Negligence — Valuation — Action by mortgagees against valuer — No contest as to liability — Questions of importance in regard to measure of damages — Baxter v F W Gapp & Co Ltd binding on Court of Appeal and decisive authority in present case, although leaving some matters of principle not concluded — Appeal from county court judge dismissed
was a chartered surveyor who made a valuation of the subject property on the
instructions of brokers for the information of the respondents, a finance company
lending on mortgage at the high-risk or, as it was known, the non-status end of
the market — The appellant valued the house, as on a forced sale with vacant
possession, at £18,000 — This was admittedly made negligently, the house not
being worth anything like so much — On the basis of this valuation the
respondents advanced the sum of £10,000, secured on mortgage of the house — The
interest rates under the mortgage were very high, 36.51% while the borrowers
made payments in accordance with the agreement but increased to 45.61% in the
event of default — The borrowers in fact defaulted very soon — The respondents
obtained an order for possession in the county court and subsequently sold the
house to a third party for £12,000 — In the respondents’ action against the
appellant for negligence they claimed damages under the following heads: (1)
the principal sum advanced less such repayments as the borrowers had managed to
make; (2) general disbursements and interest upon them; (3) legal costs arising
out of the possession proceedings; (4) Estate agents’ commission on the sale of
the property; (5) interest accrued under the mortgage contract
account the £12,000 recovered on the sale of the house, the respondents claimed
damages amounting to £7,136.41 and the county court judge gave judgment for
this amount — The amount had been arrived at after charging £7,808.92 for
interest unpaid under the mortgage contract — This was the controversial item
which was at the centre of the appeal and gave rise to the interesting
discussions in the judgments
on behalf of the appellant that to hold the mortgagees entitled to recover
interest at the extremely high rate stipulated in the mortgage agreement was in
effect to guarantee the performance by the borrowers of their mortgage
obligations — This, it was suggested, went beyond the principle of compensation
expressed by such classic statements as that of Lord Blackburn in Livingstone v Rawyards Coal
Co, which was that the injured party should be put in the same position as if
he had not sustained the injury of which complaint was made — In the present
case the respondents would be better off than if they had not entered into the
mortgage agreement
Appeal recognised the force of this criticism — Nevertheless, on the authority
of Baxter v F W Gapp & Co Ltd, they felt bound to dismiss the appeal — In
that case it was held that the measure of damages was the whole loss sustained
by the mortgagee and included the expenses of abortive sales, insurance
premiums, a builder’s account for upkeep of the property, the mortgagee’s
expenses and disbursements and the selling agent’s commission on the ultimate
sale of the property, in addition to the principal advanced and the interest
unpaid by the mortgagor — In London & South of England Building Society v Stone it was
accepted that Baxter’s case was binding on the Court of Appeal — Accordingly,
the judge below was correct in his assessment of the damages and the appeal
must be dismissed
judgments, however, reveal a number of difficulties and questions — It was
pointed out that in Baxter’s case no reference was made in the Court of Appeal
to the rate of interest, but it was impossible to exclude this one element from
the general approval given to the judge’s method of assessment — In the absence
of specific authority a number of different approaches to the treatment of
unpaid interest under a mortgage contract were possible — Neill LJ considered
that it might be necessary in some future case to examine whether any valid
distinction could be drawn between damages awarded for a negligent misstatement
and damages for deceit — Sir John Megaw could see no practical basis for the
distinction outlined by Neill LJ between the case where the borrower, if he had
not been misled, would not have entered into the loan contract at all and the
case where he would have entered into such a contract but for a smaller amount
— However, the result in the present case was clear — Appeal dismissed
The following
cases are referred to in this report.
