In a decision that will be of interest to professional indemnity insurers as well as financial institutions and valuers, the Supreme Court has overturned a decision of the Court of Appeal and found in favour of the Defendant valuer in a professional negligence claim.
The Supreme Court, in Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd  UKSC 77, held that where a lender advanced money on the basis of an initial valuation, then refinanced the facility (effectively repaying and replacing the original loan) on the basis of a second negligent valuation, the liability of the negligent valuer was limited to the ‘top up’ element of any additional lending. The valuer was not liable for the whole loss attributable to the entire amount of the second loan.
The claim related to a residential development (the “Property”). In early 2011, the Claimant (the “Lender”) advanced funds of some £2.475million to the borrower on the strength of a valuation carried out by the Defendant (the “Valuer”) in February 2011 (the “First Valuation”). The First Valuation valued the Property (in its then-current state) at £2.3million, with a gross development value (“GDV”) of some £4.5million. By November 2011, the sum outstanding had risen to some £2.5million.
In December 2011, the borrower sought to extend the loan and borrow an extra £500,000 from the Lender. A second valuation of the Property was undertaken by the Valuer (the “Second Valuation”) which valued the Property at £3.25million in its then-current condition, with a GDV of £4.9million. On the strength of the Second Valuation, the Lender agreed to extend the loan. This was structured as a re-financing arrangement – the Lender made a new facility of just under £3.1million available to the borrower which was used to repay the amount outstanding under the original loan. By June 2012, the borrower had drawn down £2.84million of the funds available under the loan facility. The borrower failed to repay the loan and the Lender appointed receivers to realise the value of the property. It was estimated by the receivers that the property would, in fact, realise only some £2.14million on sale, and the Lender sought to claim the balance of the loan due and the cost of funding from the Valuer, on the basis that the Second Valuation was negligent. The Lender made no allegation of negligence in respect of the First Valuation.
The Valuer applied for summary judgment on the Lender’s claim. The Valuer’s case was that by the time the second loan was made to the borrower, the Lender already faced an unavoidable loss of £2.5million in respect of the sums advanced under the first loan. Given the Lender had already lent that sum to the borrower at the time of the Second Valuation, it would have been exposed to that indebtedness of the Lender in any event. Those sums had been advanced on the basis of the First Valuation, which was not criticised in the claim.
In answer, the Lender’s position was that the monies advanced on the basis of the Second Valuation were a completely new and separate loan, on different terms and subject to a further facility fee. That loan was used to discharge in full the existing indebtedness of the borrower, which was replaced with the new loan. Thus, the Lender claimed that the whole of the money due from the borrower was advanced in reliance on the (impugned) Second Valuation.
As the matter had proceeded by way of a summary judgment application, it had been necessary to proceed on the basis of two fundamental assumptions: (i) that the Valuer was negligent in over-valuing the property in the Second Valuation; and (ii) that the effect of the second transaction was to discharge the debt owing on the original loan.
First Instance Decision
The judge at first instance, Mr Timothy Fancourt QC, found in favour of the Valuer. Fancourt J held that the “but for” test for causation was applicable and that on the facts of the case the Lender was exposed to a £2.5million liability even if the Second Valuation had not been negligent. The Valuer was therefore only liable for any loss caused by the additional lending and summary judgment was granted in favour of the Valuer.
Court of Appeal Decision
By a majority of two to one, the Court of Appeal allowed the Lender’s appeal. The Court of Appeal unanimously agreed that the “but for” test should be applied but disagreed as to how. The leading judgment was delivered by Moore-Bick LJ. He criticised the first instance decision on the basis that it had “failed to take into account the fact that the transaction was structured in such a way that the second loan was used to pay off the first”. His view was that the fact that the second loan stood alone and was used to repay the first loan in full released the Valuer from any potential liability in respect of the First Valuation. On this basis, there was nothing unfair in holding the Valuer liable in accordance with its own valuation for the purposes of the second loan. As a result, Moore-Bick LJ concluded that “the basic comparison for ascertaining the appellant’s loss is between the amount of that second loan and the value of the security”. He further stated that this conclusion would have been the same had different valuers carried out the relevant valuations.
The Supreme Court unanimously overturned the Court of Appeal decision and agreed with the judge at first instance. Lord Sumption, in delivering the judgment of the Supreme Court, held that the basic measure of damages was that which was required to restore the claimant as far as possible to the position that he would have been in if he had not sustained the wrong. In the case of a negligent valuation where but for the negligence the lender would not have lent, this involves what Lord Nicholls called the ‘basic comparison’ in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No. 2) . In assessing loss caused by the defendant’s negligence the relevant comparison is:
“between (a) what the plaintiff’s position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff’s actual position.”
Applying that comparison, Lord Sumption held that even if the Second Valuation had not been negligent and the second loan had not been advanced, the Lender would in any event have been exposed to a loss of £2.5million in respect of the sums advanced under the first loan. The Lender did not intend to advance the second facility in addition to the original loan.
Whilst the principles governing causation in valuer negligence cases are well established in leading authorities, this case has shown that unusual facts continue to raise potentially novel points. Whilst the facts of this case were relatively straightforward, there is plainly scope for complex loan structures (and multiple valuations) to continue to cause difficulty for potential claimants.
The Supreme Court’s conclusion follows the well-established principles on causation, and seems to reflect the Court seeking to achieve broad fairness between the positions of the claimant and the defendant.