Criminal Damage Severs Causal Link in OverValuation for Loan Case By Roger Walter | September 2010 Area of Expertise | Civil Litigation
Summary On 22 September 2010, the Victorian Court of Appeal handed down its decision in Hay Property Consultants Pty Ltd & Anor v Victorian Securities Corporation Limited & Ors Ors, a case in which a lender claimed damages against valuers under s82 of the Trade Practices Act 1974 for misleading and deceptive conduct. The lender would not have made the loan had the over-valuation not occurred. It was held on appeal that the lender was not entitled to damages against the valuers because the chain of causation was broken by criminal damage that occurred before the lender took possession.
Who Does This Impact? Lending institutions, professional indemnity insurers, valuers and litigators.
What Action Should Be Taken? This case is a good example of why litigants must carefully assess causation and of how a ‘but for’ analysis of causation can fall well short of what is required to establish legal causation. Due regard must be given to the legal framework in which a defendant is said to be liable and the rationale for holding particular conduct to be in breach.
Introduction Section 82 of the Trade Practices Act 1974 (TPA) provides for a right to recover damages for a ‘person who suffers loss or damage by conduct of another person that was done in contravention of’ certain provisions of the Act, including those proscribing false and misleading conduct. In Wardley Australia Ltd v Western Australia, Mason CJ, Dawson, Gaudron and McHugh JJ said with reference to s82: … s 82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v Stramare (E & M H) Pty Ltd, except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Act 1 (citation omitted) The 22 September 2010 decision of the Victorian Court of Appeal in Hay Property Consultants Pty Ltd & Anor v Victorian Securities Corporation Limited & Ors2 involved an over-valuation amounting to misleading and deceptive conduct under s52 of the TPA. The appellant valuers succeeded in their appeal against the lender, which had obtained judgment against them for the whole of its loss in the County Court. Although it was accepted that the lender would not have made the loan had the over-valuation not been supplied, it was held on appeal that the lender was not entitled to damages against the valuers because the chain of causation had been broken by criminal damage.
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Criminal Damage Severs Causal Link in Over-Valuation for Loan Case by Roger Walter
The decision involved consideration of English authorities and the High Court’s 2001 decision in Henville v Walker Walker, another overvaluation case involving the quantification of damages where misleading or deceptive conduct was one of a combination of circumstances leading to the loss complained of.
The Facts The valuation was given by the valuers, Hay Property Consultants, to the lender, Victorian Securities Corporation, in respect of properties at Dandenong. According to the valuation, the current (December 2004) market value of the properties was $800,000 and the properties were suitable security ‘up to a loan ratio of 65 per cent’. Relying upon the valuation, the lender lent $520,000 to the property owners on the security of first mortgages. The properties were then deliberately damaged by unknown third parties after the making of the order for possession but before the lender took possession. The lender then sold the properties for $380,000 (plus GST) in December 2006. For the purposes of the proceedings it was agreed that: (a) the properties’ actual value in December 2004 was $575,000; (b) if the properties had not been valued at $800,000, the lender would not have made the loan; (c) the diminution in value of the properties caused by the criminal damage was $215,000; and (d) the loss on sale was $170,601.74 (being the difference between the sale price and the amount lent, minus payments by the borrowers, plus costs of sale, legal costs and interest).
At Trial The trial judge in the County Court held that the decision of the High Court in Henville v Walker applied. Her Honour held that the valuers were liable for the whole of the loss suffered by the lender because the misleading and deceptive conduct was one of two operative and concurrent causes of the loss. Her Honour reasoned that this was so because ‘the entire loss was brought about by the decision to lend the money which would not have occurred without the misrepresentation ... no amount would have been lent at all if the properties had been valued at less than $800,000.’ Her Honour rejected the valuers’ argument that there was a break in the chain of causation and added: One of the fundamental purposes of the Act is to protect consumers from being induced to enter into agreements and transactions by false or misleading conduct. In my view that purpose is intended to prevent persons suffering detriment in circumstances of the kind that occurred in this case. And so her Honour entered judgment in the agreed amount of $170,601.74 plus interest.
