Plexus Law - Professional Indemnity Newsletter July 2013

Legal Matters Professional Indemnity July 2013 Issue

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www.plexuslaw.co.uk Offices in London, Leeds, Manchester and Colchester

Landmark Plexus case on third party costs The effect of the appeals in Flatman v Germany and Weddall v Barchester Heath Care Limited on costs sanctions against solicitors in unsuccessful litigation is potentially of great significance to the profession and its insurers. A defendant may seek an order for costs against a claimant and invite him to reveal the extent to which litigation was supported by

Our quarterly newsletter aims to highlight developments and recent case law in the area of professional indemnity in a concise and readable style. We hope that you find it informative and useful.

any third party, including his solicitors.

Plexus Law represented the respondents, Ms Germany and Barchester Health Care Limited (defendants in the original actions), in personal injury claims brought against them by Flatman and Weddall respectively. Godfrey Morgan solicitors, acted for the claimants under a conditional fee agreement but without after the event insurance.

The claims failed but the defendants were unable to recover costs because the claimants were impecunious. Both claims were modest but the level of GM’s costs (particularly with a 100% uplift) fuelled speculation that they had funded disbursements which would not be reimbursed from the claimants in the event of failure.

The underlying question, which led to the Law Society’s intervention, was whether solicitors funding litigation are unwittingly exposed to adverse costs orders. Have they stepped outside the role of solicitors and become commercial funders liable to costs as a ‘real party’?

This scenario could become more acute given part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, if insurers routinely pursue claimants’ solicitors in failed cases.

The lower court granted disclosure applications to the defendants to ascertain how disbursements had been funded. The Court of Appeal held that funding disbursements alone did not justify a conclusion that a solicitor had stepped outside the normal role of solicitors, so that disclosure

In This Issue: Landmark Plexus case on third party costs Solicitors afforded relief in mortgage fraud Hollow victory against solicitors Engineer liable for decline in property market Court departs from normal part 36 costs Apportionment not applicable in liability insurance Margin of error allowed in sub-prime valuations Bank wins negligence claim against surveyors Valuers succeed with limitation defence

was necessary. However, the Weddall case evidenced a

The legislation anticipates that solicitors might fund

factual basis upon which a claim could be brought against

disbursements and it would be wrong to conclude that they

GM. They had conducted the claim despite Weddall’s

were the ‘real party’. The litigant’s ability to afford experts

reservations about doing so without ATE cover. This alone

or court fees says nothing about his ability to fund adverse

justified disclosure in Flatman, a claim undertaken by GM at

costs following an unsuccessful claim.

the same time.

Disclosure Third party costs orders

Following the decision in Thomson v Berkhamsted Collegiate

The starting point for non-party costs orders is s51 of the

School (2009) the relevant factors for an application are:

Senior Courts Act 1981 and the judgments in Aiden Shipping

whether the merits are unassisted by disclosure, whether

Ltd v Interbulk Ltd (1986) and regarding solicitors, TolstoyMiloslavsky v Aldington (1996). An order against solicitors may be appropriate (i) under the wasted costs jurisdiction (ii) where they act without authority/in breach of undertaking, or (iii) outside the role of solicitor.

Cases will be fact specific and exceptional. They will not affect pure funders with no personal interest in litigation. But solicitors who control litigation fall into a different category.

“The litigant’s ability to afford experts or court fees says nothing about his ability to fund adverse costs following an unsuccessful claim.”

a warning was given, whether on summary assessment it is obvious there will be arguments about legal professional privilege, conduct and whether the effect will be just and proportionate.

Lord Justice Leveson said there was no reason why insurers, without seeking disclosure, should not obtain an order for costs against a claimant and invite him to reveal the extent to which litigation was supported by any third party and to explain why the costs order should not be enforced. Impecunious litigants may be keen to redirect an opponent’s firepower to the legal team.

LJ Leveson however also warned of the danger of applications becoming complex and costly. Indeed, claims against solicitors could mutate into expensive satellite litigation. This prospect will be a concern to insurers who may wish to step in at an early stage. Costs could spiral particularly where thorny issues of privilege take centre stage.

