The Defendant valuer valued the property in 1990 at £1.5 million.
The Plaintiff lender granted a non-status loan of 70% (£1.05
million). The borrower defaulted and the property was sold in 1993
for £435,000.
At first instance, the Judge held that the true
value of the property was £1 million and that the Defendant's
valuation had been negligent.
The Judge also held, however, that the Plaintiff
lender had been contributorily negligent, for two reasons:-
- it was imprudent to make a non-status loan of £1.05 million;
- the Plaintiff's application form required the borrower to state
the purchase price. The borrower had failed to complete that part
of the form. This would have served as an important cross-check on
the valuation and indeed, would have revealed that the borrower
only purchased the property two years earlier for
£375,000.
Accordingly, the Judge reduced the Plaintiff's
damages by 20% on account of contributory negligence.
Before the Court of Appeal, the Plaintiff lender
sought to rely on the SAAMCO decision, namely, that a valuer's
liability will be limited to the amount of the overvaluation. On
that basis, it was argued that the only relevant contributory
negligence was that which contributed to the overvaluation.
On the facts, the Plaintiff lender therefore
claimed that the only relevant allegation of contributory
negligence was the failure to check that the borrower had completed
the application form. If this form had been correctly completed,
this should have cast doubt upon the Defendant's valuation. The
Plaintiff contended that the Judge was wrong, however, to find
contributory negligence on the ground that it was imprudent to make
a non-status loan of £1.05 million. The Plaintiff's lending policy
had nothing to do with the amount of the overvaluation being
claimed from the Defendant valuer.
Held:
The Plaintiff's appeal failed.
The issue was the application of the Law Reform
(Contributory Negligence) Act 1945 to the assessment of the
liability of a Defendant valuer. Section 1(1) of the 1945 Act
provides:
"Where any person suffers damage as the result
partly of his own fault and partly of the fault of any other person
or persons, a claim in respect of that damage will not be defeated
by reason of the fault of the person suffering the damage, but the
damages recoverable in respect thereof shall be reduced to such
extent as the Court thinks just and equitable having regard to the
claimant's share in the responsibility for the damage" (our
emphasis).
The starting point for identifying whether a lender
has suffered any loss is to undertake what Lord Nicholls in
Nykredit Mortgage Bank Plc -v- Edward Erdman Group Limited (1997)
called the basic comparison. This is the real loss sustained by the
lender, namely, the loan facility plus outstanding interest, less
the actual value of the property, interest received and the value
of the borrower's covenant. This total loss may be called Loss
A.
Included within Loss A is the loss for which the
valuer is liable ("Loss B") which, on the authority of SAAMCO, is
limited to the extent of the negligent overvaluation.
If Loss A exceeds Loss B, the lender cannot recover
the difference from the valuer. However, the relevant damage for
the purposes of the Law Reform (Contributory Negligence) Act 1945
section 1 (1) is Loss A. That loss was sustained by the Plaintiff
lender partly as a result of its own fault and partly, as to Loss
B, as a result of the fault of the valuer.
Although the claim against the valuer is limited to
Loss B, pursuant to section 1 (1), it is nonetheless, a claim "in
respect of" Loss A, for it is an element in or ingredient of that
loss. On that basis, the court was entitled to reduce any damages
by reference to the lender's share in the responsibility for Loss
A. Accordingly, the Judge's finding of a 20% deduction for
contributory negligence was upheld.
The Court of Appeal also ruled on the proper
approach to the assessment of damages. This involves a number of
stages:
- the Plaintiff lender's cause of action is triggered when the
"basic comparison" indicates a loss;
- it is then necessary to ascertain by the addition of interest
to represent the cost to the Plaintiff lender of the money lent
(less interest received and any sale proceeds), when the loss
reaches the SAAMCO cap. On the facts, the Defendant's valuation was
£1.5 million and the correct valuation was £1 million. The claim
against the valuer was therefore limited to £500,000;
- once the Plaintiff's loss reaches the SAAMCO cap, the liability
of the Defendant valuer crystallises. It is at that stage that any
deduction for contributory negligence is made. On the facts,
contributory negligence was 20% and therefore the Plaintiff's
damages were reduced to £400,000. To that figure, statutory
interest is added from the date of crystallisation to the date of
the judgment.
Note:
This decision provides very welcome clarification
of the law relating to contributory negligence in claims against
valuers and, indeed, other professionals.
In essence, the decision confirms that Defendant
valuers may rely upon any negligence of a lender which contributed
to the loss. Accordingly, it will no longer be possible for a
Plaintiff lender to argue that any negligence relating to, for
example, the creditworthiness of the borrower is irrelevant because
it does not affect the adequacy of the lender's security. On this
issue, the following first instance decisions (see Bulletin No.32)
may now be regarded as overruled:-
- Interallianz Finanz AG - v - Independent Insurance Co Limited -
[1997] ECGS 91;
- Coventry Building Society - v - William Martin & Partners -
[1997] EGCS 106;
- Britannia Building Society - v - Hallas [1997] EGCS
117.
The Court of Appeal decision also provides guidance
as to the calculation of damages in claims against valuers. In many
instances, damages will now be calculated by taking the SAAMCO cap,
deducting any contributory negligence and then adding interest to
the date of judgment (Platform Home Loans Limited - v - Oyston
Shipways Limited and Others, CA: Judgment 19th December 1997).