR
53; 246 EG 1007, CA
First
National Commercial Bank plc v Humberts
[1995] 2 All ER 673; [1995] 1 EGLR 142; [1995] 14 EG 140
Forster v Outred & Co [1982] 1 WLR 86; [1982] 2 All ER 753, CA
Hunt v Douglas (RM) (Roofing) Ltd [1990] 1 AC 398
Iron
Trade Mutual Insurance Co Ltd v JK Buckenham Ltd
[1990] 1 All ER 808; [1989] 2 Lloyd’s Rep 85
Islander
Trucking Ltd v Hogg Robinson & Gardner
Mountain (Marine) Ltd [1990] 1 All ER 826
Kuwait
Airways Corporation v Iraqi Airways Co (No 2)
[1994] 1 WLR 985; [1994] 1 Lloyd’s Rep 284, CA
Moore
(DW) & Co Ltd v Ferrier [1988] 1 WLR
267; [1988] 1 All ER 400, CA
South
Australia Asset Management Corporation v York
Montague Ltd; United Bank of Kuwait plc v Prudential Property Services
Ltd; Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] AC
191; [1996] 3 WLR 87; [1996] 3 All ER 365; [1996] 2 EGLR 93; [1996] 27 EG 125,
HL
UBAF Ltd v European American Banking Corporation [1984] QB 713;
[1984] 2 WLR 508; [1984] 2 All ER 226; [1984] 1 Lloyd’s Rep 258, CA
Wadsworth v Lydall [1981] 1 WLR 598; [1981] 2 All ER 401
Wardley
Australia Ltd v State of Western Australia
(1992) 109 ALR 247
This was an
adjourned hearing of an appeal by the valuers, Edward Erdman Group Ltd, from
the decision of the Court of Appeal ([1995] 1 EGLR 129) dismissing their appeal
in a claim for damages for negligent valuation brought by the respondent,
Nykredit Mortgage Bank plc.
Simon Berry QC
and Jonathan Ferris (instructed by Williams Davies Meltzer) appeared for the
appellant; Michael Briggs QC and David Blayney (instructed by Clifford Chance)
represented the respondent.
Giving his
opinion, LORD NICHOLLS OF BIRKENHEAD said: On June 20
1996 your lordships’ House gave judgment in the present and two other appeals
concerning the measure of the damages payable to lenders by valuers who
negligently overvalued property provided as security. In the present appeal the
House decided that, for the reasons given by my noble and learned friend Lord
Hoffmann, the measure was limited to the amount of the overvaluation: see [1996]
3 WLR 87*, at p104D. This comprised £1.4m, being the difference between the
incorrect value ascribed to the property by the valuers, namely £3.5m, and the
true value of the property at the date of valuation, since agreed by the
parties at £2.1m. This was the principal amount payable by the valuers to the
bank as damages. The House adjourned the question of what interest should be
awarded upon the damages. That is the primary question now before the House.
*Editor’s
note: See South Australia Asset Management Corporation v York
Montague Ltd [1996] 2 EGLR 93
Interest
on the damages
Section 35A of
the Supreme Court Act 1981 empowers the court to award simple interest on ‘all
or any part of the debt or damages in respect of which judgment is given … for
all or any part of the period
judgment’. This raises the question of the date when the plaintiff bank’s cause
of action arose. The statutory power applies only to the period starting on
that date. The bank claims that its cause of action arose in March 1990, at the
date of the loan transaction, when it suffered an immediate loss. By December
1990, taking into account the continuing cost to the bank of providing the
money lent and the diminishing value of the property as the market
deteriorated, the bank had sustained its full allowable loss of £1.4m. Interest
should be paid on that amount from that date. The defendant valuers contend
that the cause of action did not arise until the property was sold in February
1993. That was when the bank was visited with the consequence of the valuation
being wrong.
This seemingly
narrow question, raised in the context of the payment of interest, has wide ramifications.
