The recent case of Edward Astle & Ors v CBRE Ltd (and related actions)  EWHC 3189 (Ch) considers South Australia Asset Management Corp v York Montague Ltd  A.C. 191 ("SAAMCo") in a novel context. The Defendants allegedly included a negligent property valuation in an information memorandum, promoting an investment in a property-owning trust structure. They applied for summary judgment on the basis that the losses suffered by the investor Claimants fell outside of the Defendants' scope of duty, as they were caused by factors other than the overvaluation (such as the collapse in commercial property values following the financial crisis).
The Court dismissed the Defendants' application:
- The Court reiterated that the principle in SAAMCo will apply in straightforward cases involving negligent valuations to limit the scope of the duty owed by a valuer who is a (mere) information provider to cover only those losses attributable to the overvaluation and not the whole of the investor's losses from entering into the investment.
- In applying this principle to the case of a negligent valuation contained in an information memorandum, the Court held it is arguable that the scope of an investment promoter's duty is qualitatively different from the scope of a traditional valuer's duty and this wider duty may include statutory duties under FSMA, COB and COBS.
- The Court held that it is at least arguable that the calculation of loss should be carried out at the date of the valuation, or possibly at the time the valuation is relied on when entering into the relevant transaction. However, the Court did not finally determine this point, given that the case raises the SAAMCo principle in a novel context and the exercise is likely to be fact sensitive.
The Claimants therefore had a real prospect of establishing that the loss they suffered was attributable, at least in part, to the alleged inadequacies in the information memorandum. The decision is considered in further detail below.
1. Factual Background
The Claimants were investors in a Jersey-based trust (the "Trust"), which had interests in: (a) the freehold or long leaseholds of five sites, which were intended to become regional fire and emergency rescue centres as part of a Government fire control centre project; and (b) the freehold of a property in Cirencester, which was to be developed into an office building to be leased (together, the "Properties"). In March 2006, Bank of Scotland (the "Bank") advanced a 5-year secured term loan in excess of £100 million to finance the acquisition and development of (a) and a 5-year term loan in excess of £14 million in respect of (b). In addition to these facilities, fixed interest rate swaps were put in place and the Bank advanced working capital facilities, together with bridging facilities and a mezzanine facility, which were intended to be repaid upon the receipt of monies through the issue of units and loan notes by the Trust. CBRE Limited ("CBRE") was engaged by the Bank to provide expert valuations of the Properties for loan security purposes.
On 3 October 2006, the units and loan notes were issued in accordance with the provisions of an Information Memorandum (the "IM") prepared by Evans Randall Investment Management Limited ("ERIML"). CBRE's valuation was summarised in the IM. As part of the terms of the IM, the investors were prohibited from demanding repayment of sums due and owing under the loan notes until all amounts outstanding under the facilities with the Bank and various agreements between the Trust and ERIML were repaid in full. The total amount raised from investors was £33,775,000, and of this £26,775,000 was invested by the Claimants.
Subsequently, the Government project was abandoned so the intended use for the fire and emergency rescue centres was not fulfilled, coupled with a collapse in commercial property values following the financial crisis. The term loans could not be refinanced when they fell due for repayment in July 2011, which led to an event of default and receivers were appointed over the Properties in February 2012. Accordingly, the Claimants lost the full amount of their investment.
The Claimants commenced proceedings against ERIML and CBRE alleging that the IM accorded values to the Properties which were materially overstated and contained a series of factual errors relating to the Properties. The Claimants contend that these misstatements not only go to the value of the Properties, but the viability of the investment generally.
The Defendants applied for summary judgment on the basis that losses were incurred as a result of the cancellation of the intended use for the sites and the general collapse in commercial property values, which are matters which fall outside the scope of any duty owed to the Claimants, in accordance with the principle in SAAMCo.
The Court dismissed the application for summary judgment.
Application of SAAMCo
The Court summarised the SAAMCo principle as follows:
"…a claimant seeking damage for breach of a duty of care must "prove both that he has suffered loss and that the loss fell within the scope of the duty" (per Lord Hoffmann in SAAMCo at p.218B/C). Where the relevant duty is simply a duty to inform and not a duty to advise on whether a transaction ought to be entered into, an application of the "but for" test of causation will not of itself entitle the claimant to recover. He must prove that the loss is a consequence of the information being wrong."
The Court considered how SAAMCo has been applied in subsequent cases, stating that whether or not the principle will apply (and if so, how it is to be applied) will turn on the precise scope of the duty of care to which the negligent defendant is subject. The Court was not referred to any case in which the SAAMCo principle had been applied to similar facts/alleged duties to the instant case.
