JUDGMENT
Tiuta International Limited (in liquidation)
(Respondent) v De Villiers Surveyors Limited
(Appellant)
before
Lady Hale, President
Lord Kerr
Lord Sumption
Lord Lloyd-Jones
Lord Briggs
JUDGMENT GIVEN ON
29 November 2017
Heard on 6 November 2017
Appellant Respondent
Alexander Hickey QC Joanna Smith QC
Robert Scrivener Edwin Peel
Niranjan Venkatesan
(Instructed by Reed Smith
LLP
)
(Instructed by Rosling
King LLP
)
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LORD SUMPTION: (with whom Lady Hale, Lord Kerr, Lord Lloyd-Jones
and Lord Briggs agree)
1. The claimant, Tiuta International, was a specialist lender of short-term
business finance, until it went into administration on 5 July 2012. These proceedings
were brought by Tiuta in support of a claim against the defendant surveyors for
negligently valuing a partially completed residential development over which it
proposed to take a charge to secure a loan. The present appeal raises a question of
principle concerning the quantum of damages. Since it arises out of an application
for summary judgment, it has to be determined on facts some of which are admitted
but others of which must be assumed for the purposes of the appeal. They are as
follows.
2. On 4 April 2011, Tiuta entered into a loan facility agreement with Mr Richard
Wawman in the sum of £2,475,000 for a term of nine months from initial drawdown,
in connection with a development in Sunningdale by a company called Drummond
House Construction and Developments Ltd, with which Mr Wawman was
associated. Advances under the facility were to be secured by a legal charge over
the development. The facility agreement was made on the basis of a valuation of the
development by De Villiers. They had reported that the development was worth
£2,300,000 in its current state and that if completed in accordance with all current
consents and to a standard commensurate with its location it would be worth about
£4,500,000. The initial advance was drawn down on 8 April 2011 as soon as the
charge had been executed. Other advances under the facility followed.
3. On 19 December 2011, shortly before the facility was due to expire, Tiuta
entered into a second facility agreement with Mr Wawman in the sum of £3,088,252
for a term of six months in connection with the same development. Of this sum,
£2,799,252 was for the refinancing of the indebtedness under the first facility and
£289,000 was new money advanced for the completion of the development. A fresh
charge was taken over the development to secure sums due under the second facility
agreement. On 19 January 2012, Tiuta advanced £2,560,268.45, which was paid into
Mr Wawman’s existing loan account, thereby discharging the whole of the
outstanding indebtedness under the first facility. Between that date and 8 June 2012
further sums were drawn down under the second facility amounting to £281,590 and
presumably spent on the development. The advances under the second facility were
made on the basis of a further valuation of the development by De Villiers. There
were three iterations of the further valuation. On 8 November 2011, De Villiers had
valued the development in its current state at £3,250,000 and upon completion at
£4,900,000. The current state valuation was subsequently revised on 22 December
2011 to £3,400,000 and on 23 December 2011 to £3,500,000. The second facility
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agreement expired on 19 July 2012, a few weeks after Tiuta went into
administration. None of the indebtedness outstanding under it has been repaid.
4. It is common ground that there can be no liability in damages in respect of
the advances made under the first facility. This is because (i) there is no allegation
of negligence in the making of the valuation on which the first facility agreement
was based; and (ii) even if there had been, the advances made under that facility
were discharged out of the advances under the second facility, leaving the lender
with no recoverable loss. This last point is based on the decisions of the Court of
Appeal in Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd
[2002] EWCA Civ 336 and of this court in Swynson Ltd v Lowick Rose LLP (in
liquidation) [2017] 2 WLR 1161. It is not challenged on this appeal.
5. The present claim is concerned only with the liabilities arising out of the
valuation which De Villiers made for the purposes of the second facility. It is
alleged, and for present purposes must be assumed, that the valuations given for the
purposes of the second facility were negligent, and that but for that negligence the
advances under the second facility would not have been made. In those
circumstances, the valuers contend that the most that they can be liable for by way
of damages is the new money advanced under the second facility. They cannot, they
say, be liable for that part of the loss which arises from the advance made under the
second facility and applied in discharge of the indebtedness under the first. If (as has
to be assumed) Tiuta would not have made the advances under the second facility
but for the valuers’ negligence, the advances under the first facility would have
remained outstanding and would have remained unpaid. That part of their loss would
therefore have been suffered in any event, irrespective of the care, or lack of it, which
went into the valuations prepared for the purposes of the second facility. On that
ground, the valuers applied for a summary order dismissing that part of the claim
which arose out of the refinancing element of the advances under the second facility.
6. In my opinion the result of the facts as I have set them out is perfectly
straightforward and turns on ordinary principles of the law of damages. The basic
measure of damages is that which is required to restore the claimant as nearly as
possible to the position that he would have been in if he had not sustained the wrong.