In recent years there has been much litigation over the date of accrual of a
cause of action in tort in respect of financial loss caused by professional
negligence. The question usually arises in the context of a claim that an
action has become time-barred, because time normally runs for limitation
purposes from the date when the plaintiff’s cause of action arose.
Accrual of
a cause of action: actual damage
As every law
student knows, causes of action for breach of contract and in tort arise at
different times. In cases of breach of contract the cause of action arises at
the date of the breach of contract. In cases in tort the cause of action
arises, not when the culpable conduct occurs, but when the plaintiff first
sustains damage. Thus the question which has to be addressed is what is meant
by damage in the context of claims for loss which is purely financial (or
economic, as it is sometimes described).
In Forster
v Outred & Co [1982] 1 WLR 86, at p94, Stephenson LJ recorded the
submission of Mr Stuart-Smith QC:
What is meant
by actual damage? Mr Stuart-Smith says that it is any detriment, liability or
loss capable of assessment in money terms and it includes liabilities which may
arise on a contingency, particularly a contingency over which the plaintiff has
no control; things like loss of earning capacity, loss of a chance or bargain,
loss of profit, losses incurred from onerous provisions or covenants in leases.
They are all illustrations of a kind of loss which is meant by ‘actual’ damage.
It was also suggested in argument … that ‘actual’ is really used in contrast to
‘presumed’ or ‘assumed’. Whereas damage is presumed in trespass and libel, it
is not presumed in negligence and has to be proved. There has to be some actual
damage.
Stephenson LJ,
at p98D, accepted this submission. I agree with him. I add only the cautionary
reminder that the loss must be relevant loss. To constitute actual damage for
the purpose of constituting a tort, the loss sustained must be loss falling
within the measure of damage applicable to the wrong in question.
Take first a
simple case which gives rise to no difficulty. A purchaser buys a house which
has been negligently overvalued or which is subject to a local land charge not
noticed by the purchaser’s solicitor. Had he known the true position the
purchaser would not have bought. In such a case the purchaser’s cause of action
in tort accrues when he completes the purchase. He suffers actual damage by
parting with his money and receiving in exchange property worth less than the
price he paid.
In the
ordinary way the purchaser in this example will not know of the negligence of
his valuer or solicitor when completing the purchase. Despite this his cause of
action arises at the date of completion and time begins to run for limitation
purposes. In the past this meant, in an extreme case, that a plaintiff could
find his cause of action time-barred before he even knew he had reason to bring
proceedings against anyone. On occasions the courts have strained against this
evident injustice when considering what is the date at which a plaintiff first
suffered damage. By and large, this distorting feature no longer exists.
Parliament has now remedied this defect in the limitation statutes. Under
section 14A of the Limitation Act 1980, introduced by the Latent Damage Act
1986, the plaintiff in an action for damages for negligence now has the benefit
of an extended limitation period where facts relevant to the cause of action
are not known at the date when the cause of action accrued. This extended
period embraces, in short, three years from the date when the plaintiff first
had the knowledge required for bringing an action for damages in respect of the
relevant damage, with a long stop period of 15 years.
More difficult
is the case where, as a result of negligent advice, property is acquired as
security. In one sense, the lender undoubtedly suffers detriment when the loan
transaction is completed. He parts with his money, which he would not have done
had he been properly advised. In another sense, he may suffer no loss at that
stage because often there will be no certainty he will actually lose any of his
money: the borrower may not default. Financial loss is possible, but not
certain. Indeed, it may not even be likely. Further, in some cases, and
depending on the facts, even if the borrower does default the overvalued
security may still be sufficient.
When, then,
does the lender first sustain measurable, relevant loss? The first step in
answering this question is to identify the relevant measure of loss. It is
axiomatic that in assessing loss caused by the defendant’s negligence, the
basic measure is the comparison between: (a) what the plaintiff’s position
would have been if the defendant had fulfilled his duty of care; and (b) the plaintiff’s
actual position. Frequently, but not always, the plaintiff would not have
entered into the relevant transaction had the defendant fulfilled his duty of
care and advised the plaintiff, for instance, of the true value of the
property. When this is so, a professional negligence claim calls for a
comparison between the plaintiff’s position had he not entered into the
transaction in question and his position under the transaction. That is the
basic comparison. Thus, typically in the case of a negligent valuation of an
intended loan security, the basic comparison called for is between: (a) the
amount of money lent by the plaintiff, which he would still have had in the
absence of the loan transaction, plus interest at a proper rate; and (b) the
value of the rights acquired, namely the borrower’s covenant and the true value
of the overvalued property.
