UK: Court Of Appeal Significantly Reduces Damages In Multi-Million Pound Claim Against Valuers

Last week the Court of Appeal delivered its decision in Capita Alternative Fund Services (Guernsey) Ltd and another v Drivers Jonas in relation to negligent property valuations. At first instance, the Court held that Drivers Jonas ("DJ") had been negligent in both the valuation and advisory processes and in reaching the final valuation figure.

The Facts

The claim was brought by Capita Alternative Fund Services (Guernsey) Ltd ("Capita"), a retail property investment company, after its investment in the development of a factory outlet shopping centre in Chatham Historic Dockyard ("Dockside") turned sour.

In 2001 Capita retained DJ to advise on the commercial prospects of Dockside and provide a valuation. Whilst there was no written retainer it was broadly agreed that DJ would prepare a valuation, give investment advice on the commercial viability of the development, carry out due diligence and negotiate the purchase price and terms of the acquisition.

As Dockside was within an Enterprise Zone investors were eligible for tax allowances which would affect its value. DJ valued Dockside at £62.85m with tax allowances, and £48.15m without. On this basis Capita acquired Dockside in April 2001 for £62.86m. The asset is now said to be worth as little as £7.2m, albeit in a very different market.

First Instance

Capita claimed that DJ had overstated the commercial prospects of Dockside and provided a fundamentally flawed valuation. Whilst DJ accepted it played the part of expert valuer, it denied liability and causation and disputed quantum arguing Dockside was a speculative investment "conceived in a boom but born in a bust".

Mr Justice Eder interpreted the scope of DJ's unwritten retainer widely to encompass investment advice on the commercial viability, attractiveness and prospects of Dockside as a factory outlet shopping centre. This included assessments of the rental income, market trends, potential competitors and the suitability and location of Dockside. DJ was additionally found to have agreed to conduct due diligence and acquisition negotiations.

Eder J considered DJ's performance in two parts: the competence of the valuation and consultation process itself and whether the final valuation figure was within the appropriate margin of error.

It was held that the correct valuation, without tax allowances, should have been £34,375,000. A final figure within the range of £31,955,250 and £36,795,000 would have been permissible, but DJ's valuation of £48.15m was negligent. Likewise DJ's valuation, with tax allowances, of £62.85m was negligent as the correct valuation should have been £44.8m.

Eder J acknowledged that the process of valuing property was subjective and an art rather than a science. As a result not every error will necessarily amount to negligence so long as the final valuation figure is within the permissible bracket. However, he held that DJ had been negligent in both the valuation and advisory processes and in reaching the final valuation figure. Further, Capita could demonstrate that DJ's advice had played a real and substantial part in inducing them to invest.

Capita therefore obtained judgment for damages representing the difference between what they had paid for Dockside (£62.85m) and what they would have paid on the basis of correct advice (£44.8m), namely £18.05m.

Appeal

Although the majority of Eder J's decision was accepted by both parties, DJ appealed the judgment on the following three grounds:

  1. There was no proper basis for Eder J's conclusion as to the correct valuation or valuation range for Dockside, in that there was no CACI report on Dockside's likely ability to attract consumer spending nor was there a performance analysis on which he could rely when coming to his conclusions on the valuation issues, despite the Judge having found that such a report/analysis was an essential component of a competent valuation;
  2. Eder J erred as a matter of law in failing to require Capita to give credit for the tax benefits which had been received by investors as a result of the purchase of Dockside; and
  3. Interest on damages should have been awarded from 6 April 2008, the first date when investors could have accessed their monies, instead of 6 April 2001.

On the first ground, by majority decision, the Court of Appeal could not be persuaded to depart from Eder J's conclusion and dismissed the appeal. In relation to valuations and expert evidence Lord Justice Gross emphasised that a Judge was "never bound by expert evidence", "sometimes find[ing] himself needing to do the best he can". He continued by explaining that it would be "startling and itself a cause for regret, if, despite what to my mind are obvious serial breaches of duty, the Court was driven to conclude that no loss had been established."

The Court accepted DJ's argument that it was "necessary to look at the market value of the whole that was bought" which included the tax credits the investors almost immediately became entitled to, consequently in practical terms reducing the purchase price. Lord Justice Gross explained that as tax considerations were integral to the investment, referring to BTC v Gourley, "it could not sensibly be said in the present case that the tax element was too remote so that it should be disregarded."

Capita submitted that DJ had confused legal entities and causes of action, as the tax relief had been obtained by investors, whilst Capita was the party entitled to the damages. Ordinarily, the structures of commercial transactions are established to keep the interests of the investors and the trust separate, therefore there is usually "neither need nor justification for looking behind those structures". However, in the context of the legislation relating to Enterprise Zones, "the interests of the Trust and the investors were synonymous", therefore as the investors had obtained the benefit of the tax credits on the purchase of Dockside, the tax relief obtained should be taken into consideration when calculating the damages. Lord Justice Gross departed from Eder J's calculation and held that tax relief should be deducted from both the £62.85m and £44.8m figures, reducing the amount of damages received by Capita from £18.05m to £11.8m.

Due to DJ's submissions relating to tax being upheld the argument on interest fell away. Consequently the final ground of appeal was dismissed.

Comment

Whilst Eder J's judgment did not create any new law it did contain a detailed analysis of the different factors which may apply in the court's determination of whether a valuation was negligent and will therefore act as helpful guidance for future cases. The Court of Appeal's judgment throws into sharp focus the uncertainties associated with valuation disputes: no matter how convinced your expert is of his opinion it is still possible for the judge to reach a conclusion which differs from that put forward by any party. It is also helpful for defendant professionals to see that the Court was willing to cut through the arrangements between Capita and its investors when assessing the true extent of the losses which flowed from the negligence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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