In honour of the current Ashes cricket series (and given that, at the time of writing, there has just been a resounding victory by Australia in the First Test), we have elected to focus this edition of Legal Notebook on a decision from the High Court of England and Wales, Queen's Bench Division (Technology and Construction Court).
Although this case is not from an Australian jurisdiction (which means that care must be taken when reviewing and considering its content), the judgment still provides a good summary of the general principles that fall to be considered when assessing both primary liability of valuers and contributory negligence of lenders.
In about 2006 and 2007, GMAC RFC Limited (GMAC) was the largest centralised mortgage lender in the United Kingdom. E.Surv Limited (E.Surv) was and remains the largest residential valuer (that is, surveyor) in the United Kingdom. GMAC would regularly engage E.Surv to carry out mortgage valuations on residential properties.
GMAC alleged that some of the valuations carried out by E.Surv in 2006 and 2007 were negligent and/ or in breach of contract. GMAC assigned its claims against E.Surv to Webb Resolutions Limited (Webb), which ultimately commenced the proceedings against E.Surv.
Whilst the case initially concerned four valuations, the judgment was only concerned with two (the other two valuations having been resolved beforehand). The remaining impugned valuations were in relation to separate loans given to a Mr Ali and a Mr Bradley. We will therefore refer to those as such below.
At this point, this matter may not seem any different to various other valuation liability cases that we have previously reported on in Legal Notebook, or that you may otherwise be aware of. However, the significance of this case was neatly summarised by the Court as follows:
The issues in relation to this case were therefore explored in detail and with considerable precision. In that light, we recommend a detailed reading of this judgment (which can be accessed at http://idg.to/cBL) to all readers of this Journal.
The findings — generally
Determining the duty of care/ contractual obligations
Unsurprisingly, the Court was quick to find that the standard required of the relevant valuers was that of the "ordinary skilled person", also variously been described in the cases as the "reasonably skilled", "competent", "prudent", or "average" valuer.
However, given that this basic duty at common law can be, and is, often modified by the terms of the specific contract between the valuer and the lender, the Court also placed significant focus on the terms of the contract/retainer. This is discussed in more detail below.
The proper approach
There was some debate as to whether the proper approach for determining primary valuation liability was to focus on whether the valuer was negligent in:
- The way in which they went about their task (the methodology); or
- The consequential valuation (the result).
In the end, the Court considered that, as a matter of law, the right approach was to focus on the consequential valuation (the result). As the Court asked, albeit rhetorically: "[h]ow relevant is it that the valuer made a number of errors in going about his valuation if, in the final analysis (and perhaps more through luck than judgment), his valuation was reasonable?"
This issue has been considered in Australia in Adwell Holdings Pty Ltd v Mark Smith  NSWCA 103, where the New South Wales Court of Appeal cast some doubt on this proposition when considering whether a valuation, which fell within an acceptable "bracket" of values, might still be negligent (per Meagher JA at , Mason P and Buddin J agreeing at  and  respectively).
However, the High Court of England and Wales also noted that, just because a valuation was outside the "reasonable margin" (discussed below), this did not mean that the valuer was "automatically negligent". In contrast, it merely highlighted the way in which the valuation was performed and provided a prima facie case for the valuer to answer. Furthermore, to the extent that there are any allegations of contributory negligence (or perhaps proportionate liability) that fall for consideration, questions as to the valuer's methodology and any culpability therein would be relevant. Again, this is discussed in more detail below.
The 'margin of error'
There was also discussion and debate with respect to the appropriate "margin of error" (or as others have put it, the "margin of difference", the "bracket" or the "reasonable range") that may be permissible.
The valuation experts called on behalf of Webb argued that given the relatively stock-standard nature of the subject property, the margin/ bracket/range should not be higher than plus or minus 5% on each valuation. In contrast, the valuation experts called on behalf of E.Surv maintained that the margin/bracket/ range should be plus or minus 10%. However, nothing ultimately turned on this issue as each of the valuations were found to be more than 10% above the true market value.
