Litigators have long been predicting an upturn in professional negligence claims against valuers. Recent cases suggest that their concerns were not misplaced. Capital Home Loans Ltd v Countrywide Surveyors Ltd [2011] PLSCS 237 raised an interesting and apparently novel point arising out of the manner in which a lender applied the proceeds of sale of a property that it had repossessed.
The question put to the judge was whether the way in which the lender’s computer systems had applied the proceeds of sale – to discharge the shortfall on a further advance and then to reduce the amount due in respect of the original loan – had put paid to any liability that its valuers might otherwise have had for the valuation provided before the further advance was made. The valuers argued that the further advance had been discharged, which exonerated them from liability.
The county court judge agreed. The rules that apply to the appropriation of payments as between debtors and creditors were set out in Cory Bros & Co Ltd v Owners of the Turkish Steamship
The judge rejected the lender’s argument that its computing systems operated without human input and that the entries generated constituted nothing more than internal record keeping. The way in which the computer systems operated was the result of a human decision. The lender had chosen to use the proceeds of sale to discharge the further advance, leaving a shortfall in respect of the original loan and had adopted the appropriation in subsequent correspondence. Once made, a valid appropriation is irreversible. Consequently, the lender’s losses were attributable to the original loan.
Is it necessary to communicate the way in which payment has been appropriated to a debtor to make an appropriation effective? If a debtor does not know how its money has been used, can its creditor vary its appropriation, if it wants, because the “last possible moment” has not arrived? The judge thought that the debtor need not be informed (although this is often the way in which creditors make their intentions clear) so long as there is some “overt act” from which the creditor’s intentions can be inferred. Alternatively, if some form of communication is required, a communication to a third party with an interest in the appropriation would suffice. In the instant case, the lender had sent the figures to the valuers, who had an interest in how the proceeds of sale had been appropriated, and was unable to withdraw them.
Valuers will be scrutinising claims carefully in the light of this decision. From now on, lenders may wish to review their automated processes to ensure that manual overrides are available, where borrowers are in arrears, to avoid similar problems.
Allyson Colby is a property law consultant
