Causation issues are a regular theme before the courts in claims against professionals. It is not simply enough for a claimant to say that the defendant has breached a duty and the claimant has suffered loss related to that breach. The claimant must also demonstrate that the loss would not have occurred “but for” the defendant’s error.

The recent judgment of the Court of Appeal in the case of Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2016] EWCA Civ 661 illustrates the tensions that can arise when the courts are called upon to apply the “but for” test for causation in disputes arising out of multifaceted commercial arrangements. In overturning an award of summary judgment by the High Court, the Court of Appeal emphasised the importance of the particular facts in a transaction over the overall arrangements.

In summary:

  1. In February 2011, Tiuta International Ltd (“Tiuta“) instructed De Villiers Surveyors Ltd (“DVS“) to value a partly completed residential development which it was considering accepting as security for an advance to the developer. DVS valued the development at £3.25m in its current state and £4.9m on completion of the development. On the basis of the February 2011 valuation, Tiuta advanced £2.56m to the developer under a loan facility and took security over the property.
  2. In November 2011, the developer sought to increase the amount of the facility to £3m on the basis of the same security over the property. Tiuta instructed DVS to carry out a second valuation. DVS valued the property at £3.25m in its current state and £4.9m on completion of the development. In another valuation carried out in December 2011, DVS valued the property at £3.5m in its current state and £4.9m on completion of the development.
  3. Tiuta agreed to provide the additional funds sought by the developer. It did so by refinancing the facility. Tiuta advanced £2.56m to repay the original facility, and made available further amounts to be drawn down by the developer.
  4. When the second facility expired, the amount of £2.84m remained outstanding. Tiuta appointed receivers to realise the value of the property. The amount recovered on the sale was less than the outstanding loan (£2.14m). Tiuta sought to recover the shortfall from DVS, alleging that the December 2011 valuation had been carried out negligently.
  5. DVS applied for summary judgment on Tiuta’s claim, arguing that by the time of the December 2011 valuation Tiuta was already exposed to an unavoidable loss of £2.56m in respect of the monies advanced on the basis of the February 2011 valuation. It was not part of Tiuta’s case that the February 2011 valuation had been negligent.
  6. As required in a summary judgment application, it was assumed that Tituta’s claim on breach of duty was properly made out; that is, that the December 2011 valuation was negligent. It was also assumed that the effect of the second loan was to discharge the original debt.
  7. The High Court held that, notwithstanding that the interpretation of the application of the “but for” test argued for by DVS was a novel one, it was right to grant summary judgment. The High Court considered that monies already outstanding at the time of the new facility were not caused by any negligence in the further valuation.
  8. Tiuta appealed the High Court decision to the Court of Appeal. By a majority of two to one, the Court of Appeal overturned the first instance decision holding, that when correctly applied, the “but for” test led to the conclusion that DVS was liable for the whole of the loss flowing from the December 2011 valuation.
  9. Delivering the leading opinion, Lord Justice Moore-Bick considered that the first instance judge’s application of the “but for” test failed to take account of the fact that the transaction was structured to in such a way that the second loan was used to pay off the first. In his view, the second loan stood apart from the first and the basic comparison for ascertaining Tiuta’s loss was between the amount of the second loan and the value of the security.
  10. DVS had contended that it was for Tiuta to decide how to structure its business and sought to rely on last year’s High Court decision in Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629, noting that the court should look at the substance of the transaction rather than the form. Lord Justice Moore-Bick did not consider that the decision in Swynson was authority for a broader proposition that in a context such as that of the present case the court was entitled to disregard the structure of a routine financing transaction in favour of what it regarded as the substance of the case.
  11. Lady Justice King agreed with Lord Justice Moore-Bick, while Lord Justice McCombe dissented. He considered that Tiuta’s appeal required one to ignore an important element of the factual background (namely that Tiuta was already in danger of being unable to recover the amount advanced on the first loan when it chose to make the second) and that there was no reason to interfere with the principles relating to the application of the “but for” test in valuer negligence cases (which Tiuta had conceded would fail on a simple application).

The approach taken by the Court of Appeal to the application of the “but for” test was one which clearly favoured the claimant in the circumstances of the case. However, that approach may be explained by the fact that the issue arose in the context of a strike out application on a confined issue. Generally, the courts are reluctant to grant summary judgment in strike out in professional negligence claims given the assumptions on which such applications must necessarily proceed.

Indeed, in a postscript to his judgment, Lord Justice Moore-Bick commented that it was not ideal to assume fundamental facts as was done here. He observed that the issues raised should have been considered at trial along with findings of fact (to also reduce the chance of wasted costs), and if that was not possible, then there should have been a trial of a preliminary issue. Lord Justice McCombe agreed entirely with that postscript.