Baxter v F. W. Gapp & Co [1939] 2 KB 271; [1939] 2 All ER 752;
(1939) 55 TLR 739
Corisand
Investments Ltd v Druce & Co [1978] EGD
769; (1978) 248 EG 315
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158; [1969] 2 WLR 673;
[1969] 2 All ER 119, CA
JEB
Fastners Ltd v Marks Bloom & Co [1983] 1
All ER 583, CA
Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, HL
London
& South of England Building Society v Stone
[1983] 1 WLR 1242; [1983] 3 All ER 105; [1983] EGD 921; (1983) 267 EG 69,
[1983] 2 EGLR 131
Lowenburg,
Harris & Co v Wolley (1895) 25 SCR 51
Perry v Sidney Phillips & Son [1982] 1 WLR 1297; [1982] 3 All
ER 705; [1982] EGD 412; (1982) 263 EG 888, [1982] 2 EGLR 135, CA
Philips v Ward [1956] 1 WLR 471; [1956] 1 All ER 874, CA
Scholes v Brook (1891) 64 LT 674
Seeway
Mortgage Investment Corp v First Citizens
Financial Corp. (1983) 45 BCLR 87
Singer
& Friedlander Ltd v John D Wood & Co
[1977] EGD 569; (1977) 243 EG 212 & 295, [1977] 2 EGLR 84
Smith
Kline & French Laboratories Ltd v Long
[1989] 1 WLR 1; [1988] 3 All ER 887, CA
This was an
appeal by Mr Alastair Gibson FRICS from the decision of Judge Harris QC at
Westminster County Court in which he
Ltd, in respect of the valuation for mortgage of a house at 36 North Road,
Audenshaw, Manchester.
Roger Toulson
QC and Roger Stewart (instructed by Reynolds Porter Chamberlain) appeared on
behalf of the appellant; Peter Wulwik (instructed by Brand Montague, of Harrow)
represented the respondents.
Giving
judgment, NEILL LJ said: This is an appeal by Mr Alastair Gibson
[FRICS], a chartered surveyor, against the order of His Honour Judge Harris QC
dated May 19 1989 in the Westminster County Court whereby judgment was entered
for the plaintiff company, Swingcastle Ltd, for the sum of £7,136.41, together
with interest and costs.
The appeal
raises a question as to the correct measure of damages where money has been
lent in reliance on the negligent valuation of property.
At the
beginning of 1985 Mr and Mrs Clarke were living at 36 North Road, Audenshaw,
Manchester. At that time the property was charged to a building society and
also to a finance company, Cedar Holdings. Mr and Mrs Clarke wished to obtain a
loan in order to repay the charges. They approached a firm of brokers, Richard
Murtagh & Co. Murtagh instructed Mr Gibson to make a survey and to prepare
a valuation. On January 25 1985 Mr Gibson gave a written valuation of the
property.
The valuation
was addressed to ‘the lending principals of Richard Murtagh & Co’. The
valuation stated the accommodation at the property and gave other particulars,
including the form of construction. Para 4(a) of the valuation was in these
terms:
Forced Sale
Value for easy sale with vacant possession . . . £18,000.
On February 11
1985 Swingcastle, who carry on business as a finance company and are licensed
under the Consumer Credit Act 1974, lent Mr and Mrs Clarke the sum of £10,000.
This loan was secured on the property. The loan was applied as to £1,700 for
the repayment of the moneys due to the building society, as to £6,300 for the
repayment of moneys due to Cedar Holdings and as to £2,000 to pay the fee of
the brokers.
By the
agreement dated February 11 1985 between Mr and Mrs Clarke and Swingcastle it
was provided that the repayment period for the loan would be 10 years, that the
total interest charged would be £23,000, that the annual percentage rate would
be 36.51%, but that in the event of any default the rate would be increased to
45.619%. It was further provided that there should be 120 instalments payable
of £275 each, the first payment to be made on March 11 1985 and thereafter on
the 11th day of each month.
Mr and Mrs
Clarke fell into arrears with their repayments almost at once. On April 11 1985
they failed to pay the instalment due on that date and thereafter interest
became payable at the higher rate of 45.619%. On June 29 1985 Swingcastle
issued proceedings for possession and on October 22 1985 they obtained a
suspended order for possession.
On June 30
1986 Mr and Mrs Clarke gave up possession of the property, which was then
placed on the market for sale.
In February
1987 Swingcastle sold the property to a third party for £12,000.
It is now
common ground that at the date of the sale of the property in February 1987 the
following sums were due from Mr and Mrs Clarke to Swingcastle:
|
Unpaid principal |
£9,474.59 |
|
Unpaid interest |
7,802.92 |
|
Disbursements |
344.99 |
|
Interest on disbursements |
129.31 |
|
Selling agents’ commission |
401.35 |
|
Legal costs relating to sale |
983.25 |
|
Total |
£19,136.41 |
|
Less |
12,000.00 |
|
£7,136.41 |
It is also now common ground:
(a) That the valuation made by Mr Gibson was
made negligently.
(b) That had Swingcastle known that the property
would realise only £12,000 on resale they would not have made any loan to Mr
and Mrs Clarke on the security of the property. It is the policy of Swingcastle
not to make loans on properties of a forced sale value of less than £15,000.
