Deceit and causation: Mortgage Express v Countrywide Surveyors Limited – Part 1Print publication
In the first of two articles highlighting key points arising out of Walker Morris’ recent success in the High Court, Financial Services Litigation specialist explains the principles of deceit and causation in the context of this high profile case.
- Deceit, or fraudulent misrepresentation, may provide an effective remedy as an alternative to a professional negligence claim.
- Unlike professional negligence claims, compensation for fraud will not be limited by the SAAMCo ‘cap’, nor will it be affected by any contributory negligence.
- As well as proving that a false representation was made dishonestly, a fraud claimant must establish the crucial elements of reliance and causation.
Deceit, or fraudulent misrepresentation – Where even gross negligence doesn’t cover it
Following the ‘boom and bust’ of the mid-noughties, the courts have seen many instances of over-inflated mortgage valuations giving rise to findings of professional negligence against surveyors. Pressure from sheer volume of instructions, too casual-an approach to obtaining and critically assessing comparables, combined with over-reliance on, and misplaced optimism in, the continuance of a rising market, meant that some surveyors fell below the standard of care required of them and overvalued properties, often causing borrowers and mortgage lenders to suffer loss.
In such cases, as we reported in an earlier briefing, the leading case of SAAMCo  provides that recoverable damages for claimants are limited, or ‘capped’, at the sum which is the difference between the valuation given and the true, non-negligent value at the date of valuation. (Loss resulting from other causes, such as, say, a fall in the market, would not generally be reasonably foreseeable, and could not therefore form part of any damages award.)
But what about cases in which a surveyor’s wrongdoing in providing an overvaluation is more serious, more deliberate? What is the claimant’s legal cause of action, what are the issues to watch out for and to what extent might compensation be obtained?
Mortgage Express v Countryside – Establishing deceit
The elements of the tort of deceit were established in the case of Derry v Peek  and may be summarised as follows.
- A defendant must have made a false representation of fact;
- The false representation must have been made dishonestly, in the sense that the representor had no real belief in its truth (whether knowingly or recklessly);
- The representation must have been intended to be relied upon; and
- The statement must in fact have been relied upon, causing the claimant loss.
In the case of Mortgage Express v Countrywide , heard early in 2016, a surveyor, Mr Peter Driver, employed by the defendant Countrywide Surveyors Limited (Countrywide), had received bulk instructions from mortgage brokers with whom he had close connections and from whom it was alleged he received significant direct remuneration. Mr Driver’s instructions were to provide capital and rental valuations of 64 properties, all at one new build development in Eastbourne. Mr Driver subsequently provided rental valuations to Mortgage Express, the claimant lender, which were ultimately determined to be at around twice the correct value. (Mr Driver provided 64 rental valuations of between £1,300 and £1,540 per calendar month, whereas the correct values, as confirmed by experts for both parties, were in fact £600 to £750 per calendar month.)
The claimant submitted that, in arriving at the valuations, Mr Driver did not provide comparable evidence or justification for his stated values; he did not undertake appropriate inspections and investigations yet he signed certificates to say that he had done so; he did not complete correct and appropriate paperwork; and he simply gave the rental values that the instructing broker requested.
Not finding Mr Driver to be an honest witness, the court accepted the claimant’s submissions and acknowledged that not even a finding of gross negligence would be enough to cover the surveyor’s conduct.
Instead, the court confirmed that, where a false statement is made (here, the over-inflated rental valuations) without the maker having any “honest belief”  in its truth, then deceit is established and a claim for fraudulent misrepresentation may proceed.
Causation – An essential question
Establishing a negative (which, in this case, was Mr Driver’s lack of honest belief in the truth of his rental valuations) is difficult enough. A further hurdle for a claimant to overcome, however, is the crucial question of whether the defendant’s deceit actually caused the claimant’s loss. Integral to this issue, is whether the claimant acted to its detriment in reliance on the defendant’s misrepresentation.
In the Mortgage Express case the parties agreed that the relevant date by which reliance had to be established was the date of completion of the 64 mortgage loans. If the mortgages were not completed in reliance on the overvaluations, then Mr Driver’s deceitful production of those overvaluations could not have caused the claimant’s loss. In those circumstances the cause of action would not be complete and the claim for damages would fail.
What was in issue was whether there had been any break in the chain of causation in relation to some of the valuations and loan applications, such that Mr Driver’s fraudulent representations had been modified or withdrawn and no longer inured at the date of completion. As per the 2014 case of Cramaso , “Where a misrepresentation does not have continuing effect, for example because it is withdrawn or lapses or because the other party discovers the true state of affairs before the contract is concluded, it cannot induce the other party to enter into the contract and therefore… cannot give rise to a remedy in damages for any loss”.
The valuations in question had all been carried out between early April and late June 2005. Mr Driver then left Countrywide on 30 June 2005 and was replaced by a Mr Ramsden. Shortly afterwards, on 8 July 2005, Mr Ramsden was asked to transcribe one of Mr Driver’s valuations on to a mortgage application form for another lender. (This type of instruction, often known as a ‘retype instruction’, is a frequent and acceptable practice. It is request made to a valuer by a financial institution for a mortgage valuation which has been provided to another financial institution to be ‘retyped’ on to its own form of valuation report. Retype requests are common as a potential borrower shops around for a mortgage. The institution relies on the inspection and report which were originally carried out for the earlier institution, so long as the original valuation was provided within an acceptable time period, often not longer than three or six months prior. A retype instruction does not generally involve the surveyor carrying out any additional inspection, valuation, research or updating.) In this instance, however, Mr Ramsden felt that Mr Driver’s valuation was significantly overstated. That prompted, almost immediately, extensive investigations within Countrywide into all of Mr Driver’s valuations carried out for the same mortgage brokers.
