pnBlawg

the professional negligence blog

A collaboration between Rebmark Legal Solutions and 1 Chancery Lane

Is an extension to the SAAMCO principle on the horizon?

Background Property valuation is seldom an exact science; it involves the consideration of both present factors and future contingencies.  With the property crashes of the last two decades came a wealth of litigation considering both the scope of the duty of care owed by valuers to lenders and the extent to which losses caused by negligent valuations are recoverable. One such case which those in the professional negligence field will be familiar is South Australian Asset Management Corporation v. York Montague Ltd [1996] UKHL 10. The House of Lords held, inter alia, that valuers who provide negligent valuations are only liable for the loss caused by the negligent information itself and not for any extraneous events (in the legal sphere this became known as the SAAMCO principle). Subsequent cases sought to distinguish its application, particularly where the duty was to advise rather than to inform and, earlier this month, the principle was again brought to the fore in an interesting judgment delivered in Edward Astle & Ors v CBRE Ltd and others [2015] EWHC 3189 (Ch). The case involved a Government scheme which consisted of both a trust and a partnership. The trust held freehold property and the partnership had an interest in the acquisition and development of five development sites. The Royal Bank of Scotland (“RBS”) sought expert valuations for loan security purposes and approached the Defendant companies (ERL and CBRE) in separate capacities. CBRE advised on the value of the units and freehold property. The units and loan notes were then procured and issued by ERL (the owner of the partnership and trustee company) in an information memorandum (“IM”). The IM contained a section entitled “Investment Overview” and sought to raise £37, 500,000, £25, 775, 000 of which was subsequently invested by the Claimants. Unfortunately, there was a collapse in commercial property values in 2008 and a desktop valuation carried out by CBRE noted a sharp decline in the aggregate value of the freehold and units. As such, the development centres were cancelled in 2010 and the freehold was sold. This meant that the partnership defaulted on its debt and the combined value of the properties was such that the Claimants lost all that they had invested. The Claimants brought a claim against the Defendants alleging that the valuations had been materially overstated and that their losses were attributable to the alleged overvaluation in the IM. The Defendant applied for summary judgment against the Claimants relying on the SAAMCO principle, namely that this was a case of duty to inform and therefore a claim for losses unconnected with the alleged overvaluation could not be pursued. Judgment Judge William Tower QC, sitting as High Court judge, delivered judgment on 5 November 2015. Despite accepting that the duty of the investors in this case was a duty to inform rather than to advise he nonetheless went on to hold that the Claimant had a real prospect of establishing that the loss they had suffered was attributable, at least in part, to the alleged inadequacies in the IM. In summary, the arguments presented on both sides were as follows. The Defendant argued that even if the IM has been entirely accurate, the Claimants would still have lost the totality of their investments because the cause of the loss was only attributable to the following events: commercial property values having collapsed, the project having been abandoned and the partnership refinancing having failed. The Claimants argued that whilst the SAAMCO principle applied in relation to the claims against CBRE, it did not apply to the claim against ERL.  The reason purported was that the SAAMCO case could be distinguished on its facts based on the following. Firstly, that the scope of the duty of care was different. There was no equivalence between ERL’s role and that of a valuer, SAAMCO related to a standard mortgage lender claiming against a negligent valuer whereas, in the present case, investors had acquired units or loan notes on the basis of a prospectus. In this sense ERL was not providing dispassionate objective advice as a valuer but rather it was the promoter of both a valuation and more nuanced information relating to commercial prospects. As such, ERL was also the recipient of a wide range of other benefits which were far removed from a standard fee for the provision of valuation service type scenario. Secondly, the starting point for discerning loss was different. Unlike SAAMCO, it was submitted that in the present case the court was not required to carry out a speculative analysis of what the valuation would have been had the information been accurate. Instead, it was required to assess the damages at the amount advanced less the amount recovered. The Claimant’s reasoning was that they had suffered an immediate measurable loss at the time of their investment because the units and loan notes (the asset in which they had invested) were in fact worth less than they were represented to be and that since they recovered nothing they were entitled to the full amount advanced.   Judge Tower reviewed the relevant authorities and asserted that the exercise which the court is required to carry out when considering these cases is a two-stage process: Firstly, the court must ascertain the basic loss i.e what loss did in fact occur. Secondly, the court is required to assess the maximum amount of the loss capable of falling within the duty of care, which it does by identifying the consequences which are attributable to that which made the act wrongful. Siding with the Claimants, Judge Tower agreed that it was capable of being argued at trial that the Claimants made an investment which was worthless and which they would not have made if they had been informed as to the true value of the investment. Following this, even though ERL had no duty to advise, as an information-provider on an investment rather than a lending decision, it was arguable that ERL knew that the information would be used by the Claimants and their own advisers to decide on the viability of the transaction.  Therefore the maximum loss was, at least in part, attributable to the alleged overvaluation. Comment Ultimately, this was a summary judgment application. The judge was not permitted to have a mini-trial of the issues and the threshold the Claimant had to surmount to prove that the case had a real prospect of success was a low one. It is also important to note that the judge’s decision was caveated. On the evidence before him Judge Tower decided it was quite likely that the Claimants would not be able to prove at trial that an overvaluation caused anything like as much loss as much that alleged and that a trial judge may find that his two-stage formulation is not appropriate. For all these reasons, practitioners cannot infer too much at this stage as to a possible extension of the SAAMCO principle. Nevertheless, the judgment does foreshadow a trial on the substantive issues which will raise poignant questions as to the scope of SAAMCO and one which will have potentially wide-ranging implications for practitioners (as well as valuers/investors). Most notably the door may be opened in similar cases to a third category of duty which carries a different measure of loss, one that sits between the duty to inform and the duty to advise where the tortfeasor is aware than the information will be used to decide the viability of a transactions. Looking ahead, for practitioners this could mean that the SAAMCO principle will no longer be a ‘carte blanche’ in valuation cases where the duty to inform arises and that investment contracts will need to be subjected to meticulous scrutiny. For those practising in this field, the forthcoming judgment will certainly be one to watch.    

