the professional negligence blog

A collaboration between Rebmark Legal Solutions and 1 Chancery Lane

Engineers liable for market fall

    The claimant company (“JGPL”) in John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37 provided consulting engineering services. It was engaged by Mr Gubbins, a farmer and property developer, to design a road and drainage scheme for his residential development and to obtain the necessary statutory approval by March 2007.  JGPL failed to complete its work by the agreed deadline and Mr Gubbins was ultimately forced to instruct alternative engineers. The necessary approval was only obtained in June 2008, approximately 15months late and in the meantime the value of the development declined by about 14%.   JGPL brought a claim for unpaid fees against Mr Gubbins. Mr Gubbins counterclaimed for his losses suffered as a result of a decline in the development’s market value. In the county court, the judge held that the 15months delay was caused by JGPL’s breach of contract and Mr Gubbins was entitled to damages to be assessed in respect of his losses associated with the decline in the market over the period of delay. JGPL appealed.   The Court of Appeal dismissed JGPL’s appeal. The court considered that the only live issue was whether Mr Gubbins’ loss was too remote and that this issue fell to be determined by reference to well-established authority, including Hadley v Baxendale and The Heron II. Thus, “…if the type or kind of loss was, at the time of contract, reasonably foreseeable, by the defendant as not unlikely to result from his breach (had he contemplated a breach), then such a type or kind of loss is not too remote...” (per Sir David Keene at paragraph 17). The court recognised that an exception to the usual Hadley v Baxendale approach is where on examination of the contract and commercial background, the court considers that the standard approach would not reflect the expectation or intention reasonably imputed to the parties.   The county court judge had found both that JGPL knew that the property market could go up and down and that this was not one of those unusual cases falling outside the standard approach. It is perhaps not surprising that the Court of Appeal therefore considered that Mr Gubbins’ counterclaim was recoverable. The fact that JGPL had no control over the property market did not, in the Court of Appeal’s view, take the case outside the standard Hadley v Baxendale approach. Furthermore it regarded the SAAMCO decision as providing little guidance in the present situation because it was not a delay case but one where the breach of contract was the giving of a negligently high valuation.   In the light of this decision, consulting engineers engaged in similar circumstances would be well-advised to check the precise terms of their engagement letters!  

The Supreme Court of Ireland reviews SAAMCo

In the Republic of Ireland this week the Supreme Court is being asked to consider one of the country’s largest lender cases of recent years: KBC Bank Ireland Plc v BCM Hanby Wallace (   In March 2012 Mr Justice McGovern held that the Defendant firm of solicitors had not merely breached its duty in not obtaining security with respect to a number of loans but had gone so far as to actively deceive the Bank on this issue.   Moreover, McGovern J accepted the Bank’s contention that if it had been aware that the security it required had not been put in place, it would not have entered into the transactions or lent the sums involved and that damages should be assessed on the basis of a "no transaction" case. He therefore awarded the Bank over €17 million.   In doing so, his rationale at first blush appears to contradict what Lord Hoffmann said in SAAMCo, about there being no distinction between “successful transaction” and “no transaction” cases (see South Australia Asset Management Corp v York Montague Ltd at [1997] A.C. 191 at 218C-G). McGovern J sought to distinguish SAAMCo on the basis that the breaches of duty in this case constituted active deception rather than mere omissions. It is questionable whether this is a sound basis for distinction, particularly as it was a point taken of the Court’s own motion.   It will be interesting to see whether the Supreme Court upholds the decision in KBC and, if so, what influence this will have on the assessment of damages in lender claims in England and Wales.

Disclosure under the Professional Negligence Pre-Action Protocol: Webb Resolutions Ltd v Waller Needham & Green [2012]

