The scope of a valuer's duty post Manchester Building Society and Khan – the Privy Court's view

Insight

Published

25 May 2022

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Guest article written by Alexandra Anderson, Katherine Cusack and Charles Underwood at RPC

First published: 3rd February 2022

In Charles B Lawrence & Associates v Intercommercial Bank Ltd (Trinidad and Tobago) [2021] UKPC 301, the Privy Council was tasked with applying the reformulated "scope of duty principle" derived from Manchester Building Society2 and Khan3 to a valuer's negligence claim in which the title to the secured land was also defective.

Although an appeal from Trinidad & Tobago, the applicable law is that of England. As such, this case provides useful insight to valuers, conveyancing solicitors and their insurers about how the court will now approach claims that involve allegations of negligent valuation.  It also will be of interest to other professionals who wish to gain a better understanding of the implications of Manchester Building Society and Khan for their practices. In particular, the case serves as a useful example of how the scope of duty principle (as reformulated) may be applied as between different professions in the same claim. Details and an analysis of the Manchester Building Society and Khan cases can be found here.

Facts

Intercommercial Bank Ltd (the Bank) instructed Charles B Lawrence & Associates (the Surveyors) to value land for the purposes of a proposed mortgage to Singapore Automotive Trading Ltd (the Borrower). The land was owned by Rafferty Development Ltd (the Guarantor), which was to be the guarantor of the loan, offering the land as security. 

The Surveyors issued their report in December 2008, valuing the land at $15 million, based on the following assumptions:

a) good marketable title to the land could be shown;

b) planning permission would be granted for commercial development of the land; and

c) the land was free from all encumbrances with vacant possession. 

In February 2009, on reliance on the report, the Bank loaned $3 million to the Borrower, with the land owned by the Guarantor to be used as security for the loan. Although there was no contractual relationship between the Bank and the Surveyors, all parties were aware that the purpose of providing the report was for securing a mortgage, and that the Bank would rely on the report.

Both the Borrower and Guarantor defaulted on the loan without a single payment being made. The Bank appointed receivers to enforce the security. It transpired that the land was only suitable for residential development, meaning that it was worth substantially less than initially thought. The highest bid received for the land was $2 million. In March 2012, the Bank issued a claim against the Surveyors, seeking damages in tort for the negligent preparation of the valuation report.

To add to the Bank's difficulties, it transpired that the Guarantor did not in fact have good title to the secured land, meaning that the mortgage was of no value. In January 2013, the Bank issued proceedings against its own conveyancing solicitors, for the negligent investigation of title. That claim was settled for $2.4 million, but the claim against the Surveyors proceeded to trial.

The decision of the lower courts

At first instance, the High Court of Trinidad and Tobago, decided that:

a) the Surveyors owed a duty of care to the Bank for their valuation report, even though the Bank had not retained them; 

b) The Surveyors had breached their duty to the Bank in two respects. First, they had valued the land on the basis that it could be developed commercially, when in fact it was only suitable for residential development, and the Judge accepted the evidence from the Bank's expert that it was therefore only worth $2.375 million. Secondly, the Surveyors had failed adequately to draw to the attention of the Bank that there were occupiers on the land; and

c) All the losses sustained by the Bank stemmed from the Surveyors' breach of duty, and after deducting the $2.4 million settlement, the remaining losses would be recoverable from the Surveyors. No deduction would be made for contributory negligence by the Bank. 

The High Court assessed damages at $2,361,636.70 at 14 March 2014 (being the date of settlement with the Bank's conveyancing lawyers). This was calculated on the basis of the $3 million loan amount, plus the contractual rate of interest of 15.75% up to 14 March 2014, minus the $2.4 million settlement sum. The judge therefore awarded damages of $2,361,636.70 plus contractual interest from 14 March 2014 until 16 October 2014, the date of judgement. 

The Surveyor appealed that decision to the Court of Appeal in Trinidad and Tobago, but that appeal was dismissed, save on two points. First, the Court of Appeal considered that the appropriate rate of interest was the statutory rate of 12%, rather than the contractual rate. Second, there should be a 20% deduction for the Bank's own contributory negligence, for failing to send its own agents to inspect the land and verify that it was in fact vacant.

Appeal to the Privy Council

The Surveyors then appealed to the Privy Council. The central issue before the Court was whether all the losses did in fact all within the scope of the Surveyors' duty, following the principles set out in South Australian Asset Management Corporation v York Montague Ltd (SAAMCo), since reformulated by the Supreme Court in Manchester Building Society and Khan

The Surveyors argued that the Bank had in fact suffered two distinct and separate losses:

  1. the loss suffered from the land being overvalued; and 
  2. the loss suffered as a result of the land title being defective. 

The Surveyors argued that the second loss was outside the scope of their duty to the Bank. They were not instructed, nor expected, to investigate title to the land. The Bank instructed lawyers for this purpose. The correct measure of damages, on the Surveyors' calculations, was the $3 million loan sum, less the true value of the land (being $2.375 million).  From this sum ($625,000), a further deduction of 20% should be made for contributory negligence, with any interest accruing on this final sum. 