This principle is qualified by a number of others which serve to limit the recoverable
losses to those which bear a sufficiently close causal relationship to the wrong, could
not have been avoided by reasonable steps in mitigation, were reasonably
foreseeable by the wrongdoer and are within the scope of the latter’s duty. In the
present case, we are concerned only with the basic measure. In a case of negligent
valuation where but for the negligence the lender would not have lent, this involves
what Lord Nicholls in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd
(No 2) [1997] 1 WLR 1627, 1631 called the “basic comparison”:
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“It is axiomatic that in assessing loss caused by the defendant’s
negligence the basic measure is the comparison between (a)
what the plaintiff’s position would have been if the defendant
had fulfilled his duty of care and (b) the plaintiff’s actual
position. Frequently, but not always, the plaintiff would not
have entered into the relevant transaction had the defendant
fulfilled his duty of care and advised the plaintiff, for instance,
of the true value of the property. When this is so, a professional
negligence claim calls for a comparison between the plaintiff’s
position had he not entered into the transaction in question and
his position under the transaction. That is the basic comparison.
Thus, typically in the case of a negligent valuation of an
intended loan security, the basic comparison called for is
between (a) the amount of money lent by the plaintiff, which
he would still have had in the absence of the loan transaction,
plus interest at a proper rate, and (b) the value of the rights
acquired, namely the borrower’s covenant and the true value of
the overvalued property.”
7. If the valuers had not been negligent in reporting the value of the property for
the purpose of the second facility, the lenders would not have entered into the second
facility, but they would still have entered into the first. On that hypothesis, therefore,
the lenders would have been better off in two respects. First, they would not have
lost the new money lent under the second facility, but would still have lost the
original loans made under the first. Secondly, the loans made under the first facility
would not have been discharged with the money advanced under the second facility,
so that if the valuation prepared for the first facility had been negligent, the
irrecoverable loans made under that facility would in principle have been
recoverable as damages. There being no allegation of negligence in relation to the
first facility, this last point does not arise. Accordingly, the lender’s loss is limited
to the new money advanced under the second facility.
8. This is what Timothy Fancourt QC, sitting as a Deputy High Court Judge,
held. But the Court of Appeal disagreed. By a majority (Moore-Bick and King LJJ,
McCombe LJ dissenting), they allowed the appeal. The leading judgment was
delivered by Moore-Bick LJ. He criticised the deputy judge’s reasoning on the
ground that it failed to take into account the fact that the second facility was
structured as a refinancing so that the advance was used to pay off the pre-existing
debt, thereby releasing the valuers from “any potential liability in respect of the first
valuation.” From this, he concluded that the advance under the second facility
“stands apart from the first and the basic comparison for ascertaining the appellant’s
loss is between the amount of that second loan and the value of the security.” He
explained this as follows:
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“The appellant entered into the second transaction in reliance
on the respondent’s valuation. If the valuation had not been
negligent, the appellant would not have entered into the second
transaction, and would have suffered no loss on that transaction
as a result. It would have been left with the first loan and the
security for it, together with any claim it might have had against
the valuer. However, that is of no relevance to the respondent
in its capacity as valuer for the purposes of the second loan.
The loss which the appellant sustained as a result of entering
into the second transaction was the advance of the second loan,
less the developer’s covenant and the true value of the security.
If the value of the property was negligently overstated, the
respondent will be liable to the extent that the appellant’s loss
was caused by its over-valuation.”
Moore-Bick LJ went on to say that his conclusion would have been the same even
if a different valuer had prepared the original valuation on which the first facility
was based. This was because the valuer
“valued the property itself in the expectation that the appellant
would advance funds up to its full reported value in reliance on
its valuation. There is nothing unfair in holding the respondent
liable in accordance with its own valuation for the purposes of
the second transaction.”
9. I regret that I cannot agree. It does not follow from the fact that the advance
under the second facility was applied in discharge of the advances under the first,
that the court is obliged to ignore the fact that the lender would have lost the
advances under the first facility in any event. Lord Nicholls’ statement in Nykredit
assumes, as he points out in the passage that I have quoted, that but for the negligent
valuation, he would still have had the money which it induced him to lend. In the
present case, Tiuta would not still have had it, because it had already lent it under
the first facility. Moore-Bick LJ appears to have thought that this was irrelevant
because the effect was to release the valuer from any potential liability in respect of
the first facility. I would agree that if the valuers had incurred a liability in respect
of the first facility, the lenders’ loss in relation to the second facility might at least
arguably include the loss attributable to the extinction of that liability which resulted
from the refinancing of the existing indebtedness. But the premise on which this
matter comes before the court is that there was no potential liability in respect of the
first facility because that was entered into on the basis of another valuation which is
not said to have been negligent.