In applying the SAAMCo principle to the present case, the Court said it was required to carry out a two-stage process:
- Stage one required the Court to ascertain the basic loss. It was accepted by ERIML and CBRE that, for the purpose of the summary judgment applications, it would be assumed that the Claimants had established not just the duties and their breach, but also that the Claimants would not have invested in the Trust if the breaches had not been committed. Accordingly, the basic loss was the loss sustained by the Claimants by reason of the fact that they made an investment which is now worthless, which they would not have made but for the negligent valuation. As such, the Claimants suffered 'basic loss' amounting to the total value of their investment.
- Stage two required the Court to assess the maximum amount of loss capable of falling within the duty of care owed by the Defendants, which it does by identifying the consequences attributable to the wrongful act.
Scope of duty
In considering the second stage of the test outlined above, it was assumed that both ERIML and CBRE were subject to duties to take reasonable care in their provision of information.
However, there was a "sharp divergence of view" between the Claimants and ERIML as to whether ERIML's duty went further. The Claimants argued that ERIML could not compare its role in the promotion of the Trust to the role of a valuer. The policy considerations for protecting the valuers of mortgage security against adverse movements in the markets should not apply to a promoter in the position of ERIML.
The Court found that there was "much force" in ERIML's case on this issue: that the pleaded duty was to ensure that the facts stated in the IM were true and accurate, which did not extend to giving advice. However, the Court was not persuaded that the Claimants had no real prospect of establishing that there were relevant differences between the scope of a duty owed by a valuer to a mortgage lender and the scope of such duty as ERIML owed to the Claimants. In particular, the Court found that it was arguable that:
- The range of information contained in the IM which was said to be wrong was wider than the information contained in a valuation and was included for a wider purpose, namely making an investment decision.
- Where valuation information is provided to an investor for the purposes of making a decision on whether or not to invest, the scope of the promoter's duty is qualitatively different from the scope of the valuer's duty where the valuation evidence is provided to a lender for security purposes.
- As to the scope of that duty, an investment promoter knows that the person receiving the information will be using it to make an investment decision, in relation to which there are statutory duties under FSMA, COB and COBS.
The Court did not elaborate on the precise scope of the extended duties to which ERIML was arguably subject, because of its finding on the application of the SAAMCo principle to the more limited duty owed by CBRE (and ERIML) to take reasonable care in the provision of information (see below).
Notwithstanding its conclusions in relation to the additional duties arguably owed by ERIML, the Court considered the applications on the basis of the more limited duty to take reasonable care in the provision of information (owed by CBRE in any event).
Even on the assumption that the SAAMCo principle applies so as to require the Court to identify the direct consequences of the valuation being inaccurate, the Court held that the Claimants had a real prospect of establishing that the loss they suffered on their investment was at least partly attributable to the alleged inadequacies in the IM.
The Court first considered the case of the negligent valuer who owes a duty to a mortgage lender, where the loss on application of the SAAMCo principle will usually be limited to the difference between the valuation and the true value.
In the Court's view, it was at least arguable that this comparison exercise should be carried out at the date of the valuation, or possibly at the time the valuation was relied on when entering into the relevant transaction. This was possibly more appropriate where the valuation was produced for a purpose that relates to the viability of a wider transaction, even absent the giving of advice. On this basis, the Claimants would be entitled to claim the quantum of the overvaluation on day one, which was approximately £26 million. In accordance with the two-stage test, the qualification established by SAAMCo under the second limb is to impose a limit to the basic amount of damages a party would otherwise be entitled. The Claimants would therefore be entitled to the full amount of their lost investment, because this figure is not greater than the overvaluation.
That said, the Court commented that ERIML and CBRE had a perfectly good case for contending that the use of the above formula did not work very well to identify the loss properly attributable to the inaccuracy of the information in the present case. As at the date of valuation, the Claimants could not make a direct link between the extent of the overvaluation and the extent to which they would be prejudiced by making an investment against assets worth less than they thought, because their interests were subordinated in that respect to the rights of the Bank and other unsecured creditors. If the valuations had been accurate, the Bank would have been better off, but the Claimants would have been in exactly the same position. The formula suggested by ERIML and CBRE would require the Court to examine the extent to which the Claimants would still have suffered the loss they claim, even if the valuation had been correct (which on the Defendants' case, would produce no loss at all).
However, the Court did not finally determine what approach should be adopted in this case. The application raised the SAAMCo principle in a novel context and the exercise was likely to be fact sensitive. The specific approach to be taken to calculate the Claimants' losses should be determined at trial and accordingly the Defendants' summary judgment application was refused.
This judgment relates to an application for summary judgment and so its conclusions are simply arguable and not finally determinative. However, the decision offers guidance as to how SAAMCo will be interpreted outside of the typical valuer cases, specifically in the context of a negligent valuation contained in an information memorandum promoting an investment in an asset-holding issuer.
Importantly, it appears to widen the scope of the duties arguably owed by an investment promoter who has provided information to an investor for the purpose of making an investment decision. It will be for the trial judge to decide whether this is the correct approach, and more generally to decide upon whether it is appropriate to extend the scope of the SAAMCo principle to cases of this kind.