Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2)

I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Nicholls of Birkenhead and Lord Hoffmann, with which I agree.

I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Nicholls of Birkenhead and Lord Hoffmann, with which I agree.

I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Nicholls of Birkenhead and Lord Hoffmann. I agree with their conclusions on the issues remaining to be decided.

On 20 June 1996 your Lordships' House gave judgment in the present and two other appeals concerning the measure of the damages payable to lenders by valuers who negligently overvalued property provided as security. In the present appeal the House decided that, for the reasons given by my noble and learned friend Lord Hoffmann, the measure was limited to the amount of the overvaluation: see [1996] 3 W.L.R. 87, 104D. This comprised £1.4 million, being the difference between the incorrect value ascribed to the property by the valuers, namely £3.5 million, and the true value of the property at the date of valuation, since agreed by the parties at £2.1 million. This was the principal amount payable by the valuers to the bank as damages. The House adjourned the question of what interest should be awarded upon the damages. That is the primary question now before the House.

Interest on the damages

Section 35A of the Supreme Court Act 1981 empowers the court to award simple interest on "all or any part of the debt or damages in respect of which judgment is given … for all or any part of the period between the date when the cause of action arose and … the date of the judgment". This raises the question of the date when the plaintiff bank's cause of action arose. The statutory power applies only to the period starting on that date. The bank claims that its cause of action arose in March 1990, at the date of the loan transaction, when it suffered an immediate loss. By December 1990, taking into account the continuing cost to the bank of providing the money lent and the diminishing value of the property as the market deteriorated, the bank had sustained its full allowable loss of £1.4 million. Interest should be paid on that amount from that date. The defendant valuers contend that the cause of action did not arise until the property was sold in February 1993. That was when the bank was visited with the consequence of the valuation being wrong.

This seemingly narrow question, raised in the context of the payment of interest, has wide ramifications. In recent years there has been much litigation over the date of accrual of a cause of action in tort in respect of financial loss caused by professional negligence. The question usually arises in the context of a claim that an action has become time-barred, because time normally runs for limitation purposes from the date when the plaintiff's cause of action arose.

Accrual of a cause of action: actual damage

As every law student knows, causes of action for breach of contract and in tort arise at different times. In cases of breach of contract the cause of action arises at the date of the breach of contract. In cases in tort the cause of action arises, not when the culpable conduct occurs, but when the plaintiff first sustains damage. Thus the question which has to be addressed is what is meant by "damage" in the context of claims for loss which is purely financial (or economic, as it is sometimes described).

In Forster v. Outred & Co.[1982] 1 W.L.R. 86, 94, Stephenson L.J. recorded the submission of Mr Stuart-Smith Q.C.:

"What is meant by actual damage? Mr Stuart-Smith says that it is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases. They are all illustrations of a kind of loss which is meant by 'actual' damage. It was also suggested in argument … that 'actual' is really used in contrast to 'presumed' or 'assumed". Whereas damage is presumed in trespass and libel, it is not presumed in negligence and has to be proved. There has to be some actual damage."

Stephenson L.J., at page 98D, accepted this submission. I agree with him. I add only the cautionary reminder that the loss must be relevant loss. To constitute actual damage for the purpose of constituting a tort, the loss sustained must be loss falling within the measure of damage applicable to the wrong in question.

Take first a simple case which gives rise to no difficulty. A purchaser buys a house which has been negligently overvalued or which is subject to a local land charge not noticed by the purchaser's solicitor. Had he known the true position the purchaser would not have bought. In such a case the purchaser's cause of action in tort accrues when he completes the purchase. He suffers actual damage by parting with his money and receiving in exchange property worth less than the price he paid.

In the ordinary way the purchaser in this example will not know of the negligence of his valuer or solicitor when completing the purchase. Despite this his cause of action arises at the date of completion, and time begins to run for limitation purposes. In the past this meant, in an extreme case, that a plaintiff could find his cause of action time-barred before he even knew he had reason to bring proceedings against anyone. On occasions the courts have strained against this evident injustice when considering what is the date at which a plaintiff first suffered damage. By and large, this distorting feature no longer exists. Parliament has now remedied this defect in the limitation statutes. Under section 14A of the Limitation Act 1980, introduced by the Latent Damage Act 1986, the plaintiff in an action for damages for negligence now has the benefit of an extended limitation period where facts relevant to the cause of action are not known at the date when the cause of action accrued. This extended period embraces, in short, three years from the date when the plaintiff first had the knowledge required for bringing an action for damages in respect of the relevant damage, with a long stop period of fifteen years.

More difficult is the case where, as a result of negligent advice, property is acquired as security. In one sense the lender undoubtedly suffers detriment when the loan transaction is completed. He parts with his money, which he would not have done had he been properly advised. In another sense he may suffer no loss at that stage because often there will be no certainty he will actually lose any of his money: the borrower may not default. Financial loss is possible, but not certain. Indeed, it may not even be likely. Further, in some cases, and depending on the facts, even if the borrower does default the overvalued security may still be sufficient.

When, then, does the lender first sustain measurable, relevant loss? The first step in answering this question is to identify the relevant measure of loss. It is axiomatic that in assessing loss caused by the defendant's negligence the basic measure is the comparison between (a) what the plaintiff's position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff's actual position. Frequently, but not always, the plaintiff would not have entered into the relevant transaction had the defendant fulfilled his duty of care and advised the plaintiff, for instance, of the true value of the property. When this is so, a professional negligence claim calls for a comparison between the plaintiff's position had he not entered into the transaction in question and his position under the transaction. That is the basic comparison. Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property.

However, for the reasons spelled out by my noble and learned friend Lord Hoffmann in the substantive judgments in this case, a defendant valuer is not liable for all the consequences which flow from the lender entering into the transaction. He is not even liable for all the foreseeable consequences. He is not liable for consequences which would have arisen even if the advice had been correct. He is not liable for these because they are the consequences of risks the lender would have taken upon himself if the valuation advice had been sound. As such they are not within the scope of the duty owed to the lender by the valuer.

For what, then, is the valuer liable? The valuer is liable for the adverse consequences, flowing from entering into the transaction, which are attributable to the deficiency in the valuation. This principle of liability, easier to formulate than to apply, has next to be translated into practical terms. As to this, the basic comparison remains in point, as the means of...