South Australian Asset Management Corp v York Montagu Ltd [1996] UKHL 10

Lenders suffered losses after advancing money on the strength of negligent property valuations and subsequent market falls. The House of Lords held valuers liable only for losses attributable to the overvaluation itself, not for all losses from the lending transaction, establishing the ‘information not advice’ and SAAMCO cap principles on recoverable damages.

Facts

General background

The appeals concerned the extent of liability of professional valuers who negligently overvalued properties offered as security for loans. In each case, the lender would not have advanced funds had the true value been known, and subsequent falls in the property market significantly increased the eventual loss.

The valuers had undertaken, in return for a fee, to provide estimates of the price which the property might reasonably be expected to fetch if sold in the open market at the date of valuation. The lenders used those valuations as a key part of the material on which they decided whether, and how much, to lend.

South Australia Asset Management Corporation v York Montague Ltd

On 3 August 1990, the lenders advanced £11 million on a property valued at £15 million. May J found that the actual value at the time was £5 million. On 5 August 1994, the property was sold for £2,477,000. May J quantified the loss at £9,753,927.99 and deducted 25 per cent for contributory negligence.

United Bank of Kuwait Plc v Prudential Property Services Ltd

On 19 October 1990, the lenders advanced £1.75 million on the security of a property valued by the defendants at £2.5 million. The judge found that the correct value was between £1.8 million and £1.85 million. The property was sold in February 1992 for £950,000. Gage J quantified the loss (including unpaid interest) at £1,309,876.46 and awarded this sum as damages.

Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd

On 12 March 1990, the lenders advanced £2.45 million on the security of a property valued at £3.5 million. Judge Byrt QC found the correct value to be £2 million or at most £2,375,000. On a sale by auction in February 1993, the property realised £345,000. The judge quantified the loss (including unpaid interest) at £3,058,555.52 and gave judgment for that amount.

In Nykredit, the valuation concerned property with development potential. The lender’s standard-form instructions requested an open market valuation and also set out further matters on which the valuer was to comment, including rental value, lettability, completed value and development costs. The letter stated:

“Would you please provide a report and valuation as to the open market value . . .”

“In preparing your report, please comment on the following, if applicable . . .
7. The current rental value and its relationship with the present income, and give your opinion as to the lettability of the property in the open market or, if unlet, please comment on the viability of the proposed rental income.
8. The completed value (if a development project) and a commentary regarding the potential saleability. . . .
10. The estimated development costs, and a commentary as to whether the costs quoted are realistic.”

The proposed loan was for an initial term of 12 months to finance the purchase of the land. The borrower was a single-asset company and the lenders expected to be repaid when development finance was obtained.

Issues

The key question was the scope of the valuer’s duty, and hence the type and extent of loss for which the valuer was liable when a lender entered into a transaction relying on a negligent valuation.

The Court of Appeal had held, in so‑called “no‑transaction” cases (where the lender would not have lent at all if correctly advised), that the lender could recover the full loss on the loan (principal and reasonable interest, less recoveries), thereby placing the whole transactional risk, including market falls, on the valuer. By contrast, in “successful transaction” cases (where the lender would still have lent, but a lesser sum), the loss was confined to the difference between the actual loss and the loss that would have occurred on the reduced loan.

The House had to decide:

• whether a negligent valuer is liable for all losses which would not have occurred but for the negligent valuation, including losses attributable to subsequent market falls; or
• whether liability is limited to loss attributable to the information being wrong, i.e. the consequences of the overvaluation itself within the scope of the duty of care.

Judgment

Approach to scope of duty and causation

Lord Hoffmann (with whom the other Law Lords agreed) emphasised that it was necessary first to define the kind of loss for which the valuer was responsible, before considering how to measure damages. The case was approached in terms of the scope of the duty of care, in line with the reasoning in Caparo Industries Plc v Dickman.

The duty arose under contract, with a concurrent duty in tort, and was to exercise reasonable care and skill in providing a valuation for the known purpose of informing the lender’s decision whether, and how much, to lend. However, the valuer was not privy to other matters affecting the lender’s commercial decision (such as availability of funds, the borrower’s covenant strength or interest rates).

Lord Hoffmann relied on the principle articulated in Caparo. Citing Lord Bridge of Harwich, he noted:

“It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.”

He held that, in the usual case of liability for negligent provision of information, the defendant is responsible only for the consequences of the information being wrong, not for all consequences of the claimant’s decision to engage in the transaction.

Information versus advice

Lord Hoffmann distinguished between two types of duty:

• a duty to advise whether a course of action should be taken, where the adviser must consider all potential consequences of that course and may be liable for all foreseeable loss caused by taking it; and
• a duty merely to provide information to inform another’s decision, where liability is confined to foreseeable consequences of the information being inaccurate.

Valuers here fell into the latter category: they supplied information (a valuation) to be used as one factor in the lender’s wider commercial decision.

Rejection of the Court of Appeal’s “no‑transaction” principle

The Court of Appeal had treated the valuer as bearing the whole risk of any transaction that would not have occurred but for the negligence, subject to reasonable foreseeability. Lord Hoffmann considered that approach wrong in principle and contrary to common sense. It effectively made the valuer responsible for all consequences of the lender’s decision, including a general fall in the market, merely because the lender would not otherwise have lent.

He illustrated this with an example of a mountaineer who, relying on negligent medical advice about his knee, undertakes an expedition and suffers an injury unconnected with the knee. On the Court of Appeal’s reasoning, the doctor would be liable for that injury simply because, but for the bad advice, the climber would not have gone. Lord Hoffmann considered this “offends common sense” because it lacks a sufficient causal connection with the subject matter of the duty.