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Criminal Damage Severs Causal Link in Over-Valuation for Loan Case by Roger Walter
The Appeal The point argued on appeal was the valuers’ contention that the trial judge erred in concluding that the criminal damage was not an intervening act and that it did not break the chain of causation between the over-valuation and the loss. The valuers began by submitting that had the properties not been damaged they would have sold for $595,000, which was enough to cover the indebtedness of the borrowers ($550,601.74 at the date of the sale). The valuers submitted on that basis that no recovery against them was available. The valuers then focused on the purpose of s52 of the TPA, which is to protect people from loss caused by misleading and deceptive conduct. The valuers submitted that the question of causation should be determined in light of that purpose and that the only correct finding was that the damage caused by the criminal acts of a third party fell outside the scope of the harm against which the TPA provided protection. The valuers added in this regard: To attribute the loss suffered by the lender to the valuers’ misleading statement would be to fall into the error identified by Lord Hoffman in Banque Bruxelles Lambert SA v Eagle Star Insurance Ltd. Lord Hoffman gave the example of a doctor who negligently told a patient that his knee was sufficiently fit to allow him to climb a mountain. The doctor could not be held liable if the patient died as the result of an avalanche, despite the fact that the man would not have climbed the mountain but for the doctor’s advice. (citation omitted) The valuers submitted that although valuations for mortgage purposes normally indicate an appropriate margin for fluctuations in the property market, such margins are not intended to cover the kind of losses evidenced here. The valuers added that if it were to be held that they were liable as claimed for ‘losses caused by the criminal acts of third parties, a negligent valuation could give rise to a liability for any unanticipated future loss, including a loss caused by a natural disaster or by unanticipated events which reduced the value of all properties in a neighbourhood.’ The lender specifically took issue with this last submission and emphasised in reply that two representations were made. The first related to the market value and the second concerned the loan to value ratio of 65 per cent. The lender submitted that the ratio amounted to a warranty that the properties would adequately secure the loan amount. It was also submitted that as that representation ‘was premised on a reduction in the value of the properties of up to $280,000, the $215,000 diminution in value could not be characterised as an intervening event for which the valuers were not liable.’ The Court of Appeal concluded that the valuers should succeed with their appeal, essentially because the over-valuation did not increase the risk that a third party would damage the properties. The Court held: … the purpose and policy of the TPA does not require a negligent valuer to be held liable for loss caused by the criminal acts of third parties, except in circumstances where the original breach increased the risk that those acts would occur. The damage suffered was not within the scope of the protection conferred by the TPA.
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Criminal Damage Severs Causal Link in Over-Valuation for Loan Case by Roger Walter
Implications The property sold at a figure $430,000 below the valuation complained of. On the agreed facts, the criminal damage and the overvaluation were each of the order of $200,000 ($215,000 and $225,000 respectively), while the loss on sale was $170,601.74. But for the receipt of the over-valuation, the lender would not have lent the borrowers any amount. To the lender, the claim for damages appeared sound and it was found to be so by the trial judge. On appeal though, it was found that the criminal damage resulted in a loss for which the valuers could not be held liable as the criminal damage severed the causal link; it had nothing to do with the valuation or even the suggested loan to value ratio. The loss arising from the granting of the loan was found not to have been caused by the misleading valuation but by the infliction of the damage. Central to this outcome was that the valuers’ suggested loan to value ratio was held not to have involved the contemplation of criminal damage. This case is a good example of why litigants must carefully assess causation. It has long been recognised that a ‘but for’ causation analysis can fall well short of what is required to establish legal causation. While it is true that the issue arises infrequently, due regard must be given to the legal framework in which a defendant is said to be liable and the rationale for holding particular conduct to be in breach. Fact finding is responsible for a lot of uncertainty in dispute resolution and much of the litigation in the civil courts is devoted to this task. Equally, the principles of causation may not lend themselves to ready analysis in a particular case while material facts remain to be established. Sometimes, however, a claim may be fundamentally flawed from the outset. There will be the potential for such a flaw if there is insufficient evidence on causation or, as in this case, insufficient attention is given to the facts in the context of the policy underlying the statutory protection and the rationale for finding a breach in respect of the particular conduct complained of.
Endnotes 1
(1992) 175 CLR 514 at 525
2
[2010] VSCA 247
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Criminal Damage Severs Causal Link in Over-Valuation for Loan Case by Roger Walter
For more information, please contact: Roger Walter Partner T: 02 8257 5736 roger.walter@turkslegal.com.au
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