Gavin Flatman v Gill Germany and Richard Weddall v Barchester Health Care Limited (2013) EWCA

CFAs were introduced by the Courts and Legal Services Act 1990 and ‘expenses’ are dealt with in s58. The phrase “fees and expenses” in the Act must be construed in the context of the litigation. The client does not have to be in funds before incurring costs but once incurred they become an expense, going into an account as a disbursement. The credit is part of the client service.

03

Solicitors afforded relief in mortgage fraud The Court of Appeal (CA) case of Davison Solicitors (A firm) v

the existing mortgage was not discharged nor Nationwide’s

Nationwide Building Society involved a fraudster assuming

charge registered.

the identity of a solicitor. This case of identity fraud might prompt solicitors and their insurers to brace themselves for a wave of breach of trust claims by lenders keen to thwart defences of contributory negligence which are not available in these cases. It is also a good example of the operation of the exculpatory discretion in s61 of the Trustee Act 1925.

The facts In late 2008 Nationwide Building Society offered a loan of £187,500 to Mr Patel to buy a property for £249,995.

There was an existing mortgage on the property. Mr Wilkes of Davisons Solicitors acted for Nationwide and Mr Patel, under a retainer governed by the Council of Mortgage

It transpired that there is a Mr Gill who is a solicitor with Rothschild, but he had never practised from any address in South Heath. An imposter had supplied a false address to the Law Society and Solicitors Regulation Authority.

“It was a mandatory requirement of the CML handbook to obtain a fully enforceable first legal charge on completion...”

Lenders Handbook. Paragraph 10.3.4 of the handbook requires an advance to be retained on trust until completion.

Purporting to represent the seller, a ‘Mr Gill’ from Rothschild solicitor’s Small Heath office wrote to Davisons stating that (a) they held a deposit of £62,995 from Mr Patel and (b) their client would gift stamp duty. These matters were reported to Nationwide who duly reduced its advance to £185,620. It is unclear from the judgment though what, if any, advice was given on the potential significance of these factors.

Not having previously dealt with Rothschild, Mr Wilkes checked Mr Gill’s details on the Law Society and Solicitors Regulation Authority websites to satisfy himself that all was in order.

Although

Nationwide asserted breach of retainer and breach of trust.

The court below found against Davisons on both aspects and they were ordered to pay Nationwide over £200,000 plus costs. It was a mandatory requirement of the CML handbook to obtain a fully enforceable first legal charge on completion, and the existing charge had to be redeemed.

As Gill was fictitious, any undertaking would have been unacceptable.

Conventional completion The Court of Appeal considered Lloyds TSB Bank Plc v Markandan & Uddin (2012) (see March 2011 and June 2012 newsletters) which clarifies that ‘completion’ denotes

sent

standard

protocol

requisitions

TA13,

not registration of transfer and charge but ‘conventional

Rothschild replied by a different document (an OYEZ form)

completion’. In typical domestic sales this is the ceremony

which confirmed that the existing mortgage would be

or agreed postal equivalent where parties perform the prior

discharged on completion. They also agreed that the Law

contract namely, exchange of money and documents.

Society’s Code for Completion by post applied.

The trust imposed on the loan could only be discharged by

In March 2009 Nationwide released funds, contracts

completion of the purchase or return of funds. Neither event

were exchanged and the purchase price was remitted to

having happened (although the contract was not a nullity),

Rothschild. Mr Patel was registered as the new proprietor but 04

breach of trust was established. However, the CA granted exculpatory relief under s.61 of the Trustee Act.

Law Socity criticism The Law Society was refused permission to intervene and

Section 61 has three components: honesty, reasonableness

criticised for failing promptly to rectify websites of the SRA

and discretion. The court below withheld relief, considering

and the Law Society showing the Small Heath address.

that it was unreasonable to proceed without clearly worded

This, it was warned, might precipitate claims against them.

undertakings. The standard requisitions on form TA13 would constitute a sufficient undertaking.

As a postscript, solicitors should be astute to explaining risks inherent in unusual gestures (e.g. direct payment of a

The CA disagreed stating that answers to the OYEZ form

deposit and gifted stamp duty) which may impact upon s61

had like effect. Although unsigned, the document was sent

applications.

under cover of a letter. There was no undertaking because the writer was not a solicitor, but he was reasonably believed to be one. The requisite standard under s61 was reasonableness, not perfection. Having acted honestly and reasonably, relief should be afforded. The minor lapse from best practice (failure to obtain an undertaking in TA13), had not caused the loss to Nationwide.

