Senior Associate, Ben Hartley and Law Graduate, Daniel Coloe look at Hay Property Consultants Pty Ltd & Anor v Victorian Securities Corporation Limited & Ors, and consider the question of causation in the context of a negligent valuation – an issue that is the subject of frequent litigation in a fluctuating property market.
In 2004, Amir and Indira Burzic borrowed money for the purchase of property in Dandenong. The valuers forwarded a valuation to the lender indicating that the value of the properties was $800,000 and was adequate security for 65% of that amount. On that basis the lenders lent $520,000 to the borrowers and attained the security of first mortgages over the properties.
The borrowers subsequently defaulted on their loan repayments, and the lender took possession of the properties. However, before doing so, the properties were deliberately damaged by an unknown third party. The properties were then sold for $380,000 by the lender resulting in a $170,601.74 loss. It was agreed that the valuers owed the lender a duty of care and that if the valuers had not inaccurately valued the properties, the lender would not have made the loan at all.
The lender issued proceedings in the County Court of Victoria seeking damages for breach of contract, negligence and for loss caused by the valuers’ misleading and deceptive conduct contrary to section 52 of the Trade Practices Act 1974 (Cth) (TPA) (or more particularly under section 82 of the TPA which allows the recovery of damages for breach).
The County Court had to resolve two questions:
- Are the valuers liable for the entire loss sustained by the lender or is the diminution in value caused by the third party criminal damage to be excluded?
- Do the proportionate liability provisions under Pt VIA TPA or Pt IVAA Wrongs Act 1958 (Vic) operate to reduce/ eliminate the valuers’ liability?
In regards to the first question, the court held that it was bound by Henville v Walker, which held that section 82 of the TPA did not require the plaintiff to prove that the valuers’ misleading advice was the sole cause of their loss. In regards to the second question, the court held that valuers were liable for the whole loss suffered on the sale of the properties, because the valuers’ misleading and deceptive conduct was one of two operative causes of the lender’s loss.
Appeal to the Supreme Court of Victoria
The valuers appealed on the ground that the trial judge erred in concluding that the damage to the property committed by unknown persons was not an intervening act, and that it did not break the chain of causation between the negligence of the valuers in overvaluing the subject property and the loss claimed by the respondent. The valuers argued even though the overvaluation meant that money was lent that normally would not have been, if the properties had not been damaged they would still have sold for $595,000, an amount sufficient to cover the lender’s loss.
The decision came down to causation, specifically whether there was a causal connection between the valuers’ misleading representations and the lender’s loss, or whether the deliberate property damage was an intervening act.
In looking at causation Justice Neave held that “general principles should be applied in resolving causation issues.” Her Honour did however note that in the case of section 82 of the TPA, whilst common law principles are relevant they are not decisive as decisions on causation are dependent on their particular facts.
In deciding the case, Justice Neave considered a number of English and Australian authorities. In the UK prior to the decision in Banque Bruxelle Lambert SA v Eagle Star Insurance Ltd, English authority differed on the extent to which compensation would be granted depending on whether the case was (1) one where no loan would have been made but for the negligent valuation (no transaction); or (2) where a smaller loan would have been made if the valuation was correct (lower amount). Banque Bruxelles simplified this position by holding that all lenders were entitled to recover the difference between the sum lent and the sum recovered from a negligent valuer, because damages should be measured by reference to the kind of loss which fell within the valuer’s duty of care.
Justice Neave then referred to the three leading Australian authorities, Kenny & Good Pty Ltd v MGICA (1998), Henville and I&L Securities v HWT Valurers (2002). Kenny involved a transaction that would not have been entered into but for the negligent over-valuation. The High Court held 6:1, that in “no transaction” cases the negligent valuer would be liable for the actual loss.
In Henville, the majority held that the financial loss on the sale of the home units was caused by the estate agent’s misleading advice as to the prospective value of the units and the appellant’s own negligence did not prevent section 82 of the TPA from applying. The High Court also held 3:2 that the estate agents were liable for the whole of the loss.
I&L Securities was consistent with Henville that section 82 damages cannot be reduced by the plaintiff’s contributory negligence as contributory negligence is irrelevant unless the court can find that the loss was divisible into ‘parts’ and the original contravening party did not cause those other parts. Once the loss is determined to be a result of the contravening conduct it cannot be divided.
Justice Neave held that the lender was not entitled to section 82 damages for loss of the value of the properties resulting from the third party criminal acts. The loss on resale was not an indivisible loss which was caused by the misleading representations of the valuers, but rather two distinct types of loss, one attributable to the damage by third parties.
The reasoning was as follows:
- Even though the lender would not have made the loan but for the valuers’ misrepresentation, the satisfaction of the “but for” test was not sufficient to mean that loss was caused ‘by’ the negligent valuation. In a factual sense, the lender would not have suffered any loss if it had not entered into the transaction with the borrowers.
- Justice Neave held that whilst the lender would not have suffered any loss if it had not made the loan, the misrepresentation merely “initiated the train of events and did not create a legally causal relationship between the loss caused by the damage to the properties and the making of the loan.”
- The legal context in which the right to recover damages arises must be taken into account in resolving causation issues. The object of the TPA is not for a negligent valuer to be liable for losses caused by third parties unless the breach increased the risk that the subsequent acts would occur.
- None of the authorities discussed supported the lender’s claim for the whole of the loss. The law does not require valuers to act as insurers of the loan for all subsequent actions after the negligent misstatement. The reference to the 65% loan to value ratio here was not an undertaking that the properties’ value would remain adequately secured even if the properties were subsequently damaged.
- The case was an example of an abnormal event intervening between breach and damage breaking the chain of causation between the misrepresentation and the loss.
- Finally, in common law negligence cases, courts have been reluctant to hold a defendant liable for harm caused by subsequent criminal acts. In these cases the courts may deny liability by holding that no duty is owed to a victim to prevent the harm suffered, or by holding that the damage was too remote. In some cases defendants have been held liable for the subsequent acts of third parties but only because the negligent actions created a risk that the latter may occur. This principle did not apply here.
Therefore the court held that the appeal should be allowed.
Hay Property Consultants presents a unique factual scenario from other cases dealing with negligent valuation. Unlike cases where the intervening event included a drop in the property market or purchaser negligence, third party criminal damage was found to break the chain of causation.
This case stands as a reminder that causation must be carefully assessed on its merits. Despite the plaintiff being successful at first instance, the outcome of the appeal is indicative that the question of causation can be quite complex. This case further confirms that applying a “but for” analysis can be unreliable in proving causation.
The decision also reminds parties that the overall purpose of section 82 of the TPA (and from 1 January this year, the Competition and Consumer Act 2011), will be taken into account when determining causation and if loss does not flow from a menace that consumer protection legislation is designed to protect, then courts will be reluctant to allow recovery of damages.
Finally, in a fluctuating property market, the case serves as a reminder that care and consideration must be given when valuating a property and likewise the decision to loan monies based on a valuation. While the factual scenario in Hay Property Consultants was unique, the fact that a valuer was being pursued through the court following a negligent valuation was most certainly not.