On September 4
1987 Swingcastle issued a writ endorsed with a statement of claim against Mr
Gibson claiming damages. The statement of claim was subsequently amended, but
these amendments are of no importance for the purposes of this appeal.
In due course
the action was transferred to the Westminster County Court, where it was tried
by His Honour Judge Harris QC. At the trial the sum claimed by Swingcastle was
£9,297.56. This sum included a sum of £2,161.15 claimed by Swingcastle as
redemption interest. The judge, however, disallowed the claim for redemption
interest on the basis that this interest was not owing on February 27 1987 when
the property was sold. He gave judgment, however, for £7,136.41, being the
balance of the sum claimed by Swingcastle. This sum is made up on the way which
I have already set out and represents the sum which was due from Mr and Mrs
Clarke to Swingcastle on February 27 1987, the date of the sale.
The judge was
referred, as we were, to a number of authorities, including in particular Baxter
v F W Gapp & Co Ltd [1938] 4 All ER 457 (at first instance); [1939]
2 KB 271 (CA), and London & South of England Building Society v Stone
[1983] 1 WLR 1242.
In Baxter
v Gapp the defendants, a firm of estate agents, valued a property in
Maidenhead for the purpose of an advance by way of mortgage. The valuation was
£1,800. The defendants advised an advance of £1,200 upon first mortgage and
subsequently advised an advance of £150 on second mortgage. After a short time,
however, the mortgagor made default and in April 1937 Mr Baxter, the mortgagee,
retook possession. He had some difficulty in selling the property, which was
finally sold for £850. He then brought an action against the estate agents
claiming damages.
At the trial
before Goddard LJ sitting as an additional judge, it was the case for Mr Baxter
that had a careful valuation been made the property would have been valued at a
considerably lower sum. In that event he would not have entered the first
mortgage transaction. He left open the question whether he might have advanced
£800 or £1,000. The judge made no finding as to the actual value of the
property, considering that it was unnecessary for him to do so, but was clearly
satisfied that there had been a serious over-valuation and that Mr Baxter would
not have entered into this transaction had the property been valued carefully.
Having decided
the issue of liability in favour of the plaintiff, the judge turned to consider
the question of damages. He came to the conclusion that the plaintiff was
entitled to recover the whole loss which he had suffered as a result of
entering into the transaction. He was, therefore, held to be entitled to
recover not only the expenses which he had incurred following the repossession,
namely, the expenses of abortive sales, insurance premiums paid, the builder’s
account for the upkeep of the property, and his expenses and disbursements in
connection with the ultimate sale, but also the principal sum which he had
advanced to the mortgagor and the interest which had not been paid by the
mortgagor under the mortgage since the last payment in February 1936.
The defendants
then appealed to the Court of Appeal, where it was argued on their behalf that
the damage should be limited to the difference between the valuation figure and
the true value of the property at the time of the valuation. This argument was
rejected, however, and the Court of Appeal approved the method of assessment
adopted by Goddard LJ. At [1939] 2 KB 271 at p 274 MacKinnon LJ stated that
‘the measure of damages in such a case as the present is that which the
plaintiff has lost by being led into a disastrous investment’.
I come next to
the decision of the Court of Appeal in London & South of England
Building Society v Stone.
The facts in
that case were unusual. The defendant valuer was instructed by a building
society to inspect a house which the borrowers wished to purchase. The valuer
recommended that the property would be a suitable security for a loan of
£12,800 repayable over 25 years. In reliance on this recommendation the
building society lent £11,880 to the borrowers, the size of the loan being
limited by the policy of the building society not to lend more than 80% of the
purchase price (£14,800).
Soon after the
transaction had been completed it was found that the house was subject to subsidence
and that unless repairs were carried out part of the house would collapse. The
borrowers approached the building society, who agreed to repair the house,
having warned the valuer that they proposed to take proceedings against him.
The cost of the repairs, however, proved to be no less than £29,000.
In the
subsequent proceedings against the valuer the building society put forward
their claim for damages in alternative ways. Their actual loss was £29,000
because, although the borrowers had kept up their repayments under the mortgage
and had repaid the original advance when the repaired house was sold, the
building society had spent that sum on the repairs and had decided not to
enforce the personal covenants in the mortgage to try to recover any part of
this expenditure from the borrowers.