“Whether an obligation is absolute is a question of construction of the handbook and the overall retainer.”

Nor was there breach of retainer. Whether an obligation is absolute is a question of construction of the handbook and the overall retainer. The obligation in paragraph 5.8 of the handbook is one of “reasonable skill and care to procure an outcome”. Conveyancing transactions involve issues of title, exercise of professional skill and reliance on vendors’ solicitors. These are matters ‘inconsistent with an absolute obligation’ – Barclays Bank Plc v Weeks Legg & Dean (1999) and Patel v Daybells (2001).

05

Davisons Solicitors (A firm) v Nationwide Building Society (2012) EWCA

Hollow victory against solicitors AIB Group (UK) Plc v Mark Redler & Co Solicitors concerns

In a remortgage transaction, the solicitor is retained to

the appeal of a decision on preliminary issues by HH Judge

obtain security stipulated as a term of the loan. A failure to

Cooke, which featured in our June 2012 newsletter. The

take sufficient care entitled the lender to compensation for

decision clarifies what documents solicitors should require

the loss occasioned by the lack of appropriate security. The

an existing chargee to supply, before releasing funds in a

solicitor does not warrant that the transaction will be loss-

remortgage transaction.

free and if loss would be occasioned even with intended security, the lender cannot claim this from the solicitor.

The facts Mark Redler & Co represented the bank, AIB Group (UK) Plc and the borrowers, Drs Sondhi, in a £3.3m remortgage transaction. The property was already subject to a £1.5m mortgage in favour of another bank. AIB instructed Redler to pay the advance to discharge the existing mortgage and enable AIB’s mortgage to be registered as a first legal charge.

Inadvertently, Redler failed to ensure that two accounts with Barclays Bank were discharged, because they negligently

“Funds remain trust property until disbursed in accordance with instructions or on completion.”

failed to obtain requisite information which would have revealed their mistake. Consequently, they paid surplus

A breach of trust claim could potentially transform quantum

funds of £300,000 to the Sondhis. AIB were relegated to the

in these circumstances. To treat a failure to obtain a charge

rank of second mortgagees and subsequently sustained a

as negating authority to release funds would enable lenders

shortfall on a forced sale of £300,000.

to seek the entire advance and obtain immunity from

AIB argued that its claim was not restricted to damages for breach of retainer (putting them in the position they would have been in had Barclays’ charge been redeemed) but the

commercial losses.

Paradoxically, the lender could be

better off than had the retainer been observed.

entire sum advanced to Barclays on grounds of breach of

When can funds be released?

trust. It therefore appealed against the first instance finding

Following Target Holding Limited v Redferns (1996) it is

that breach of trust was confined to the additional sum of

breach of trust to part with client money before completion

£300,000 required to repay the balance outstanding on the

without authority. The CA referred to the decision in Davisons

second loan account.

(see above) as to meaning of the term ‘completion’.

When does the trust subsist?

Accordingly, the outcome turned on whether the remortgage completed on 1 August 2006.

Funds remain trust property until disbursed in accordance

In a remortgage transaction the borrower does not need to

with instructions or on completion. Instructions usually form

acquire a property to provide security. The essential point

part of the retainer. Proper consideration must also be given

is replacement of one charge with another. The existing

to s10.3 of the CML Handbook on which AIB’s case was

chargee is unlikely to be legally represented and can be

based.

relied upon to use the advance to redeem its loan.

06

Redlers did not have a redemption statement, an unconditional commitment by Barclays or an undertaking from solicitors to use the loan to clear indebtedness and release their charge. They were not authorised to release funds without such documents.

“Where loss is sustained in a commercial transaction and payment of funds into the client account forms a minor role, established principles of equitable recovery must be applied proportionately to loss.”

Quantum Where loss is sustained in a commercial transaction and payment of funds into the client account forms a minor role, established principles of equitable recovery must be applied proportionately to loss.

