No prophets, no losses

Surveyors will not have to forecast the future of property prices, thanks to a landmark ruling on professional negligence.

Surveyors facing multi-million-pound compensation claims are resting easier after a House of Lords judgment absolved them of taking on the role of prophet in foretelling rises and falls in the property market.

The landmark ruling in South Australia Asset Management Corporation v York Montague Limited and two other appeals will also have significant consequences on the whole field of professional negligence.

It will play a key part, for example, in the hundreds of outstanding cases involving solicitors being sued by lenders for negligence over investigation of title and other omissions in loan applications.

The case centred on whether surveyors, who had been negligent in overvaluing properties, could be held responsible for losses caused by the collapse in the property market.

The lenders, who had made loans on the basis of the valuations, suffered massive losses when the borrowers defaulted and the properties had to be repossessed and sold in a falling market.

The Court of Appeal decided that, since the loan would not have been made but for the negligent valuation, the surveyors were liable for all the losses.

However, the House of Lords concluded last month that surveyors did not "undertake the role of a prophet". While the Lords upheld the basic principle that negligent surveyors were liable for damage suffered, they cleared them of responsibility for unforeseen falls in property values.

Professor Tony Dugdale, Wansbroughs Willey Hargraves Professor of Negligence Law at Keele University, wrote a leading article on the case last year, saying the Lords had the opportunity not just to settle the narrow issue of valuers' liability but also to consider the wider issue of the nature of an professional's responsibility.

Professor Dugdale said this week: "I think the Lords have now set the ground rules for determining professional liability. Lord Hoffmann, who gave the leading judgment, did not just deal with the valuers' situation - he dealt with all professionals who provide information."

He said that before this case, the law had used two concepts to limit the scope of a professional's liability - causation, the losses caused by the fact that the information was wrong, and remoteness, how reasonable it was to have foreseen those losses.

Lord Hoffmann added a third element by asking whether the loss fell within the scope of the professional's duty. He argued that the first step should be to decide what kind of loss the professional was responsible for before trying to calculate the amount.

For the surveyors, that would mean capping the losses at the difference between the negligent valuation and the property's true value.

Professor Dugdale said: "Lord Hoffmann concluded that where the professional was simply providing information, liability should be limited to the consequences of that information being wrong.

"He made a clear distinction between giving information and giving advice. A surveyor essentially says this property is worth x, you do what you want with it. If his valuation was negligent, his liability should be limited to the loss caused by the inaccuracy of his information.

"But if, for example, a merchant bank says to a lender they really should lend against commercial property - this is a good piece of property, a good borrower, the market looks good, and we advise you to lend - then they would be liable for all the losses suffered by lender."

The relatively short judgment leaves some issues open, such as interest on the loss, the contributory negligence of a lender, who for example knew the borrower had paid less for the property than the valuation, and the failure of a lender to mitigate his losses, for example, by holding out for a higher price and suffering further losses as the market dropped.

One solicitor commented: "Lord Hoffmann is a lawyer's lawyer - he has made more work for us than he has provided resolutions."

But Professor Dugdale said the existing principles governing those issues still applied. He argued that interest on the capital was claimable as long as the final amount did not exceed the limit set on the surveyor's liability. Interest on the the damages remained ciaimable under normal rules.

He said Lord Hoffmann had "put to bed" other troublesome points, such as the argument over the date at which damages were calculated. "Lord Hoffmann said you should follow the normal rule of law and calculate the damages at the time of trial, as in personal injury cases, not at the date of the breach, as in Sale of Goods cases."

In the past, awards had distinguished between "no transaction" cases, where no loan would have been made had the lender known the true value of the property, and "successful transaction" cases, where a smaller loan would have been made.

Professor Dugdale said: "This used to be thought the key to the valuer's liability. Lord Hoffmann said it simply goes to how you calculate the lender's losses but these are still subject to the scope of the valuer's duty which is limited to the overvaluation."

In the case of solicitors, some lawyers have argued that the ruling means they, like the surveyors, will not be responsible for loss attributable solely to falls in the property market.

But Malcolm Stitcher, a barrister in Robin Stewart QC's chambers, argued the reverse. "If you apply the distinction between giving advice and providing information, where solicitors take on the role of advisers about entering into a transaction, the clear implication is they may be liable for all the losses." Professor Dugdale was also cautious. "Clearly the principle of the Lords' judgment applies just as much to solicitors as it does to valuers but the scope of a solicitor's duty is likely to be broader. Where the Solicitors' Indemnity Fund will possibly have an argument is over the nature of the duty in each particular case."

Overall, he said: "I think this is a very good judgment. It provides a clear framework on which to go forward over the next five to six years. It will take that time to clear up the backlog of cases left over from the Eighties property boom. I think a lot of cases will now settle but this kind of problem is always arising."

Mr Stitcher, who specialises in professional negligence cases, believed that the distinction between information and advice would involve a lot of "line drawing" and hybrid situations.

"There will no doubt be attempts by financial institutions to require professionals to provide advice rather than give information - the courts will have to work out whether those attempts are successful or not.

"The trouble with the judgment is it does not give the full figures for the three appeals so it is difficult to see what was intended about contributory negligence, mitigation and interest. You can make informed guesses but everybody is making different ones," he said.

David Robinson, head of professional indemnity and insurance litigation at the solicitors Pinsent Curtis, said: "The Lords ruling smacks of common sense. Even if a surveyor's valuation is negligent, he should not effectively be insuring the lender against the possibility or a fall in prices.

"The ruling will have far reaching effects on the liability of professionals as a whole. It is another example of judges trying to limit the obligations and the amount of damages payable when a party is in breach of its obligations. This makes for less litigation, which may mean that some lose out in certain cases, but which ultimately benefits us all."