Insurance: Negligence - landmark decision on contributory negligence in claim against valuer

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).