The Bank argued that the valuation report was commissioned for the purpose of the loan, and as such all reasonably foreseeable losses suffered by it as a result of the decision to enter into the loan, based on the higher valuation, fell within the Surveyors' scope of duty. The Bank added that it would not have made the loan at all had it been aware of the presence of the occupiers.

The judgment of the Privy Council 

The Privy Council agreed with the Surveyors' calculation of damages and unanimously upheld their appeal. In doing so, the Court cited two passages from Manchester Building Society:

the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given…4

in the case of negligent advice given by a professional adviser one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk.”5

And the following passage from Khan:

In addressing the scope of duty question in the context of the provision of advice or information, the court seeks to identify the purpose for which that advice or information was given. Where the claimant has asked for advice about a risk or about a proposed activity which involved that risk, the court asks: ‘what was the risk which the advice or information was intended and was reasonably understood to address?’.”6

The Privy Council concluded that the purpose of the report, as made clear within the report itself, was to value the land on the assumption of good title. It was not the purpose of the report to advise, or otherwise provide information, on title to the land. The fact that the Bank instructed its own lawyers to advise on title and deal with the conveyance confirmed this view. 

The loss caused by the defect on title should therefore be deducted from the losses recoverable from the Surveyors. These losses were assessed as being the value of the land as at the date of the loan, on the assumption that there was good title, being $2.375 million. 

The Privy Council found that no credit should be given for the settlement reached with the solicitors (the $2.4 million), the reason being that these settlement funds were attributable to the defect in title, being a distinct loss, separable from the losses recoverable from the Surveyors. 

With particular reliance on Khan, the Privy Council concluded that the overvaluation loss was within the scope of the Surveyors' duty, but the defective title was not. In Khan, the doctor had been approached to advise on the risk that the patient carried the haemophilia gene and not for providing general advice about the risks of pregnancy.  In the present case, the Surveyors had been approached to provide advice on the value of the land, but not the legal title. 

The court also considered the application of the SAAMCo counterfactual test. While Manchester Building Society and Khan has relegated this test to a useful "cross-check", the Privy Council nonetheless found it a useful exercise to apply the test: would the claimant have still suffered the same loss if the information/advice had been correct? If the answer is "yes", the scope of duty does not extend to that loss; conversely, if the answer is "no", then the duty does extend to the recovery of that loss. Applying that test, the Privy Council concluded that, if the advice had been correct, so that the was land worth $15 million, then the Bank would have been suffered no loss, as it would have had adequate security (providing there was no defect in title). This reinforces the Supreme Court's view expressed in Manchester Building Society, that the counterfactual is a useful "cross-check", in assessing the scope of duty in most but not all cases.

Comment and key takeaways

The Privy Council's decision demonstrates the way the courts will now approach the question of the scope of a professional's duty, be it a solicitor, doctor, surveyor, accountant, by ascertaining the purpose for which the advice/information was provided and analysing whether the losses sustained flow from the risk that the advice/information was intended to guard against. 

The Privy Council have also reinforced the view of the Supreme Court that the SAAMCo counterfactual test has been relegated to a useful, but secondary, consideration when determining the scope of a professional's duty. 

This case also raises interesting issues concerning contributory between co-defendants. Section 1 of the Civil Liability (Contribution) Act 1978 states that;

… any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)."

The essential ingredient is that the damage must be the same. On the above analysis, with greater emphasis being placed on the nexus between the negligent act and the cause of the loss, it appears that there will be opportunities for parties to argue that the damage is in fact different and does not therefore fall under the ambit of section 1, so as to avoid claims for contribution.


1 A copy of the judgment can be found here.
2 Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 
3 Meadows v Khan [2021] UKSC 2
4 Paragraph 4
5 Paragraph 17[6] Paragraph 41

Howden Commentary

Good to see the Privy Council reaffirming the ability of a valuer to defend claims based on the limited scope of their duty of care.  A valuer should not be held liable for defective title issues which fall outside of the scope of their appointment and are the responsibility of lawyers retained for this purpose.

Rob Skingley, Divisional Director, Professional Indemnity

Authored by:

Alex Anderson, RPC

Alexandra Anderson

Partner, RPC

Email Alexandra Anderson

+44 (20) 2060 6499

Katherine Cusack, RPC

Katharine Cusack

Partner, RPC

Email Katharine Cusack

+44 (20) 3060 6965

Charles Underwood, RPC

Charles Underwood

Trainee Solicitor, RPC

Email Charles Underwood

+44 (20) 3060 6000

This article has been written by Reynolds Porter Chamberlain LLP "RPC" and the opinions and views stated in this article are those of RPC and not Howden Insurance Brokers Limited (“Howden”). Howden is an insurance broker and is not authorised or regulated to advise on how courts will now approach the question of the scope of a professional's duty. Howden shall not (i) owe or accept any duty, responsibility or liability to you or any other person; and (ii) be liable in respect of any loss, damage or expense caused by your or any other party’s reliance on this article.