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Published 29 November 2017
Tiuta International v De Villiers Surveyors  UKSC 77
On 29 November the Supreme Court handed down judgment in the case of Tiuta International v De Villiers Surveyors  UKSC 77. By unanimous decision, the surveyor's appeal was allowed and should prove to be extremely valuable for surveyors and their professional indemnity insurers wherever claims arise out of loans which refinanced existing debt by the same lender.
It is now absolutely clear that any claimant lender who says it would not have done something if properly advised will be put back in the position that would have prevailed had it not so acted. As a result, in any instance where a lender advances further monies (however it may have choose to structure that lending internally), it can only seek to recover the new money from any professional advice it relied on (assuming, of course, it is proven to have been negligently provided).
It seems that the Court of Appeal, in reaching the decision it did, was influenced by its earlier decision in the case of Preferred Mortgages v Bradford & Bingley Estate Agencies (see Footnote below) in 2002; feeling that application of the 'but for' test would produce unfairness and inequity.
The Supreme Court did not share that view and even pointed toward a potentially new head of loss; that attributable to the extinction of any earlier facility; as founding a route of recovery. That, however, could well create new scope of duty arguments and, as such, the issues arising out of these two authorities may be ones aired in the future. Much will depend on whether the practice of creating new facilities and charges in refinancing transactions was commonplace.
Clearly for Tiuta it would appear to be the end of the road. Or is it?
The claim involved two valuations of a residential development. In February 2011 De Villiers valued the security against which Tiuta lent £2.475m to a developer. By late 2011 the developer needed to release further finance and in December 2011, De Villiers provided an updated valuation, as a result of which Tiuta increased its funding to £3.088m. The developer defaulted and receivers were appointed, but the price achieved on forced sale was inadequate to extinguish the debt. Tiuta accused the surveyors of negligently overvaluing the security in December 2011, albeit no allegations were made about the February 2011 report.
Tiuta looked to recover its overall transaction loss, put at £890,000. In response, De Villiers argued that as Tiuta was already exposed to an indebtedness of £2.799m immediately before the criticised December 2011 valuation, its liability (if any) should not exceed the new money made available in reliance on that valuation, i.e. £289,000, and invited the court to resolve the issue summarily.
In March 2015 the surveyors were successful, on the basis that losses attributable to the pre-existing indebtedness had not been caused by the December 2011 valuation. In essence, the Judge found that the "but for" test excluded all losses that would have been incurred even if the December 2011 valuation had resulted in no further lending.
Tiuta's appeal was upheld in July 2016. The court said that the starting point required determination of the precise nature of the transaction and the part the surveyor played in it.
As a consequence, where Tiuta entered into an entirely new facility and took a fresh legal charge over the security in reliance on De Villiers' December 2011 valuation, it should be able to pursue a claim for the totality of the losses that flowed from that valuation. The Judge felt that it was completely irrelevant that part of the new facility had been used to discharge an existing debt owed to Tiuta.
McCombe LJ disagreed in what was a majority decision. He felt that the usual "but for" test should prevail and should exclude all losses that would have arisen in any event. He went as far as to say that the contrary view risked creating an inherent unfairness, in allowing the lender to saddle the surveyor with liability for "advances made long before the allegedly negligent valuation was provided and in respect of which it already stood to make a loss".
By a unanimous decision, the court allowed the appeal. It noted that the majority of the second facility had been used to redeem the first and considered that this could not be ignored. If Tiuta had not entered into the second facility (which it said it would not have done if the second valuation had not been a negligent one), it would still have sustained a substantial loss when the developer defaulted.
Giving the lead Judgment, Lord Sumption said that determination of the issue required a perfectly straightforward application of the ordinary principles of the law of damages. That is to restore the claimant as nearly as possible to the position he would have been in if he had not sustained the wrong. In other words, consideration of the 'basic comparison' as described by Lord Nicholls in Nykredit Mortgage bank plc v Edward Erdman Group Ltd (No 2)  1 WLR 1627.
