Negligence — Solicitors — Measure of damages — Failure to report fraud by borrowers — Whether damages should be assessed at date of cause of action — Whether damages nominal — Whether proceeds of mortgage indemnity policy should be allowed for in damages assessment — Whether costs and fees of internal lawyers and estate agents recoverable
In July 1990 Mr and Mrs G acquired a property for £218,000 with a
75% loan provided by a predecessor in title of the plaintiff building society
and secured by a mortgage. The balance of £50,000 was met by a second charge in
favour of the vendor. A partner of the first defendant firm of solicitors acted
for the vendor and a second solicitor in the same firm acted for the purchasers
and the building society. The purchasers defaulted on repayments. The building
society recovered possession of the property, following an order made in August
1993, and sold it for £110,000. The building society brought proceedings
against the solicitor alleging breach of retainer, negligence, breach of
fiduciary duty and breach of trust; in particular that the solicitor failed to
inform the building society that Mr
mortgage contrary to what they said on the application form for a loan. The
solicitor admitted liability in respect of the failure of the person acting for
Mr and Mrs G in not reporting the proposal for the second mortgage.
In the court below, Longmore J held that the solicitor was also
liable in respect of the partner acting for the vendor, as he did so contrary
to the building society’s standing instructions. He decided that the case was
one in which, had the building society known the true facts, it would have
concluded that Mr
a loan; the building society was therefore entitled to recover the whole of its
loss of £74,323.92. The first defendant appealed contending that: (1) damages
should have been assessed as at the date when the cause of action arose; (2)
the measure of damages should only be nominal; and (3)
given for the proceeds of a mortgage indemnity guarantee policy. The
plaintiff’s cross-appeal contended that the judge was wrong to have disallowed
certain costs of internal lawyers, the fees of the estate agent, which was part
of a subsidiary company, and compounded interest rates.
in part. The judge was right to depart from the normal rule that damages should
be assessed as at the date of the breach. Although the building society knew of
the second mortgage in 1990, it did not know, or could not reasonably have
known, that it occurred through a breach of duty by the solicitor. Where a
negligent solicitor fails to provide information that shows that the
transaction is not viable, or that tends to reveal an actual or potential fraud
on the part of the borrowers, the lender is entitled to recover the whole of
its loss. Moneys recovered under a mortgage indemnity policy do not normally
have to be brought into account in assessing damages. The costs of the building
society’s internal lawyers were recoverable as legal costs or disbursements.
The estate agent’s charges were also recoverable, even though the agent was a
trading arm of one of the building society’s subsidiaries. The issues
concerning interest rates were adjourned.
The following cases are referred to in this report.
Anglia Hastings
& Thanet Building Society v House & Son [1981] 2 EGLR 17;
(1981) 260 EG 1128
Attorney-General v
Shillibeer (1849) 4 Ex 606
Baker v Black
Sea & Baltic General Insurance Co Ltd [1998] 1 WLR 974; [1998] 2 All ER
833; [1998] Lloyd’s Rep IR 327
Banque Bruxelles
Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191; [1996] 3 WLR
87; [1995] 3 All ER 365, HL
Bristol & West
Building Society v Fancy & Jackson [1997] 4 All ER 582
Bristol & West
Building Society v May May & Merrimans (No 2) [1998] 1 WLR 336;
[1997] 3 All ER 206
Bristol & West
Building Society v Mothew [1998] Ch 1; [1997] 2 WLR 436; [1996] 4
All ER 698, CA
Caparo Industries
plc v Dickman [1990] 2 AC 605; [1990] 2 WLR 358; [1990] 1 All ER 568
County Personnel
(Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916;
[1987] 1 All ER 289; [1986] 2 EGLR 246, CA
Dodd Properties
(Kent) Ltd v Canterbury City Council [1980] 1 WLR 433; [1980] 1 All
ER 928; [1980] 1 EGLR 15; (1979) 253 EG 1335, CA
Eastwood, Re
[1975] Ch 112
Galloway v London
Corporation (1867) LR 4 Eq 90
Hayne v Rhodes
(1846) 8 QB 342
Henderson v Merthyr
Tydfil Urban District Council [1900] 1 QB 434
Lord Advocate v
Stewart [1905] 36 SCR 945
Miliangos v George
Frank (Textiles) Ltd [1976] AC 443; [1975] 3 WLR 758; [1975] 3 All ER 801;
[1976] 1 Lloyd’s Rep 201, HL
Nykredit Mortgage
Bank plc v Edward Erdman Group Ltd [1997] 1 WLR 1627; [1998] 1 EGLR
99; [1998] 05 EG 150, HL
Smith New Court
Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC
254; [1996] 3 WLR 1051; [1996] 4 All ER 769, HL
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
Tate & Lyle
Food & Distribution Ltd v Greater London Council [1982] 1 WLR
149; [1981] 3 All ER 716
This was an appeal by the first defendant, Bevan Ashford (a firm),
from a decision of Longmore J in proceedings by the claimant, Portman Building
Society, for damages for breach of retainer, common law negligence, and breach
of trust and fiduciary duty.