However, for
the reasons spelled out by my noble and learned friend Lord Hoffmann in the
substantive judgments in this case, a defendant valuer is not liable for all
the consequences which flow from the lender entering into the transaction. He
is not even liable for all the foreseeable consequences. He is not liable for
consequences which would have arisen even if the advice had been correct. He is
not liable for these because they are the consequences of risks the lender
would have taken upon himself if the valuation advice had been sound. As such
they are not within the scope of the duty owed to the lender by the valuer.
For what,
then, is the valuer liable? The valuer is liable for the adverse consequences,
flowing from entering into the transaction, which are attributable to the
deficiency in the valuation. This principle of liability, easier to formulate
than to apply, has next to be translated into practical terms. As to this, the
basic comparison remains in point, as the means of identifying whether the
lender has suffered any loss in consequence of entering into the transaction .
If he has not, then currently he has no cause of action against the valuer. The
deficiency in security has, in practice, caused him no damage. However, if the
basic comparison throws up a loss, then it is necessary to inquire further and
see what part of the loss is the consequence of the deficiency in the security.
Typically, the
answer to this further inquiry will correspond with the amount of the loss as
shown by the basic comparison, for the lender would not have entered into the
transaction had he been properly advised, but limited to the extent of the
overvaluation. This was the measure applied in the present case. Nykredit
suffered a loss, including unpaid interest, of over £3m. Of this loss the
amount attributable to Erdman’s incorrect valuation was £1.4m, being the extent
of the overvaluation.
The basic
comparison gives rise to issues of fact. The moment at which the comparison
first reveals a loss will depend on the facts of each case. Such difficulties
as there may be are evidential and practical difficulties, not difficulties in
principle.
Ascribing a
value to the borrower’s covenant should not be unduly troublesome. A comparable
exercise regarding lessees’ covenants is a routine matter when valuing
property. Sometimes the comparison will reveal a loss from the inception of the
loan transaction. The borrower may be a company with no other assets, its sole
business may comprise redeveloping and reselling the property, and for
repayment the lender may be looking solely to his security. In such a case, if
the property is worth less than the amount of the loan, relevant and measurable
loss will be sustained at once. In other cases the borrower’s covenant may have
value, and until there is default the lender may presently sustain no loss,
even though the security is worth less than the amount of the loan. Conversely,
in some cases there may be no loss even when the borrower defaults. A borrower
may default after a while but when he does so, despite the overvaluation, the
security may still be adequate
It should be
acknowledged at once that, to greater or lesser extent, quantification of the
lender’s loss is bound to be less certain, and therefore less satisfactory, if
the quantification exercise is carried out before, rather than after, the
security is ultimately sold. This consideration weighed heavily with the High
Court of Australia in Wardley Australia Ltd v State of Western
Australia (1992) 109 ALR 247. But the difficulties of assessment at the
earlier stage do not seem to me to lead to the conclusion that at the earlier
stage the lender has suffered no measurable loss and has no cause of
action, and that it is only when the assessment becomes more straightforward or
final that loss first arises and with it the cause of action.
Indeed, for
the cause of action to arise only when the lender realises his security would
be a highly unattractive proposition. It would mean that, however obvious it
may be that the lender will not recover his money, he cannot start proceedings.
He must wait until he manages to sell the property, a process which may be
protracted. This would be a surprising stance for the law to take. It would be
all the more surprising when one has in mind that a lender’s cause of action
against his negligent valuer for breach of contract, as distinct from a claim
in tort, arises when the negligent valuation is given. If disaster were evident
and the lender were to sue his valuer for breach of contract without waiting
until he had realised his security, it is inconceivable that the court would
award only nominal damages. The court would do its best to assess the loss.