The claim to the entire amount less sums recovered was based on the premise that, at the date of breach, AIB was entitled to simply ask for its money back – an argument rejected in Target v Redferns. Equitable principles of compensation, although not identical to causation and remoteness at common law, can recognise the loss actually suffered from the breach of trust, and base the compensation recoverable upon a causal connection between the breach and loss.

The time of assessment of loss is the time of trial with the benefit of hindsight.

AIB received less security than it should have. This was not a case like Markandan where the lender received nothing.

The breach of trust consisted of the unauthorised release of funds pre-completion, not the failure of Redler to obtain a first charge. Thus the order below as to calculation of

Where there are no solicitors, a redemption statement must be obtained from the bank coupled with an unconditional

loss was affirmed. In terms of quantum this was therefore a hollow victory.

confirmation from the bank to apply the advance to redeem

AIB Group (UK) plc v Mark Redler & Co Solicitors (2013)

its charge. With solicitors, a redemption certificate coupled

EWCA

with a solicitor’s undertaking is necessary.

It is artificial to treat completion as occurring before the lender’s solicitor takes steps to use the advance to redeem a charge. The cases show that release of funds is an essential part of completion and authority to disburse monies depends on having undertakings.

It followed that breach of trust was not limited to part of the advance.

07

Engineer liable for decline in property market The appeal in John Grimes Partnership Limited v Gubbins

The established cases show that the emphasis is on what the

addresses remoteness of damage in breach of contract

defendant at the time of contract reasonably contemplated

cases. The case considers whether a developer, whose

would result from breach. If the type of loss was reasonably

scheme is delayed by a consulting engineer’s failure to

foreseeable by the defendant as not unlikely to result from

perform tasks by an agreed date, can recover loss arising

his breach, such a type of loss was not too remote. The

from diminution in the market value of the development

defendant’s knowledge is clearly relevant.

during the delay.

The case Gubbins obtained planning consent to develop a field in Cornwall into a mix of open-market and affordable housing.

He wished to build a road to be adopted by Cornwall County Council, under s38 of the Highways Act 1980.

Gubbins engaged John Grimes Partnership Limited (JG), consulting engineers and geological experts, to design the road, drainage and obtain s38 approval. There was an express oral agreement in September 2006 for work to be completed by March 2007. Initial s38 approval was not obtained until February 2008, leading Gubbins to instruct a replacement engineer to redesign the road and drainage, and secure approval.

“But the issue under appeal was whether loss was too remote under classic Hadley v Baxendale (1854) principles.”

JG relied on HL authority Transfield Shipping Inc v Mercator Shipping Inc (the Achilleas) (2008) – it is necessary to decide whether, when considered objectively, the appellant accepted at the time of contract responsibility for the type

Gubbins sought damages for (i) delay resulting in a

of loss. The presumed intention was key. The CA said

reduction in market value of private residential units (by July

that Lord Hoffmann in Achilleas was not undermining the

2009 prices fell by nearly £400,000 on gross sales value),

foreseeability test, merely alluding to circumstances which

(ii) a reduction in the offer from a Housing Association for

might demonstrate that the parties did not contract on the

affordable units, and (iii) increased building costs.

basis of assuming some form of liability, because of general expectations in that market, such as banking or shipping.

Was the loss too remote?

The judge found that JG’s breach set the development back

Party agreement

15 months. But for this, it would have been completed by

The CA approved the legal summary in Siemens Building

June 2008. The delay and losses flowing from the decline

Technologies Ltd v Supershield Ltd (2010). It is right to bear

in the property market were caused by breach of contract.

in mind, as in Achilleas, that the law of contract is governed

Therefore causation was established. But the issue under

by what was agreed between the parties.

appeal was whether loss was too remote under classic Hadley v Baxendale (1854) principles.

If there was no express term dealing with what types of losses a party accepted potential liability for, the law in

08

effect implied a term to determine the answer. Normally, an implied term accepted responsibility for the types of loss which can reasonably be foreseen at the time of contract. However, if there is evidence that the nature of the contract and commercial background or other special circumstances, render that implied assumption of responsibility inappropriate, the contract breaker escapes liability.

“The fact that JG had no control over market prices was irrelevant.”

The judge below applied these principles, asking whether losses arising from movement in the property market were reasonably foreseeable at the time of contract as a consequence of delay. He concluded that they were. He also considered whether this was an unusual case falling outside Hadley v Baxendale and if commercial background had a bearing.