On the afternoon of 19 July 2005 Countrywide sent an e-mail to the claimant which referred to the possibility of overvaluation on an unspecified number of rental valuations carried out by Mr Driver at the development in question, and requested the opportunity to review the (as yet unspecified) valuation advice before any further lending decisions were made.
On 29 July 2005 the claimant sent an email to Countrywide showing 21 properties at the same development which had been valued by Mr Driver and asking for the rental values to be reassessed.
In response to the claimant’s e-mail of 29 July, on 25 August 2005 Countrywide sent an e-mail to the claimant attaching a schedule listing those 21 properties. No warnings were given, no mention was made of any fraud and there was no request for reliance not to be placed on the original valuations, but the schedule set out Mr Driver’s original valuations and Countrywide’s revised valuations and left it to the claimant to cross check those figures.
As an aside, it was clear on the evidence that, during their internal investigations, representatives of Countrywide quickly became aware of the issues with Mr Driver and his valuations; the number of properties involved; the extent of the inaccuracies; and their strong suspicions of fraud; and that they could have revealed much more to the claimant, and earlier, than they chose to do. The judge commented that, had the claimant’s case been pleaded in contract, it was likely that Countrywide would have been found to be in breach. However, with the case being pleaded in fraud, the key question was simply whether the communications that Countrywide did have with the claimant were sufficient to correct the false valuations, and therefore to break the chain of causation.
…and an application of the law
The High Court reiterated that the crucial question is whether the correspondence between 19 July and 25 August 2005 had the effect of withdrawing or correcting rental valuation advice originally provided by Mr Driver; that the burden of establishing the modification rests on the person making it (here, Countrywide); and that the modification must be sufficiently clear in all the circumstances.
The judge also confirmed that where a modification is made in written documents, the court is required to consider the meaning which is reasonably (that is, objectively) conveyed to the recipient, but in the context of the particular (subjective) facts of the case and bearing in mind any specific features of the person to whom the representations were made.
Reliance and causation – a practical analysis
Applying the above principles to this case, the court noted that there were several different categories of claim to determine:
A – mortgage loans completed before 19 July 2005 (before any correspondence concerning the possibility that Mr Driver may have overvalued took place);
B – mortgage loans completed between 19 July and 25 August 2005;
C – mortgage loans completed after 25 August 2005 in respect of properties listed in the claimant’s own e-mail to Countrywide dated 29 July 2005; and
D – mortgage loans completed after 25 August 2005 in respect of properties not listed in the claimant’s e-mail dated 29 July 2005.
Bearing in mind both the commercial context (in particular, Countrywide were experienced panel valuers for the claimant, carrying out high volumes of mortgage valuation instructions and being well aware of the claimant’s lending processes and its responsibilities to conveyancing solicitors and borrowers to turn loans around quickly) and the recipient within the claimant (a Mr Vaughan, the claimant’s Third Party Relationship Manager, the court concluded that the e-mails of 19 July and 25 August were insufficient to withdraw or correct Mr Driver’s deceitful valuations in respect of Categories A, B and D.
The court explained that, whilst an astute lender may have appreciated from the correspondence that all of Mr Driver’s valuations were suspect and whilst it may have been negligent for the claimant to continue to lend in reliance upon them, the case of Redgrave v Hurd  established that negligence on the part of the claimant does not preclude reliance, and therefore does not break the chain of causation. As a matter of law, the reasonableness (or otherwise) of the claimant’s reliance is irrelevant – it is the fact of reliance which matters.
The court did find, however, that the claimant’s own e-mail of 29 July 2005, which asked for rental valuations at 21 properties to be reassessed, together with Countrywide’s response of 25 August, did have the effect of withdrawing the original valuations for those properties. Reliance, and therefore causation, was not therefore made out in respect of those properties, and the category ‘C’ claims failed.
The claimant succeeded in all other categories of claim.
There is a high bar for proving deceit. It is a difficult task which can have devastating reputational consequences and should not be embarked upon lightly. Overcoming the causation hurdle is often very difficult for a claimant to do. This is particularly so in the age of modern communication. Email correspondence abounds and is often of so informal a-nature that it is issued without the same level of thought and care that a writer may give to, say, a more formal letter or report. This can often result in the inadvertent break in the chain of causation.
However, as the Mortgage Express case shows, it is reassuring that, where a claimant really has been the victim of serious wrongdoing, the law can provide an effective remedy. Not only does a deceit claim take a case outside the realm of professional negligence where SAAMCo may limit financial recovery, but also it means that claimants do not have to worry about the [partial] defence of contributory negligence.
This case does not make any new law. However, in today’s climate where fraud, including mortgage fraud, is on the rise, it is a clear reminder of the key legal components of a claim for deceit or fraudulent misrepresentation, and a useful illustration of how the courts will apply those principles in practice.
For more on the compensation calculation in deceit claims, please watch out for the second of our two articles on Mortgage Express v Countrywide, to follow shortly.
 South Australia Asset Management Corporation v York Montague Ltd  UKHL 10
 Derry v Peek (1889) 14 App Cas 337
 Mortgage Express v Countrywide Surveyors Limited  EWHC 224 (Ch)
 Ibid. paras 160 – 164; Derry v Peek paras 374 and 375
 Cramaso LLP v Ogilvie-Grant  AC 1093, para 20
 (1881) 20 Ch D 1. This case confirmed that it is not a defence to an action for deceit that a person to whom the representation was made might with reasonable diligence have discovered that it was untrue.