Plaintiff bank lending £4m in 1989 on four properties valued by defendants at £6.23m – Bank dispensing with standard credit checks on borrower – Judge holding one property negligently overvalued by £2,335,000 – Whether damages to be reduced under Law Reform (Contributory Negligence) Act 1945
In February 1989 an application was made to the plaintiff bank by a property company (ASR), which was created and controlled by W, whom the bank knew to be a successful property dealer. The application was for a £4m refinancing package to be secured on four properties, one of which was Centre House, Portsmouth, a former sailors’ hostel, which ASR had bought in June 1987 for £375,000. The package was intended to replace facilities then afforded by Midland Bank, which at that time had advanced £1.65m on the security of Centre House and £1.55m on the other three properties. In March 1989 the defendant valuers, knowing the purpose for which their report was required by the bank, valued Centre Point at £3m and the other three properties at £3.23m. With the approval of its head office credit committee, the bank proceeded with the £4m advance without calling for ASR’s authorised accounts for the previous two years and without insisting on W’s personal guarantee, thus departing from its standard policy as laid down in its own risk administration manual.
Following a default by ASR, the bank proceeded to realise its securities, and in November 1994 Centre House was sold for £255,000. In proceedings brought by the bank in respect of the valuation of Centre House, the defendants admitted negligence, but took issue, inter alia, on the figure which would have been reported if a “correct valuation” had been made in March 1989. After considering the strongly conflicting expert evidence, the judge concluded that a reasonable valuer would have put forward a figure of £665,000 and, having found that the bank would not have gone ahead if so advised (a “no transaction” case), assessed the recoverable loss at £2,335,000. The judge went on to consider what deduction, if any, should be made in respect of the alleged contributory negligence on the part of the bank.
Held A deduction of 10% was to be made under the Law Reform (Contributory Negligence) Act 1945.
1. It was now settled by the Court of Appeal in Platform Home Loans Ltd v Oyston Shipways Ltd [1998] 13 EG 148 that the damage in respect of which a deduction may be made under the 1945 Act was the whole loss sustained by the lender, as distinct from the loss for which the valuer was liable. Accordingly, contributory negligence could be alleged not only in relation to the valuation but also in relation to the borrower.
2. Having loaned only 64% of the valuation of all four properties, the bank justifiably believed that it was protected against any capital loss. However, the lavishness of the security did not necessarily extinguish the obligation of prudence. In favour of the bank the court would accept that merchant banks were thought to take more risks than high street banks, that the risk administration manual was directed at more junior staff, and that W was genuinely seen by his current bankers and others as a developer with a good record. Nevertheless, the court was satisfied that the bank did not obtain a sufficiently detailed picture of the financial history and status of ASR and its owner and that in all the circumstances the damages should be reduced to £2,102,157.
John Slater QC and John Wardell (instructed by Dibb Lupton Alsop) appeared for the plaintiff; Iain Hughes QC and Fiona Sinclair (instructed by Fishburn Boxer) appeared for the defendants