| Date | 24 October 1996 |
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| Judgment | South Australia Asset Management Corporation -v- York Montague Limited, House of Lords, 20 June 1996 |
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| The Issue | Quantum of damages for negligent valuation. |
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| Implication |
In situations where there remains doubt over the precise terms of the contract, or when work commences in the absence of a formalised agreement it will fall to the courts to interpret the intention of the parties when deciding the extent to which any agreement exists between them. |
printIn the heyday of the property boom, vast sums of money were lent on properties on the basis of extremely optimistic valuations. There has since been a considerable volume of litigation concerning negligent over-valuation of property offered as security for loans. The House of Lords has recently delivered judgment on a series of these cases dealing with two common features. The first is that if the lender had known the true value of the property he would not have lent. The second is that a fall in the property market after the date of the valuation greatly increased the loss which the lender eventually suffered. The Court of Appeal had decided that in a case in which the lender would not otherwise have lent (which they called the 'no transaction case') he was entitled to recover the difference between the sum which he lent and the net sum which he actually got back. The valuer was thus liable for all the loss, including that attributable to the fall in the market. This was to be distinguished with what the Appeal Court called the 'successful transaction case' where it could be shown that if the lender had been correctly advised he would still have lent a lesser sum on the same security. In such a case the valuer would only be liable for the 'over exposure' of the lender, and thus the loss related to the fall in the market would not become a factor. In deciding these cases in this way, the Court of Appeal had operated the principle that where an injury is to be compensated by damages, the damages should be as nearly as possible the sum which would put the plaintiff in the position in which he would have been if he had not been injured. The House of Lords has overturned this approach. Lord Hoffman considered that the general principle was that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action, is not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. In the case of property transactions, the valuer was not giving an undertaking concerning the wisdom of the wider commercial policy of the lender. The valuer would not ordinarily be privy to other considerations which the lender may take into account, such as how much money he has available, how much the borrower needs to borrow, the strength of his covenant, the attraction of the rate of interest, or any other personal and commercial considerations which may induce the lender to lend. He illustrated his concern with the decision of the Court of Appeal using an example of a mountaineer about to undertake a difficult climb and worried about the fitness of his knee. A doctor is consulted who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering, but has nothing to do with his knee. On the Court of Appeal's principle, Lord Hoffamn suggested, the doctor would be responsible for the injury suffered by the mountaineer, because it is damage which would not have occurred if he had been given correct information about his knee. This was an unusual principle to apply according to Lord Hoffman, who found such reasoning unsatisfactory. Whilst one might question whether this example properly reflects the circumstances of the negligent valuer, since there would appear to be no causative link at all between the negligent diagnosis and the mountaineer's injury, it nonetheless helped to place starkly in contrast the difficulty which the House of Lords had with the decision of the Court of Appeal. Accordingly, the damages to which the valuer would be liable were to be limited to the consequences of the valuation being wrong, and thus in appropriate circumstances the damages would be reduced to the difference between the negligent valuation, and the correct value at the date of valuation. In the construction context, this decision will have a direct parallel for those contractors and professional practices who become involved in the development of feasibility or business cases for their employer. Where an employer decides to proceed with a project based upon negligent advice, the measure of damages to which the adviser may now be liable will be circumscribed by the decision of the House of Lords in this case.
CJ-9635
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