Solicitors’ firms feel the pressure as professional negligence claims soar

The Solicitors Regulation Authority is considering launching judicial review proceedings against the Legal Services Board’s refusal to lower the minimum level of professional indemnity insurance cover to £500,000.      Coverage is a more pressing issue than ever given that, in 2013, the number of negligence claims brought in the High Court against solicitors increased almost threefold, according to figures from law firm RPC. The stark rise may be explained by a last-minute rush to issue claims 6 years after the 2008 financial crisis, however, and is unlikely to reflect a long-term trend.  

No duty owed by a valuer for a developer’s loss of profit or loss of a chance on subsequent sale

Freemont (Denbigh) Ltd v Knight Frank LLP [2014] All ER (D) 165 (Oct)    On 14 October 2014 Stephen Smith QC sitting as a Deputy High Court Judge in the Chancery Division handed down judgment on five preliminary issues concerning a multi-million pound dispute over an allegedly negligent valuation of a development site.    HELD, although a valuer owes concurrent duties in contract and tort to a developer, the developer's claim for loss of profit or loss of chance of a subsequent sale, were outwith the scope of the valuer’s duty.    The Facts    The Defendant valuer Knight Frank LLP (“KF”) had been instructed to value a plot of land, approximately 17 acres in size, on the outskirts of Denbigh, North Wales. The landowner was seeking finance to develop the land.   The valuation report was prepared for the purpose of supporting the landowner’s application for finance from the proposed lender. The valuer was aware of this purpose. The valuation was subsequently relied upon by the Claimant, Freemont (Denbigh) Limited (“Freemont”), as a minimum price to accept when selling the land.   A number of offers to purchase the land were made to Freemont. These fell below KF’s minimum valuation and so were rejected. The failure to obtain an offer in excess of the minimum valuation caused a delay in the sale of the land and as a result, the land fell into disrepair and significantly reduced in value.   Loss claimed   Freemont claimed that it suffered loss of profit (by not accepting one of the developer's offers) and claimed damages for the same, together with damages for all subsequent marketing costs and costs of future disposal of the Development (giving credit for any future sale). Further or alternatively, Freemont claimed that it had suffered the loss of a chance to sell the Development.    The Decision    Stephen Smith QC gave judgment on five preliminary issues directed by Master Price on 12 August 2013. The common law position on the duty of care owed by a valuer was summarised as follows:   (1)   A duty of care in tort is likely to be owed to the person for whom the report was prepared (even though a contractual duty may also be owed to the same party);    (2)   The duty of care in tort is likely to be limited to the purposes for which the report was prepared;    (3)   A duty of care in tort may also be owed by a valuer valuing premises for mortgage purposes (at least if they are modestly valued residential premises), to the purchaser of those premises, if        a.     The valuer knows that his report is likely to be shown to the purchaser, and      b.    The purchaser intends to use the premises for his own residential purposes, and not let them, and      c.     The valuer knows that his report is likely to be relied upon by the purchaser for the purpose of deciding whether to purchase the premises; but    (4)   A duty of care in tort is unlikely to be owed by a valuer instructed to produce a report for a lender for security purposes, to an investor who relies on the report for other purposes.   Of the above four propositions, the first three were well-settled. The fourth however, could not be regarded as settled before the Court of Appeal’s decision in Scullion v Bank of Scotland plc [2011] 1 WLR 3212. In Scullion, Lord Neuberger MR held that a valuer acting for a lender did not owe a duty of care to a borrower where the loan was for a buy-to-let investment property.   Applying the reasoning of Lord Neuberger in Scullion, Stephen Smith QC held that questions regarding the valuation of the land for sale purposes were “tricky” and he rejected Freemont’s contention that KF knew or ought reasonably to have known that it would rely on the report when considering whether to sell the land in the future. In this instance therefore, the duty of care extended only to the provision of a report for the purposes of securing finance. KF had not negligently valued the land at such a low figure that Freemont had been unable to obtain the financing it had negotiated (paragraph 148).   This case is welcome news for valuers and their insurers and shows that the Court will look to the purpose behind the valuation report and that reliance upon the report will be limited to the purpose of the valuation report.