This prompted the trenchant observation of Bingham LJ in DW Moore & Co
Ltd v Ferrier [1988] 1 WLR 267, at p280E:
If, in a
contractual claim for negligence, the court would have awarded other than
nominal damages, I do not see how it can be said that an action in tort based
on the same negligence would have been bound to fail for want of any damage as
an essential ingredient of the cause of action.
As Mr Michael
Briggs QC submitted, no accountant or prospective buyer, viewing the loan book
of a commercial lender, would say that the shortfall in security against
outstanding loans to defaulting borrowers did not represent a loss to the
lender merely because the securities had yet to be sold. Realisation of the
security does not create the lender’s loss, nor does it convert a potential
loss into an actual loss. Rather, it crystallises the amount of a present loss,
which hitherto had been open to be aggravated or diminished by movements in the
property market.
I can see no
necessity for the law to travel the commercially unrealistic road. The amount
of a plaintiff’s loss frequently becomes clearer after court proceedings have
been started and while awaiting trial. This is an everyday experience. There is
no reason to think that the approach I have spelled out will give rise to any
insuperable difficulties in practice. In their practical conduct of litigation,
courts are well able to ensure that assessments of damages are made in a
sensible way. It is not necessary, in order to achieve a sensible and fair
result, to go so far as asserting that the plaintiff has no cause of action,
and hence may not issue a writ, until the assessment can be made with the
degree of precision that accompanies a realisation of the security. Further,
within the bounds of sense and reasonableness, the policy of the law should be
to advance, rather than retard, the accrual of a cause of action. This is
especially so if the law provides parallel causes of action in contract and in
tort in respect of the same conduct. The disparity between the time when these
parallel causes of action arise should be smaller, rather than greater.
An alternative
less extreme possibility is that the cause of action does not arise until the
lender becomes entitled to have recourse to the security. I am not attracted by
this, as a proposition of law. This suggestion involves the proposition that
until then, as a matter of law, the lender can never suffer loss, and the
lender can never issue his writ, whatever the circumstances. That does not seem
right to me. This proposition, like the date of realisation submission, loses
sight of the starting point: that the lender would not have entered into the
transaction had the valuer given proper advice. If the basic comparison shows a
loss at an earlier stage, why should the lender have to wait until the borrower
defaults before issuing his writ against the negligent valuer? There may be
good reason why the lender wishes to start proceedings without delay.
I recognise
that, in practice, the basic comparison may well not reveal a loss so long as
the borrower’s covenant is performing satisfactorily. For this reason there is
little risk of a lender finding his action statute-barred before he needs to
resort to the deficient security. But it would be unwise to elevate this
practical consideration into a rigid proposition of law.
I must now
comment briefly on the leading authorities in this field. With the possible
exception of the Australian case of Wardley Australia Ltd v Western
Australia (1992) 109 ALR 247, the actual decisions in all these cases
accord with the approach outlined above. In Forster v Outred & Co
[1982] 1 WLR 86, the plaintiff mortgaged her house to secure her son’s
indebtedness. She sustained loss as soon as she entered into the transaction.
That was when her house became encumbered. Her cause of action against the
solicitors arose at that date, even though no demand was made under the
mortgage until two years later.
In DW Moore
& Co Ltd v Ferrier [1988] 1 WLR 267 the measure of damages was
the measure sometimes loosely referred to as the contract or warranty measure.
Had the solicitor done his job properly the plaintiffs would have obtained the
benefit of an effective restraint of trade covenant. As it was, they received a
worthless covenant. They suffered damage when the transaction was entered into.
