With the scope of valuers’ duties facing a refresh in the 31 January 2022 version of the Red Book, the decision in Charles B Lawrence & Associates v Inter-commercial Bank Ltd provides a helpful analysis of the scope of duty in negligent valuer claims. Whilst the decision arises from a Privy Council hearing on appeal from the Courts of the Republic of Trinidad and Tobago, the case provides insight into the judicial treatment of valuer claims against the background of the seminal Supreme Court decisions in Manchester Building Society v Grant Thornton UK LLP and Meadows v Khan (see our Law-Now here).
In 2009, the claimant bank loaned $3 million to a borrower company. There was a guarantor to the loan and land owned by the guarantor was mortgaged as security for the loan (the Land). Prior to entering into the loan, the guarantor appointed a valuer. In December 2008, the valuer reported that the value of the Land was $15 million, on the assumption that good marketable title could be shown, planning permission would be granted for commercial development of the Land and that the Land was free from all encumbrances with vacant possession.
The borrower and guarantor defaulted on the loan without making any payments. The bank opted to enforce security and sell the Land but the highest bid that it received for the Land was $2 million. The bank issued a claim against the valuer for damages in the tort of negligence, for providing a negligent valuation report in respect of the Land. The bank subsequently discovered that the borrower did not have good title to the Land and therefore the mortgage was of no value. The bank separately issued a claim against its lawyers for failing to investigate title and settled that claim for $2.4 million in March 2014.
The lower court found that the valuer owed a duty of care to the bank which was breached in two ways: (1) the Land should have been valued on the basis that it could only be developed for residential use; and (2) the report should have taken into account the fact that there were occupiers on the Land. According to the expert witness, the correct valuation of the Land at the time would have been at $2,375,000. On this basis, the court awarded the bank the value of the loan ($3 million) plus interest, less the settlement sum reached with the bank’s lawyers ($2.4 million).
Considering the SAAMCO principle as developed by Manchester Building Society v Grant Thornton UK LLP and Meadows v Khan, the Privy Council held that the valuer was not responsible for the entirety of the bank’s loss, but rather the loss suffered because the Land was overvalued as being for commercial use rather than residential use (assuming that there was good title to the Land). The valuer was not responsible for the second distinct loss arising because the title to the Land was defective; this category of loss was outside the scope of the valuer’s duty of care because the valuer’s role was not to investigate title to the Land.
- Comparing the claim to Meadows v Khan, the court commented that “just as the haemophilia loss, but not the autism loss, was within the scope of the doctor’s duty of care so here the commercial, rather than residential, overvaluation loss, but not the defective title loss, was within the scope of the valuer’s duty of care”. This conclusion flowed from the purpose of the advice or information given by the professional, hence the risk that was being guarded against.
- As the purpose of the valuer’s information or advice related to the value of the Land and not the quality of the title, the bank could not recover defective title losses from the valuer. The bank was not looking to the valuer’s report to advise on, or give information about the title to the Land, that was a matter for the bank’s lawyers.
- This was an example of a case where Lord Hoffmann’s counterfactual test in SAAMCO would be unhelpful. The test is to ask whether the claimant would still have suffered the same loss if the information or advice provided had been true. If the answer is “yes”, the scope of duty does not extend to the recovery of that loss; but if the answer is “no”, the scope of duty does extend to recovery of that loss. Applying that reasoning here would have contradicted the view that the “title” loss fell outside of the scope of duty. The Supreme Court in Manchester Building Society explained that the counterfactual test could be a useful cross-check in most but not all cases. The Privy Council decided that this was not one of those cases, reinforcing the Supreme Court’s view in Manchester Building Society that the counter-factual test was of second-order importance with regards to establishing the duty of care.
Although this decision was not made within the jurisdiction of the law of England and Wales, it applied English law and further clarifies the interpretation of the SAAMCO test post Manchester Building Society. The Privy Council indicated further departure from the distinction between advice and information and placed more emphasis on the purpose of the advice or information sought to establish the scope of duty of care. Therefore, in future transactions, clearly agreeing the scope of instructions with the client and recording them in as much detail as possible will be crucial. In the context of valuation reports, assumptions should be set out clearly and the purpose of the valuation should be provided.
In the upcoming update to the Red Book, global standards on property valuation, the Royal Institute of Chartered Surveyors recognises the importance of understanding the purpose of the valuation as a way to limit the scope of valuers’ liability arising out of negligent valuations.
From 31 January 2022 the Red Book will provide that: “The purpose for which the valuation assignment is being prepared must be clearly identified and stated as it is important that valuation advice is not used out of context or for purposes for which it is not intended”. The Red Book will note that the purpose of a valuation will typically influence the valuation basis to be used. The updated Red Book recommends that if a client refuses to reveal the purpose of the valuation, the valuer should advise the client in writing that this omission will be referred to in the report. Further, it advises that such reports must not be published or disclosed to third parties and that the terms of engagement must provide that such a report is not to be used for any purpose other than that originally agreed with the client.
Further reading: Charles B Lawrence & Associates v Inter-commercial Bank Ltd (Trinidad and Tobago)  UKPC 30 (22 November 2021) (bailii.org)