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Negligent valuation

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.

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