Bell v Peter Browne & Co [1990] 2 QB 495 is a similar type of
case. The solicitors could and should have protected the plaintiff’s continuing
interest in the house he was transferring to his wife. He suffered damage when
he parted with the house without that protection. Similarly in Baker v Ollard
& Bentley (1982) 126 SJ 593 the solicitors failed to ensure that the
plaintiff obtained security of occupation of the first floor as they could and
should have done. She sustained loss when that occurred. Likewise, in the
insurance broker cases of Iron Trade Mutual Insurance Co Ltd v JK
Buckenham Ltd [1990] 1 All ER 808 and Islander Trucking Ltd v Hogg
Robinson & Gardner Mountain (Marine) Ltd [1990] 1 All ER 826, the
brokers should have obtained valid and effective insurance or reinsurance
contracts. The plaintiffs suffered loss when the brokers failed to do so, since
the voidable contracts were of less commercial value.
In UBAF Ltd
v European American Banking Corporation [1984] QB 713 the measure of
damages called for a comparison between the position of the plaintiffs as it
would have been had they not made the loans, and the position of the plaintiffs
as participants in the loan agreements. The Court of Appeal, comprising Ackner
and Oliver LJJ, declined, at p725E, to accept that it was self-evident that by
entering into the transaction the plaintiffs were worse off. It was possible,
even if unlikely, that the rights they acquired when they lent their money were
at that time worth as much as the amount of the loans. The facts would need to
be established at trial. Finally, of the English authorities, is First
National Commercial Bank plc v Humberts [1995] 2 All ER 673* where
the court drew the distinction between the two different measures of damages.
The evidence established that the financing deal
defendants’ valuation been correct. As Saville LJ pointed out, at p676e, that
was not the relevant measure of damages in that case. The relevant measure
involved comparing what the plaintiffs paid out and what they received under
the transaction. On the evidence, the plaintiffs did not suffer any relevant
damage when they parted with their money and entered into the transaction. It
was not until after March 1984, within the limitation period, that their
outlay, plus cost of borrowing or notional profit obtainable elsewhere,
exceeded the value of the security.
*Editor’s
note: Also reported at [1995] 1 EGLR 142
In Wardley
Australia Ltd v Western Australia (1992) 109 ALR 247 the High Court
of Australia considered the meaning of ‘loss or damage’; in the context of a
cause of action for the recovery of loss or damage created by section 82 of the
Trade Practices Act 1974. The court held that the indemnity given by the state
generated a contingent liability and that the state, as the person misled into
giving the indemnity by misrepresentations, did not suffer loss or damage for
the purposes of the statutory cause of action until, in short, the contingency
occurred. Of the wider observations made in the course of the judgments,
Brennan J stated that a transaction which involves benefits and burdens results
in loss or damage only if an adverse balance is struck. Loss cannot be said to
be suffered until it is ‘reasonably ascertainable’ that by bearing the burdens
the plaintiff is worse off than if he had not entered into the transaction.
In the present
case the borrower’s covenant was worthless. The borrower defaulted at once, and
the amount lent (£2.45m) at all times exceeded the true value of the property
(£2.1m). Thus the cause of action arose at the time of the transaction (March
12 1990) or thereabouts. By December 1990 the bank had sustained its full
allowable loss of £1.4m. I would award simple interest on that amount from
December 12 1990 until judgment at the agreed rate of 0.4% above LIBOR.
Interest
on costs orders
Judgment debts
carry interest by virtue of the Judgments Act 1838. For this purpose an order
for payment of costs ranks as a judgment. Interest on costs runs from the date
on which the order for payment is made (the so-called incipitur rule), not from
the (later) date on which the amount of costs is quantified (the allocatur
rule). This was decided in Hunt v RM Douglas (Roofing) Ltd [1990]
1 AC 398.
The
application of this principle is straightforward in relation to the costs order
made by your lordships’ House in the present case concerning costs incurred on
the appeal to the House. But the costs order made by this House also embraced
some of the costs incurred by the valuers in the appeal to the Court of Appeal.