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10. Moore-Bick LJ’s view appears to have been that none of this mattered
because the valuer would have contemplated that he might be liable for the full
amount of the advances under the second facility, so that it was a windfall for him
that part of the advances was used to repay a pre-existing debt rather than to fund
the development. A similar argument was advanced before us. The difficulty about
it is that while the reasonable contemplation of the valuer might be relevant in
determining what responsibility he assumed or what loss might be regarded as
foreseeable, it cannot be relevant to Lord Nicholls’ “basic comparison”. That
involves asking by how much the lender would have been better off if he had not
lent the money which he was negligently induced to lend. This is a purely factual
inquiry. There are, as I have pointed out, legal filters which may result in the valuer
being liable for less than the difference. For example, part of it may be too remote
or is not within the scope of the relevant duty. But the valuer cannot be liable for
more than the difference which his negligence has made, simply because he
contemplated that on hypothetical facts different from those which actually
obtained, he might have been. There are many cases in which the internal
arrangements of a claimant mean that his financial loss is smaller than it might have
been. That may be fortunate for the defendant, but it cannot make him liable for
more than the claimant’s actual financial loss.
11. Ms Joanna Smith QC, who appeared for the lenders, was realistic enough to
perceive these difficulties, and adopted a rather different approach. She submitted
that the court should disregard the fact that the advance under the second facility
was applied in discharge of the outstanding indebtedness under the first, because
that application of the funds was a collateral benefit to the lender, which they were
not obliged to take into account in computing their loss. The argument is that if the
discharge of the outstanding indebtedness under the first facility is disregarded,
damages can be assessed as if the whole of the loan under the second facility was an
additional advance. Since that additional advance would not have been made or lost
but for the negligent valuations of November and December 2011 the whole of it is
recoverable as damages.
12. I am not persuaded that this was what the Court of Appeal had in mind, but
her point is none the worse for that. The real objection to it is more fundamental.
This court has recently had to deal with collateral benefits in a context not far
removed from the present one. The general rule is that where the claimant has
received some benefit attributable to the events which caused his loss, it must be
taken into account in assessing damages, unless it is collateral. In Swynson Ltd v
Lowick Rose LLP (in liquidation) [2017] 2 WLR 1161, para 11, it was held that as
a general rule “collateral benefits are those whose receipt arose independently of the
circumstances giving rise to the loss.” Leaving aside purely benevolent benefits, the
paradigm cases are benefits under distinct agreements for which the claimant has
given consideration independent of the relevant legal relationship with the
defendant, for example insurance receipts or disability benefits under contributory
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pension schemes. These are not necessarily the only circumstances in which a
benefit arising from a breach of duty will be treated as collateral, for there may be
analogous cases which do not exactly fit into the traditional categories. But they are
a valuable guide to the kind of benefits that may properly be left out of account on
this basis.
13. The discharge of the existing indebtedness out of the advance made under the
second facility was plainly not a collateral benefit in this sense. In the first place, it
did not confer a benefit on the lenders and so no question arises of either taking it
into account or leaving it out of account. Lord Nicholls’ “basic comparison” requires
one to look at the whole of the transaction which was caused by the negligent
valuation. In this case, that means that one must have regard to the fact that the
refinancing element of the second facility both (i) increased the lender’s exposure
and ultimate loss under the second facility by £2,560,268.45, and (ii) reduced its loss
under the first facility by the same amount. Its net effect on the lender’s exposure
and ultimate loss was therefore neutral. Only the new money advanced under the
second facility made a difference. It is true that the refinancing element might not
have been neutral if the discharge of the indebtedness under the first facility had also
extinguished a liability of the valuers under the first facility. But on the assumptions
that we must make on this appeal there was no such liability. Secondly, even on the
footing that there was such a liability, the benefit arising from the discharge of the
indebtedness under the first facility was not collateral because it was required by the
terms of the second facility. The lenders did not intend to advance the whole of the
second facility in addition to the whole of the first, something which would have
involved lending a total amount substantially in excess of any of the successive
valuations. They never intended to lend more than £289,000 of new money. The
concept of collateral benefits is concerned with collateral matters. It cannot be
deployed so as to deem the very transaction which gave rise to the loss to be other
than it was.
14. This is why the decision of Toulson J in Komercni Banka AS v Stone and
Rolls Ltd [2003] 1 Lloyd’s Rep 383, which was pressed on us as an analogy, was
ultimately unhelpful. Toulson J was concerned with a complex series of frauds
against a bank under which part of the proceeds of one fraud found its way back to
the bank via a third party to serve as pump priming for distinct, further frauds. He
declined to reduce the damages by the amount of these circular payments, because
they were not an intrinsic part of the relevant venture or transaction but were simply
“the result of [the fraudster’s] independent choice how to use the opportunity created
by his fraud” (para 171). I doubt whether much is to be gained by analogies with
other cases decided on their own peculiar facts, but Komercni Banka does not even
offer a relevant analogy.
15. For these reasons, which correspond to those given by the Deputy Judge and
by McCombe LJ in his dissenting judgment, I would allow the appeal. The reasons
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are of course sensitive to the facts, including those facts which are disputed and have
been assumed for the purposes of this appeal. In particular, different considerations
might arise were it to be alleged that the valuers were negligent in relation to both
facilities. The Deputy Judge’s order was carefully drawn so as to address the point
of principle while leaving these matters open. Subject to any submissions that may
be made about the exact form of relief, I would restore his order.
