Recent Supreme Court decision: Tiuta International Ltd (in Liquidation) v De Villiers Surveyors Ltd  UKSC 77
In this recent decision, the Supreme Court considered the proper approach to the quantum of damages in professional negligence refinance cases.
In the circumstances of this case, the lender had advanced funds based on the negligent valuation of a property obtained by the lender before making a refinance loan, the first loan and charge having been redeemed by the second advance.
The question was whether the recoverable loss is limited to the amount of additional lending included in the second loan, even where the same valuer prepared both valuations.
Background to the High Court and Court of Appeal decisions
Tiuta International Ltd ("the Lender") entered into a loan facility agreement with a property developer in connection with a residential development based on a valuation of the development conducted by De Villiers Surveyors Ltd ("the Surveyor").
Shortly before the facility agreement was due to expire, the Lender entered into a second facility agreement in connection with the same development on the basis of a second valuation by the Surveyor.
Under the second facility agreement, the Lender agreed to lend a sum to discharge indebtedness under the first facility and a separate sum of new money advanced for the completion of the development.
The second facility expired a few weeks after the Lender went into administration and none of the indebtedness outstanding had been repaid.
The Lender claimed that the second valuation had been made negligently. The Surveyor applied for a summary judgement order as there was no suggestion that its first valuation had been negligent. The Surveyor argued that the most it could be liable for by way of damages was the new money advanced under the second facility as the indebtedness under the first facility would have been suffered in any event.
The Deputy High Court Judge granted summary judgment in favour of the Surveyor. However, the Court of Appeal reversed that decision finding that the loss which the Lender sustained as a result of entering into the second transaction was the advance of the second loan, less the amount of money lent and the value of the rights acquired.
The Surveyor appealed.
Basic principles of the law of damages and collateral benefit
The basic measure of damages is to restore the claimant as nearly as possible to the position that he would have been in if he had not sustained the wrong.
Where a claimant had received some benefit attributable to the events which caused his loss that benefit had to be taken into account in assessing damages, unless it was collateral.
The principle of collateral benefit states that if an injured party receives compensation for the injuries from a source different from the wrong doer, the payment should not be deducted from the damages that the wrongdoer must pay.
Supreme Court findings
If the Surveyor had not been negligent in valuing the property for the purpose of the second facility, the Lender would not have entered into the second facility but it would have entered into the first. The Lender would not have lost the new money lent under the second facility but would have lost the original loans made under the first.
In the case of negligent valuation where, but for the negligence, the Lender would not have lent, that involved the basic comparison. The basic comparison was typically between the amount of money lent (which he still would have had in the absence of the loan transaction) plus interest at a proper rate and the value of the rights acquired. It was therefore necessary to take a purely factual enquiry which involved asking by how much the Lender would have been better off if he had not lent the money which he had been negligently induced to lend.
But for the second valuation/facility, all losses attributable to the first facility would still have arisen. The Surveyor could not, therefore, be liable for more than the difference which his negligence made. The Lender's loss was therefore limited to the new money advanced under the second facility.
The Court held that the discharge of the existing indebtedness out of the advance made under the second facility was plainly not a collateral benefit as it had been required by the terms of the second facility. The basic comparison required consideration of the whole transaction. That meant having regard to the fact that the refinancing element of the second facility both increased the Lender's exposure and ultimate loss under the second facility and reduced its loss under the first facility by the same amount. Only the new money under the second facility made a difference.
This decision finds in favour of the valuer and has negative implications for lenders in relation to negligent valuations. The Court has limited the quantum that lenders can recover if they have in place a top up advance after the existing loan is redeemed. In turn, this may limit the scope of professional negligence claims that can be brought by lenders against valuers.
The decision does make it clear that a valuer who overvalues a property can only be responsible for the difference that their negligence made to the claimant's position. In other words, a lender cannot recover losses which it would have sustained in any event.
It could be easier for the lender to recover losses flowing from the first valuation if both the first and second valuation have been prepared by the same valuer as arguments can be raised that losses flowing from the first valuation were foreseeable.
On the other hand, where the two valuations have been prepared by different valuers the position may be different and it could be more difficult for the lender to successfully argue that the losses flowing from a report prepared by a different valuer were foreseeable.
Furthermore, it should be borne in mind that the Court made the decision that it did on the basis of an assumption that the first valuation undertaken by the Surveyor had not been negligent.
It also remains to be seen whether the rationale behind the Court's decision in this particular case is only applicable in cases where the first loan was entirely redeemed or if it can also be applied in situations where the security remains in place but, for example, the loan terms altered.