Delay = quantifiable loss Whilst there were few decided cases on declines in the property market occasioned by delay, there was no evidence that an engineer would not have expected to assume responsibility for market movements. Here “an egregious delay” of 15 months gave rise to quantifiable loss.

Lord Justice Tomlinson, in a supporting judgment, referred to his earlier decision in Pindell Ltd v Air Asia Berhad (2011), commenting he had been precipitate in interpreting Achilleas as precluding loss from extremely volatile market conditions which occur over a short time frame. When the issue arises again, he considered it would not permit “of so trenchant or simplistic an answer”.

The fact that JG had no control over market prices was irrelevant. JG would have known that, with significant delay, there would be a potential impact on prices. That the fee of £15,000 was disproportionate to the scale of the loss was 09

also just one factor and did not impact on the outcome.

There was no basis to disturb the conventional approach to remoteness and therefore the consulting engineer’s appeal was dismissed.

John Grimes Partnership Limited v Gubbins (2013) EWCA

Court departs from normal part 36 costs Webb Resolutions Limited v Waller Needham & Green

letter of response under the protocol and to understand and

concerns costs in a professional negligence claim brought

evaluate the claim. Webb refused to provide the documents

by Webb Resolutions Limited, a residential lender, against

until liability was admitted.

solicitors Waller Needham & Green (WNG). The claim was settled leaving outstanding a contested issue about costs.

The decision

Webb made a part 36 offer on 17 May 2011 which was later

There should not be a departure from the usual costs

accepted. Webb contended for a standard order as being

order unless the defendant satisfied the court that it would

the norm when part 36 offers are accepted out of time.

be unjust not to do so. Relevant considerations are costs

This would allow Webb its costs up to the date of WNG’s

sanctions in the practice direction for pre-action conduct,

acceptance of the offer.

all the circumstances including those in CPR 36.14(4) and

The relevant legal principles under CPR 36.10(4) are set out

compliance with the protocol.

in SG v Hewitt (2012). Where a part 36 offer is accepted

The court acknowledged the tension between a party wishing

after the relevant period, the claimant is entitled to costs

to settle a claim with minimum cost and inconvenience, and

up to expiry of the relevant period and thereafter costs are

having to provide information to the other side. The pre-

payable by the offeree up until the date of acceptance of the

action protocol addresses this conundrum, as does CPR 36.

claimant’s offer.

“The court acknowledged the tension between a party wishing to settle a claim with minimum cost and inconvenience, and having to provide information to the other side.”

The scheme encourages a common sense approach, both practical and expedient. Only two files were sought

by WNG and reasons enunciated. A reasonable claimant would have supplied them. Non-compliance with the protocol made it unjust for the normal order under CPR36 (10)(4) to flow. Webb’s costs were allowed only to 17 June 2011 which meant it forfeited nearly a year’s subsequent costs, including those incurred after service of proceedings.

Webb Resolutions Limited v Waller Needham & Green (a firm) (2012) EWHC

WNG countered that this was inappropriate because of Webb’s non-compliance with the professional negligence pre-action protocol. There had been an unreasonable refusal to supply two files to the defendant during the protocol period. On 12 January 2011 WNG made a request for disclosure of documents to assist in the preparation of its 010

Apportionment not applicable in liability insurance In the Ace European Group v Standard Life Assurance Court

claims. This was the stipulated purpose. The secondary

of Appeal hearing, the crux of the matter was whether, in

objective did not affect entitlement to remediation.

the context of liability insurance, an insured is entitled to the full level of indemnity where loss arises from two operative causes: one of which constitutes an insured peril and one which does not. The CA’s emphatic answer was in the affirmative.

