Yesterday, the Supreme Court handed down its decision in Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd. We discuss the decision and its implications below.

Background

Bridging lender Tiuta provided a loan to a borrower of £2,475,000 in 2011 on the basis of a valuation by De Villiers Surveyors Ltd (De Villiers). Shortly before the loan facility expired Tiuta entered into a second loan facility agreement with the borrower, on the basis of a second De Villiers valuation, of which £2,799,252 was for the refinancing of the first facility, was paid into the loan account and so discharging the first facility and £289,000 was new money. None of the lending had been repaid when the matter came to court.

No allegation of negligence was made in respect of the valuation on which the first facility was based and the court therefore assumed (rightly or wrongly) that there was no liability arising from the first valuation, and it was common ground that there was no recoverable loss in respect of the first facility as the indebtedness had been discharged. The claim was concerned only with liabilities arising out of the allegedly negligent second valuation.

The issue for the courts, which arose on a summary judgment application, was whether, if the valuer was negligent (which was assumed for the purposes of the application), Tiuta was entitled to recover only the difference between the sums lent by way of the first facility (discharged / redeemed by the second advance) and the second loan (i.e. the new money advanced under the second facility), or loss by reference to the full amount of the second facility.

The High Court found that only the new money could be recovered, but this was overturned by the Court of Appeal which found that the loss Tiuta sustained as a result of the second facility was the amount advanced in the second loan less the borrower's covenant and the true value of the security. The Court of Appeal held that the fact that Tiuta would have been left with the shortfall arising from the borrower's failure to repay the first facility was not relevant for the second valuation.

Supreme Court's decision

Lord Sumption gave the unanimous judgment, which overturned the decision of the Court of Appeal and restored the relevant parts of the judgment of the High Court in Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002].

Lord Sumption held, applying ordinary principles of the law of damages, that the basic measure of damages is that which is required to restore the claimant to the position that it would have been in, had it not sustained the wrong. Following Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] this involves undertaking the "basic comparison", typically in the case of a negligent valuation of intended loan security, of: (a) a comparison between the money lent that the lender would still otherwise have had (plus interest); and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property.

Applying this to the facts, it was held that but for the negligent second valuation, Tiuta would not have entered into the second facility, but would still have entered into the first facility, which would not have been repaid. On that basis, it was held that Tiuta would still have lost the money from the failure to repay the first facility. Had the first facility not been discharged by Tiuta with part of the sums advanced under the second facility, and if the valuation relied on by Tiuta for the purposes of advancing the first facility was negligent, the irrecoverable loans made under that facility would in principle have been recoverable as damages. However, as it was assumed that there was no such negligence alleged in relation to the first valuation in this case, Tiuta's loss was limited only to the new money advanced under the second facility.

Lord Sumption disagreed with the Court of Appeal's reasoning that there was nothing unfair in holding the valuer liable for the full loss in respect of the second valuation (even if the first valuation had been undertaken by a different surveyor) as the valuer had provided its valuation in the expectation that Tiuta would advance funds up to the full reported value. Lord Sumption held that this was not relevant for the purposes of the "basic comparison", which involves a factual enquiry as to how much Tiuta would have been better off if had it not lent the money which it was induced to lend by way of the second negligent valuation. A valuer could not be liable for more than the difference his negligence had made simply because he contemplated that he might have been liable for more on entirely different and hypothetical facts. In other words, the Court could not ignore the fact that, but for the second negligent valuation, the first facility would still not have been repaid and Tiuta would have suffered losses relating to the sums advanced under the first facility in any event.

The Supreme Court also rejected the novel arguments, made on behalf of Tiuta, that: 1) the court should disregard the fact that the second facility was used to discharge the first, as the application of the funds in this way constituted a collateral benefit to Tiuta, which the court was not obliged to take into account in calculating the loss; and 2) on the basis that if the discharge of the existing indebtedness is disregarded, then damages can be assessed as if the whole sum lent under the second facility was an additional recoverable advance. Lord Sumption noted that in Swynson v Lowick Rose [2017] it was held that "collateral benefits are those whose receipt arose independently of the circumstances giving rise to the loss". The paradigm cases were distinct agreements for which the claimant has given consideration independent of the legal relationship with the defendant, such as insurance receipts. Lord Sumption held that the discharge of the existing facility was plainly not a collateral benefit:

  1. It did not confer a benefit on Tiuta, but was neutral in terms of its overall exposure and so there was no question of whether to take it into account. It was held however, that if a liability of the valuer arising from a negligent first valuation had been extinguished by the refinancing, then it might not be deemed as neutral.
  2. Secondly, the benefit from the discharge of the first facility was not collateral because it was expressly required by the terms of the second facility.

It was held that in circumstances where there was a liability on a valuer in respect of a first facility, and where the first facility had been extinguished by the refinancing, the recoverable loss under the second loan may include the loss of a chance to claim in regards to a first negligent valuation, regardless of whether the first valuation was undertaken by the same or a different valuer. Notwithstanding this, it will be easier for a lender to argue that loss arising from a loan advanced in reliance on a first negligent valuation, if carried out by the same valuer, was reasonably foreseeable in respects of a loss of a chance to succeed in a claim arising from a first negligent valuation upon discharge of the first facility. However, if a different firm of surveyors is instructed to provide a second valuation, it may not be aware of the first valuation, nor even the first facility, and a claim of a loss of chance to claim in regards to a first negligent valuation by a third party valuer is likely to be less foreseeable in those circumstances.

The decision underlines the importance of a valuer ensuring that his liability is limited as far as possible when providing a valuation in a refinance situation by way of his terms of business, such as expressly stating that no knowledge should be imputed on him as to any prior loans or valuations, without this information being expressly provided by a lender on his instruction.

It cannot be ignored that the decision was one based on specific assumed facts, and it is unclear what the scope of the Supreme Court's decision would be on the basis of a different factual matrix with regards to the nature of the refinance, such as where the first facility is not entirely extinguished / discharged by way of the second one.