DAMAGES IN NEGLIGENT VALUATION ACTIONS

• Published date: 01 December 1998
• Citation: (1998) 10 SAcLJ 217
• Date: 01 December 1998
• Author: STUART ISAACS QC

1. INTRODUCTION

This article focuses on the position of valuers and solicitors in the particular context of mortgage lending. The particular reason for this approach is that the recent English case-law has in large part involved disputes arising out of the last property market crash between lenders and their professional advisers. The period of the late 1980s was one when the market price of domestic property in the United Kingdom was rising steeply and there was a widely-held belief that prices could only continue to rise and that a failure to get onto the bandwagon would make it difficult, if not impossible, to enter the housing market. From a lender’s viewpoint, the rising market enabled him to recover any bad loans out of the proceeds of realised security. But when the market began to collapse during 1991, the realisation proceeds frequently left a shortfall which was irrecoverable from the borrower. In these circumstances, lenders began to look to other potential sources of recovery, specifically the solicitors who acted for them in the advancing of the purchase monies and the taking of the security and the valuers who prepared valuations of the property intended to be mortgaged.1

The title of this article is in several senses misleading because its subject-matter extends more widely. First, it is not limited to dealing with the liability of valuers but also addresses the liability of solicitors. Secondly, it goes beyond dealing with liability for breach of a contractual or tortious duty of care but also addresses the liability of a solicitor for breach of trust. Thirdly, it goes beyond dealing with claims for damages because the remedies for breach of trust are different and more extensive.

It is not the purpose of this article to recite what is established law in the field. Instead, it seeks to highlight the latest developments in the case-law and attempts to grapple with some of the issues to which they give rise. Particular attention will be given to two difficult House of Lords rulings, those in South Australia Asset Management Corporation v York Montague Ltd2 and in Target Holdings Ltd v Redferns3, which in some ways raise more questions than they answer.

2. VALUERS

2.1 Generally

Valuation is a prime example of a professional activity which cannot produce answers of absolute precision. The valuer gives his opinion, not a definitive and absolute statement; the exercise is an art, not a science. It follows that the fact that the property valued is sold at a higher or lower figure than the valuation does not of itself establish negligence on the part of the valuer, although the extent of the difference between the sale price and the valuation figure will obviously be relevant.

Although it will usually be surveyors who carry out property valuations, there is a clear difference firmly recognised by the courts between a valuation and a survey4. However, a valuer is not free to ignore structural defects which affect the valuation and so a degree of inquiry into the structure is required from him.5

2.2 The valuer’s duty of care

In Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (the case which, in the House of Lords, became known as the South Australia case) Sir Thomas Bingham MR defined the duty owed by a valuer to a mortgage lender as a duty:

“to take reasonable care to give a reliable and informed opinion on the open market value of the land in question at the date of the valuation. In the ordinary way [the valuer] does not warrant that the land would fetch on the open market the value he puts on it, any more than a medical practitioner warrants that he will cure a patient of illness.”

In determining the existence and scope of the valuer’s duty of care, many factors must be borne in mind and different factors will hold sway in each case. For example, the valuer may not always be in possession of all the relevant facts and the parties concerned may have particular reasons for concluding a sale at a different figure. The prudent valuer will always state the basis upon which his valuation is made. Also, in most cases, there will be a range of values which might properly be put on the property rather than a single correct figure.6 The bulk of authority seems to take the view that professional practice recognises that the valuation

figure may vary according to the purpose for which the valuation is required.7

2.3 Measuring the damages for a negligent valuation

The existence and scope of the valuer’s duty of care has excited considerably less interest in the recent case-law, no doubt because it is relatively well settled, than the contentious issue of the extent of the negligent valuer’s liability to pay damages. In the South Australia case, that issue came to a head after surfacing in a number of earlier cases.8 The House of Lords was concerned with three appeals where valuers had been required by mortgage lenders to value properties on the security of which they were considering the advance of purchase monies on mortgage and had considerably overvalued the property. The loans were made in circumstances where they would not have been had the lenders known the true value of the property. The borrowers later defaulted and, in the meantime, the property market had fallen, greatly increasing the lenders’ losses.

Lord Hoffmann, with whose speech all the other members of the House of Lords agreed, laid down the general principle that:

“A person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong.”

The House of Lords therefore held that valuers whose negligent valuations had been relied on by lenders in deciding to grant loans on the security of the properties in question could not be liable for all the foreseeable consequences of the lenders proceeding with the loans. The Court of Appeal had been wrong to hold the valuers responsible for the whole of the loss suffered, including the loss arising out of the fall in the property market. They were only liable for that part of the lenders’ loss that was attributable to the inaccuracy of the valuations.

One therefore compares the loss actually suffered by the lender with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information. Put another way, the lenders could recover

for so much of their loss as did not exceed the difference between the actual valuations given and the correct values of the property at the time of the valuations.

In reaching this conclusion, the House of Lords relieved what was widely regarded as the unfair burden placed on the valuer in consequence of the Court of Appeal’s decision. In any case where it was found as a fact that, but for the negligent valuation, the lender would not have made any loan at all, it is easy, starting from the Court of Appeal’s point of departure of asking what damages the lender was entitled to against the negligent valuer, to reach the conclusion that the valuer was liable for the full loss on the transaction. But the inherent unfairness of that approach lies in the consideration that the valuer was not being asked at all to forecast the value of the property at a future time when the lender might resort to it but only to value the property at the date of the valuation. It could readily be anticipated that the value of the property would later go up or down. Yet the effect of the Court of Appeal’s decision was that the valuer was to be treated as if he had given a warranty that if and when the property came to be sold by the lender as mortgagee it would fetch a particular figure.

The House of Lords found the Court of Appeal’s approached to be flawed in that any consideration of the measure of damages had to be preceded by a consideration of what were the kinds of loss for which the lender was entitled to compensation.9 Whilst there is no reason in principle why a wrongdoer should not be made liable for all the consequences of his wrongful act, such a rule is exceptional. The advance by the mortgage lender might flow from the negligent valuation but it is not in law a relevant consequence because the valuer is not there to advise the lender on whether or not to make the advance but only as to the value of the security.

Lord Hoffmann’s justification for limiting the valuers’ liability in this way seems to be that a person should not be entitled to recover a greater amount of damages for the negligent provision to him of information than if the information were the subject of a contractual warranty.10 The House of Lords clearly believed that this was the result it was achieving by its decision, so avoiding what it otherwise regarded as a paradox.11

In the context of a negligent valuation, Lord Hoffmann considered that the only relevant consequence in the assessment of damages of the wrong valuations was that the lenders “had less security than they thought”.12 However, it is far from clear that the outcome of the three cases decided by the House of Lords in the South Australia case reflects that view.13 Also, selecting as the only relevant consequence the fact that at the date of the loan the lender had less valuable security than he was led to believe is unsatisfactory: it provides no obvious causal link between the negligence and the recoverable loss. As one writer has pointed out,14 the error can be illustrated by considering the case where the lender’s solicitor negligently reports to the lender that the borrower has executed the mortgage, and in reliance on the report the lender advances the purchase monies. In that situation, the lender’s loss is limited to the shortfall in recovery, suffered by reason of the absence...