He concluded that a duty of care limited to taking reasonable care in providing information does not fairly or reasonably extend to losses that would have occurred even if the information had been correct.

Measure of damages for negligent information versus warranty

Lord Hoffmann distinguished damages for breach of a duty of care in providing information from damages for breach of a warranty that the information is accurate. In the former, the measure is the loss attributable to the inaccuracy of the information, assessed by comparing the claimant’s actual position with the position if he had not entered into the transaction, and then isolating the element of loss attributable to the information being wrong. In the latter (warranty) case, the comparison is between the claimant’s actual position and the position if the information had been true.

This analysis underpinned the earlier decision in Swingcastle Ltd v Alastair Gibson, where a lender could not recover contractual interest lost on a loan because that would place it in the position it would have enjoyed had the valuation been correct, rather than compensating the loss attributable to the inaccuracy.

No general “no‑transaction/successful transaction” distinction

Lord Hoffmann rejected the Court of Appeal’s legal distinction between “no‑transaction” and “successful transaction” cases as irrelevant to the scope of duty. Every transaction induced by a negligent valuation was, in one sense, a “no‑transaction” case, because the actual transaction would not have occurred. For assessing loss, however, other hypothetical uses of the money remained relevant. The fundamental requirement remained that only loss caused by the valuation being wrong, and within the scope of the duty, is recoverable.

Alternative theories rejected

The House rejected a “cushion theory” of damages (based on the proportion of loan to true value) as unjustified, and also rejected the idea of quantifying damages solely by reference to the value of the security at the date of the advance.

Lord Hoffmann accepted that subsequent market falls could be relevant where the lender had relied on the valuation to provide a margin against such falls. A rigid assessment at the date of breach would wrongly exclude the very future events (such as falls in value) against which the lender had sought protection.

An argument that damages should be limited to the excess over the highest non‑negligent valuation was also rejected as confusing the standard of care with the loss within the scope of the duty. Once negligence is established, the court must determine the most probable correct valuation and treat the loss caused by the difference between that figure and the negligent valuation as the relevant damage.

Application to the three appeals

South Australia Asset Management Corporation v York Montague Ltd

The negligent valuation of £15 million compared with an actual value of £5 million meant the lender had £10 million less security than believed. If the property had been worth £15 million, no loss would have been suffered despite the subsequent sale for £2,477,000. Accordingly, the whole of the lender’s loss was within the scope of the valuer’s duty.

The appeal was dismissed and the judgment of May J, including the deduction for contributory negligence, was effectively upheld.

United Bank of Kuwait Plc v Prudential Property Services Ltd

The negligent valuation was £2.5 million; the correct value lay between £1.8 million and £1.85 million. The lender therefore had £700,000 or £650,000 less security than believed. The Court of Appeal’s approach had awarded the whole transactional loss, including unpaid interest.

Lord Hoffmann held that the recoverable damage should be confined to the consequences of the overvaluation, namely the shortfall in security. Arguments that the valuer had also misled the lender as to the risk of default were rejected, as the valuer had not been asked to advise on default risk and such matters lay outside his knowledge and the scope of his duty.

The appeal was allowed. Damages were to be reduced to the difference between the negligent valuation and the true value at the valuation date, with the precise figure remitted to the trial judge if not agreed.

Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd

The negligent valuation was £3.5 million and the correct value was £2 million or at most £2,375,000. As in United Bank of Kuwait, the judge had awarded the whole loss, including interest.

The lenders argued that, given the developmental nature of the property and the additional comments requested in the instructions, the valuer’s duty extended to advising on the viability of the development and the risk of default.

Lord Hoffmann held that the additional requested comments were not separate heads of information on which the lender could rely independently of the valuation. They were part of the exposition of the valuation process, allowing the lender to assess the valuation’s reliability. The valuer would not have been liable if some comments were wrong but the ultimate valuation was correct. Thus the scope of the duty was not broader than in the other cases.

The appeal was allowed, and damages were to be substituted equal to the difference between £3.5 million and the true value at the valuation date, with that true value to be determined by the trial judge if not agreed.

Implications

The House of Lords clarified the scope of professional valuers’ liability to lenders. A valuer who negligently overvalues security property is liable only for losses which are the foreseeable consequence of the valuation being wrong, not for all losses arising from the lending transaction.

This case establishes the principle that, where a professional provides information (rather than comprehensive advice on whether to enter into a transaction), damages are limited to the loss attributable to the inaccuracy of that information. The decision also affirms the distinction between negligence and warranty: in negligence, the measure is how much worse off the claimant is because the information was wrong, rather than how much better off they would have been if it had been correct.

In practice, this produces what is often called a ‘cap’ on recoverable damages, being the amount by which the negligent valuation exceeds the true value at the time. While subsequent market movements may influence the calculation of actual loss, the recoverable loss cannot exceed the extent to which the security was overstated by the valuer, viewed through the lens of the valuer’s limited informational duty.

Verdict: The House of Lords dismissed the appeal in South Australia Asset Management Corporation v York Montague Ltd, holding the valuer liable for the lender’s whole loss within the security margin, but allowed the appeals in United Bank of Kuwait Plc v Prudential Property Services Ltd and Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd, limiting damages in those cases to the loss attributable to the amount of the overvaluation (the difference between the negligent valuation and the true value), with remittals for determination of true value where necessary.

Source: South Australian Asset Management Corp v York Montagu Ltd [1996] UKHL 10