Is the correct measure of damages the diminution in the value of the property or the cost of the cure? Stuart Pemble explains why the answer might not be the one you are expecting.
Calculating the damages due for a breach of contract sounds deceptively simple in theory: they should put the innocent party in the same position as if the contract had been performed properly.
However, applying that principle in practice is often more difficult that it sounds. Cases involving negligent surveyors are a good example of this problem.
There are two main ways to assess the loss suffered by the innocent party after a negligent survey. On the one hand, the courts can consider the diminution in the property’s value. This is the difference in value between the property with the defects which were missed by the surveyor and the price actually paid on the assumption that the property was defect-free. On the other, the courts can consider the cost of curing the defects.
You might assume that these two measures of loss would be similar (if not the same). After all, if the defects had been spotted by the surveyor beforehand, wouldn’t the purchaser have tried to reduce the price they were paying to reflect the costs they would incur putting things right?
However, in practice, the cost of cure often exceeds the diminution in value. Historically, the innocent purchaser of the property tried to recover the higher amount. Surveyors (and their insurers) argued that damages should be assessed by the diminution in value.
There is in fact a long line of Court of Appeal authority – stretching back to Phillips v Ward [1956] 167 EG 279 and including Perry v Sidney Phillips & Son (a firm) [1982] 2 EGLR 135 and Watts v Morrow [1991] 2 EGLR 152 – that the diminution in value is the correct measure.
The reasoning was explained by Romer LJ in Phillips. The claimant bought a property for £25,000. The surveyor had failed to spot defects that would cost £7,000 to fix. However, with the defects, the house was worth £21,000 rather than £18,000. To quote the judge: “Having bought it…[the claimants]…now have an asset worth £21,000. The fact that it costs £7,000 to repair does not mean it is worth £18,000 unrepaired. They could spend £7,000 repairing it if they wish or they could sell it for £21,000.”
The facts
Moore and another v National Westminster Bank [2018] EWHC 1805 (TCC); [2018] PLSCS 133 was an appeal by the defendant bank from a decision of Mr Recorder Willetts in the Birmingham County Court. The claimants had bought a flat in Bideford, Devon, in order to let it. The purchase price was £135,000, part of which was paid by a mortgage from the bank for £81,000.
During their mortgage application, the claimants had asked the bank to obtain a RICS Homebuyer Report. When the bank offered the mortgage, the claimants assumed that there was a favourable report. However, no report had been obtained, and the property (which has a Grade II listing and is in a conservation area) had defects that would cost £115,000 to repair.
At first instance, the recorder did not follow the Phillips line of authority for three reasons. First, he accepted that the failure to produce a survey at all was different from the production of a negligent one. Second, he held that Phillips can be distinguished where purchasers can show (as was the case here) that, but for the surveyor’s negligence, they would not have purchased the property at all (and there is authority – known as the “transaction” cases – that might support that conclusion). Finally, the true loss in this case was the cost of repair. He therefore awarded damages of £115,000.
The appeal
The bank appealed on the basis that the recorder should have followed Phillips. But, despite agreeing with two of the bank’s key arguments, Birss J dismissed the appeal.
This is a surprising result. After all, Birss J accepted the bank’s arguments that there was no difference between a failure to supply a survey at all and supplying a negligent one (the failure in both instances was in not providing a report which indicated there were serious defects at the property) and that Phillips was applicable – the “transaction/negligent surveyor distinction is a distinction without a difference”.
The problem for the bank was that there was appellate authority – Birss J refers to both Steward and another v Rapley [1989] 1 EGLR 159 and County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1986] 2 EGLR 246 – that “diminution in value is not an invariable rule and that diminution in value can in a proper case be determined by the cost of repair”. In other words, the two principles can, effectively, be one and the same.
And although Birss J disagreed with some of the recorder’s analysis of the relevant authorities, he held that, on the facts, the recorder “was entitled to take the view that the cost of repair represented the only practical indicator of what the diminution in the value of the asset was”.
The judge made that finding despite the fact that the claimants’ expert witness could not give a figure for the diminution in the value of the property. The judge accepted that was a valid opinion which should not prejudice the claimants, especially when he had some sympathy with the recorder’s criticism of the bank’s expert (who had suggested £15,000 as the correct figure).
In conclusion, diminution in value remains the key way of assessing damages for a negligent (or non-existent) survey, but be aware that, depending on the facts, that figure may well best be assessed by calculating the cost of the cure.
Stuart Pemble is a partner at Mills & Reeve