The findings—the Ali loan
In respect of the valuation in relation to the Ali loan, the Court was "in no doubt that [the valuer's] performance of the valuation fell below the standard to be expected of a reasonable valuer and was therefore in breach of the requirements of the [relevant contract]." The Court identified four principal reasons for this conclusion, as follows:
- The valuer produced the impugned valuation without inspecting the property, notwithstanding specific representations made within the valuation report that the property had in fact been inspected.
- Despite the guidance provided to the valuer – in the form of guidance notes from the Royal Institution of Chartered Surveyors (RICS) – in respect of incentives, the Court was not persuaded that the valuer actually asked the relevant sales team about incentives on the subject property.
- The comparables reviewed and considered by the valuer reflected pounds (£) per square metre figures that were not necessarily based on the actual sale/purchase prices; rather, they included and were based on asking prices and valuations.
- The valuer started at the relevant asking price of the subject property and "worked back in an effort to justify that figure." Put simply, the fact that he had "started at the figure he wanted to reach at the end" was "bad practice".
Overall, the Court was critical of the "slapdash nature of the valuation". However, notwithstanding the various failings with respect to methodology, the real issue was whether or not the valuer was negligent in arriving at the valuation result. For various reasons which we will not go into now, the Court was satisfied (based upon an assessment of expert evidence) that the valuation was negligent as it was more than 10% above the accurate market value of the subject property at the time.
Consideration then turned to whether GMAC was guilty of any contributory negligence. It was clear that the standard to be applied in a case such as this was that of the reasonably competent professional or practitioner, judged against the standards at the time.
Webb initially argued that the appropriate standard was that of a "reasonable centralised sub-prime lender." However, the Court did not accept this narrow approach, particularly given that not all of GMAC's lending was in the sub-prime market. On that basis, the Court found that the appropriate standard by which contributory negligence should be judged was broader; namely, that of a "reasonably competent centralised lender". This is, in our opinion, a favourable finding for valuers in a case such as this.
The Court described the "principal problem" with the loan as being that it was a "self-certified mortgage". That is, the relevant borrower (in this case, Mr Ali) simply declared what his income was and "unless there was a random check, that was regarded as enough."
The Court did not "require hindsight to see that this was a risky way to run a lending system", yet also noted that "it appears that everyone was doing it so that, in the mid-2000s, self-certified mortgages were commonplace." Furthermore, after noting the problems that self-certified mortgages have caused in recent decades, the Court also commented that "[a] lthough one is driven to conclude that those involved in the world of financial services and mortgagelending appear sadly immune to the lessons of history, it is against that background that these allegations of contributory negligence have to be judged."
In the end, notwithstanding these quite pointed remarks, the Court did not find that GMAC was negligent when issuing the loan to, and entering into, the subject mortgage with Mr Ali. The Court summarised the position as follows:
However, the Court reached a different conclusion when considering whether GMAC was guilty of contributory negligence in issuing the loan to and entering into the subject mortgage with Mr Bradley. We therefore turn to this issue.
The findings — the Bradley loan
Like the findings in respect of the valuation in relation to the Ali loan, the Court was "in no doubt that [the valuer's] performance of the valuation [in relation to the Bradley loan] fell below the standard to be expected of a reasonable valuer and was therefore in breach of the requirements of the [relevant contract]." The Court identified three principal reasons for this conclusion, as follows:
- Like with the Ali loan, the valuer in relation to the Bradley loan "started at the end and then sought to justify the figure which he had been given. He knew the estimated value of the property for Mr Bradley's remortgage purposes ...[and]did not seek to value the property independently, but instead sought to justify that pre-existing figure."
- The valuer's methodology "was entirely awry because, having worked out a range, instead of putting forward a figure that was in the middle of that range, he then tried to justify a figure at the top end of it." The Court was very critical of this, commenting that "it is wholly unacceptable for a [valuer] to add to his own figure an uplift to reflect a margin of tolerance. No justification for that approach was offered. It is contrary to the terms of the [relevant contract] and the RICS guidance notes."