The insured had considered two approaches (1) wait for claims or (2) proactively make a one-off payment and meet individual claims. The latter course was selected as being more likely to restore confidence. Whilst there was no legal necessity to make the payment, legal obligation was not

The appellants, Ace European Group, were for the policy

the relevant test of necessity. Nor did payments have to be

year 2008/9, professional indemnity insurers of Standard

in discharge of a particular liability of a specific third party

Life Assurance Limited. The policy afforded cover of £100m

claimant.

above a £10m deductible. The policy indemnified the insured against civil liability for third party claims arising out of the provision of financial services, including costs incurred in

The main issue on appeal was that there should have been an apportionment of the uninsured exposure.

mitigating such claims; ‘mitigation costs’ – monies reasonably

The CA held that the appeal should be dismissed. As a

and necessarily incurred to avoid third party claims. In 2009

matter of construction of the plain words of the insuring

the insured faced multiple claims from the operation of its

clause, apportionment is unavailable because it would result

Pension Sterling Fund. What triggered the crisis was the re-

in insurers paying less than they unambiguously agreed

valuation of asset backed securities held by a pension fund in

to pay. The whole payment, a one-off indivisible sum, was

January 2009, resulting in a significant drop in value.

for the relevant purpose and it was irrelevant that 36% of

The fund had been marketed to investors as a temporary home for short-term funds as if it was invested in cash or the

investors received a windfall, as no misrepresentation was made to them.

equivalent of putting money on deposit. Brand damage was

A useful analogy was JJ Lloyd Instruments v Northern Star

calculated at £300m.

Insurance Company Limited, the ‘Miss Jay Jay’ (1987). Where

To reduce the potential claims against it and any further damage to its brand, the insured made a lump sum cash injection (£101,862,048) and paid individual claims (£4.8m).

loss is caused by an insured peril, entitlement to indemnity is unaffected by another equally effective cause of loss which is uninsured.

Ace declined to reimburse these monies arguing that they did

The judgment analysed the different approach adopted in

not qualify as mitigation costs, the dominant purpose was

‘sue and labour’ provisions in marine insurance contracts,

to avoid brand damage – interpreted as the loss of present

where recovery is limited according to a pro rata approach

and future business affecting retail customers and corporate

between insured and uninsured liabilities. The authorities

clients.

demonstrate that the rationale underlying the principle of

At first instance, Mr Justice Eder found dual objectives – claims mitigation and avoidance of brand damage – but allowed recovery in full (subject to the deductible). There was a high threshold, but the cash injection was reasonably and necessarily incurred to avoid or reduce relevant third party

apportionment has no place in liability insurance and it would be irrational and unprincipled to attempt to introduce it. The concepts of averaging and under insurance did not arise in this context.

Ace European Group & Ors v Standard Life Assurance Limited (2012) EWCA

011

Margin of error allowed in sub-prime valuations The decision in Webb Resolutions Limited v E.Surv Limited

to communicate information not accommodated on the box

probes the approach to determine whether a valuation has

format in order to discharge his contractual/ tortious duties,

been negligently performed and considers the operation of

he should annotate the form or send a covering letter.

contributory negligence.

E.Surv Limited is a large residential surveyor, GMAC RFC

Performance yardstick

Limited, the UK’s largest centralised mortgage lender.

The correct approach is to focus on the negligent valuation

E.Surv was regularly used by GMAC to conduct mortgage valuations under a supplier agreement. It is alleged that some of the valuations carried out in 2006 and 2007 by E.Surv were negligent or performed in breach of contract.

All such claims were assigned to Webb Resolutions Limited.

Two cases are considered. Mr Justice Coulson described them as modest and the SAAMCO cap limited them to the difference between the E.Surv valuation and the correct valuation. They have illustrative value, since similar issues are said to arise in 40 other claims against E.Surv and 200 against other valuers.

The agreement The term ‘prudent’ in the agreement in relation to E.Surv’s

and whether it fell within a permissible bracket rather than the valuer’s methodology – Merivale Moore Plc v Strutt & Parker (a firm) (2000). Having ascertained that a valuation was wrong, the methodology may however be relevant to issues of contributory negligence.

“The correct approach is to focus on the negligent valuation and whether it fell within a permissible bracket...”

performance of its obligations, did not enhance the ordinary duty at common law – Sarginson Brothers v Keith Moulton and Co. Limited (1942).

Margin or bracket In negligent valuation cases there is a permissible margin.