Mark Wonnacott (instructed by Bevan Ashford, of Tiverton) appeared
for the appellants; Mark West (instructed by Clarke Willmott & Clarke, of
Yeovil) represented the respondent.
Giving the first judgment, OTTON
LJ said: This is an appeal by the first defendant from the decision
of Longmore J given on 22 May 1998, when he ordered that the first defendant
pay the plaintiff damages in the sum of £74,323.92 and costs to be taxed.
The appeal concerns the measure of damages where solicitors have
negligently failed to reveal to a lender (their client) information that casts
doubt upon the reliability of the purchaser/borrower and of his covenant to pay
the mortgage instalments.
The plaintiff, Portman Building Society (PBS), sues its former
solicitor, Bevan Ashford (BA), for breach of its retainer, common law
negligence, breach of trust and fiduciary duty. The proceedings arise out of a
situation where BA was acting both for PBS and its borrowers (Mr & Mrs
Goff), who were purchasers of Rydon House, Willand, Devon. It also acted for
the vendor without informing the society.
On 18 April 1990 the Goffs made an application to the plaintiff’s
predecessor in title, Regency & West of England Building Society (prior to
its merger with the plaintiff), for an advance of 75% of the purchase price of
£225,000 for Rydon House by way of mortgage. At that time the plaintiff was
marketing an Express Mortgage Plan or scheme for clients introduced by Allied
Dunbar. This was a self-certifying scheme. In their application form the Goffs
stated that their joint income from their business was £62,000 pa and (in
answer to question 31) that they were providing the balance of the purchase
price (a sum of £56,300) from their own resources. They also stated that they
did not want the plaintiff’s solicitor to act for them. By chance, their own
solicitor was Mr David Bliss, a partner in BA at its Cullompton office, who
also acted for the vendor, Mrs
On 24 April the plaintiff’s surveyor valued the property at
£225,000 and PBS made a formal offer to the Goffs of a loan of £168,700.
PBS was in principle prepared to instruct the first defendant, and
accordingly, on the same day as it made the offer of advance, wrote to BA
instructing it to act on its behalf with regard to its offer of advance. The
letter enclosed the plaintiff’s standing instructions to solicitors and stated:
These instructions should be returned if you are acting for the
vendor.
Mr Bliss did not comply with those instructions. The purchase of
the property was delayed for some two months, during the course of which the
vendor (Mrs
£218,000.
Mr Stockman, a colleague of Mr Bliss, but working in the Tiverton
office, was instructed by Mr Bliss to act for the Goffs. Mr Bliss told Mr
Stockman that £50,000 of the purchase price was to remain outstanding and was
to be secured by a second charge over the property in Mrs
On 4 July PBS issued a revised offer of advance to the Goffs in the sum of
£163,500 (75% of the new purchase price). The offer contained both general and
special conditions. General condition 9 provided:
No loan may be raised in connection with the purchase of the
property or otherwise on second mortgage…without the written consent of the
Society.
The offer included the following clause:
We certify that no other loan has been arranged or is contemplated
in connection with the purchase of the property of which the Society has not
been informed…
The Goffs accepted this offer of advance by signing it in the
appropriate place. This was clearly a false declaration.
Two days later, PBS again sent a letter of instruction to Mr Bliss
and enclosed a copy of the offer of advance, together with a copy of the
society’s standing instructions to solicitors. The covering letter again
stated:
These instructions should be returned if you are acting for the
vendor.
Mr Bliss again did not comply with those instructions; instead he
sent the relevant documentation to Mr
liability were the solicitor’s standing instructions, which provided:
TO ALL THE SOCIETY’S SOLICITORS
These instructions are designed to help you. You are, however,
instructed to act as Solicitor for the Society and:
(a) In any case where you see a conflict of interest arising or
likely to arise you must notify the Society in writing at once.
(b) In acting on the Society’s behalf you are expected to bring to
the Society’s notice in timely manner anything which will or may adversely
affect the Society’s security, whether as to valuation or realisation or which
the Society ought reasonably to take into account before the mortgage is
completed. NOTWITHSTANDING that these instructions may give no guidelines on
the point.
Nothing contained in these instructions is to be taken as
excluding or overriding the obligations of Solicitors implied by Law or
practice to protect the Society’s interests.
5. REPORTING DISCREPANCIES AND DIFFICULTIES ON TITLE
Any discrepancies in the information contained in our
instructions, or the Offer, or any difficulties regarding title (see Part ÔB’)
should be referred to the Society by letter as soon as they are discovered.
Completion should not be arranged until the Society has indicated that it is
prepared to proceed.
12. MATTERS TO BE REPORTED TO THE SOCIETY
(g) Any proposal that the applicant may grant a second mortgage.
On 16 July contracts were exchanged and three days later Mr
Stockman sent an unsigned copy of his report on title to the plaintiff, which
indicated that completion was fixed for 30 July. After being requested to sign
it, he faxed a signed copy to the plaintiff on 24
that the Goffs proposed to grant a second mortgage to Mrs Batten. Instead he
certified as follows:
(d) There are no other matters affecting the security about which
the Society should be advised.