Law Society: Mortgage Fraud Practice Note Update

On 31 July 2014 the Law Society issued an updated practice note on mortgage fraud. http://www.lawsociety.org.uk/advice/practice-notes/mortgage-fraud/ There are no changes to the guidance.   The changes reflect updates to the law and publications. As of October 2013 the Serious Organised Crime Agency was replaced by the National Crime Agency. The Economic Crime Command is tasked with fighting economic crime including fraud and identity crime.

Mortgage fraud - section 61 Trustee Act 1925 revisited

  The case of Santander UK Plc v R A Legal Solicitors (a firm) [2013] EWHC 1380 (QB) contains a timely review of “mortgage fraud” cases and of the circumstances in which a solicitor might successfully obtain relief under section 61 Trustee Act 1925 (see further Karen Shuman’s posting “Section 61 Trustee Act 1925 and the Three Wise Men”). The brief facts were as follows: the defendant solicitors (“RA”) acted for V, the purchaser and V’s lender (“Abbey”), which provided V with a loan of £150,000. RA dealt with Sovereign Chambers LLP (“Sovereign”), which fraudulently presented itself as acting for S, the registered owner of the property. S had no intention of selling the property and was ignorant of Sovereign’s fraud. As a result of Sovereign’s deception, RA paid over the purchase monies (including £150,000 loan) to Sovereign in the belief that it was completing the sale. Completion did not take place and Abbey did not receive a valid charge over the property. The monies were never recovered. As part of its claim, Abbey sued RA for breach of trust. Applying Lloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65, and Nationwide Building Society v Davisons Solicitors [2012] EWCA Civ 1626, the Judge held that RA had no authority to release the trust funds in the circumstances in which it did. Therefore by paying away the trust property (i.e. the advance) without receiving genuine documents to complete the transaction, the solicitors were in breach of trust. In deciding that RA was entitled to relief under section 61 Trustee Act, the Judge decided that the correct approach was similar to that adopted in cases concerning relief under section 727(a) Companies Act 1985, such as Barings Plc v Coopers v Lybrand (No 7) [2003] EWHC 1319. Thus a person may have acted “reasonably” for the purposes of the statutory provision even though he/she acted negligently if their negligence was “technical and minor in character” and not “pervasive and compelling”. The Judge concluded that RA had acted reasonably: none of the criticisms made of the solicitors were sufficiently serious or involved such a departure from ordinary and proper standards as to cut them off from the court’s discretion to relieve them of liability. The Judge also observed that the law generally (although not invariably) leant towards confining the responsibility of professional people to a duty to take reasonable care and in particular, it did not readily impose on them responsibility for loss resulting from the fraud of others. This case provides further analysis as to how a court might exercise its discretion under section 61 Trustee Act and it illustrates the point that a solicitor guilty of negligence that was “technical and minor in nature” might still obtain relief.    