- The valuer failed to take into account obvious adverse factors that affected the subject property, including the presence of a railway line at the back of the property and the proximity of a large Council estate that had "a mixed reputation."
On that basis, although the Court found that the valuer was negligent in the way he went about his task (his methodology), the critical finding based upon assessment of expert evidence was that the valuation arrived at exceeded 10% above the accurate market value of the subject property and was therefore outside the reasonable "margin of error".
Consideration then again turned to allegations of contributory negligence. This time, unlike in relation to the Ali loan (outlined earlier), E.Surv was successful in demonstrating that GMAC was "guilty" of contributory negligence.
By reference to the evidence of practices and behaviour in the marketplace at the time, the Court accepted that the loan-to-value ratio applied by GMAC in the case of the Bradley loan, at 95%, was too high. On that basis, the Court considered that it was negligent for GMAC to allow Mr Bradley's application for a re-mortgage at such a loan-to-value ratio. Put simply, "a reasonable centralised lender would not have done so."
Indeed, even putting to one side the evidence regarding what was common in the marketplace at the time, the Court considered that "5% was just not enough of an equity cushion." This was particularly so, given that it was accepted that there was a reasonable margin of error around the ultimate valuation figure of at least 5%. On that basis, "Webb must accept that the property might only have been worth 95% of the stated value. In this way, the equity cushion is removed at a stroke."
Furthermore, the Court was critical that the application form completed on behalf of Mr Bradley did not state that it was a self-certified mortgage application; however, that is how it was treated. The Court noted that:
In relation to this telephone call between GMAC and Mr Bradley's accountant, the Court focused attention on an excerpt of the transcript of cross examination of Webb's lending expert on this issue:
In response to this excerpt, particularly the witness' final response, the Court was quick to note that a "lending system in which common sense plays no part is, I think, a negligent lending system."
Taking all of the evidence into account, the Court concluded that, on the balance of probabilities, had "the right questions" been asked of Mr Bradley's accountant and had the necessary proof been sought, the loan would probably not have been made at all. Indeed, notwithstanding that a self-employed scaffolder could have been earning £75,000 gross a year, once an allowance was made for tax and National Insurance, and once the scale of Mr Bradley's other debts had been taken into account, the position would no doubt have been "much less good".
The Court summarised the position as follows:
Consideration then turned to the proper percentage deduction to reflect the contributory negligence of GMAC.
Ultimately, the Court concluded that both GMAC and E.Surv were "equally at fault" and, in those circumstances, both parties were "equally to blame". On that basis, the Court considered that "the right deduction for contributory negligence is 50%."
This case provides a helpful indication of the circumstances in which a Court may find that a lender has been guilty of contributory negligence.
Whilst it goes without saying, each and every matter will continue to be judged in accordance with (and will rise and fall on) its own facts. Consideration also needs to be paid to the appropriate jurisdiction which, for many readers of this Journal, will most likely be Australia or New Zealand, as opposed to the United Kingdom.
However, it is abundantly clear that a primary focus of any Court's enquiries, when considering allegations of contributory negligence, will be the relevant lending guidelines, policies, procedures, parameters or protocols, along with evidence of reasonable practices and behaviour in the marketplace at the relevant time. This is particularly relevant when one considers what the Court described as the "over-generous lending policies" that were in force prior to what has now become known as the Global Financial Crisis. The fact remains that the lender's acts must be "reasonable" in all of the circumstances.
In our opinion, valuers should, to the extent appropriate in the circumstances, take greater notice of the details of the specific lending transaction (such as the proposed loan-to-value ratio) so as to consider whether the valuer actually wants to accept the instruction — and the risk of providing a valuation in response to such an instruction — in the first place.
We have been and are greatly appreciative of the interest and support that the readers of the Journal have displayed and provided to us, particularly in respect of the Legal Notebook articles that have been published throughout 2013. We wish all readers a very safe and happy Christmas and New Year, and look forward to working and engaging with you further throughout 2014.
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