(e) I have satisfied myself upon all matters contained in the
Society’s Standing Instructions to Solicitors.
Completion duly took place on 30 July. The mortgage advance was
sent by CHAPS to BA. The Goffs had already executed a deed of charge in favour
of PBS and a deed of second charge in favour of Mrs Batten to secure £50,000
outstanding on the purchase price.
On 2 August, three days after completion, Mr Bliss (still acting
for the vendor) sent notice of the second charge to PBS. It was acknowledged by
the administration department on 7 August. On 10 August PBS sent Mr Bliss’
letter back to his office to keep with the deeds. Mr Stockman still had the
deeds signed on completion and, in due course, sent them to the Land Registry
for registration on 24 August.
On 15 April 1991 registration was completed. On 26
sent the certificate of first charge and the notice of and the acknowledgement
of notice of the second charge to the deeds department of the plaintiff.
In the meantime, the Goffs paid the monthly instalments of
interest, and did so until they defaulted approximately two years after
completion. Their joint business venture had failed and Mr Goff was made
bankrupt. In February 1993 PBS brought proceedings for possession against the
Goffs for failure to pay the mortgage instalments, and an order for possession
was granted in August 1993. Rydon House was sold for £110,000.
Subsequently, when all the matters came to light, PBS in May 1994
commenced proceedings against BA for breach of retainer, negligence, breach of
fiduciary duty and breach of trust. In particular, PBS alleged that BA failed
to inform PBS that the Goffs, contrary to what they said in their application
form for a loan, proposed to and did take out a second mortgage on the property
from the vendor.
Not surprisingly, BA admits that Mr Stockman was negligent because
he had not reported to PBS the proposal for the second mortgage to Mrs Batten,
and had not satisfied himself properly on all matters contained in the standard
instructions.
Longmore J held that in addition to the first defendant’s admitted
negligence on the part of Mr
It seems to me, however, that Mr Bliss was equally in breach of
duty in failing to return the plaintiffs’ instructions at the outset on the
grounds that the first defendants were acting for the vendor.
In essence he found as follows:
I… turn to ask what loss was caused by Bevan Ashford’s breaches of
duty in not returning the Society’s instructions and not reporting the existence
of the proposal for the second mortgage…
and:
[Counsel for the plaintiffs] submitted that if the instructions
had been returned, the society would have instructed another firm of solicitors
who would have discovered the proposal for a second mortgage before completion,
and the society would not then have advanced the money and the whole
transaction would not have occurred. Thereafter, he submitted, Bevan Ashford
were in breach of their fiduciary duty and compounded that breach by
negligently failing themselves to report the proposal for the second mortgage.
Had they complied with their duty and duly reported that proposal once again
[PBS] would not have advanced the money. I accept that factual submission,
based as it was on the evidence of Mr Ostime, that if he had known that there
was a proposal for a second mortgage to the vendor, he would not have
authorised the loan to be made. That is because the Goffs’ overall borrowing
would considerably exceed the society’s view of the appropriate multiplier of
2.7 x their joint income viz. £170,500. Mr Ostime would have concluded,
therefore, that the Goffs might well not be able to meet their repayment
obligations…
Longmore J relied on the principle formulated by Lord Hoffman in South
Australia Asset Management Corporation v York Montague Ltd [1997] AC
191* at p214C as a starting point:
It is that a person under a duty to take reasonable care to
provide information on which someone else will decide upon a course of action
is, if negligent, not generally regarded as responsible for all the
consequences of that course of action. He is responsible only for the
consequences of the information being wrong.
* Editor’s note: Also reported at [1996] 2 EGLR 93
He referred to the observations of Chadwick J (as he then was) in Bristol
& West Building Society v Fancy & Jackson [1997] 4 All ER
582 at p621 and stated that in solicitor negligence cases one must still answer
the question:
what are the consequences of the information provided by the
solicitor being wrong or incomplete?
By comparing the position as it was presented to be with the
position as it actually was, the learned judge decided that it was not possible
on the facts to say that the plaintiff’s loss would have been the same if BA
had represented the true position or given correct information about the second
mortgage. The material facts leading to this conclusion were as follows:
1. the Goffs were borrowing further money;
2. they had no personal equity in the property; and
3. they had fraudulently deceived the society when they signed the
acceptance for the offer of advance when they certified that no other loan had
been arranged or was contemplated in connection with the purchase of the
property.
Longmore J distinguished the decision of this court in Bristol
& West Building Society v Mothew [1997] 2 WLR 436, where the
second charge was for the comparatively small sum of £3,350 and there was no
suggestion that the building society would never have advanced the money had it
known of the proposal to create the second charge to secure that small sum of
indebtedness. In the present case, however:
Here the second charge was to secure more or less the entirety of
the outstanding balance of the purchase price.
