Calculating Loss in Valuers’ Negligence Claims

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12 December 2017

This blog considers the case of Tuita International Limited (in liquidation) v De Villiers Surveyors Limited [2017] UKSC 77 which was handed down on 29 November 2017.

The Supreme Court has confirmed how damages in negligence claims against valuers ought to be assessed.  This widely reported case will be of interest to banks and other investors in property, surveyors and their professional indemnity insurers.

Background

In February 2011, Tuita International Limited (Tuita) entered into a loan facility agreement relating to a residential property development.  To assist in its decision to make the loan to the borrower, Tuita obtained a valuation report from De Villiers Surveyors Limited (De Villiers).  The report concluded that the development was worth £3.25m in its then incomplete state, and would be worth £4.9m when finished.   Relying on the valuation, Tuita advanced £2.56m to the borrower and secured a legal charge against the development (the First Facility).

Shortly before the First Facility was due to expire in December 2011, the borrower applied to Tuita to increase its borrowing to approximately £3.09m.  At that time, £2.8m was outstanding on the facility.

Tuita instructed De Villiers to value the development again. De Viliers valued the development at £3.5m in its then current state and £4.9m on completion.  Relying on that valuation, Tuita agreed to discharge the amount outstanding on the First Facility in full and advanced the requested £3.09m to the borrower. This loan was secured the advance against the development (the Second Facility).  The borrower planned to use the extra finance of £289,000 to further fund the development.

The borrower defaulted on the Second Facility.  The development was sold after receivers were appointed, but the sale price was insufficient to satisfy the money owed on the Second Facility. Tuita alleged that De Villiers’ December 2011 valuation report was negligently prepared because it had significantly over valued the development. No complaint was made in respect of the first report.

Tuita issued proceedings against De Villiers claiming that it was entitled to recover all of its loss relating to the transaction , some £890,000.  In its defence, De Villiers argued that, as the borrower already owed a debt of £2.8m before the December 2011 valuation had been prepared, Tuita’s claim for loss should be restricted to the amount of extra money made available to the borrower under the Second Facility, the sum of £289,000.

De Villiers was sufficiently confident about its case on loss that it applied for summary judgement on this point.  For the purpose of the summary judgment application it was assumed, amongst other things, that the December 2011 valuation had been negligently prepared.

De Villiers’ summary judgment application was successful.  The deputy High Court judge limited Tuita’s entitlement to loss to the amount of extra money made available to the borrower under the Second Facility, £289,000. The judge applied the “but for” test of causation and found that any breach of duty relating to the December 2011 valuation had not resulted in any loss which was attributable to the First Facility.

In making its decision, the court referred to the case of Preferred Mortgages Ltd v Bradford and Bingley Estate Agencies Ltd [2002] EWCA Civ 336.  In this case, the court held that a negligence claim against a valuer would not be successful if the loan advanced on reliance of that valuation had been repaid.

The Court of Appeal’s Decision

Tuita appealed the first instance decision and the appeal was upheld by a majority of two to one. The majority held that in determining the loss attributable to the December 2011 valuation, it was necessary to consider the particular circumstances of the transaction.

The court found that one of the purposes of the Second Facility was to repay the indebtedness under the First Facility. As such, it was the majority’s view that the first instance’s use of the “but for” test did not account for the fact that any liability that De Villiers might have had in respect of the first valuation in February 2011 was extinguished when the First Facility was repaid.   The Court of Appeal therefore a held that Tuita should be able to claim for all of its losses on the Second Facility, and not just the extra money of £289,000.

Supreme Court

In a unanimous decision, the Supreme Court restored the order of the deputy High Court judge at first instance and held that Tuita’s loss was limited to the extra money lent under the Second Facility.  The court confirmed that the ordinary principal of damages is to restore the claimant to the position he would have been had the defendant not been negligent.

If the valuers had not been negligent in reporting the value of the property for the purpose of the second facility, the lenders would not have entered into the second facility, but they would have still entered into the first.  On that hypothesis, therefore, the lenders would have been better off in two respects.  First they would not have lost the new money lent under the second facility, but would still have lost the original loans made under the first.  Secondly, the loans made under the first facility would not have been discharged with the money advanced under the second facility, so that if the valuation prepared for the first facility had been negligent, the irrecoverable loans made under that facility would in principle have been recoverable in damages.”

It did not matter that the valuer may have contemplated being liable for the full amount of the loan made under the Second Facility.  The court also held that the use of the Second Facility to discharge the First Facility was not a collateral benefit.

Comment 

Calculating what loss flows from a defendant's alleged breach of duty is often a difficult issue to determine in a negligence claim and this case’s journey to the Supreme Court highlights this.  The Supreme Court had no difficulty in confirming that the ordinary principal of damages is to restore the claimant to the position he would have been had the defendant not been negligent.  The fact that this principal has been clarified by the Supreme Court will help to limit the scope of disputes about loss in professional negligence claims.

 

 

 

 

 

 

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