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Negligence and loans

Advance of further funds

Causation

Tiuta International Ltd v De Villiers Surveyors Ltd
[2017] UKSC 77

Summary

A mortgage valuer is only liable for the consequences of his negligent valuation. Where the same valuer had been negligent in respect of a second valuation (but not the first), in reliance upon which a lender advanced further funds which (a) discharged the first advance, and (b) provided new money, the valuer was only liable for the loss of the new money.

Facts

In April 2011, T provided a first short-term loan facility of £2,475,000 on the security of a legal charge. The facility was required to fund a residential development and was made in reliance upon a valuation from V.

In December 2011, T provided a second loan facility of £3,088,252. Part of the second loan was used to repay the 1st loan facility and the balance was released to the borrower. The second loan facility was made in reliance upon a further valuation from V.

The borrower defaulted in repayment leaving a projected shortfall. At that stage, the balance outstanding on the facility was £2,084,000 with likely recoveries valued at £2,014,000. T sued V alleging negligence in relation to its second valuation. T claimed that had the valuation not been negligent it would not have entered into the second loan facility and would not have suf-fered the losses it now faced. There was no allegation that the first valuation had been negli-gent.

V defended the claim, and alleged that since T had already advanced £2,475,000 in reliance upon the first valuation (which had not been negligent) T could not have suffered any greater loss than the amount by which the indebtedness had increased as a result of the second valu-ation [£289,000]. V applied for summary judgment against T on this point.

First instance

Timothy Fancourt QC sitting as a Deputy High Court Judge held that the "but for" test of causation was applicable and that any negligence by V in relation to the second valuation had not caused the loss attributable to the first loan facility. V was therefore liable only for any loss caused by the additional lending. T appealed.

Court of Appeal

A majority allowed the appeal and held that T entered into the second loan facility in reliance upon the second valuation. If the second valuation had not been negligent, T would not have entered into the second loan facility and would have suffered no loss on that transaction as a result; that T would have been left with the first loan facility was of no relevance to V in its ca-pacity as valuer for the second loan facility. The loss that T sustained as a result of entering into the second transaction was the advance of the second loan. If the value of the property was negligently overstated, V would be liable to the extent that T’s loss was caused by its over-valuation. V appealed.

Supreme Court

In allowing the appeal, the Supreme Court held that the case turned on ordinary principles of the law of damages. The ‘basic measure of damages’ is that which is required to restore the claimant as nearly as possible to the position that he would have been in if he had not sus-tained the wrong. In a case of negligent valuation where, but for the negligence, the lender would not have lent, this involves the ‘basic comparison’ between (a) the amount of money lent by the claimant, 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 cove-nant and the true value of the overvalued property (per Lord Nicholls in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No. 2) [1977] 1 WLR 1627).

If the valuer had not been negligent in respect of the second valuation, T would not have entered into the second transaction, but they would still have entered into the first. The difference between the two is the amount of the new money advanced under the second loan facility.

The error made by the Court of Appeal was to hold that V would have contemplated that it might be liable for the full amount of the advances under the second loan facility, and that it was a windfall for it that part of the second loan facility was used to repay the first loan facility, rather than being used to fund the development. This was not relevant to the ‘basic comparison’. A valuer cannot be liable for more than the difference which his negligence has made, simply because he contemplated, on hypothetical facts different from those which actually ob-tained, that he might have been.

Further, although as a general rule, where a claimant has received some benefit attributable to the events which caused his loss, it must be taken into account in assessing damages, unless it is collateral. The Court of Appeal recently held in Swynson Ltd v Lowick Rose LLP [2017] 2 WLR 1161 that collateral benefits are those whose receipt of which arose inde-pendently of the circumstances giving rise to the loss.

Here, the discharge of the existing indebtedness out of the advance made under the second loan facility was plainly not a collateral benefit in this sense (a) because it did not confer a benefit on, and (b) it was required by the terms of the second loan facility – T did not intend to lend the whole of the second facility in addition to the whole of the first. They never intended to lend more than £289,000 of new money.

Comment

Assessing quantum in professional negligence claims is difficult, particularly when it involves negligent mortgage valuations. Best advice is always to go back to basic principles and work through the cases. There is some helpful guidance in Jackson & Powell on Professional Lia-bility, 8th Edition, para 10-193 etc.

The main point to arise from this case is that a valuer will only be liable for the consequences of his negligent valuation. The application of the ‘basic measure of damages’ meant that the valuer was liable only for the ‘new’ money advanced in reliance upon the negligent valuation. The ‘old’ money had already been lost.


Extent of Professional responsibility

The client's decision

Hughes-Holland v BPE Solicitors & Anr
[2017] UKSC 21

Summary

The Supreme Court provided clarification of the extent to which the SAAMCO principle is to be applied to solicitors and other professionals. The Court decided that, although the solicitors had been negligent in the drawing up of a loan facility agreement, they were not legally responsible for their client’s decision to make the loan; losses resulting from the client’s own commercial misjudgment in making the loan were not within the scope of the solicitor’s duty to him.

Facts

G, a businessman with knowledge of property and property dealing, had agreed to lend £200,000 to a friend, L, assuming it would be used to redevelop a disused tower at a substantial profit. That tower was owned by L’s operating company subject to a charge securing a £150,000 bank loan. However, G’s assumption was wrong, as L did not intend to use the money for those redevelopment purposes. Instead, L intended to buy the tower through a SPV company and to discharge the bank loan and other debts. G was not aware of that intention, and instructed his solicitors to draw up a loan facility agreement and charge. However L did inform G’s solicitors of his intentions to sell the property to the SPV and that G would lend him the money. G’s solicitors drew up the facility agreement but mistakenly based this on an earlier abortive deal between the parties and so mistakenly inserted terms which indicated the loan was to be used to fund the development. The tower was not developed and G lost his money.