The judge
decided, however, that it was unreasonable to have spent so much money on
repairing the house. He assessed the damages by reference to the sum advanced
(£11,880) less a discount of £3,000 to take account of the possibility that the
building society, if they had chosen to enforce their rights, might have
recovered this sum from the borrowers on the personal covenants. He also
included in the damages the sum of £253.13 as the reasonable costs incurred by
the building society in investigating the matter and a further sum by way of
interest of about £3,455. The report does not make clear what rate of interest
was used for the purpose of the calculation.
In the Court
of Appeal the arguments were directed to the question whether the judge was
right to reduce the award by a discount to allow for the possibility of
recovery under the personal covenants. The building society succeeded on this
issue, but this is not a matter which arises for consideration in this case. Nevertheless
the decision in London & South of England Building Society v Stone
is of importance to the present appeal for the following reasons:
(a) It was there held that the decision in Baxter
v Gapp was binding on the court.
(b) It was agreed between counsel that the
measure of damages was the difference between the sum the plaintiff advanced on
the negligent valuation and the sum he would have advanced on a true valuation:
see per O’Connor LJ at p 1249E and Stephenson LJ at p 1260D. In that
case the relevant figures were £11,880 and nil. The majority of the Court of
Appeal seem to have accepted that this was in general the correct measure of
damages, but Stephenson LJ treated the decision in Baxter v Gapp
as binding authority for the proposition that ‘the loss of the money advanced
may be increased by expenses and reduced by receipts’: see p 1260F.
The point at
issue in the present appeal is whether Swingcastle are entitled to recover
interest at the default rate stipulated in the mortgage or whether they are
restricted to the ordinary commercial rate of interest.
It was agreed
on behalf of Mr Gibson:
(1) That it was wrong in
principle to allow Swingcastle to recover interest at the mortgage rate because
to do so had the same effect as if Mr Gibson had warranted the performance by
the borrowers of their mortgage obligations.
(2) That the true measure of
damages was the net loss suffered by Swingcastle together with any expenses
incurred by them as a result of making the loan, less any sums recovered either
from the borrowers or from the proceeds of the sale of the property. In this
context the net loss meant the amount lent by Swingcastle. Interest would be
recoverable on this sum but only at the ordinary rate. In addition Swingcastle
were entitled to recover the expenses they had incurred.
(3) That if Swingcastle were
to recover any additional sum to represent the loss of the use of the money for
lending elsewhere it would have been necessary for them to plead and to prove
that the money lent to Mr and Mrs Clarke could and would have been lent to
another borrower. In the present case there was no evidence to support this
additional loss.
(4) That the decision in Baxter
v Gapp was of no assistance on the question of the proper rate of
interest because:
(a) The question of the rate
of interest was never argued before Goddard LJ. Indeed in the report at p 466F
it was said that ‘the loss which [Mr Baxter] suffered is not challenged in this
case as a figure’.
(b) It was not surprising
that the question of the rate of interest was not investigated in that case
because the difference between the rate allowed under the mortgage and the rate
of interest which would otherwise have been recoverable was of little
importance at that time.
(c) The rate of interest was
not considered when the matter reached the Court of Appeal. Furthermore, as was
noted by O’Connor LJ in London & South of England Building Society v
Stone at p 1255C, MacKinnon LJ misapprehended the effect of the judgment
of the Supreme Court of Canada in Lowenburg, Harris & Co v Wolley
(1895) 25 SCR 51 when treating that case as some support for the decision of Goddard
LJ at first instance.
I see the
force of these criticisms. Moreover, I have not been able to derive any
assistance from the reports of the decision in Scholes v Brook
(1891) 64 LT 674, which was regarded as binding by du Parcq LJ in Baxter
v Gapp at p 275 as to the correct principle to be applied. Nevertheless,
I am quite satisfied that this court is bound by the decision in Baxter
v Gapp and that one cannot treat that decision as having reached per
incuriam. In the Court of Appeal detailed argument was directed to the
measure of damages, and, even if no reference was made to the rate of interest,
it seems to me to be impossible to exclude this one element of the award from
the general approval given to the judge’s method of assessment.
In these circumstances
I would dismiss the appeal on the short ground that this court is bound by
authority and that the judge was right to assess the damages in the way that he
did.
In deference
to the full and careful arguments which were addressed to us, however, I propose
to examine a little further the basis upon which damages should be assessed in
a case such as the present if the matter were free from authority.
In the course
of the argument our attention was drawn to the statement of principle by Lord
Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25,
where he said at p 39:
. . . where
any injury is to be compensated by damages, in settling the sum of money to be
given for reparation of damages you should as nearly as possible get at that
sum of money which will put the party who has been injured, or who has
suffered, in the same position as he would have been in if he had not sustained
the wrong for which he is now getting his compensation or reparation.
