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The valuer's liability for negligent valuation - toward a more principled allocation of the risk of market decline

Published online by Cambridge University Press:  02 January 2018

Alexander Loke*
National University of Singapore


The scope of duty of care concept developed by Lord Hoffmann in South Australia Asset Management v York Montagu (1997) AC 191 seeks to limit a valuer's responsibility for a lender's losses arising from his negligent valuation report. The limitation device stems from a laudable motivation. As the valuer provides only one of the considerations on which the lender relies to assess the loan proposal, it is intuitively unappealing to thrust the full loss onto the valuer. However, this limitation technique operates in a mechanical manner and does not deal with the loss attributable to the market fall in a cogent and principled manner. This article suggests that the key to a principled restriction on the valuer's responsibility lies in identifying the kinds of risks the parties were willing to assume. The author develops two techniques - the Constructive Alternative Transaction Discount and the Constructive Actualised Risk Discount - for reducing the valuer's extent of responsibility in a principled and cogent manner.

Research Article
Copyright © Society of Legal Scholars 1999

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1 The principles of causation would also apply to determine whether the later event is the effective cause of the damage.

2 (1997) AC 191, sub nom Banque Bruxelles SA v Eagle Star.

3 (1997) AC 191 at 214.

4 Livingstone v Rawyards Coal Co (1880) 5 App Case 25 at 39, HL, Sc: ‘…as nearly as possible get that sum of money which will put the party who has been injured…in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.’

5 The ‘successful transaction/no transaction’ terminology was introduced by Staughton LJ in Hayes v James and Charles Dodd (1990) 2 ALL ER 8 15, CA. The ‘successful transaction’ scenario contemplates that the lender would have entered into another transaction (on different terms) with the borrower given the accurate valuation: see section 3(b) below ( Avoiding “no transaction” through “successful transaction”). The ‘successful transaction/no transaction’ terminology has since been regularly used; indeed it was adopted by the House of Lords in South Australia Asset Management v York Montagu (1997) AC 191. For further refinements, see A M Dugdale ‘A Purposive Analysis of Professional Advice: Reflections on the BBL Decision’ (1995) JBL 533 at 534–536.

6 J Stapleton ‘The Normal Expectancies Measure in Tort Damages’ (1997) 113 LQR 257.

7 MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313 (Lindgren J); affd (1997) 147 ALR 568 (Full Court).

8 (1990) 2 AC 605.

9 (1997) AC 191 at 212.

10 Nykredit Mortgage Bank v Edward Erman (No 2) (1998) 1 ALL ER 305 at 316.

11 (1997) AC 191 at 214.

12 Nykredit Mortgage Bank v Edward Erman (No 2) (1998) 1 ALL ER 305 at 316.

13 (1991) 2 AC 249.

14 See above, section 2(d), ‘An implicit incorporation of a warranty obligation in the scope of duty idea?’

15 (1997) AC 191 at 214.

16 D W McLauchlan ‘A Damages Dilemma’ (1997) 12 JCL 114 at 127–129 (’ The Paradox Survives’).

17 The burden of proof is on the defendant: CCC Films (London) Ltd v Impact Quadrant Films Ltd (1985) QB 16.

18 (1997) 113 LQR 1 at 4.

19 Unless the warranty is to the effect that the property will continue to maintain its value at £10m. This would be surprising even as an express warranty by the valuer. An argument that this constitutes an implied warranty is surely unsustainable.

20 D W McLauchlan ‘A Damages Dilemma’ (1997) 12 JCL 114 at 127-129 (’ The Paradox Survives’), substantially reiterating the points made in his note at (1997) 113 LQR 421.

21 (1997) AC 191 at 216.

22 Banque Bruxelle Lambert SA v Eagle Star Insurance Co (1995) 2 ALL ER 769.

23 (1991) 2 AC 223.

24 £8.8 =£8 principal advanced +£2.8 lost interest - £2 realisation value.

25 Reported with South Australian Asset Management at (1997) AC 222.

26 (1998) 1 ALL ER 305, HL. It is interesting to set United Bank of Kuwait v Prudential Property Services Ltd alongside the follow-up case of Nycredit Mortgage Bank v Edward Erdman Group (No 2). In the latter case, damages payable was capped at £1.4m, this being the difference between the value as ascribed by the valuer and the accurate value of the security. However, statutory interest on the damages was awarded under s 35A(1) of the Supreme Court Act 1981 at the agreed rate of 0.4% over LIBOR. While Nycredit is explicable on the basis of the statutory power to award simple interest on damages, there remains unaddressed the broader issue of whether it is right for the scope of duty of care limitation to apply without exception to consequential losses.