Fraud, forgery and conspiracy: Inferring Dishonesty

“The Bank was just able to put salt upon his tail - and only just.” So says a prison warder in Dickens’ David Copperfield of how Uriah Heep came to be convicted and sentenced to transportation for life for “fraud, forgery and conspiracy” in a “deep plot for a large sum” against the Bank of England. The Uriah Heeps of our times have practised mortgage fraud and their epilogues are pronounced by the Court of Appeal Criminal Division. In R v Kimani [2012] EWCA Crim 2881 the prosecution’s case was that Mrs Kimani’s signature appeared on a mortgage application form for a purchase from a “Mr Kibiku”; that “Mr Kibiku” was in fact Mrs Kimani’s husband; and that the purchase was a sham to release equity from a property already owned by the family. Mrs Kimani appealed her conviction, claiming be a woman dragged down by a mountain of evidence against her co-accused (her husband and a dishonest mortgage broker). She acknowledged that the application form had contained falsehoods, including as to her nationality and employment, but argued that there was no evidence that she knew that the application contained false information. So what was the salt upon Mrs Kimani’s tail? As Davis L.J. said, “The evidence against the appellant was essentially circumstantial, but it was none the worse for that”. There were a number of strands to the evidence: ·         A sum corresponding to the balance due on completion had appeared in her joint account on the day of the purchase ·         She was named as the landlord in a Council document prior to the purchase ·         A Council document completed by a tenant described her as the wife of “Mr Kibiku” These factors were specific to Mr Kimani but the Crown Court judge had also considered that the “generalities of the situation, her own knowledge of her own means” and the fact “that ordinarily an applicant would know of the content of an application form they signed” were matters from which the jury could be invited to infer dishonesty. I leave you with words of the penitent Uriah Heep which you may think have some resonance to our own banking troubles: “Before I come here, I was given to follies; but now I am sensible of my follies.”