In seeking to
apply this statement of principle to cases where, in reliance on a negligent
valuation by B, A has lent money to C on mortgage for the purchase of property
it is necessary to distinguish between two types of case.
In the first
type of case the evidence may establish that had a proper valuation been made A
would still have lent the money to C though he would have lent a smaller sum.
In such a case it seems clear that the measure of damages will be the
difference between the sum lent and the sum which would have been lent had the
valuation been a proper one. Thus in Singer & Friedlander Ltd v John
D Wood & Co (1977) 243 EG 212, [1977] 2 EGLR 84 Watkins J awarded
damages of £491,250, being the difference between the sum actually lent and the
sum which the bank would have lent on a proper valuation of the property. And a
year later in Corisand Investments Ltd v Druce & Co (1978)
248 EG 315 Ralph Gibson J awarded damages of £34,625 to a money-lending company
on the basis of the difference between the sum which the company had lent
(£60,000) less the sums repaid (£9,075) and the sum which the judge considered
they would have lent (£16,300) on a proper valuation.
It is to be
noted that in each of these cases the actual loss sustained by the lenders was
greater than the sum awarded. In the Singer & Friedlander case the
security was worth £900,000 less than the sum lent. In the Corisand case
the security was worthless to the lenders because on the borrowers’ default the
property had been taken by the first mortgagees. In both cases, however, the
lenders would have made a loan in any event, so that the losses attributable to
the default of the borrowers had not been caused by the negligence of the
valuers.
In the second
type of case, however, the evidence may establish that had a proper valuation
been made the lenders would not have made a loan at all to the particular
borrowers to whom they in fact made the loan. This was the position in Baxter
v Gapp and in the present case. In such a case the prima facie
measure of damages would seem to be the same as in the first type of case,
namely the difference between the sum advanced (£x) and the sum which would
have been advanced (£nil).
This was the
general approach which appealed to O’Connor LJ and Stephenson LJ in London
& South of England Building Society v Stone. But if the claim is
for damages for negligence and the actual loss suffered by the lender exceeds
the prima facie measure of damages, I see no reason in principle why,
subject to proof, the lender should not recover the actual loss which he has suffered
as a result of making the loan. Recovery on this alternative basis would seem
to be in accord with the general rules relating to the measure of damages in
tort. Thus, in J E B Fasteners Ltd v Marks Bloom & Co [1983]
1 All ER 583, where the plaintiffs had taken over a manufacturing
prepared by the defendants as auditors, Donaldson LJ, referring to the measure
of damages recoverable by the plaintiffs, said at p 587:
The
plaintiffs did not take the usual precaution of requiring the directors . . .
to warrant the accuracy of the audited accounts and the fact that there had
been no material change in the profitability of the company since the end of
the period covered by those accounts. Accordingly, they cannot sue the
directors for breach of warranty but must rely on a claim against the defendant
auditors for negligent misstatement. Furthermore, the measure of damage is
different. It is not the difference between the value of the company if the
facts had been as stated in the accounts and its actual value, but the loss
which the plaintiffs have sustained as a result of acting in reliance on the
accuracy of the accounts.
On this basis
the lender would be awarded:
(a) The amount advanced less the aggregate of
any sum recovered from the borrower and any sum recovered on the realisation of
the security; and
(b) any expenses incurred by the lender in
realising the security or in maintaining the value of the security until
disposal.
It remains to
consider, however, whether, in this second type of case, the lender can recover
in addition any sum for the loss of the use of the money during the period
before the security can be realised. This is a matter of importance for those
who advance money at the high-risk (or, as it is called, the non-status) end of
the market and where it may be possible to claim that the high rates of
interest charged are no more than a reflection of the perils of the business
undertaken.
A number of
approaches are possible, including the following:
(a) The lender could be awarded the unpaid
interest owed by the borrower at the date when the security was realised. This
was the method adopted in Baxter v Gapp. But to award damages on
this basis is in effect to treat the valuer as the guarantor of the contract of
loan. In the absence of authority I would for my part reject this solution.
(b) The lender could be awarded a sum equivalent
to the amount he would have earned by way of interest on another loan if he had
had the money available for this purpose. In my view, however, such an award
should not be made in the absence of evidence that the money lent would have
been used for another transaction. This evidence would have to be directed to
proving an unsatisfied demand for loans and I anticipate that such evidence
might seldom be forthcoming. Moreover, even if evidence of a lost transaction
were available, I see no reason why the interest should be at the default rate
rather than at the ordinary rate provided for in a standard contract for this
type of business.