The Court of Appeal had dismissed the valuers’ appeal with costs. This House
set aside the order of the Court of Appeal and varied the order of the trial
judge by reducing the amount of damages. The House ordered the bank to pay the
costs incurred by the valuers in respect of the appeal to the House and also,
and this is the relevant part of the order, the costs incurred by the valuers
in the Court of Appeal on the issue of quantum. In respect of the latter costs
the valuers seek interest from the date on which judgment was given in the
Court of Appeal, in like manner as would be the position if the Court of Appeal
had on that date made an order for payment of those costs to the valuers. They
seek an order similar to the backdated order which the Court of Appeal approved
in Kuwait Airways Corporation v Iraqi Airways Co (No 2) [1994] 1
WLR 985.
I have to say
that in the Kuwait Airways case the court was lured into error. It let
its heart rule its head. Statute apart, courts have no power to award interest
on costs. The statutory power is found in sections 17 and 18 of the Judgments Act
1838. Before then interest was not recoverable on costs. The discretionary
power to award interest conferred by section 35A of the Supreme Court Act 1981
does not apply because it is confined to the payment of interest on a debt or
damages. In the Kuwait Airways case the court found an alternative
source of jurisdiction in RSC Ord 42 r 3, which provides:
(1) … a
judgment or order of the Court … takes effect from the day of its date.
(2) Such a
judgment or order shall be dated as of the day on which it is pronounced, given
or made, unless the Court … orders it to be dated as of some other earlier or
later day, in which case it shall be dated as of that other day.
Leggatt LJ
observed, at p987E, that when the Court of Appeal reverses an order for costs
given on a final judgment in the court below, it will ordinarily be just to
backdate that part of its order as to costs which relates to the costs of the
action.
However
desirable it might be for the court to have power to order the payment of
interest on costs from a date earlier than the date on which the court gives
judgment, I do not think such a power can be squeezed out of this rule. That
would be to use the rule as a means of doing indirectly what the court has no
power to do directly. Whatever is the ambit of this rule, it cannot be a proper
use of the rule to backdate a judgment, so far as it relates to costs, with the
sole object of thereby bringing into operation statutory judgment debt interest
from a date earlier than the date on which in fact judgment was given.
Interestingly, when giving some examples of when a court might backdate an
order, Sir David Cairns in Covell Matthews & Partners v French
Woods Ltd [1978] 1 WLR 1477*, at p1487, gave a money judgment as a form of
order which could clearly could not be backdated so as to carry interest under
the Judgments Act 1838 from an earlier date.
*Editor’s
note: Also reported at [1978] 1 EGLR 53
Indeed, the
actual decision in the Kuwait Airways case illustrates the
inappropriateness of using Ord 42 r 3 as a means to award a reasonable rate of
interest on costs incurred in a lower court. Judgment Act interest attaches
automatically to judgment debts, at the prescribed rate. In Kuwait Airways
the relevant period covered by the proposed backdating was from July 3 1992 to
October 21 1993. On July 3 1992, the date of the trial judge’s judgment, the
prescribed rate of interest was 15%, described by Nourse LJ, at p990D, as an
unnaturally high rate compared with base lending rate plus 2%. The court had no
power to vary the rate of interest payable on a judgment debt. To achieve the
effect, which the court could not do directly, of reducing the applicable rate
of interest, the court backdated the costs order, not to July 3 1992, but to an
intermediate date, February 1 1993, so as to avoid unfairness to the paying
party.
In my view,
the Kuwait Airways case was wrongly decided. The court has no power to
order interest as asked by the valuers in this case. Ord 42 r 3 cannot properly
be used to fill a lacuna in section 35A of the Supreme Court Act 1981. This
rule is intended to confer a power which, of its nature, is exceptional. This
is so even though the requirement for ‘special leave of the court’ is no longer
included in the rule. But the principle espoused in the Kuwait Airways
case would mean that it would be the standard practice to antedate part of the
costs orders made by the Court of Appeal. That would be a misuse of the power.
I agree with the observations of Bankes LJ in Belgian Grain & Produce Co
Ltd v Cox & Co (France) Ltd [1919] WN 308.