The learned judge referred to the distinction drawn by Chadwick J
in Fancy & Jackson (supra) between the two firms of
solicitors, Steggles Palmer and Colin Bishop. In the former, the society would
not have made the advance had the correct information been provided (as it
would not have been willing to lend to that particular borrower). In the latter
case the society would not have formed such a view. Longmore J further held:
The present case is one which, if the society had known the true
facts, they would have concluded that the Goffs were not persons to whom they
would wish to lend…I therefore conclude that the society can recover the whole
of its loss, on the basis that if the solicitor had not been negligent the
society would never have made an advance to the Goffs at all…
Finally, he rejected the plea of contributory negligence, and this
aspect does not feature in this appeal.
In its notice of appeal BA advances three grounds.
First ground: a date when the cause
of action arose
Mr Mark Wonnacott asserts that the judge should have held that BA
was only liable to pay nominal damages for negligently representing, in the
report on title, that the Goffs did not propose ‘to grant a second mortgage’.
There was no good reason for departing from the normal rule that damages in a
solicitor’s negligence action are to be assessed at the date that the cause of
action arose. In particular, PBS knew of the facts that constituted the breach
immediately after the breach occurred, and would have been able (had it chosen
to do so) to realise its security then. It was common ground below that, if the
damages fell to be assessed at the date the cause of action arose, then the damages
would be only nominal.
Counsel developed this argument in a skilfully crafted skeleton
argument and an attractive submission. The normal rule, in both contract and
negligence, is that damages are assessed as at the date on which the wrong was
committed: see Smith New Court Securities Ltd v Scrimgeour
Vickers (Asset Mangement) Ltd [1997] AC 254. Thus, in a contract claim, the
normal date for assessment is the date of breach; in a negligence claim, it is
the date when the claimant first suffered loss. He acknowledged that the court
may depart from the normal rule, and fix some other date as may be appropriate,
where the normal rule would cause injustice. All such cases are where the
injured party is not able to extract himself from the situation resulting from
the wrong until some later date, for example, where the injured party does not
know, and could not with reasonable diligence have discovered, that he was in
that situation. But the judge approached the problem in the wrong way, because
he focused on the question of when PBS ought reasonably to have discovered that
BA had committed a wrong, rather than when PBS ought reasonably to have
discovered that it was in the situation that was the result of that wrong. PBS
was notified that a second charge had been created at completion within a week
of it happening, and this should have triggered an immediate inquiry. PBS then
had the opportunity to extract itself from that situation immediately
thereafter, by taking possession of and selling the property pursuant to the
powers contained in the charge. Thus, there was no reason for departing from
the normal rule that damages are assessed at the date the wrong was committed.
Accordingly, the date when the cause of action in contract arose
was, at the latest, the date of completion, 30 July. No loss was suffered on
that date because the value of the security was well within the excess of the
amount of the loan. The date when the cause of action in negligence arose is
not known, save that it occurred between 1990 and 1994. In this period, the
value of the security was falling and the amount of the loan was rising, and at
some point the two lines on the graph crossed. The cause of action arose when
they crossed, and whenever they crossed, the damages at that point would have
been nominal.
Mr Mark West, on behalf of the respondent, submitted that the
normal rule in assessing damages at the date of the breach of contract is only
a prima facie rule that should not be applied ‘mechanistically’ in
circumstances where assessment at another date more accurately reflects the
overriding compensatory principle. Thus, the learned judge was right to hold
that the overriding compensatory principle required him to assess the damages
at a date later than that of the breach. He was correct to do so because the
society did not know of the breach of duty by BA, and could not with reasonable
diligence have discovered it, until, at the earliest, when it obtained BA’s
file in early 1994. The judge was right to hold that PBS may have known of the existence
of the second charge on 7 August 1990 (or, at the latest, by 26 April 1991),
but also right to hold that it did not know, and could not reasonably have
known, that the existence of the charge had occurred through a breach of
duty on the part of the defendant. As the learned judge put it:
No-one assumes that a solicitor is in breach of duty.
Conclusion
It is well established that a solicitor acting for a lender of
money is negligent if he does not take reasonable steps to protect his client’s
position. In Anglia Hastings & Thanet Building Society v House
& Son (1981) 260 EG 1128* Bingham J (as he then was) held that a
solicitor, acting for both the purchaser of the property and for the building
society, was liable for failing to report to the building society certain
matters that cast doubt on the reliability of the purchaser or borrower. This
duty is separate from any duty that might arise to advise on the value of the
proposed security. The solicitor is not, in the ordinary way, expected to
advise on the value of the proposed security: see Hayne v Rhodes
(1846) 8 QB 342. A
specifically instructed to consider the adequacy of the security and he accepts
such instructions: see Jackson & Powell Professional Negligence (4th
ed) 4-171-3.
* Editor’s note: Also reported at [1981] 2 EGLR 17
Damages are generally (but not invariably) assessed at the date of
breach: see Miliangos v George Frank (Textiles) Ltd [1976] AC 443
at p468, per Lord Wilberforce. However, in County Personnel
(Employment Agency) Ltd v Allan R Pulver & Co [1987] 1 WLR 916†
this rule also should not be mechanistically applied in
circumstances where assessment at another date may more accurately reflect the
overriding compensatory rule.
