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Supreme Court conclusion to long-running lender litigation

Leeds Town Hall Building, England, United Kingdom Print publication

01/12/2017

Walker Morris’ Banking Litigation and Professional Negligence specialist Sandip Singh explains the Supreme Court’s decision in the long-running Tiuta v De Villiers litigation, and comments upon its implications for lenders and valuers alike.

The law

In order to succeed in a negligence claim against a surveyor, a claimant must establish causation. It must prove, on the balance of probabilities, that but for the surveyor’s negligence, the claimant would not have suffered any loss. Applying the well-established but for test involves comparing the claimant’s position with the no negligence position (i.e. the position it would have been in if the surveyor had valued correctly). That basic proposition was established in the well-known Nykredit [1] case.

Where a subsequent loan fully redeems an earlier loan, no loss is suffered and so no cause of action subsists. In these circumstances, a claimant would only be able to pursue a claim if it had suffered loss and if that loss was caused by negligence, if any, in the valuation upon which the subsequent loan was founded. That principle derives from the Preferred Mortgages [2] case where it was found that there could be no claim against the first valuer once a remortgage had completed since no loss arose from that valuation following redemption of the original loan. There the lender should have pursued the second valuer.

The facts

In Tiuta v De Villiers Surveyors [3] the surveyor valued a part-built residential development on two separate occasions: once in February 2011 and later in November of the same year. The lender advanced loans to a borrower on the basis of each valuation, with the second loan fully redeeming the first. No allegations were made that the February valuation was negligent in any way, but following that initial valuation and loan, the borrower was indebted to the claimant lender for around £2.5m. The claimant lender subsequently sued the valuer on the basis of valuation given in November, which was allegedly a negligent overvaluation, and the defendant valuer sought summary judgment.

The claimant accepted that if the traditional but for test were to be applied, it would have no case. In comparing the actual circumstances with the no negligence position, the claimant would have been exposed to the existing indebtedness loss following the initial loan, regardless of the subsequent loan and any negligence.  (“The negligence caused the claimant to lend all the money under the new facility, but it did not cause loss.” [4].) The claimant therefore argued that the approach in Preferred Mortgages meant that the usual but for test should not apply. The claimant would otherwise be left having suffered loss and without a remedy despite alleged negligence in November 2011.

The litigation

At first instance, in 2015, the High Court agreed with the defendant that any loss was attributable to the existing indebtedness and was not caused by the alleged negligence in November 2011.

The lender then successfully argued before the Court of Appeal, in 2016, that the second transaction had discharged the original loan in full and had created a fresh loan, with fresh security, rendering the surveyor liable for all losses flowing from the negligent valuation which had been provided in support of the second loan.  The Court of Appeal decided that when a lender considered making a fresh loan, part of which was to be used to repay an existing debt, the purpose to which the new loan would be put was irrelevant to the valuer.   The valuer was instructed to provide a valuation upon which the lender would rely when considering whether to enter the transaction, regardless of the purpose to which the loan monies would be put.  If the surveyor negligently overvalued the security, he would be liable for the losses flowing from that valuation which would not be limited to the amount by which the re-finance exceeds the original loan.

On 29 November 2017, however, the Supreme Court handed down its judgment in this case, which unanimously reinstated the High Court’s decision to award judgment in favour of the defendant surveyor.

Supreme Court authority

To reach its decision, the Supreme Court went back to basics when considering causation and the calculation of damages.  The Supreme Court noted that damages should place a claimant, so far as possible, in the position that he would have been in but for the defendant’s wrong.  That translated, in this case, as follows: the lender would not have advanced the second loan had the surveyor’s second valuation not been negligent; the lender would still, however, have suffered loss as a result of the indebtedness under the first loan; the fact that a subsequent loan was used to pay off indebtedness under the first loan did not require the court to ignore that fact.  As there was no allegation in respect of the first valuation, there was no basis for the lender recovering those losses.  The lender’s damages were therefore limited to those flowing from the additional money advanced under the second loan.

WM Comment

The Supreme Court’s decision is a clear conclusion to this long-running litigation, and will be of interest to lenders, surveyors, legal advisors and professional indemnity insurers.  In fact, the law has been clarified and now stands again as it has done ever since the leading case of Nykredit in 1997.

The facts of this particular case created a perfect storm for the lender in question – with the same valuer having provided both valuations and the lender having suffered loss under both.

Going forward (and acknowledging that this may involve taking a commercial decision), perhaps the best way for lenders to protect themselves will be not to instruct the same lender to provide the second (or other subsequent) valuation so as to give it an opportunity to flag any potential earlier overvaluation; and/or not to rely on merely an indexed valuation in subsequent loan, re-mortgage or other further advance situations (as these would adopt the earlier valuation but likely mean there was no cause of action if it later transpired the original valuation was negligent).  If different valuers and/or entirely fresh non-indexed valuations are provided in respect of every advance, then lenders should be able to protect their potential cause of action, and to minimise the risk of any break in the chain of causation.  Using different surveyors on later loans should also increase the likelihood of earlier negligence claims coming to light, therefore hopefully providing lenders with an opportunity to recoup any resulting losses.

So far as surveyors and their professional indemnity insurance are concerned, this Supreme Court case is likely to reverse the impact of the Court of Appeal’s earlier decision, which had signalled increased exposure (and insurance premiums) for subsequent loan, re-mortgage or re-financing valuations.

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[1] Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] UKHL 53
[2] Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336
[3] Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2015] EWHC 773 (Ch); then [2016] EWCA Civ 661; now [2017] UKSC 77
[4] Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2015] EWHC 773 (Ch), para 12

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