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Pointing the finger of blame

publication date: Apr 6, 2009
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bowCase Law has brought to attention the issue of the scope of a professional’s liability. The case law developed in South Australia Asset Management Corporation v York Montague Limited [1997] (“SAAMCO”) meant that in instances of negligence, professionals are not liable to compensate lending institutions for losses arising from the fall in the property market. Yet the case of Platform Funding Ltd v Bank of Scotland Plc (formerly Halifax Plc) [2008] shows that professionals are still being made to carry the penalty of such mistakes.

The economic cycle in Britain has traditionally been one of boom and bust. Yet since the last period of bust in the early 1990s, professional liability case law has changed beyond recognition.

The property market is all but stagnant, residential mortgage applications are down more than 50 per cent on a year ago and the commercial sector is no better. The number of commercial property deals is significantly lower now than seen in recent years. Property developments are being halted. The economy is in recession.

RECESSION BREEDS CLAIMS

It is during periods of slump that individuals and companies experience losses, a consequence of which is that professional negligence and frauds which would otherwise have gone undetected are exposed. The professionals who advised the individuals and companies who have suffered losses could find themselves in the firing line for professional liability claims.

The banks and building societies are well practised at pursuing professionals for recoveries when their borrower clients are unable to pay the sums due in accordance with their loan agreements. The last property slump of the late 1980s/early 1990s produced a raft of litigation which assisted in identifying the scope of duties owed by surveyors and the level of losses recoverable. That litigation now sets the scene for the new cases we are starting to see being brought against surveyors. Platform Funding v Bank of Scotland is just such a case.

In order to succeed in a claim for breach of contract/negligence against a surveyor a claimant must establish that:

1 A duty was owed;
2 The duty has been breached;
3 There is a recoverable loss as a consequence of the breach.

Surveyors’ duties will vary depending upon the particular circumstances of each instruction. A surveyor will, however, invariably be under a duty to exercise reasonable care and skill. The first consideration must be whether a surveyor owed a claimant a duty of care and if so whether the scope of duty owed to the claimant was sufficiently extensive to cover the losses claimed.

In SAAMCO, the House of Lords defined the scope of liability of a surveyor to a lender and limited the damages recoverable by virtue of the scope of duty. In that case the claimants were bankers who had suffered a significant loss following the default of their property developer borrower. The claimants alleged that the defendant surveyors had negligently overvalued a development site in London Docklands at £15 million.

Following the sale of the development site, the claimants’ total losses were £9.753m. The claimants claimed that sum plus interest against the surveyors. The losses claimed included the loss caused as a consequence of the fall in the property market. The House of Lords decided that no greater loss could be recovered than the difference between the negligent valuation and a correct valuation at the time of the loan, plus interest at an appropriate level. The House of Lords held that in most cases surveyors are not liable to compensate claimants for any losses caused as a consequence of a fall in the property market on the basis that a surveyors report will not normally guarantee a valuation against such a fall. It is normally a surveyors’ duty to take reasonable care in producing a property report and valuation warning however; it is possible that lenders and other claimants may seek to circumvent SAAMCO by carefully wording the express terms of their contracts with surveyors.

NEGLIGENCE V WARRANTY BREACH

The facts in Platform are significantly different from the facts in SAAMCO. In Platform the defendant surveyors had inspected and provided a report on the wrong property. The claim against the surveyors was not pursued in negligence for failing to exercise reasonable care. Platform instead claimed breach of warranty. In the valuation report the surveyors had declared “This valuation is for the benefit of [Platform], its assignees and transferees… I certify that the property offered as security has been inspected by me and that the above valuation is a fair indication of the current open market valuation for mortgage purposes…” The court decided that the surveyors were liable for breach of warranty. They appealed on the basis that the finding against them was wrong when there was no proof of negligence before the court. The appeal was dismissed. The Court of Appeal stated that although a professional person owes a duty to take reasonable care and no more, this was not an immutable rule, and was no obstacle to a finding of breach of a strict warranty.

Platform has reinforced the position in relation to cases of breach of warranty. If a surveyor expressly warrants the accuracy of a valuation, the measure of loss will be the difference between the situation a claimant is in having relied upon the valuation and the position the claimant would have been in had the valuation been as warranted by the surveyor. The claimant can recover its losses, potentially including those caused by the fall in the property market.

The case has therefore highlighted the profound effect on quantum that a finding of breach of warranty can have. The lessons to be learned are twofold. First, a surveyor should ensure that he does not make any unintended warranties in his valuation. Secondly, he should make sure he is reporting on the correct property!

Julie Bowker, Partner, Dispute Resolution, Halliwells LLP. julie.bowker@halliwells.com