It ran counter to authority to suggest that the agreement

Mr Justice Coulson endorsed the summary he gave in K/S

imposed any obligation to value properties on the basis of

Lincoln v CB Richard Ellis Hotels Limited (2010).

re-sale value i.e. assuming borrowers might default and the property resold quickly – Banque Bruxelles Lambert SA v Eagle Star Insurance Co. Limited (1995). Absent any special

• For a standard residential property the margin of error may be as low as plus or minus 5%

instructions, there was no duty to advise on future price

• For a one-off property plus or minus 10%

movements, only current value. GMAC could have stated

• If the property had exceptional features plus or minus 15%

that valuations were to be carried out on a special basis.

or even higher

Electronic forms

The two cases

E.Surv was required to complete their valuations on

These comprised (a) a purchase of a flat in Birmingham by Mr

electronic forms. GMAC was described as almost obsessive

Ali and (b) a loan to Mr Bradley to consolidate debt against

in its use of tick boxes. The court said that if a valuer wished

security of a house in Whitstable. Common to both, the 012

valuers (i) took valuation figures supplied by the developer’s

answers. It was risky. However, such lending was common

sales team, (ii) worked backwards from the asking price to

in 2004-07 and it was impossible to say that the decision

justify the figures, (iii) failed to use appropriate comparable

to lend money in respect of Ali was irrational, illogical or

properties, and (iv) arrived at valuations outside the standard

negligent. It was only in 2011 that the FSA reported that

5% bracket.

self-certification of income was unacceptable.

In Ali, the valuer had not inspected the property, although he

Bradley was a different proposition. His loan at 95% LVT was

certified he had (a RICS requirement). He claimed he could

treated as self-certified when this is not what was sought.

not tell GMAC because of the ‘tick box’ nature of the form.

He had a poor credit history and third party evidence of

But for the valuer’s negligence, neither loan would have

income was essential. The LTV was too high and the loan

proceeded.

should not have been made. Both parties were equally to blame and the right deduction was 50%.

Contributory negligence E.Surv alleged contributory negligence. The burden of proof is on defendants and the standard is that of the reasonably competent professional, here the reasonably competent centralised lender. A court would be wary of concluding that practices, logical to lenders at the time or common among them, were illogical or irrational. That caution comes from Banque Bruxelles as reflected in Paratus AMC Limited v Countrywide Surveyors Limited (2011).

“A court would be wary of concluding that practices, logical to lenders at the time or common among them, were illogical or irrational.”

In Ali there was a four-month delay in selling the property, for which E.Surv should not be penalised in interest. Lending was based on a high loan-to-value (LTV) percentage of 85.13%, but it was a subprime lending product more expensive than a standard mortgage and all centralised lenders acted in a broadly similar way. Other factors were that intermediaries did the donkey work and centralised lenders operated computer programs to produce instant 013

Webb Resolutions Limited v E.Surv Limited (2012) EWHC

Bank wins negligence claim against surveyors On the same day and with identical legal teams and experts

way. E.Surv’s figure was outside the appropriate bracket and

as in Webb, Mr Justice Coulson handed down judgment in

negligent, being one which no reasonable valuer would have

Blemain Finance v E.Surv Limited. It was agreed that Webb

given. Blemain would not have advanced funds had they

be treated as the principal judgment. E.Surv called the same

known the property was not worth more than £3.08m.

lending expert, a gentleman whose evidence was considered

With regard to contributory negligence, the standard was that

inferior to his opposite number.

of a reasonably competent second charge lender, with the

This case featured a claim by Blemain Finance Limited

caveat that the courts are wary of condemning commonplace

against panel surveyors, E.Surv, arising from their valuation

practices.

of a substantial detached house in Putney. Blemain relied on

Enquiries were made of the Shermans’ finances using a

this to provide a second mortgage to Mr and Mrs Sherman of

detailed search engine called Equifax. This showed no

£250,000.

problems. Blemain’s lending policy was that the LTV ratio

The Shermans acquired the house in 2004 for £1.92m. In July

should not exceed 70%, although there was discretion to go

2007 Mr McKeown of E.Surv valued it at the figure told to him

higher. As this was a second mortgage both loans would be

by the Shermans of £3.4m. When it was later sold for £2m

taken into account. On this occasion the LTV was 73%, but

Blemain recovered nothing.

it was approved because of the Shermans’ monthly earnings.