† Editor’s note: Also reported at [1986] 2 EGLR 246
Dodd Properties (Kent) Ltd v Canterbury City Council
[1980] 1 WLR 433‡ affirms this principle and illustrates its application.
‡ Editor’s note: Also reported at [1980] 1 EGLR 15
In the present case, the judge found as a fact that the society
merely knew of the existence of the second charge in 1990, but did not know,
and could not then reasonably have known, that the existence of the charge had
occurred through a breach of duty on the part of BA. This finding of
fact is unassailable and, in my view, led inevitably to Longmore J concluding
that there should be a departure from the normal rule. He was right to do so.
He put the matter thus:
If, moreover, I accept Mr Wonnacott’s speculation as to the motive
for giving notice of the second charge (as I am inclined to do) it was
obviously not given to anyone who had authority to receive it as a correction
of the previous position. It was given and received for quite a different
purpose and cannot, in my judgement, be utilised by the negligent solicitors
for the purpose of taking advantage of a mechanistic rule about damages. I use
the word ‘mechanistic’ advisedly in the light of the judgment of Bingham LJ.
Even if that is wrong the question still remains whether the
society could have acted on their knowledge or reputed knowledge that Bevan Ashford
had been in breach of duty. The advance had been made; the Goffs were not in
default… I cannot accept that the society could or should have [transferred the
mortgage which was by condition 18 assignable by the society]… The mortgage had
been induced by the fraudulent representation of the Goffs that they had
neither arranged nor contemplated any other loan… I am satisfied that no
respectable Society would seek to market a mortgage made with a fraudulent
borrower without full disclosure to any intended purchaser; if disclosure were
made, no purchaser would touch it… [It was] submitted in the alternative that
the society should have exercised their rights to call in the loan. But that
argument again presupposed that the society had discovered or ought to have
discovered the Goffs’ fraud and the first defendant’s breach of duty, and I
cannot make such a finding.
In my judgment, the argument that damages should have been assessed
at the date of the wrong, because the society had the opportunity to extract itself
from the situation almost immediately by taking possession of the property and
selling it, is misconceived. Such an argument can only succeed if one
presupposes that the society ought to have discovered the breach of duty, and
the evidence does not support such a finding.
Second ground: measure of damages
The issue raised by Mr Wonnacott’s second ground is more complex to
resolve. The plaintiff conceded in the court below that if BA had warranted
that the borrowers did not propose a second mortgage, then only nominal damages
would have been recoverable for breach of that warranty. Mr Wonnacott contends
that it follows that the plaintiff’s loss was not caused by the defendant’s
negligent misrepresentation that the borrowers did not propose to grant a second
mortgage. Alternatively, the loss recoverable for negligently representing that
a fact is true cannot be greater than the loss recoverable for absolutely
warranting that it is true.
The usual measure of loss recoverable by a lender is:
1. the difference between the advance and any capital recovered,
plus
2. consequential expenses, plus
3. interest to reflect the loss of use of the capital sum advanced,
credit being given for any interest payments made: see Jackson & Powell
(supra) 4-235.
Counsel on both sides referred to Banque Bruxelles Lambert SA
v Eagle Star Insurance Co Ltd (otherwise known as SAAMCO v York
Montague) [1997] AC 191), where the House of Lords considered the extent of
the liability of a valuer who provided a lender with a negligent overvaluation
of the property offered as security for loans. In all three cases under
consideration it was a common feature that if the lender had known the true
value of the property, he would not have lent. Lord Hoffmann gave the only
reasoned speech, with which his brethren expressed agreement, and concluded
that in each case the damages should be limited to the consequences of the
valuation being wrong. In other words, the damages should be limited to the
amount by which the faulty valuation exceeded the figure that a reasonable
valuer would have arrived at as the amount the property would be most likely to
have fetched if sold on the open market. This was limited in effect to the
shortfall in the plaintiff’s security. At p211A he said:
Before one can consider the principle on which one should calculate
the damages to which a plaintiff is entitled as compensation for loss, it is
necessary to decide for what kind of loss he is entitled to compensation. A
correct description of the loss for which the valuer is liable must precede any
consideration of the measure of damages. For this purpose it is better to begin
at the beginning and consider the lender’s cause of action… The valuation tells
the lender how much, at current values, he is likely to recover if he has to
resort to his security. This enables him to decide what margin, if any, an
advance of a given amount will allow for a fall in the market, reasonably
foreseeable variance from the figure put forward by the valuer… accidental
damage to the property and any other obvious contingencies which may happen.
The valuer will know that if he over-estimates the value of the property, the
lender’s margin for all these purposes will be correspondingly less.
On the other hand, the valuer will not ordinarily be privy to the
other considerations which the lender may take into account, such as how much
money he has available, how much the borrower needs to borrow, the strength of
his covenant, the attraction of the rate of interest or the other personal or
commercial considerations which may induce the lender to lend.
