Insurance: House of Lords ruling on when cause of action accrues against a valuer

In South Australia Asset Management Corporation - v - York Montague Limited (1996) ("SAAMCO"), the House of Lords considered three appeals together on the extent of a valuer's liability to a lender in respect of the negligent overvaluation of property offered as security for a loan. The House of Lords held that a valuer's liability is limited to that part of the lender's loss which falls within the scope of the valuer's duty of care. On that basis, a valuer's liability will be limited to the amount of the overvaluation. This is sometimes known as the "SAAMCO cap".

Although the House of Lords gave judgment on the amount of damages payable by the valuers, the question of what interest should be awarded upon the damages was adjourned.

In the present case, the parties to one of the SAAMCO appeals returned to the House of Lords for a decision on the question of when interest should be awarded upon damages.

Under the Supreme Court Act 1981 Section 35A, the Court has power to award interest for any part of the period between the date when the cause of action arose and the date of judgment.

The Plaintiff lender contended that the cause of action arose in March 1990, when the loan facility was granted; the Defendant valuers argued that the cause of action did not accrue until the property was sold in February 1993.

Accordingly, the key issues were, first, when the cause of action in tort accrues, (this being important for the purposes of limitation as well as the calculation of interest) and, secondly, from what date interest should run.

Held:

In tort, the cause of action arises when the Plaintiff first sustains damage.

In the present case, this involved a comparison between the lender's actual position and its position if the valuation had been correct. Lord Nicholls called this the basic comparison, and stated:

"Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the Plaintiff, 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 covenant and the true value of the overvalued property."

The House of Lords held that a cause of action against a valuer accrues when the "basic comparison" first reveals a loss. This is the commencement date for limitation purposes and is the earliest date from which Section 35A interest could run. However, the House of Lords held that interest will not, in fact, run until the lender's loss has reached the SAAMCO cap (i.e., the difference between the negligent valuation and the true value of the security at the time of the valuation). This was because the Plaintiff's damages included loss of interest up to the date of the SAAMCO cap and, accordingly, an award of interest from the date of the "basic comparison" would involve double counting.

On the facts of the case, the Defendants valued the property at £3.5million. The true value was £2.1million and the Plaintiff lent £2.45million. The "basic comparison" therefore showed that the Plaintiff suffered an immediate loss at the date of the advance (March 1990), which subsequently increased as the value of the property fell and the arrears of interest amounted. On that basis, the cause of action arose in March 1990.

Interest was, however, only awarded from December 1990, the date when the Plaintiff's damages reached the SAAMCO cap of £1.4million (i.e. £3.5million less £2.1million).

Note:

This decision represents the final chapter in the BBL/SAAMCO litigation. Although the House of Lords' test is straightforward in theory, it is likely to create considerable uncertainty in practice.

The precise dates upon which (a) a lender's cause of action accrues (for the purposes of limitation) and (b) interest runs on the "capped" loss will depend upon the facts of each case and will require expert evidence as to the true value of the property at various times together with a consideration of the value of the borrower's covenant. It is implicit from the judgment of Lord Hoffman that, in determining these dates, account must be taken of the fall in value of the security, a factor which introduces a further element of complexity and uncertainty into the quantum exercise. Accordingly, far from simplifying the calculation of interest, the House of Lords decision in Nykredit has complicated matters, in that it will be necessary for the Court to hear expert evidence on the subsequent fall in value, no doubt involving conflicting retrospective valuations at various dates. The corollary of this is that it will probably be necessary for experts to undertake more work on this type of issue (subject to the economics of the litigation).

Lord Nicholls stated:

"Ascribing a value to the borrower's covenant should not be unduly troublesome. A comparison exercise regarding lessees' covenants is a routine matter when valuing property. Sometimes the comparison will reveal a loss from the inception of the loan transaction. The borrower may be a company with no other assets, its sole business may comprise redeveloping and reselling the property, and for repayment a lender may be looking solely to his security. In such a case, if the property is worth less than the amount of the loan, relevant and measurable loss will be sustained at once. In other cases, the borrower's covenant may have value, and until there is default the lender may sustain no loss even though the security is worth less than the amount of the loan. Conversely, in some cases there may be no loss even when the borrower defaults. A borrower may default after a while but when he does, despite the overvaluation, the security may still be adequate."

Although Lord Nicholls stated that ascribing a value to the borrower's covenant "should not be unduly troublesome", the House of Lords gave no indication as to how this should be carried out and there is a dearth of authority on this type of issue, (in the first instance decision of Eagle Star v Gale & Power (1955), the borrower's covenant was valued at £100, but the Judge did not explain the means by which he had reached this figure).

The House of Lords decision in Nykredit is therefore likely to require the parties to obtain expert "covenant valuation" evidence, which will, in turn, introduce a further complication and cost into the litigation. In this respect, the court will have regard to factors such as the payment record of the borrowers over the term of the facility (including any earlier, sporadic default), their current performance and the availability of any other assets against which the lender could seek recourse.

There are a number of cases in the pipeline involving these type of issues and the courts' approach may, therefore, become clearer in the near future.

Faced with the current uncertainties and the need for additional expert evidence, Defendants and their insurers are, in cases where liability is not seriously in issue, likely to continue to make early payments into court in an attempt to force a compromise (Nykredit Mortgage Bank Plc - v - Edward Erdman Group Limited, HL: Judgment 27th November 1997).