Surveyors surveyed

Judgments which contain a review of the authorities are always useful to the busy practitioner.  One such is that of Coulson J. in Webb Resolutions Ltd v. E. Surv Ltd [2012] EWHC 3653 (TCC), where he discusses the law relating to surveyors’ negligence in making mortgage valuations.    The judgment also contains one or two discrete titbits worth remembering and is entertaining when dealing with the quality of the expert evidence about lending and with the Claimant’s lending policy itself, about which the judge is characteristically forthright.  Alas, I am going to deal with the less jolly matter, the law. The judge first sets out the standard of care expected of the surveyor as found in Jackson and Powell, namely, that of the ordinary skilled man exercising the same skill as himself.   “He is variously described in the cases as the ‘reasonably skilled’, ‘competent’, ‘prudent’ or ‘average’ surveyor.”  He then points out that the basic common law duty can be extended, reduced or modified by the terms of the contract between lender and valuer and goes on to examine the terms of the particular retainer.  One of the terms related to the standard of care.  The surveyor was to “observe the standard of skill, care, competence and diligence in performing its obligations which a prudent manager and supplier of property valuations and appraisals would observe practicing a profession in which it or their being employed for the purposes of this Agreement.” Did the use of the word “prudent” impose on the surveyor a higher standard of care than that demanded by the common law?  The answer was No.  Prudence was one of the yardsticks used by the common law to measure the duty of care.  Moreover, as a matter of dictionary definition it did not necessarily mean “conservative” or “erring on the side of caution”. The terms of the agreement made clear that the valuations were required for a mortgage company providing loans on the security of residential property.  So, it was argued, the valuations ought to have been arrived at on the basis of the re-sale value of the property, on the assumption that the borrowers might default.   The judge rejected that argument as being contrary to the authorities of Singer and Friedlander Ltd v. John D Wood and Co. [1977] 2 EGLR 84 and Banque Bruxelles Lambert SA v. Eagle Star Insurance Co. Limited  [1995] QB 375.  In reaching his conclusion as to value, a valuer must ignore the purpose for which the valuation is required.  It must reflect the true market value of the land at the relevant time.  In the absence of special instructions it is no part of a valuer’s duty to advise on future movement of property prices.  Here there was nothing in the agreement that would have alerted the valuer to the risk that the valuations had to be carried out on a special or unusual basis. The Claimant required the valuer to complete its valuations on electronic valuation forms, a “tick-box” process, and issued guidance notes for the purpose.  Those required: (1)    only information requested on the form to be provided, not any additional information; (2)    since it was a “tick-box” format, no additional text to be added within the body of the report; (3)    since there was no general remarks section, no additional pages of text to be supplied. “All our information requirements are met by the tick boxes provided on the form.” In respect of one particular valuation the question arose as to what the valuer should do if his obligation to take reasonable care required him to say something which could not be accommodated by the tick-boxes.  The general answer was that in such a case the valuer was to ignore the guidance notes and add words to the form or produce a covering letter.  To do anything else would be a plain breach of duty. Having dealt with those issues, Coulson J. then examined the authorities relating to negligent valuations. Methodology or result? Was the court to focus on how the valuer went about his task (the methodology) or on the consequential valuation (the result)?  How relevant was it that the valuer made a number of errors in going about his valuation if in the final analysis his valuation was reasonable?  The judge decided that one should focus on the result, the valuation itself: see Lewisham v. Morgan [1997] 2 EGLR 150; Merrivale More PLC v. Strutton Parker (a firm) [2000] PNLR 498, Goldstein v. Levy G (a firm) [2003] PNLR 35.  If the valuation was outside the reasonable margin, while not automatically rendering the valuer negligent, that highlights his methodology and provides a case to answer. Questions as to how the valuations were carried out might become relevant if the valuer alleges contributory negligence on the part of the client and the court then has to apportion blameworthiness. Margin of error It was accepted that in any negligent valuation case there is a permissible margin of error.  In cases of complex calculations for investment purposes it is usual for the bracket to be assessed by reference to each of the variable figures used in set formulae: Goldstein v. Levy G and Derek Dennard and Others v Price Waterhouse Coopers LLP [2010] EWHC 812(Ch).  In the case of residential valuation, however, it was agreed there should be just one bracket, calculated by reference to the correct valuation figure.  Coulson J., however, thought it potentially unwise to fix the bracket solely by reference to earlier authorities but they might provide some rough parameters.  He rehearsed the cases: Singer and Friedlander; Corisand v. Druce and Co. [1978] 2 EGLR 86; Legal & General Mortgage Service Ltd v. HPC Professional Services Ltd [1997] PNLR 567; Mount Banking Corporation Ltd v. Cooper and Co. [1992] 2 EGLR 142 and Arab Bank PLC v. John D Wood Commercial Limited [1998] EGCS 34; Axa Equity and Law Home Loans Limited v. Goldsack & Freeman [1994] 1 EGLR 175 and BNP Mortgages v. Barton Cook and Sams [1996] 1 EGLR 239; Paratus AMC Limited v. Countrywide Surveyors Limited [2011] EWHC 3307 (Ch) and Platform Funding Limited v. Anderson and Associates Limited [2012] EWHC 1853 (QB).  In K/S Lincoln and Others v. CB Richard Ellis Hotels Limited [2010] EWHC 1156 (TCC) he himself had summarised some of them as follows: (a) For a standard residential property, the margin of error may be as low as + or – 5%; (b) For a valuation of a one-off property, the margin of error will usually be + or – 10%;        (c) If there are exceptional features of the property in question, the margin of error could be + or – 15%, or even higher in an appropriate case. He stood by that summary and dealt with each valuation before him accordingly. Contributory negligence Again, the judge set out the relevant law.  The burden was on the surveyor to show that the client had failed to look after its own interests and that the failure caused loss: Davis Swan Motor Co. Limited v. James [1949] 2 KB 291 and Banque Bruxelles v Eagle Star Insurance at first instance [1994] EGLR 68 at 99. In general terms, the applicable standard of care was that of the reasonably competent professional or practitioner.   In this case Coulson J. had to examine the Claimant’s lending policy.  Had it done what its competitors in the market were doing?  If so, negligence was unlikely, unless its conduct was irrational or illogical: see e.g. Banques Bruxelles.  He did note Sir John Vinelott’s warning in Birmingham Midshires Mortgage Services Limited v.  Parry [1996] PNLR 494, however, that the behaviour of the market is not necessarily a reliable guide;  there might be good commercial reasons which lead businessmen to take risks.  In Paratus Judge Keyser had noted that the courts were not well-suited to assess whether the business models of entire sectors of the financial services industry were reasonable in the interests of those who undertook them.  Coulson J. decided that the standard to apply was that of the reasonably competent centralized lender, acknowledging that in applying it he should be wary of concluding that practices common in the market were in fact irrational. Having thus warned himself, he went on to say that lending large sums on a self-certified basis, relying on intermediaries and placing complete faith in computerised tick-box forms "seems to me to be a potential recipe for disaster."  But, he acknowledged, such lending was common in the years 2004-2007.  So he could not say that, in respect of one of the loans he was dealing with, the decision to lend was irrational or illogical or negligent. So one might conclude that, if enough people take enough risks enough of the time, they might in hindsight be feckless but they are not negligent.