He cited a passage from the speech of Lord Bridge in Caparo
Industries plc v Dickman [1990] 2 AC 605 at p627:
It is never sufficient to ask simply whether A owes B a duty of
care. It is always necessary to determine the scope of the duty by reference to
the kind of damage from which A must take care to save B harmless.
Lord Hoffmann added:
In the present case there is no dispute that the duty was owed to
the lenders. The real question in this case is the kind of loss in respect of
which the duty was owed.
Later, at p214C, he continued:
I think that one can to some extent generalise the principle upon
which this response depends. It is that a person under a duty to take
reasonable care to provide information on which someone else will decide upon a
course of action is, if negligent, not generally regarded as responsible for
all the consequences of the information being wrong. A duty of care which
imposes upon the informant responsibility for losses which would have occurred
even if the information which he gave had been correct is not in my view fair
and reasonable as between the parties. It is therefore inappropriate either as
an
them.
The principle thus stated distinguishes between a duty to provide
information for the purpose of enabling someone else to decide upon a
course of action and a duty to advise someone as to what course of
action he should take. If the duty is to advise whether or not a course of
action should be taken, the adviser must take reasonable care to consider all
the potential consequences of that course of action. If he is negligent, he
will therefore be responsible for all the foreseeable loss which is a
consequence of that course of action having been taken. If his duty is only to
supply information, he must take reasonable care to ensure that the information
is correct and, if he is negligent, will be responsible for all the foreseeable
consequences of the information being wrong.
Thus, in summary, the measure of damage is the loss, attributable
to the inaccuracy of the information that the plaintiff has suffered by reason
of having entered into the transaction on the assumption that the information
was correct. Thus, one must compare the loss actually suffered with what the
position would have been if it had not entered into the transaction, and ask
what element was attributable to the inaccuracy of the information.
The application of the test of comparing the position as it was with
the position as it was represented to be was considered by Chadwick J (as he
then was) in Bristol & West Building Society v Fancy &
Jackson [1997] 4 All ER 582 at p621H. When the test was applied to the
facts in Fancy & Jackson, it led to the conclusion that the
solicitor was not only not responsible for the whole of the loss suffered by
the society; it was not responsible for any part of it. However, the position
was different in the case of Steggles Palmer, where the judge held that
the solicitors were in breach of duty in failing, inter alia, to notify
the society that they could not confirm that the borrower was to pay the
balance of the purchase moneys from his own resources. At p622E Chadwick J
said:
The reason why the society would not have made the advance is, in
my view, because the society would have been unwilling to lend to that borrower
in order to fund a purchase from the vendor. If the society had known what it
should have known, it would have decided that Mr Whittaker was a borrower to whom
it did not wish to lend. In those circumstances it seems to me fair and in
accordance with Lord Hoffmann’s test, that the defendants should be responsible
for the consequences of the society not being in the position to take the
decision which it would have taken if the defendants had done what they should
have done. That is to say, the defendants should be responsible for the loss
suffered by the society as a result of lending to Mr Whittaker. That, subject
to questions of mitigation and contributory negligence, is the whole loss
arising from the advance.
Mr Wonnacott submitted that although Chadwick J stated the
principle correctly, his actual application of it in the Steggles Palmer part
of the decision was wrong and cannot stand in the light of the subsequent
decision of the House of Lords in Nykredit Mortgage Bank plc v Edward
Erdman Group Ltd [1997] 1 WLR 1627*. He relies in particular upon the
passage in the speech of Lord Nicholls at p1631D:
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 [1997] AC 191,
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.
* Editor’s note: Also reported at [1998] 1 EGLR 99
Counsel submits, applying Lord Hoffmann’s distinction, that this
was a case where the solicitor was not asked to advise, merely to give
information, and it is only responsible for all the foreseeable consequences of
the information being wrong. The question ‘what would I have lost if the
representation had been true?’, is not answered by asking ‘what would have happened
if the falsity of the representation had been apparent?’ It is answered by
asking ‘what would have happened if the false representation had actually been
true, as it was represented to be?’ Assuming that the Goffs had had £50,000 of
their own capital to sink into the property, and asking what would have
happened if they had done so, the answer is that they, instead of the vendor,
would have lost the £50,000 when PBS enforced its charge. Thus, it would not
have made any difference to the position of PBS. Consequently, only nominal
damages can be recovered for the breach.
Mr West, in a succinct argument, submits that far from being an
incorrect application of the SAAMCO principle, the decision of Chadwick
J is a proper application of the principles. If the whole of the loss suffered
by the claimant is within the scope of the relevant duty, it should be entitled
to recover the whole of the loss arising from the advance. He also sought to
argue (if necessary) that BA tendered advice rather than gave information.
