United States: The Court Of Appeal Redefines The "But-For" Causation Test For Negligence: Losses Caused To A Lender By A Surveyor's Negligent Property Valuation On A Refinancing Were Wholly Recoverable

In a landmark judgment with wide implications for the lending, refinancing and valuation industries, in Tiuta International Ltd (In liquidation) v De Villiers Surveyors Ltd [2016] EWCA Civ 661, the Court of Appeal, by a two to one majority, overturned a first instance decision relating to professional negligence based on what had been considered to be a well-established test of causation. It held that the "but-for" test of causation, correctly applied, should take into account that a refinancing transaction was factually and legally independent of the first advance by the same lender. The lender's loss was therefore the total amount of the second advance (less the value (if any) of the borrower's covenant and the true value of the property). The fact that the purpose of the refinancing was to discharge the first loan was irrelevant.

The Facts

In February 2011, De Villiers were instructed by Tiuta to value a partially completed residential development in Sunningdale. At that date, the property was valued by De Villiers at £3.25 million in its current state and £4.9 million on completion. On the basis of that valuation, Tiuta offered the developer a loan facility of £2.56 million on the security of a first legal charge. In November 2011, the developer approached Tiuta requesting an increase in the facility to £3.088 million on the same security. Tiuta instructed De Villiers to provide a fresh report, and they carried out further valuations of the property in November and December 2011. The December valuation was at £3.5 million in the property's then current state and £4.9 million on completion.

Tiuta agreed to provide the additional funds requested by the borrower not as a variation of the original agreement but by way of refinancing. In January 2012, a second facility agreement and registered charge were entered into and Tiuta opened a new account with the borrower. The £2.5 million due under the first facility was repaid out of the second advance and the original registered charge released. The borrower drew down the balance of the second advance in further tranches.

On the expiry of the second facility, £2.84 million remained outstanding. The loan was not repaid and Tiuta appointed receivers. The property was expected to realise £2.1 million. Tiuta brought a claim against De Villiers alleging that the December valuation had negligently overstated the value of the property and, in reliance on that valuation, it had granted the second loan facility causing a loss of £890,500. The second advance had been used partly to discharge the February advance so all the monies due to them were advanced in reliance on the second valuation. It was not alleged that the February valuation was negligent. De Villiers applied for summary judgment on the basis that the December valuation had not caused Tiuta's loss. It said that the majority of Tiuta's loss related to the original loan and had already been sustained when it made the original loan, not based on a negligent valuation. De Villiers further argued that, whatever the structure of the transaction, the second advance involved nothing more than an agreement to increase the original amount. This could have been achieved without amending the original security, so that if Tiuta organised its business in a way which involved the repayment in full of the original loan, it could not complain of the consequences.

Legal Analysis

In any negligence claim it is essential to establish on a balance of probabilities that the defendant's negligence caused the claimant's loss. To achieve this, a comparison has to be made between what would have been the claimant's position had the defendant fulfilled his duty of care and the claimant's actual position. This is known as the "but-for" test. (Nykredit Group Ltd Mortgage Bank plc v Edward Erdman [1997] UKHL 53).

In the first instance hearing in the High Court, the judge decided in favour of De Villiers and ruled, following Nykredit, that the loss attributable to the first advance was not caused by the December negligent valuation and that Tiuta's loss should be limited to £272,700, being the amount that the second facility "topped-up" the original loan.

The majority decision in the Court of Appeal held that in order to determine what loss, if any, had been caused by the overvaluation, it was necessary to identify correctly the nature of the transaction and the part that the valuers played in it. Moore-Bick LJ said that the purpose to which the new loan was to be put is of no interest or relevance in fact, or law, to the valuer asked to value the property on which it is to be secured. In his view, the High Court judgment failed to take into account the fact that the transaction was structured in such a way that the second loan was used to pay off the first, and the fact that the lender was the same in each case did not affect the analysis. The second loan stands apart from the first and the basic comparison for ascertaining Tiuta's loss (the "but-for") is between the amount of the second loan and the value of the security.

King LJ supported this argument and said that, had De Villiers wished to limit its liability, it could have done so in the terms and conditions when accepting instructions to value the development site. She also said that the creation of an entirely new loan, standing apart from the first, also had collateral consequences, such that Tiuta lost the right to claim against the valuers in relation to the first loan and released the valuers from their potential liability in respect of the first valuation. She said that it could be said to be inherently unfair that, where both parties are commercial organisations, a negligent valuer could use an attack on the legitimate working practices and systems of the appellant as a means of escaping part of the consequences of his or her negligence. 

The Court of Appeal also said that, because the matter had come before them by way of summary judgment, it had been necessary to proceed on the assumptions that the December valuation was negligent and that the effect of the second facility was to discharge the first; and that it would have been better if the appeal could have been determined at trial on the findings of fact rather than a hypothetical basis. It is assumed that the matter will now proceed to trial where the question of whether the second valuation was in fact negligent or not will be determined.

Commercial Implications

This is a win for lenders on a tricky and contentious area of law and the key commercial consequences are that:

  • the case sets a new precedent for the principle of causation. It refines the way in which a court will apply the "but for" test when determining the loss that flows from negligence. Lenders can be certain that a negligent valuer may be liable for the entire loss arising out of a refinance, not restricted to the amount by which the refinance exceeds the original loan;
  • valuers may seek to amend their terms and conditions to limit their liability – lenders should check their valuer's terms and conditions carefully to ensure that a valuer is liable for the total value of the relevant facility; and
  • consequently, professional indemnity insurers may raise policy premiums for surveyors.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.