27 See also similar criticisms in McLauchlan (1997) 12 JCL 114 at 124.

28 (1997) AC 191 at 214.

29 Nycredit Mortgage Bank v Edward Erdman Group (No 2) (1998) 1 ALL ER 305 at 317.

30 England: Baxter v F W Gapp (1938) 4 ALL ER 457; affd (1939) 2 KB 271. Australia Trade Credits Ltd v Baillieu Knight Frank (1985) 12 NSWLR 670; MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313; affd (1997) 147 ALR 568. NZ: McElroy Milne v Commercial Electronics [19931 1 NZLR 39. Contra. Canada: Lowenburg Harris & Co v Wolley (1895) 25 SCR 51.

31 (1996) 140 ALR 313 (Lindgren J), affd (1997) 147 ALR 568 (Full Court).

32 Bristol and West Bidding Society v Mothew (1997) 2 WLR 436 at 456.

33 Corisand Investments Ltd v Druce & Co (1978) EGD 769 at 807-811 (damages based on the difference between what was advanced and what plaintiff would have advanced if the correct valuation had been given).

34 Rainbow Industrial Caterers Ltd v CNR Co (1992) 84 DLR (4th) 291 at 297–298.

34a Dugdale (1995) JBL 533 at 535.

35 For example, South Australia Asset Management (1997) AC 191 at 217-218. See also First National Bank PLC v Humberts [1995) 2 ALL ER 673 at 678, per Saville LJ; and County Personnel Ltd v Pulver & Co (1987) 1 ALL ER 289 at 298.

36 (1996) 67 SASR 525 (South Australia Supreme Court, Full Court).

37 In County Personnel Ltd v Pulver & Co (1987) 1 ALL ER 289, Bingham LJ cautioned that, in view of the speculative nature of the alternative transaction, the ascertainment of the outcome under the alternative scenario should be approached in a ‘cautious and conservative’ manner.

38 (1995) 2 ALL ER 769.

39 (1994) 1 WLR 1271.

40 Law and Legal Theory in England and America (Oxford: Clarendon Press. 1997) pp 66–67.

41 (1997) AC 254. See also A Loke ‘Adequate and Just Compensation for Fraud- induced Acquisition of Shares’ (1997) SJLS 318.

42 (1995) 2 ALL ER 769 at 806.

43 McLauchlan, above n 16, who in his article fully exposed the difficulties with Lord Hoffmann's judgment in South Australian Asset Management and endorsed the decision of the Court of Appeal embracing the status ante quo approach, felt sympathy for the burden thrust upon the negligent valuer. None the less he felt that Lord Hoffmann's judgment represents an instance of hard cases making bad law. Coote also expresses sympathies for the negligent valuer and suggests several tentative views on how the negligent valuer's liability may be limited: B Coote ‘Is There Hope, Still, for Negligent Valuers?’ (1997) 12 JCL 145.

44 But see attempts in Seeway Mortgage Investment Corp v First Citizens Financial Corp (1983) 45 BCLR 87. In Seeway, the judge did not decide whether it was a case of successful transaction or no transaction. He held that the mortgagee-lender ought to be compensated for loss of a chance to turn down the mortgage and divided the loss equally between the parties.

45 The Law Reform (Contributory Negligence) Act 1945, s 1(1): ‘Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons…the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share of responsibility for the damage…’ In Platform Home Loans v Oyston Shipways (1998) 3 WLR 94, CA, the lender was found contributorily negligent to the extent of 20%. As the lender's full loss exceeded the amount of the overvaluation, the scope of duty of care limitation was applied to limit the claimable loss to the latter amount. The Court of Appeal then applied the Law Reform (Contributory Negligence) Act 1945 to the loss attributable to the scope of duty of care and reduced the liability of the valuers under the SAAM limitation by 20%. Thus, the apportionment was carried out after the determination of the valuers extent of liability to the lenders (under appeal to the House of Lords).

46 The Law Reform (Contributory Negligence) Act 1945. s 4.

47 See cases at n 30, above.

48 See above, section 2(b), ‘The “Paradox”’.