It is a well-established principle that a successful negligence claim will require a claimant to prove that the defendant's negligence caused the claimant to suffer loss. Furthermore, the measure of damages will be that which is required to restore the claimant as nearly as possible to the position he would have been in if the defendant had not been negligent. The Supreme Court has provided a very clear reminder of this principle in the case of Tiuta International Limited v De Villiers Surveyors Limited.

Background

The claimant (T) was a specialist lender of short-term business finance. In April 2011, T entered into a loan facility with an individual (W) in connection with a development by a company with whom W was associated. The loan, in the sum of £2.45 million, was secured by a legal charge over the development. It was made on the basis of a valuation of the development by the defendant (D), which confirmed the development provided adequate security.

In December 2011 the parties entered into a second facility agreement in the sum of £3.088 million in respect of the same development. Of this just over £2.79 million was expressly provided for the refinancing of the indebtedness under the first facility and £289,000 for completion of the development.

In January 2012, £2.5 million was paid into W's existing loan account, discharging his liability under that facility in full. Further sums totalling £281,590 were also drawn down in relation to the development.

The second facility was entered into on the basis of further valuations by D, carried out in November and December 2011. Both valuations exceeded those provided in April 2011.

The second facility expired in July 2012, with the indebtedness fully outstanding.

No claim was made in respect of the first facility agreement. No allegations of negligence were made and the facility had been discharged in full.

T claimed against D in respect of the valuation provided in relation to the second facility. T alleged that the valuations given for the purpose of the second facility were negligent and but for that negligence the advances under the second facility would not have been made. D asserted that they could not be liable for the part of the second facility that was used to discharge the indebtedness under the first facility. Their liability could only extend to the additional sums drawn down in relation to the development. D applied for summary judgment.

First instance and Court of Appeal decisions

At first instance the High Court granted summary judgement in favour of D. The first valuation was not alleged to have been negligent. The losses attributable to the pre-existing indebtedness had not been caused by the December 2011 valuation. The "but for" test excluded the loss resulting from the advance under the second facility that was used to pay off the first.

T appealed to the Court of Appeal and the appeal was allowed. The Court of Appeal, also applying the "but for" test, held that D was liable to T for the whole of the loss flowing from the second valuation. This was the advance under the second facility, minus only the true value of the security and the developer's covenant.

The Court of Appeal confirmed the purpose to which the refinancing loan was put was irrelevant. A valuer would expect a lender, in reliance upon the valuation, to advance funds up to its full reported value. Applying the 'but for' test, D was liable for any adverse consequences attributable to the negligent valuation, which flowed from T entering into the second facility with W. T had entered into an entirely new facility and had taken a fresh legal charge over the security - all as a result of the negligent valuation received from D.

See our earlier insight for more detail on the Court of Appeal decision: Same 'but for' test of causation but different outcome

D appealed to the Supreme Court.

Supreme Court Decision

The Supreme Court allowed the appeal and restored the order for summary judgment made at first instance.

The basic measure of damages was that required to restore T to the position it would have been in had the second valuation not been negligent. If the second valuation had been a true reflection of the value of the development the second facility would not have been entered into. However, the first facility would not have been affected, T had entered into that facility on the back of a completely separate valuation and even if the second valuation had not been negligent the funds under the first facility would still have been advanced.

The fact that funds advanced under the second facility were used by W to settle the debt owed under the first facility did not mean D should be liable for the whole amount. Had there been no negligence there would have been no second facility or any indebtedness under that facility. However, the first facility would have remained outstanding and T would have been out of pocket to almost the same extent. In fact advances made under the second facility had resulted in T suffering an additional loss of just over £280,000.

The Supreme Court also confirmed that there was no collateral benefit here. As a general rule if a claimant obtains a benefit as a result of the circumstances that caused its loss credit will have to be given when damages are assessed, unless the benefit was collateral.

The fact that W had used the funds from the second facility to pay off the first facility was not collateral. The terms of the second facility expressly provided that the funds advanced under it should be used to settle the first facility. T never had any intention of advancing the funds under the first facility and under the second facility at the same time - it was always the case that the first facility had to be settled with the funds from the second.

Comment

This case was a negligent valuation one and the Supreme Court decision was obviously made in that context. However the decision is also relevant for damages claims in negligence generally. When calculating damages for claims in negligence start with the basics. The claimant will need to be put back into the position it would have been in had the negligence not occurred - the damages will be those sums that would not have been incurred "but for" the negligence of the defendant.

Lenders should be clear that they cannot recover losses that they will have suffered regardless of any negligence. If refinancing, on the basis of a negligent valuation, is provided to pay off an earlier facility, the loss suffered as a result of the refinance will not include the sum used to settle the earlier debt - if that debt would have remained outstanding in any event.