Interest
on repayable damages and costs
The effect of
the decision of this House given last June was that some of the money
previously paid by the defendants to the plaintiff as damages and costs,
pursuant to orders of the judge and of the Court of Appeal, fell to be repaid
to the defendants. This has given rise to the question whether, when ordering
repayment, the House has jurisdiction to award interest on the money ordered to
be repaid.
I am in no
doubt that the answer to this question is yes. The court has no general
inherent power to order the payment of interest. But the situation now under
consideration is not directed at requiring a defendant, against whom the plaintiff
has a cause of action, to pay interest on money to which the plaintiff’s cause
of action entitles him. Nor is it directed at requiring him to pay interest on
unpaid costs. Rather, when ordering repayment the House is unravelling the
practical consequences of orders made by the courts below and duly carried out
by the unsuccessful party. The result of the appeal to this
not have been made. This result could, in some cases, be an idle exercise
unless the House were able to make consequential orders which achieve, as
nearly as is reasonably practicable, the restitution which this result
requires. This requires that the House should have power to order repayment of
money paid over pursuant to an order which is subsequently set aside. It also
requires that in suitable cases the House should have power to award interest
on amounts ordered to be repaid. Otherwise the unravelling would be partial
only.
This power
seems to me to fall squarely within that range of powers which are necessarily
implicit if a court of law possessed of appellate functions is to carry out its
prescribed functions properly. It is, as such, a power derived from what is
usually referred to as the inherent jurisdiction of the court. It is a power
equally possessed by the Court of Appeal consequential upon orders made by it.
The only surprising aspect of this power is that its existence has not
previously arisen for decision.
Agreeing, LORD
HOFFMANN said: I have had the advantage of reading in draft the speech of
my noble and learned friend, Lord Nicholls of Birkenhead, with whom I agree. I
add some words of my own only upon the question of the proper method of
calculating the interest payable to the lender, Nykredit Mortgage Bank plc
(Nykredit), upon the damages of £1.4m which it recovered from the valuers,
Edward Erdman Group Ltd (Erdman).
Section 35A of
the Supreme Court Act 1981 gives the court power to award interest on ‘all or
any part of the debt or damages in respect of which judgment is given … for all
or any part of the period between the date when the cause of action arose and …
the date of the judgment’. It is accepted that in principle Nykredit should be
awarded interest upon the judgment, but there are disputes. First, as to the
date upon which the cause of action may be said to have arisen and, second, as
to the way in which the discretion conferred by section 35A should be
exercised.
Nykredit say
that the cause of action arose as soon as the money was lent. On March 12 1990
it advanced £2.45m on the security of a property which, it is now agreed, was
worth only £2.1m. It therefore suffered immediate loss and damage in the sum of
£350,000 and this loss subsequently increased as the value of the property fell
and the arrears of interest mounted. It cannot recover more than £1.4m because
this is the amount by which Erdman overvalued the security. But the loss
reached this amount by December 1990 and therefore Nykredit should be entitled
to interest on £1.4m from that date. It does not claim interest from the date
of the advance because its £1.4m claim to damages includes special damage in
the form of interest, which it had to pay until December 1990 on money borrowed
to fund the loan: compare Wadsworth v Lydall [1981] 1 WLR 598. An
award of interest under the statute from the earlier date would therefore be
double counting.
On the other
hand, Mr Simon Berry QC, who appeared for Erdman, says that no cause of action
accrued until Nykredit sold the mortgaged property in February 1993. The only
loss for which Erdman was responsible was loss attributable to the deficiency
in the security, and such loss could not be determined until the security had
been realised.
A
determination of the date upon which the cause of action arises is important
not merely for the purposes of an award of interest under the Supreme Court Act
1981, but also for the purposes of limitation under the Limitation Act 1980.
Under the latter statute, time runs from when the cause of action ‘accrued’. Mr
Berry argued that this was not necessarily the same date as that upon which the
cause of action ‘arose’ within the meaning of section 35A of the 1981 Act, but
I think that the words have the same meaning.
