In an unfavourable judgment for valuers, the Court of Appeal has recently reversed a decision of the High Court relating to whether or not an allegedly negligent valuation was causative of the losses claimed. This included an examination of the application of the ‘but for’ test.

Background

In February 2011, the lender, Tiuta, instructed a surveyor, De Villiers, to carry out a valuation of a development (the February Valuation). Based on the February Valuation, Tiuta advanced a sum of £2.2 million and took a charge on the development. In December 2011, Tiuta asked De Villiers for a further valuation (the December Valuation). Based on the December Valuation, Tiuta advanced funds which served to extinguish the earlier loan and create a new one.

Following default on the loan there was a shortfall. As a consequence, Tiuta claimed that the December Valuation was negligent and that the loss it had suffered was a result of that valuation (it was not alleged that the February Valuation was negligent).

High Court decision

De Villiers applied for summary judgment on the basis that any loss attributable to the existing indebtedness (i.e. from the first loan) could not be said to have been caused by any negligence in respect of the December Valuation. This was on the basis that, had the property been valued correctly, no new facility would have been offered and Tiuta would have “faced an unavoidable loss” irrespective of De Villiers’ advice.

The High Court sided with De Villiers, holding that the ‘but for’ test was indeed applicable and that any supposed negligence in the December Valuation had not resulted in any loss attributable to the February Valuation.

To read more on the High Court’s decision click here.

[link to http://www.cms-lawnow.com/ealerts/2015/04/surveyors-pi-successful-application-of-but-for-test-in-assessing-causation-of-loss?cc_lang=en]

Court of Appeal decision

Tiuta appealed to the Court of Appeal on the basis that the effect of the loan following the December Valuation had been to discharge the original loan and to create a new, unrelated loan. In such circumstances, the ‘but for’ test would result in injustice as it meant Tiuta would not be successful in any claim it might have had if the February Valuation had been negligent. De Villiers, however, contended that, applying the decision in Swynson Ltd v Lowick Rose LLP (in liquidation) (2015), the substance of the transaction meant that the second loan was merely an increase of the original loan.

The Court of Appeal upheld the appeal. It discredited the reliance by De Villiers on Swynson, saying that it did not mean the court could disregard the structure of a refinancing transaction. Here the transaction was structured so that the second loan was used to pay off the first loan, i.e. it was effectively a “fresh” loan. This meant that the valuer was liable for the losses following as a consequence of a lender’s reliance on the valuation for the purposes of making the second loan, which was to be viewed as standalone from the first loan.

The Court of Appeal therefore concluded that the ‘but for’ test did apply but that it had not been applied correctly by the High Court. It had erred by not taking into account the structure of the transaction.

Comment

This decision highlights how the courts are disposed to avoid circumstances where causes of action can fall into a ‘black hole’ in lender claims which concern re-financing. As a consequence, ideally any valuer undertaking a refinance valuation will want first to establish the scope of their appointment and the purpose for which the valuation is to be used. However, it is rare that upon instruction this information is readily available. As such, in cases which concern refinancing and the cancelling of an earlier loan, it is increasingly important for valuers to consider the options to limit their liability.

Further reading:

Tiuta International Ltd v De Villiers Surveyors Ltd [2016] EWCA Civ 661 [link to http://www.bailii.org/ew/cases/EWCA/Civ/2016/661.html]

Swynson Ltd v Lowick Rose LLP (in liquidation) [2015] EWCA Civ 629 [link to http://www.bailii.org/ew/cases/EWCA/Civ/2015/629.html]