Conclusion
I consider that the answer to this issue is to be found in the
particular facts of this case. As a result of the negligence of the firm, PBS
believed that there was no second charge, and indeed, that the Goffs were
providing the balance of the purchase price from their own resources. In fact,
there was a substantial second charge of £50,000. The Goffs had no personal
equity in the property, and they had fraudulently deceived the society when
they signed the offer of advance. Accordingly, the society believed that only
£163,500 was being advanced on mortgage. The maximum sum that the society
considered could be serviced by their joint income of £62,000 was £170,500. In
fact, however, the Goffs were taking on combined loans of £213,500, well in
excess of the maximum sum that the society considered could properly have been
serviced on their stated joint income. Thus, the consequence of the information
provided by the solicitor being wrong was that:
1. The society thought that the transaction was viable whereas, if
it had been correctly advised, it would have concluded that the transaction was
in fact not viable.
2. The society thought it had the covenants of honest solvent
borrowers, whereas it had the covenants of people guilty of fraud.
Longmore J found in terms:
I accept… that if (Mr Ostime) had known that there was a proposal
for a second mortgage to the vendor, he would not have authorised the loan to
be made.
These are findings of fact that were based on solid evidence of Mr
Ostime, which was not challenged, nor could it be. Thus, I am satisfied that,
in these circumstances, PBS was rightly held by Longmore J to be entitled to
recover the whole of its loss. Longmore J was correct to follow the reasoning
of Chadwick J in the application of the SAAMCO principle, which has the
effect that where a negligent solicitor fails to provide information that shows
that the transaction is
borrowers, the lender is entitled to recover the whole of its loss. In other
words, the whole of the loss suffered by the lender is within the scope of the
solicitor’s duty and is properly recoverable.
I am also satisfied that far from being an incorrect application of
the SAAMCO principle, the decision of Chadwick J is a proper application
of the principle. If the whole of the loss suffered by the lender is within the
scope of the relevant duty, he should be entitled to recover the whole of the
loss.
On this analysis, I do not consider it necessary to consider
whether BA gave advice rather than information.
Third ground: failure to credit the
MIG
Mr Wonnacott contends that the learned judge wrongly held that no
credit had to be given for the proceeds of the mortgage indemnity guarantee (MIG)
policy. The premium for the MIG policy having been included as part of the
pleaded loss, a corresponding credit ought to have been given for the proceeds
of the policy. He submitted that where (as here) the premium paid is part of
the loss claim against the wrongdoer, as part of the loss a corresponding
credit must be given for the fruits of the policy. It was included in the gross
advance of £163,500. Credit must therefore be given for the proceeds in
calculating PBS’s loss.
The judge held:
There is no reason why this should be treated any differently from
normal insurance proceeds. It is, as lawyers say, res inter alios acta
and should be left out of account. The fact that the premium was part of the
advance makes no difference to that principal.
I would reject this ground of appeal. Moneys recovered under a MIG
policy do not normally have to be brought into account in assessing damages: Bristol
& West Building Society v May May & Merrimans (No 2) [1998]
1WLR 336. The learned judge was correct to hold that the proceeds should be
left out of account. It makes no difference that the premium of £463.25 was
part of the original advance of £163,500.
Respondent’s notice
By its notice the respondent seeks to challenge Longmore J’s
decisions in respect of some of the individual heads of damage.
Internal costs
Mr West submits that the judge was wrong in holding that PBS was
not entitled to recover as damages its internal legal costs amounting to
£1,936. He should have held that the plaintiff was entitled to recover the sums
as damages.
In reaching his conclusion, Longmore J relied on the decision of
the House of Lords in Baker v Black Sea & Baltic General
Insurance Co Ltd [1998] 1WLR 974 and drew an analogy between the position
of an insurer suing a reinsurer to recover the costs of his own in-house claims
manager, and that of PBS suing its negligent solicitor to recover the costs of
its in-house lawyers. The question arose of whether a syndicate could recover
from its reinsurers under the terms of its contract a share of the cost
of investigating claims. It was held that there was no express term to that
effect and no such term could be implied to give business efficacy to the
contract or to comply with the presumed intention of the parties. The case was
remitted to determine whether a term could be implied by custom or trade usage.
It was not concerned with the recovery of damages in an action for negligence.
There is clear authority that, in principle, a claimant is entitled
not only to recover in respect of particular disbursements made to third
parties, but also the costs of its in-house lawyers: see Attorney-General
v Shillibeer (1849) 4 Ex 606, Galloway v London Corporation
(1867) LR 4 Eq 90, Henderson v Merthyr Tydfil Urban District Council [1900]
1 QB 434, Lord Advocate v Stewart [1905] 36 SCR 945 and Re
Eastwood [1975] Ch 112.
It should, however, be pointed out that Re Eastwood was
primarily concerned with the taxation of a salaried solicitor’s costs; even so,
Russell LJ at p132 stated:
In summary, therefore, in our opinion: (1) It is the proper method
of taxation of a bill in a case of this sort to deal with it as though it were
the bill of an independent solicitor, assessing accordingly the reasonable and
fair amount of a discretionary item such as this, having regard to all the
circumstances of the case. (2) There is no reason to suppose that the
conventional A B method is other than appropriate to the case of both
independent and employed solicitor. (3) It is a sensible and reasonable
presumption that the figure arrived at on this basis will not infringe the
principle that the taxed costs should not be more than an indemnity to the
party against the expense to which he has been put in the litigation.