In order to
decide when the cause of action arose, it is first necessary to recall, by
reference to your lordships’ earlier judgment, precisely what the cause of
action was. It was for breach of the duty of care owed by the valuer to the
lender, which existed concurrently in contract and in tort. Your lordships
identified the duty as being in respect of any loss which the lender might
suffer by reason of the security which had been valued being worth less than
the sum which the valuer had advised. The principle approved by the House was
that the valuer owes no duty of care to the lender in respect of his entering
into the transaction as such, and that it is therefore insufficient, for the
purpose of establishing liability on the part of the valuer, to prove that the
lender is worse off than he would have been if he had not lent the money at
all. What he must show is that he is worse off as a lender than he would have
been if the security had been worth what the valuer said. It is of course also
the case that the lender cannot recover if he is, on balance, in a better or no
worse position than if he had not entered into the transaction at all. He will
have suffered no loss. The valuer does not warrant the accuracy of his
valuation and the lender cannot therefore complain that he would have made more
profit if the valuation had been correct. But in order to establish a cause of
action in negligence he must show that his loss is attributable to the
overvaluation, that is, that he is worse off than he would have been if it had
been correct.
It is important
to emphasise that this is a consequence of the limited way in which the House
defined the valuer’s duty of care and has nothing to do with questions of
causation or any limit or cap imposed upon damages which would otherwise be
recoverable. It was accepted that the whole loss suffered by reasons of the
fall in the property market was, as a matter of causation, properly
attributable to the lender having entered into the transaction and that, but
for the negligent valuation, he would not have done so. It was not suggested
that the possibility of a fall in the market was unforeseeable or that there
was any other factor which negatived the causal connection between lending and
losing the money. There was, for example, no evidence that if the lender had not
made the advance in question, he would have lost his money in some other way.
Nor, if one started from the proposition that the valuer was responsible for
the consequences of the loan being made, could there be any logical basis for
limiting the recoverable damages to the amount of the overvaluation. The
essence of the decision was that this is not where one starts and that the
valuer is responsible only for the consequences of the lender having too little
security.
Proof of loss
attributable to a breach of the relevant duty of care is an essential element
in a cause of action for the tort of negligence. Given that there has been
negligence, the cause of action will therefore arise when the plaintiff has
suffered loss in respect of which the duty was owed. It follows that in the
present case such loss will be suffered when the lender can show that he is
worse off than he would have been if the security had been worth the sum
advised by the valuer. The comparison is between the lender’s actual position
and what it would have been if the valuation had been correct.
There may be
cases in which it is possible to demonstrate that such loss is suffered
immediately upon the loan being made. The lender may be able to show that the
rights which he has acquired as lender are worth less in the open market than
they would have been if the security had not been overvalued. But I think that
this would be difficult to prove in a case in which the lender’s personal
covenant still appears good and interest payments are being duly made. On the
other hand, loss will easily be demonstrable if the borrower has defaulted, so
that the lender’s recovery has become dependent upon the realisation of his
security and that security is inadequate. On the other hand, I do not accept Mr
Berry’s submission that no loss can be shown until the security has actually
been realised. Relevant loss is suffered when the lender is financially worse
off by reason of a breach of the duty of care than he would otherwise have
been. This is, I think, in accordance with the decisions of the Court of Appeal
in UBAF v European American Banking Corporation [1984] QB 713 and
First National Commercial Bank plc v Humberts [1995] 2 All ER
673.
In the present
case, the lender defaulted almost at once, well before the date in December
1990 from which Nykredit claims interest. There was ample evidence of relevant
loss having been suffered before that date. The House therefore has
jurisdiction to award interest from then under the 1981 Act. But how should the
discretion be exercised?
that time, Nykredit had sustained the whole loss attributable to the
overvaluation. Simple interest at the agreed rate of 0.4% over LIBOR should
therefore be paid on £1.4m from that date.
LORD GOFF OF CHIEVELEY, LORD JAUNCEY OF
TULLICHETTLE and LORD SLYNN OF
HADLEY agreed and did not add anything.