(c) The lender could be awarded a sum equivalent
to the interest which would have been earned if the sum had been placed on
deposit.
(d) The lender could be awarded a sum to
represent the loss of the opportunity to invest the money elsewhere. This was
the solution adopted by the Supreme Court of British Columbia in Seeway
Mortgage Investment Corp v First Citizens Financial Corp (1983) 45
BCLR 87, where it was said at p 101:
What the
plaintiff lost then was the opportunity to invest its $50,000 in a security
which had the same risks except that the appraisal would be accurate.
I do not
propose to express any concluded view about these methods of assessment. I do
not consider that any one of the last three methods of assessment would
necessarily be right to suit all cases. It would depend on the evidence. I
would, however, also observe that it may be necessary in some future case to
examine whether any valid distinction can be drawn between damages awarded for
a negligent misstatement and damages awarded in deceit. In the latter case the
measure of damages is that laid down in Doyle v Olby (Ironmongers)
Ltd [1969] 2 QB 158 and Smith Kline & French Laboratories Ltd v Long
[1989] 1 WLR 1.
In the present
case, however, for the reasons which I have stated, I consider that the court
is bound by the decision in Baxter v F W Gapp & Co Ltd.
I would
dismiss the appeal.
Agreeing, FARQUHARSON
LJ said: The respondent finances mortgage agreements at the high-risk or,
as it is called, the non-status end of the market. The appellant carries on
business as a surveyor. In January 1985 a Mr and Mrs Clarke applied to the
respondent through mortgage brokers for a loan of £11,000 on their house at 36
North Road, Audenshaw, Manchester. The appellant was asked to give the
respondent a valuation of the house, and he did so giving a figure of £18,000
on a forced sale with vacant possession. The valuation was admittedly made
negligently. The house was not worth anything like so much.
On the faith
of the valuation the respondent advanced the sum of £10,000 secured on a
mortgage of the house. The interest rates under the mortgage were very high,
being 37% while the borrowers made payments in accordance with the agreement
and 45% if they fell into arrears. The Clarkes defaulted very quickly.
Proceedings for possession were launched by the respondent in the county court
and possession was obtained on June 30 1986. On February 27 1987 the respondent
sold the house to a third party for £12,000.
In this action
against the appellant the respondent sought to recover damages flowing from the
appellant’s negligence under the following heads:
(1) The principal sum advanced less such
repayment as were made by the Clarkes.
(2) General disbursements and interest upon them.
(3) Legal costs arising out of the possession
proceedings.
(4) Estate agents’ commission on sale of the
property.
(5) Interest accrued under the mortgage contract.
Bringing into
account the £12,000 recovered on the sale of the house, the respondent claimed
damages amounting to £7,136.41 with interest and the learned judge gave
judgment for that amount.
The appellant
concedes that the respondent is entitled to recover all the above items of
damages, save the last, and this appeal is brought against the learned judge’s
award in the sum of £7,808.92, being the interest which was due under the
mortgage contract and which the Clarkes failed to pay.
The basis of
Mr Toulson’s argument on behalf of the appellant against this award starts with
the general proposition on the measure of damages enunciated by Lord Blackburn
in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at p 39:
. . . where
any injury is to be compensated by damages, in settling the sum of money to be
given for reparation of damages you should as nearly as possible get at that
sum of money which will put the party who has been injured, or who has
suffered, in the same position as he would have been in if he had not sustained
the wrong for which he is now getting his compensation or reparation.
Counsel
submits that so far from putting the respondent in the position it would have
been in if it had not entered into the mortgage agreement, it is in a much
better one by recovering interest payments at an extremely high rate. He admits
that all the general expenses in preparing the mortgage, the legal costs of
obtaining possession, and the sale of the property are recoverable as being in
the category of damages naturally flowing from the appellant’s negligence, but
the contractual interest is a benefit resulting from the respondent’s entering
into the mortgage contract. If it is to be placed in the same position as it
would have been in if it had never entered into the mortgage contract the
respondent clearly cannot recover moneys only payable under that contract. The
respondent’s claim, he argues, in effect puts it in the same position as if the
appellant had warranted or guaranteed the performance by the Clarkes of their
contractual obligations, which he had not. Neither had he warranted the
correctness of his valuation. Counsel concedes that the respondent could
properly recover as damages any loss it sustained by reason of losing the use
of the £10,000 advanced under the mortgage, but that there would have to be evidence,
which there was not, that the respondent could have applied the £10,000 in
another mortgage investment or at the very least to have earned interest by
placing it on deposit.
