Supreme Court goes back to basics in negligent valuation claim

12 January 2018

The Supreme Court has gone back to basics in its approach to the assessment of damages in a claim involving a negligent valuation.

The case in question is that of Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2017] UKSC 77. However, before visiting the facts of this case, it is first useful to revisit the main principles relating to the measure of damages in professional negligence claims.  

Basic measure of damages

One of the essential elements of a negligence claim is establishing that the defendant's negligence caused the claimant to sustain loss as a matter of fact on the balance of probabilities (that is, factual causation). In other words, a claimant must prove that, “but for” the defendant's carelessness, the claimant would not have suffered any loss.

In Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] UKHL 53, Lord Nicholls set out the correct approach to assessing loss caused by the defendant's negligence. He described the basic measure as a comparison between: (i) the “no-negligence position”, that is, what the claimant's position would have been if the defendant had fulfilled his duty of care and (ii) the claimant's actual position.

Facts of the case

The Claimant had entered into a loan facility agreement with a property developer, secured by a legal charge over a property development (“L1”). In doing so, the Claimant had relied on a valuation of the development by the Defendant, a property surveyor.  Shortly before the facility agreement was due to expire, the Claimant entered into a second facility agreement (“L2”) in connection with the same development. It did so on the basis of a second valuation by the Defendant. The majority of L2 was used to refinance the indebtedness under L1, with a small amount being “new money” advanced for the completion of the development. The term of L2 expired, and when the Claimant tried to enforce its security there was a shortfall on the outstanding balance. The Claimant claimed that the Defendant’s second valuation had been negligent and, “but for” that negligence, L2 would not have been entered into.

The Defendant argued that as there was no suggestion that its first valuation had been negligent, the most it could be liable for by way of damages was the “new money” advanced under L2. It maintained that it could not be liable for that part of the loss which arose from the advance made under L2 and which had been applied in discharge of the indebtedness under L1. The Defendant applied for summary judgment on that basis, and the High Court allowed the application.

The Claimant appealed.

The Court of Appeal allowed the Claimant's appeal against the summary judgment order by a majority of 2:1. The Court held that, applying the "but for" test, the Defendant was liable to the Claimant for the whole of the loss flowing from the second valuation.

The Defendant appealed to the Supreme Court.

The Supreme Court considered the correct position to be straightforward. Applying the basic measure of damages test in Nykdredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] UKHL 53, the Court found that, if the second valuation had not been negligent, the Claimant would not have entered into L2. However, it would still have entered into L1. Therefore, the Claimant would not have lost the “new money” advanced under L2, but would still have lost the original loans made under L1, as these would not have been discharged. As there was no allegation of negligence in respect of the first valuation, there was no basis for recovering the loans made under L1. As a result, the Claimant's loss was limited to the new money advanced under L2.

Comment: The Supreme Court's back to basics approach to the assessment of damages provides welcome clarification on the correct approach where a lender has granted successive loan facilities in reliance on valuations of security by the same valuer. The key principle to be derived from the case is that a lender cannot recover losses which it would have incurred in any event. 

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