Non-compliance by claimants with their disclosure obligations under the Professional Negligence Pre-Action Protocol can prove an expensive mistake.  Webb Resolutions Ltd v Waller Needham & Green [2012] EWHC 3529 (Ch) shows why.   The Claimant, a purchaser of mortgage loans from institutional lenders – c.f. the preceding post – wished to sue the Defendant solicitors who had been engaged by the original lender.  In July 2010 it sent the Defendant a Letter of Claim.  After initial exchanges the Defendant wrote in January 2011 requesting sight of 12 classes of documents which it said it needed to prepare its Letter of Response.  The Claimant asserted that the documents were for the most part unnecessary and that no more would be provided until liability was admitted.  In May 2011 the Claimant made a Part 36 Offer on the usual 21-day terms.  The Defendant objected that it could neither serve a Letter of Response nor advise on the merits of the offer without receipt of the requested documents.   The Claimant was having none of that.  In September 2011 it went ahead and issued proceedings.  In its Defence the Defendant pleaded extensively from the Protocol and repeated its stance regarding the documents.  In March 2012 the Claimant provided standard disclosure, inspection took place, and in May 2012 the Defendant accepted the Part 36 Offer made a year earlier.   As the offer had been accepted after expiry of the 21-day period the automatic costs provision in rule 36.10(1) – defendant pays all – no longer applied, and instead costs became a matter for the court’s discretion under rule 36.10(4).  The default setting in that situation is that the claimant gets his costs up to the date when the relevant period expires, and the offeree is liable for the offeror’s costs thereafter until acceptance: rule 36.10(5).  The court should depart from the normal order only if it would be unjust not to, having regard to all the circumstances but in particular the four matters set out in the analogous rule 36.14(4): SG v Hewitt [2012] EWCA Civ 1053.   In this case the normal order would have resulted in the Defendant paying all of the Claimant’s costs both before and after issue.  However the judge (John Baldwin QC sitting as a deputy) was underwhelmed by the Claimant’s conduct.  He noted that the stated aim of the Protocol (paragraph A2) is to establish a framework in which there is an early exchange of information so that the claim can be fully investigated and, if possible, resolved without the need for litigation.  He found that although the Defendant’s early requests for disclosure were overambitious the Defendant had made out a good case for why it needed some of the documents and the Claimant, if acting reasonably, would have supplied copies of the files and not merely extracts from them.  By failing to do so the Claimant offended against the letter and the spirit of the Protocol.  That justified a departure from the normal order.   What order to make instead?  The judge began by holding that the Defendant should pay the Claimant’s costs incurred up until the end of the 21-day period (i.e. until June 2011), notwithstanding that the Defendant had been awaiting sight of the documents since the previous January.  He rejected the Defendant’s argument that the Claimant’s costs should be disallowed from that earlier date, reasoning that that would place the Defendant in a better position than if it had accepted the Claimant’s Part 36 Offer in time and the automatic costs order under rule 36.10(1) had taken effect.  It would be “rare indeed”, he said, that a party could improve his position on costs by waiting till the relevant period had expired, so as to take advantage of the more flexible position under rule 36.10(4).   In so saying the judge was perhaps overlooking two things.  First, it didn’t follow that settlement by acceptance of the Claimant’s Part 36 Offer was the best the Defendant could have hoped for.  Given the judge’s finding that the Claimant’s conduct had reduced the prospects of early settlement he could have concluded that, if the disclosure had been provided promptly, the case would probably have settled earlier even than June 2011 - for example, as the result of acceptance of a Part 36 Offer made by the Defendant upon viewing the documents.  (The Defendant had in fact made its own offer as early as December 2010, albeit at a nuisance level.)  So the judge wasn’t bound to treat all costs incurred prior to the end of the 21-day period as necessarily beyond the reach of his discretion.   Secondly, the automatic costs order under rule 36.10(1) is not quite as inflexible as it looks.  In Lahey v Pirelli Tyres Ltd [2007] EWCA Civ 91 the Court of Appeal held that although the rule deprived the court of its general discretionary powers under rule 44.3, nonetheless on any detailed assessment the costs judge could still disallow entire sections of the claimant’s bill of costs on the footing that they were costs "unreasonably incurred": rule 44.4(1).  The Court cited as an example (at [24]) that if the costs judge considered that the claimant had acted unreasonably in refusing an offer to settle made before proceedings were issued, he was entitled to disallow all the costs post-issue.  (See too Re (Edwards & Anor) v Environment Agency & Ors [2010] UKSC 57 at [21].)  So if the judge in Webb Resolutions had deprived the Claimant of some of its costs incurred before June 2011 he wouldn’t necessarily have been rewarding the Defendant for its delay: even if the matter had concluded with an acceptance of the Claimant’s Part 36 Offer, a costs judge could have disallowed just such costs on a detailed assessment anyway.   As for the costs incurred after June 2011, the judge felt unconstrained by the automatic rule and adopted a harder stance.  He held that it was significantly more likely than not that such costs would not have been incurred at all had the Claimant acted reasonably and responded properly to the letters of request for disclosure: by implication, the matter would have settled.  Therefore the Claimant, far from having its costs in respect of that period, should be ordered to pay the equivalent costs incurred by the Defendant.   One further point is worth making.  For the purposes of rule 36.10(1) “the relevant period” for accepting a Part 36 offer means, in the case of an offer made more than 21 days before trial, the period stipulated in the offer letter “or such longer period as the parties agree”: rule 36.3(1)(c)(i).  So a defendant who receives a Part 36 offer at a time when the information available to him is incomplete should be wary of negotiating any extension of time for acceptance until after provision of the missing documents.  If the defendant then accepts the offer within the extended period he will deprive himself of any opportunity to recover any of his own costs from the claimant, because the automatic rule will take effect.  Even if he then delays acceptance until after the extended deadline, he is still likely to be met with the argument that he must bear all the claimant’s costs up to the deadline on the authority of Webb Solutions.  Better, then, to protest at the claimant’s breach of the Protocol and let the original acceptance period go by default.    

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.