The judgment makes clear that precisely what was in the valuer's reasonable contemplation when carrying out the second valuation was only relevant to determining what responsibility was assumed. That was irrelevant to the entirely different issue of the 'basic comparison'. That, Lord Sumption said, "involves asking by how much the lender would have been better off if he had not lent the money which he was negligently induced to lend". This was a purely factual enquiry.
If Tiuta had not lent in reliance on the second valuation, it would not have been able to redeem the first facility and would therefore have lost that full indebtedness, less the security's actual value, on default. That was a loss that was wholly unconnected to the second valuation and would have been sustained in any event – thereby putting Tiuta back into its pleaded position. But for the second valuation/facility, all losses attributable to the first facility would still have arisen.
Tiuta, recognising this difficulty, tried to argue that the funds applied to redeem the first facility amounted to a collateral benefit which should not be taken into account when computing its loss.
Again this received short shrift. The general rule is that where a claimant has received some benefit attributable to the events which caused his loss, it must be taken into account in assessing damages. Further, and as recently touched upon by the Supreme Court in the case of Swynson Ltd v Lowick Rose LLP (in liquidation)  2 WLR 1161, collateral benefits are those "whose receipt arose independently of the circumstances giving rise to the benefits".
The Supreme Court felt that on the facts of this case there was no collateral benefit conferred by redeeming indebtedness out of the fresh advance, so no question arose as to whether it should be taken into account or left out. In any event, as it was an express term of the second facility that the vast majority of the advance was used to discharge the existing indebtedness, it could not be said to be collateral in any way.
In short, Tiuta never intended to lend more than £289,000 of new money, did not do so and its losses (if the second valuation was in fact negligent) should be accordingly restricted. Whilst accepting that the position might be very different if both the first and second valuations were alleged (and ultimately found) to have been negligent, that was not the case in this matter.
This appeal did not unduly trouble the Supreme Court who unanimously considered the answer to be a fairly straightforward one; that a lender cannot (however it chooses to structure its business practices from an internal perspective) look to recover losses that it would have sustained in any event. That must be right and is a welcome and crystal clear clarification of the law.
So whenever a professional is faced with a refinancing transaction it can now use this Supreme Court authority to restrict potential exposure to the new money lent. There will likely be many other issues to consider, liability aside, given that in our experience lenders are not immune from throwing good after bad in an effort to salvage an existing debt which has gone wrong.
Before the Court of Appeal, but not seemingly the Supreme Court, Tiuta had made great play of the inequity that the first instance decision created in light of the 2002 Court of Appeal authority of Preferred Mortgages v Bradford & Bingley Estate Agencies (see footnote below). Does today's judgment, when combined with the 2002 decision, preclude lenders from recovering anything other than the new money on any refinancing exercise?
Here is the twist. Lord Sumption referred to the possibility that if "the valuers had incurred a liability in respect of the first facility, the lender's loss in relation to the second facility might at least arguably include the loss attributable to the extinction of that liability which resulted from the refinancing of the existing indebtedness".
It is not known why Tiuta did not simply assert that both valuations were negligent and it is unlikely, against known fact, that limitation (at least at common law) has expired. Will it therefore look to amend the claim to include allegations about the first valuation or, as suggested by Lord Sumption, to plead a fresh head of loss along the above lines? In the latter event, scope of duty arguments about what was or was not in the reasonable contemplation of the parties will surely arise.
All in all a case of watch this space…
In the 2002 Court of Appeal case of Preferred Mortgages v Bradford & Bingley Estate Agencies, a professional negligence claim against a firm of surveyors accused of overvaluation was dismissed because the lender's loan and supporting legal charge, which had been made in reliance on the valuation, had subsequently been fully redeemed.
Even though the redemption had been achieved using Preferred's own money; it had chosen to treat a modest further advance as a full remortgage; that made no difference. The Court of Appeal found that there could be no continuing liability as the 'transaction' entered into in reliance on the valuation had not created any loss; having been fully redeemed when the account was closed and the legal charge formally cancelled.
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