Mr Wonnacott seeks to uphold the judge’s decision and contends that
the internal legal costs are not recoverable because no evidence was led that
PBS had to employ extra staff as a result of this case, or that the trading
potential of PBS was harmed as a result of the resources devoted to dealing
with the arrears and repossessing the property. He cited Tate & Lyle
Food & Distribution Ltd v Greater London Council [1982] 1WLR 149
in support of this proposition. In my judgment, this decision does not assist
the solicitor. In that case, it was accepted in principle that the cost of
disruption to managerial time would be recoverable, but there was no evidence
on which the judge could determine the quantum of the claim. In the instant
case, there are figures that show the actual cost to PBS incurred through its
in-house lawyers.
I have come to the conclusion that I must respectfully dissent from
the trial judge on this particular issue. In fairness to the learned judge, I
should make it clear that the point was argued at first instance solely as a
matter of principle and that Longmore J did not have authority cited to him; Baker
v Black Sea was a case reported after the trial was concluded and before
judgment, and his lordship had only seen the Times‘ report of the case.
The decision in Baker v Black Sea & Baltic General
Insurance is clearly distinguishable, as that case concerned the terms of a
written contract between insurers and reinsurers; it was not concerned with the
recovery of damages in an action for negligence. I see no reason to depart from
the basic principle that the costs of in-house lawyers are recoverable as
though they were those of an independent solicitor charging a reasonable and
fair amount for the work done. I am left with the firm impression that the
in-house costs were considerably less than they would have been if the matters
had been handled by independent solicitors. Accordingly, I consider that all
these items are recoverable either as legal costs or disbursements.
Estate agent’s fees
PBS asserts that the learned judge was wrong in holding that it was
not entitled to recover as damages the estate agent’s fee of £1,100 plus
£192.50 VAT that it paid to Ridgeway Property Management Services Ltd. He
should have held that PBS was entitled to recover this sum as damages. Ridgeway
was the trading arm of a wholly-owned subsidiary of PBS and the costs were in
substance internal costs.
I am unable to agree with the judge’s reasoning or conclusion for
the same reasons as for the legal costs. There was evidence from Mrs Orford
that work was actually done by Ridgeway on behalf of PBS following repossession
of the property in appointing selling agents and obtaining valuations. The
standard 1% fee was payable as commission. Payment was made to Ridgeway as a
separate legal entity for the services rendered. In my view, that sum is
recoverable just as much as payments to the selling agents as well as
disbursements incurred by Ridgeway. As Mr West succinctly put it:
There is no warrant for collapsing the respective corporate
identity of (Ridgeway) and (the subsidiary) into that of the society and
denying recovery of a sum actually paid by the latter to the former.
I would therefore allow the appeal on this point also.
Interest
PBS contends that the learned judge was wrong in holding that the
plaintiff was entitled to recover simple interest at LIBOR. The learned judge
dealt with the matter in summary form:
The way in which the claim has been calculated has charged
interest with quarterly rests and interest is thus effectively compounded. I do
not consider
less.
Mr West contends that the learned judge should have held that the
plaintiff was entitled to recover interest charged on a compound basis with
quarterly rests at LIBOR.
Mr Wonnacott contends that the learned judge was right to award
interest at LIBOR because that represented the true costs of borrowing to PBS.
The true cost of borrowing was not represented by compound interest with
quarterly rests, because that would mean that PBS was paying more to borrow the
money than it was charging to lend it out to its customers.
This issue turned out to be more complex than anticipated and to
raise issues of principle. We did not have time to hear the argument in depth.
It was therefore adjourned to a later date for further arguments, if necessary
before a different constitution.
Consequently, I would dismiss all three grounds of the appellant’s
notice of appeal. I would allow the respondent’s appeal relating to internal
costs and estate agent’s fees, amend the judgment accordingly (asking the
parties to agree the calculations) and adjourn the item relating to interest
for further argument, if necessary before a different constitution.
Agreeing, SCHIEMANN LJ
said: I agree with the order proposed by my lord for the reasons that he has
set out.
This solicitor was under an obligation to draw to the attention of
the lender a matter that cast doubt upon the reliability of the borrowers. The
reason why this duty is imposed upon it is to protect the lender against
greater exposure to risk of damage, occasioned by the failure of the borrowers
to honour their covenants to repay, than it would willingly have assumed, in
any event at the rate at which it lent. Any lender is exposed to a risk that
the borrower will default. Its willingness to expose itself to that risk in
return for a particular consideration depends on its assessment of the chance
of the borrower defaulting. In part, that assessment depends on the borrower’s
financial situation and honesty. In the present case, the financial situation
and honesty of the borrowers were misrepresented to the lender due to the
negligence of the solicitors. The lender clearly would not have lent had the
borrowers’ true situation been made clear to it. It is right that, in those
circumstances, the solicitor should pay for the damage resulting from the fact
that the lender made a loan that otherwise it would not have made.
DAME BUTLER-SLOSS
also agreed, and did not add anything.