As a matter of
principle, I would, for my part, find these arguments hard to resist, but it is
submitted by Mr Wulwik, on behalf of the respondent, that the weight of
authority shows that the judge’s decision as to the measure of damages is
correct.
The text-book
writers have drawn a distinction as to the proper measure of damages between
cases where a person has purchased a house on the basis of a negligent
valuation and suffered damage as a result and cases, such as the present, where
a mortgagee has advanced money on a loan on the same basis, when but for the
negligent valuation it would not have advanced any money at all, or not so
much. In the former category a line of cases from Philips v Ward
[1956] 1 WLR 471 to Perry v Sidney Phillips & Son [1982] 1
WLR 1297 has shown that the correct measure of damages is the difference in value
between the purchase price and the market value of the house
any advance but for the negligent valuation the measure of damages will be the
difference between the sum advanced and the sum recovered on sale of the
property plus any consequential loss and expenses (see Clerk and Lindsell on
Torts, 16th ed para 1-45). This definition does not, of course, answer the
present problem and it is necessary to look at the authorities upon which it is
based.
The first case
is Scholes v Brook (1891) 63 LT 837, where Romer J gave damages
to a mortgagee in an action against a negligent surveyor ‘representing the
whole loss he had sustained through the deficiency of the security’. Although
his decision was upheld in this court, the report is too short to be
satisfactory and again does not deal directly with the present problem.
The most
important case is Baxter v F W Gapp & Co Ltd [1938] 4 All ER
457*. Here again the mortgagee would not have advanced money on a house but for
a negligent survey. Goddard LJ, sitting as an additional judge of the King’s
Bench Division, held that the measure of damage was the whole loss sustained by
the mortgagee and included the expenses of abortive sales, insurance premiums,
a builder’s account for upkeep of the property, the mortgagee’s expenses and
disbursements and the selling agent’s commission upon the ultimate sale of the
property, in addition to the principal advanced and the interest unpaid by the
mortgagor. Goddard LJ’s decision was also upheld by this court. Mr Toulson
seeks to discount the weight of that authority by pointing to the fact that
Goddard LJ says (at p 466) that ‘the loss suffered is not challenged as a
figure’, and says this issue was not argued. However, I think Mr Wulwik is
right when he submits that the reference is to the mathematics of calculating
the figure rather than to the measure of damages which was clearly in dispute.
While this case is authority for Mr Wulwik’s submission in the present case,
once again the principle involved does not seem to have been argued; ie whether
the interest should be the contractual amount in the mortgage deed or what
represents the loss of use of the capital sum.
*Editor’s
note: This is the reference to the judgment at first instance. The reference to
the appeal decision is [1939] 2 KB 271.
Corisand
Investments Ltd v Druce & Co (1978) 248
EG 315, 407, 504, was a case where the mortgagees lent a greater sum than they
would have done but for the negligent valuation. Ralph Gibson J rejected the
argument that the mortgagees were entitled to the 30% interest they would have
got if the borrowers had performed their contractual obligations.
However, in London
& South of England Building Society v Stone [1983] 1 WLR 1242
O’Connor LJ, in referring to that decision, said: ‘For some reason which is not
clear to me Ralph Gibson J rejected the plaintiffs’ claim for ‘interest”. In Stone’s
case the issue was whether the plaintiff mortgagee was obliged to pursue its
rights against the mortgagors and take any amount recovered into account when
suing the negligent valuer, so the decision is not in point. Nevertheless,
O’Connor LJ held that Baxter v Gapp was binding on the Court of
Appeal (p 1255). Furthermore, Stephenson LJ (at p 1261 E to G) said:
Though the
identity of the borrowers was of no interest or relevance to the valuer or his
duty to the lenders, the amount of the advance and the length of time for
repayment were. Though the mortgage deed by way of legal charge gave the
lenders a right to foreclose for other breaches of covenant, the object of
securing the loan by charging the property was to secure repayment of the sum
lent with interest under the covenant to repay. The borrowers’ obligation to
repay was therefore not so collateral or remote as to be disregarded altogether
in measuring the lenders’ loss, and although the valuer was not a party to the
mortgage, and the mortgage was literally res inter alios acta, it was a
transaction with which the valuer’s report and valuation and breach of duty
were closely connected, as now demonstrated by the decision of Park J in Yianni
v Edwin Evans & Sons [1982] QB 438.