First instance

At first instance, he successfully sued his solicitors for negligence, the trial judge finding that G’s solicitors:
    “…should have explained to him that the funds would be applied for [L’s] benefit and that in reality he was not putting anything into the project. [His solicitor] failed to do that, and indeed negligently misled [G] by allowing statements to appear in the loan documentation which suggested the opposite.”


Therefore had G not been misled by their mistake, he would not have made the loan. He was awarded damages representing the full loan amount.

Court of Appeal

On appeal the Court of Appeal reduced G’s damages to nil. It found that the development project had never been viable such that, even if the £200,000 had been spent on developing the tower, its value would not have increased and G would have still lost his money.

G was adjudicated bankrupt and his trustee in bankruptcy was substituted in the proceedings. The trustee appealed to the Supreme Court.

Issues:
  • Whether the Court of Appeal was entitled to substitute its own assessment of the viability of the development project for that of the judge; and, even if it was,
  • Whether G was entitled in law to the whole loss flowing from a transaction into which he would not have entered but for the solicitors’ negligence.
Decision of Supreme Court

The Supreme Court dismissed the appeal, and held that there was sufficient evidence to entitle the Court of Appeal to find that the tower would not have increased in value had G’s money been spent on its development.

The SAAMCO principle had often been misunderstood. SAAMCO concerned a negligent valuation, and the damages were limited to the difference between the valuation and the true value, on the ground that the recoverable loss could not exceed what the lender would have lost had the valuation been correct. What had become known as the SAAMCO cap had become misunderstood due to a tendency for two fundamental features of reasoning to be overlooked. First, the principle had nothing to do with causation as that term was usually understood. Secondly, a defendant was not liable for a transaction entered into by a claim if he had simply supplied information, leaving the claimant to assess the merits of entering into the transaction. Even if he know that the information he supplied was critical to the decision, he would only be liable for the financial consequences of its being wrong, not for the financial consequences of the claimant entering into the transaction.

In relation to conveyancers’ negligence, to the extent that Bristol & West Building Society v. Fancy & Jackson [1997] 4 All ER 582 decided that a conveyancer was liable for the whole loss flowing from a transaction where he had failed to supply information that was fundamental to the prospective mortgage lender’s decision to finance the purchase, it was wrong. (Fancy & Jackson was overruled in part.)

In the instant case, the solicitors had not assumed responsibility for G’s decision to lend money to L, having only been instructed to draw up the facility agreement and charge. They were not legally responsible for his decision to lend the money, but because their error had confirmed his erroneous assumption as to the use of the money, they would be liable for loss attributable to his assumption being wrong. However, even if G had been right in assuming the loan would be spent on development, he would have still lost all his money. None of his loss was within the scope of the solicitor’s duty.


Quantum of damages

Date of assessment

LSREF III Wight Ltd v Gateley LLP
[2016] EWCA Civ 359

Summary

The Court of Appeal held that the quantum of damages in the lender’s claim would be determined at the date of trial. The claim was for damages for professional negligence for the diminution in value of its leasehold security by reason of some undisclosed insolvency forfeiture provisions in the lease. By the date of trial the lender would have been in a position to mitigate its loss by negotiating a release of the relevant provisions.

Facts

G, a firm of solicitors, was retained by a bank to provide a report on title in respect of a proposed loan to its customer, M, on the security of leasehold property. G’s report was negligent in that it failed to warn that the lease contained a forfeiture clause in the event of specified insolvency events. Liability was admitted.

Issues

(1) Whether the date of trial was the correct date of assessment of loss; and
(2) Whether the bank had failed to mitigate its loss by negotiating a variation of the lease with the landlord.

First instance

At trial, the judge determined that the bank had suffered loss at the commencement of the transaction (2007) and, based on expert evidence, concluded that the diminution in value of the security by reason of the insolvency forfeiture provisions was £240,000, on which would be allowed interest at 2% per annum. The judge also indicated that if the diminution in value was determined at the date of trial (2014), it would have increased to £497,250.

Shortly after trial, the bank succeeded in negotiating a variation of the lease by the removal of the insolvency forfeiture provisions at a cost of £150,000. M was put into administration and the leasehold interest sold.

G appealed on the basis that the judge should have valued the loss at the date of trial, by which time the bank could have mitigated its loss by remedying the defect at a cost of £150,000 plus expenses (which G had offered to lend).

Decision on appeal

The Court of Appeal admitted fresh evidence of what had happened post-trial and concluded that the judge had erred in principle in confining his assessment of loss to the transaction date rather than the trial date. The bank had unreasonably failed to mitigate its loss by 2014 by remedying the defect at a cost of £150,000 plus expenses. Nonetheless, G was liable for the full cost of curing the defect (£157,000).

Comment

The judgment contains a helpful review of the law on the quantification of loss suffered as a result of lending money upon negligent advice and on the extent of the duty to mitigate. Briggs LJ made the point that where a lender’s transactional loss based on negligent advice remains uncrystallised at the date of the trial it will be a rare case in which quantification of that loss would be better calculated by reference to any earlier date than the trial date. However, if a lender’s transactional loss is crystallised by a realisation of the security prior to trial, there is generally no need to postpone the quantification of that loss to a later date. All that the court needs to do is quantify it then (which will usually be a simple process of accounting, uncomplicated by valuation issues) and then add interest at an appropriate rate.


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