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12 December 2017
In Tiuta International Limited (in liquidation) v De Villiers Surveyors Limited ( UKSC 77) the Supreme Court clarified that when applying the 'but for' test in the context of a negligent valuation, the basic comparison is between the position that the claimant would have been in if the defendant had fulfilled its duty of care and the claimant's actual position. This means that a defendant cannot be liable for a greater loss than was caused by its negligent valuation.
Tiuta International was a specialist lender of short-term business finance. On April 4 2011 it entered into a loan facility agreement with Richard Wawman for the sum of £2,475,000 in connection with a development project. De Villiers Surveyors Limited valued the development so that the facility agreement could be secured by a legal charge over the development. The development was valued at £2.3 million in its present state, with a valuation of approximately £4.5 million if it was completed as predicted. The initial advance was drawn down on April 8 2011 with other advances following thereafter.
On December 19 2011, shortly before the expiry of the facility agreement, Tiuta and Wawman entered into a second facility agreement for £3,088,252, also in connection with the development. Of this amount, £2,799,252 was to be used to refinance the sums borrowed under the first agreement, while £289,000 was new money advanced for the completion of the development. This second facility agreement was secured by way of a new charge over the development. As agreed, Tiuta's first drawdown under the second facility agreement was used to discharge the whole of the outstanding indebtedness under the first facility agreement. Further sums were subsequently drawn down. The advances under the second facility agreement were made following De Villiers providing a second valuation report. The second facility agreement expired on July 19 2012, by which point Tiuta had gone into administration without repaying any of the indebtedness outstanding under it.
Tiuta brought proceedings against De Villiers in the High Court for providing a negligent valuation of the development in relation to the second facility agreement; Tiuta claimed that without that negligence, it would not have made the advances under the second facility agreement. Both parties accepted that there was no liability in damages in respect of the advances made under the first facility agreement because the valuation provided in respect of the first facility agreement was not negligent and the first facility agreement had been entirely discharged.
De Villiers applied for summary judgment on the grounds that it could be found liable only in respect of the new money advanced under the second facility agreement. De Villiers's valuation of the second facility agreement was assumed negligent for the purposes of this summary judgment.
The High Court granted summary judgment in favour of De Villiers. However, the Court of Appeal allowed Tiuta's appeal against the summary judgment, with the majority of judges finding that on application of the 'but for' test, De Villiers was liable for the entire amount of the second facility agreement, rather than just for the new money advanced under the second facility agreement.
The Supreme Court unanimously allowed the appeal, finding that De Villiers could be held liable only for the new money advanced under the second facility agreement, rather than the entire amount of the second facility agreement. The court relied on the basic measure of damages (ie, to restore the claimant as far as possible to the position that it would have been in had it not been wronged).
The 'basic comparison' concept advanced in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) ( 1 WLR 1627) was used to determine the relevant comparison. This comparison looked to find the "comparison between the [claimant]'s position had he not entered into the transaction in question and his position under the transaction". Here, the court found that under this comparison, Tiuta would not have entered into the second facility agreement with De Villiers; however, it would have still entered into the first facility agreement, as this was entered into on the basis of De Villiers's first (and not negligent) valuation. Therefore, Tiuta would have still lost the money advanced under the first facility agreement, leaving only the new moneys advanced under the second facility agreement as the loss it could recover from De Villiers.
The majority position in the Court of Appeal was criticised; the majority had held that as the second facility agreement was structured as a refinancing of the sums owed under the first facility agreement, it meant that De Villiers was discharged from "any potential liability in respect of the first valuation". The majority subsequently concluded that the second facility agreement stood alone from the first facility agreement, and that the basic comparison was therefore between the amount advanced under the second facility agreement and the value of the security. The Supreme Court disagreed, stating that the refinancing did not change the fact that but for the negligent second valuation, Tiuta would not have lost the sums it had advanced under the first facility agreement. Moreover, the court added that the loss contemplated by the valuer might be relevant in determining what loss is regarded as foreseeable or what responsibility the valuer assumed, but it cannot be relevant to the basic comparison. This is deemed a purely "factual inquiry".
Additionally, the Supreme Court dismissed Tiuta's submission that the discharge of the indebtedness owed under the first facility agreement was a collateral benefit to Tiuta. Tiuta had relied on this argument to state that as a collateral benefit to Tiuta, it should not be taken into account when computing Tiuta's loss and therefore the sums advanced under the second facility agreement should be considered as one whole additional advance. This would have made the whole of the second facility agreement recoverable, as but for the negligent second valuation, Tiuta would not have made or lost the advancement under the second facility agreement.
Following the approach in Swynson v Lowick Rose LLP (in liquidation) ( 2 WLR 1161), the Supreme Court held that the discharge of the indebtedness owed under the first facility agreement was not collateral because it was a requirement of the second facility agreement; there was never an intention to advance the sums under the second facility agreement in addition to those under the first facility agreement. Moreover, Tiuta did not benefit from having discharged the indebtedness owed under the first facility agreement; the amount of this indebtedness was still owed to Tiuta, just now under the second facility agreement. The refinancing also did not extinguish any liability owed by De Villiers under the first facility agreement. The net effect of the refinancing was therefore neutral.
The Supreme Court's judgment has clarified that the relevant 'basic comparison' is simply between the position that the claimant would have been in if the defendant had not been negligent and the claimant's actual position. The extinguishing of the valuer's liability under the first facility agreement is irrelevant where the claimant would have entered into, and suffered a loss under, the first facility agreement irrespective of the subsequent negligent valuation. Moreover, the court confirmed that a defendant cannot be liable for a greater loss than was caused by its negligent valuation.
However, because the court explicitly focused only on dealing with the facts at hand, it remains unclear what the position is where, for example:
Until these questions are answered, loan providers will continue to be uncertain as to when they can recover advances made under a facility agreement where a negligent valuation has been provided in the process.
For further information on this topic please contact Steven Rajavinothan at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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