The Supreme Court takes us back to reality

The Supreme Court has overturned the Court of Appeal’s earlier judgment (see article) which called into question the application of the ‘but for’ test where a negligent valuation caused a lender to increase an existing exposure to a borrower (where the valuation giving rise to the initial exposure was not the subject of criticism). In those narrow circumstances, recoverable losses are now likely to be limited to the amount of any additional lending.
The Supreme Court’s decision leaves some questions unanswered and it remains open for a valuer to become liable to a lender for the latter’s lost opportunity of pursuing a claim in respect of an earlier valuation that caused the initial exposure to the borrower. This outcome becomes far more likely if the earlier and subsequent valuations are prepared by the same valuer (as they were here).

Background

After three judgments, the facts are generally well known. In summary:

• In reliance on De Villiers’ first valuation of February 2011, Tiuta made a loan of just over £2.56 million to the borrower to be secured over the development that De Villiers had valued.
• De Villiers was instructed by Tiuta to value the development again in December 2011.
• In reliance on the second valuation, Tiuta entered into a second loan agreement with the borrower, offering circa £3 million (rather than extending amending the first loan).
• It was a condition of the second loan that it would be used, in part, to discharge the first loan in its entirety.
• Tiuta was subsequently placed into administration, the second loan went unpaid and it suffered a loss upon enforcement of its security.

Tiuta sued De Villiers in respect of the second valuation for the sum advanced under the second loan, with credit given for sale proceeds. No cause of action was pleaded in respect of the first valuation. De Villiers applied for summary judgment, arguing that the recoverable loss was limited to the monetary difference between the two loans. They were successful at first instance.

The Court of Appeal

The Court of Appeal (overturning the High Court) held that the second loan was a “fresh” and separate transaction which must be treated independently of the first loan. The High Court’s application of the ‘but for’ test was held to have failed to take into account that the second loan had paid off the first (rather than the first having been extended or increased).

De Villiers’ liability was not limited to the amount by which the second loan exceeded the first, rather it was found liable for the full value of the second loan. The Court of Appeal’s judgment was met with surprise amongst commentators.

The Supreme Court

Overturning the Court of Appeal, the Supreme Court held on the facts that:

• Notwithstanding that De Villiers prepared both valuations, ‘but for’ causation and ordinary principles for the calculation of damages applied.
• It was inappropriate to ignore Tiuta’s existing exposure to the borrower when the second loan was provided.
• Tiuta’s recoverable loss was limited to the amount of additional lending included in the second loan.

In doing so, the Supreme Court emphasised two issues:

1. Firstly, the correct application of the basic comparison exercise. It was necessary, in the Supreme Court’s view, to look at a claimant’s position before and after, and seek to “restore the claimant as nearly as possible to the position that he would have been in if he had not sustained the wrong”; and

2. Secondly, the need to look at the loan as a whole and weigh the benefit (the extra amount lent) with the burden (the fact that it was a condition precedent of the new loan that the first be repaid).

While the second loan gave rise to an increase in Tiuta’s exposure, it also extinguished Tiuta’s exposure to the first loan. Had the second valuation been non-negligent, on Tiuta’s pleaded case, its exposure to the first loan would have remained. Only the additional money, beyond that owing under the second loan, represented loss flowing from the second valuation. It must be remembered, however, that the decision was made on the assumed fact that the first valuation was non-negligent.

Welcome clarity?

The Supreme Court’s judgment will be seen by many as the affirmation of what was, before the Court of Appeal’s interjection, the conventional wisdom in assessing causation and recoverable loss in the majority of cases concerning negligent valuations. Beyond preventing lender claimants from recovering additional losses simply by structuring extension of credit as ‘fresh’ loans, and with an eye towards the slightly artificial factual basis upon which it was decided, it is unlikely, in our view, to be of great wider significance.

Had Tiuta pleaded (and made good the argument) that the first valuation was also negligent, De Villiers may have found itself liable, prima facie, for the losses claimed against it.

Related item: Surveyors' negligence: no more 'but for'?

Read other items in the Professions and Financial Lines Brief - December 2017