These
observations evidently weaken the argument of Mr Toulson that the valuer is not
concerned or responsible for the acts of the mortgagor.
In the result,
although the authorities are not entirely satisfactory in resolving the
question whether a mortgagee in these circumstances is entitled to recover loss
of contractual interest under the mortgage from the negligent valuer, they are
binding on this court.
I would
accordingly dismiss this appeal.
Also agreeing,
SIR JOHN MEGAW said: Despite the cogent arguments of counsel for the
appellant (‘the valuer’), I think that we are bound to dismiss this appeal on
the authority of the decision of the court in Baxter v F W Gapp Ltd
[1939] 2 KB 271.
However, lest
that view of the effect of Baxter v Gapp should be wrong, I think
it is desirable to indicate why, if the issue were free from authority, I
should not feel able to accept the submission by counsel for the valuer as to
the correct approach to the assessment of damages in this case.
There is no
doubt what the law is, at any rate so far as this court is concerned, where a
negligent valuation has been provided to the potential purchaser of a house,
with the result that the house has been bought at a price above the market
value. Perry v Sidney Phillips & Son [1982] 1 WLR 1297
confirms that in such a case the measure of damages is the difference between
the inflated, negligent valuation at which the house was bought, in reliance on
the valuation, and the true market value of the house at the date of the
purchase. (The question did not arise in that case; but presumably, if there
had been a lapse of time between the date of the valuation and the date of the
purchase, the relevant market value might have to be adjusted, if there had
been a material change between the two dates, owing to extraneous circumstances.)
The issue
decided in Perry’s case was as to the date by reference to which the
damages were to be calculated. The answer was that it was the date when the
loss was actually incurred. The loss was incurred when, as a result of the
valuer’s negligence, the purchaser became the owner of a house for which he had
paid £X, whereas the market value of that house was £X-Y. This is consonant
with the general principle in tort. The tort is committed when loss is incurred
as a result of negligence, whether or not the fact of the negligence or of the
loss is known as at that moment.
As it appears
to me, the analogy of the principle laid down in Perry’s case — the
purchase of a house on a negligent valuation — applies to a case such as the
present. The damages have to be calculated by reference to the date when the
loss is incurred. No loss is incurred, nor can anyone foretell whether any loss
is going to be incurred, as a result of the valuer’s negligent valuation,
unless and until the third party, the borrower under the loan contract with the
lender, defaults on the payments due under the loan contracts, the lender seeks
to exercise his right to enforce the security, and the proceeds of the security
prove to be less than the total amount which the lender is then entitled to
recover from the borrower under the terms of the loan contract. Up to that time
— or at any rate up to the time when the lender decides to enforce the security
— there may be a potential loss; but there is no actual loss.
There is no
‘market value’, so far as I am aware, ascertainable by reference to the bundle
of rights contained in a loan contract secured against property, varying
according as the value of the security is £X or £Y. In any case, unlike the
purchase of a house, the value of a loan contract to the lender, if it could be
assessed in the market or otherwise, depends on other elements besides the
value of the security. If the loan contract proceeds to normal completion in
accordance with its terms the lender suffers no loss. I can see no practical
basis for any distinction in the assessment of damages according to whether the
lender, if he had not been misled as to the value of the security, would not
have entered into a loan contract with that borrower or, alternatively, would
have entered into a loan contract but with a loan of a smaller amount. It
might, depending on the figures, affect the amount recoverable; but why should
it affect the method of assessment, at any rate in a case where, as here, the
error in the valuation is not known until the occasion has arisen for
realisation of the security?
In the absence
of authority to the contrary, I should regard the correct principle of damages
as being that the claim for damages arises when the loss is incurred. The loss
is incurred if and when the lender, validly under the loan contract, realises
the security, and the amount realised is less than the amount due under the
loan contract, including expenses properly incurred, and allowing for all
payments made by the borrower. There is one important qualification. The valuer
should not be liable for a greater amount than the amount of his original
overestimate of the value compared with the true market value as at the date of
the valuation. Any shortfall in the proceeds of the realisation above that
amount should not be regarded as being caused by the negligent valuation.
Subject,
possibly, to that qualification, which did not arise in Baxter v Gapp,
it appears to me that the principle which I have suggested above is wholly in
accord with Baxter v Gapp.
The appeal
was dismissed with costs; application for leave to appeal to the House of Lords
was refused.
