LAW REPORT : Valuers not liable for property market losses

LAW REPORT v 2 July 1996 : South Australia Asset Management Corp v York Montague Ltd; United Bank of Kuwait plc v Prudential Property Services Ltd; Nykredit Mortgage Bank Ltd v Edward Erdman Group Ltd; House of Lords (Lord Goff of Chieveley, Lord Jaunc

Valuers who negligently overvalued properties on which lenders had advanced money on mortgage were liable to the lenders for losses sustained by them to the extent that those losses were caused by the reasonably foreseeable consequences of the valuers' overvaluation, such as the decision to lend money which would not have been lent had the true value of the property been known, but not to the greater extent resulting from circumstances, such as a collapse in the property market, which were not a consequence of the valuers' negligence.

The House of Lords dismissed an appeal by York Montague Ltd against the decision of Mr Justice May who, on 24 April 1995, awarding South Australia Asset Management Corp damages of pounds 7,336,802.24; and allowed appeals by Prudential Property Service Ltd and Edward Erdman Group Ltd from the Court of Appeal ([1995] QB 375) who affirmed decisions of Mr Justice Gage on 10 December 1993, awarding the United Bank of Kuwait pounds 1,309,876, and of Judge Byrt QC on 1 October 1993 awarding Nykredit Mortgage Bank plc pounds 3,058,555.52.

In each of the three cases the plaintiff lenders were suing the defendant valuers over losses incurred as a result of negligent valuations. In the first case, May J awarded the plaintiff damages within the difference between the negligent valuation and the true value of the property at the time. This decision was upheld. In the latter two cases, the plaintiffs were awarded damages representing the difference between the sum lent and the price at which the properties were ultimately sold, following a collapse in the property market; the damages awarded in these cases were reduced to the difference between the negligent valuations and the true values of the properties concerned.

Jonathan Sumption QC, Marion Egan (Rowe & Maw) for York Montague; Mark Hapgood QC, Charles Douthwaite (Alsop Wilkinson) for Asset Management; Ronald Walker QC, Vincent Moran (Cameron Markby Hewitt) for Prudential; Roger Toulson QC, Daniel Pearce-Higgins (Clifford Chance) for UBK; Michael de Navarro QC, Jonathan Ferris (Williams Davies Meltzer) for Erdman; Michael Briggs QC, David Blayney (Clifford Chance) for Nykredit.

Lord Hoffmann said the three cases had two common features. First, if the lenders had known the true value of the property they would not have lent. Second, a fall in the property market after the date of the valuation had greatly increased the lenders' eventual loss.

The Court of Appeal held that, where the lender would not otherwise have lent, he was entitled to recover the difference between the sum lent, together with a reasonable rate of interest, and the net sum he actually got back. The valuer bore the whole risk of a transaction which, but for his negligence, would not have happened. He was therefore liable for all the loss attributable to a fall in the market.

There was no reason in principle why the law should not penalise wrongful conduct by shifting on to the wrongdoer the whole risk of consequences that would not have happened but for the wrongful act. But that was not the normal rule. Normally the law limited liability to those consequences which were attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this meant liability for the consequences of the information being inaccurate.

A person under a duty to take reasonable care to provide information on which someone else would decide a course of action was, if negligent, not generally regarded as responsible for all the consequences of that course of action. He was responsible only for the consequences of the information's being wrong.

A duty of care that imposed on the informant responsibility for losses that would have occurred even if the information given had been correct was not fair and reasonable as between the parties. It was therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

Paul Magrath, Barrister