In determining whether a valuation was negligent, the court

This was, unlike Webb, a status or prime mortgage granted

needed to apply a margin of error. Citing Merivale Moore Plc

against an accountant’s evidence of earnings. The borrowers

v Strutt & Parker (a firm) (2000), E.Surv’s team argued that

were high-earners and there was an equity cushion of over

valuation outside the bracket was not necessarily negligent.

£800,000. This was at the other end of the lending scale to

There was an issue as to whether the valuer acted in

Webb. The similarity lay in Blemain’s readiness to advance a

accordance with accepted practice.

loan in circumstances which in hindsight were unpromising.

On the evidence, the judge found the valuation exercise

The Shermans lived a lifestyle sustained by credit cards and

was negligent. It was unclear how the valuation figure was

debts, yet Blemain took scant account of this.

determined. The following matters were considered:

Could it be proven that no reasonable second charge lender

• That Mr McKeown did not give evidence

would have made the loan? The expert evidence did not go

• Reasonable valuers rely on comparables (a) closer in price than the ones used which had a £1m range and (b) of the same era

• Performance is measured by reference to the state of the market; here it was thriving

• Evidence demonstrated the inherent unreliability of using indices

• Webb suggested a 10% bracket • It was bad practice to attempt to marry-up valuation with figures provided by prospective borrowers The correct valuation was £2.8m with a 10% margin either

that far. Thus contributory negligence arguments floundered.

In case he was wrong on causation, the judge addressed the LTV, concluding this was reasonable. Whilst the credit committee should have probed further, the Shermans’ good credit servicing and high credit score gave comfort.

No second charge lender is obliged to question or go behind an accountant’s certificate when ascertaining the SDI – the secure debt to income ratio. Blemain should have enquired about other mortgages and not assumed they were self-funding.

However, it was unnecessary to conduct a TDI – a total debt to income ratio – which uses gross rather than net income, as with big earners it is net disposable income which is relevant.

Blemain Finance Limited v E.Surv Limited (2012) EWHC 014

Valuers succeed with limitation defence Jones Lang Lasalle Limited (JLL) appealed against the

had dropped by £3m. Their investment was exposed and

refusal of the court below to grant summary judgment or

the claimants should then have sought expert advice on

strike out a claim against them from Mr Atique Rehman and

re-letting the property and could not justify the following

Mrs Tahia Shaikh (the claimants).

two years when they did nothing. The onus was on them to

The claimants established Greenhammer Investments Limited, of which they were shareholders and directors, to purchase an industrial site from Alpine Cold Stores Limited in 2005.

JLL provided two valuation reports (July and November

provide an evidential basis for the issues which needed to be resolved at trial or preliminary issue and to explain why date of knowledge should be postponed.

They had not discharged their burden of proof and it followed that the claim was statute barred.

2004) valuing the site at £7m, with the benefit of a leaseback

In case the claimants seek further appeal, the judge

to Alpine. The second included a £4m value on the basis of

considered ancillary grounds of appeal. Summarising these,

the property being vacant. The second report was prepared

she said the duty of care issue could not be fully determined

for the claimants’ bank, Bank of Scotland (the bank). Both

until it is established who the client was in respect of each

reports contained a disclaimer of liability to third parties.

report. This was plainly a matter for evidence at trial, not

Greenhammer bought the site for £3.25m, leasing it back to Alpine. The claimants gave personal guarantees and executed charges over their homes in the bank’s favour.

Alpine was wound up in 2007.

Proceedings were issued in July 2012 after primary limitation had expired. Reliance was thus placed on s14A of the Limitation Act 1980 with the claimants pinning their date of knowledge to August 2009, when they received a valuation report for £2m.

suitable for summary disposal. Once established, the impact of the disclaimer could be addressed in relation to the first report. It was, however, possible to allow summary judgment or have the claim struck out in relation to the second report based on the disclaimer, given the commercial context in which it was prepared.

The damages claim could not be struck out as being a clear case of reflective losses. The principle that underlying reflective losses are irrecoverable is summarised in Gardner v Parker (2003).

Greenhammer did not exist when the

For requisite knowledge within s14A(6) see Hayward v

first report was made and the position might fall within an

Fawcetts (2006). Knowledge means enough for it to be

exception to the rule.

reasonable to investigate further. There is a distinction between knowledge of facts said to constitute negligence and legal consequences. Only the former is required.

The decision Her Honour Judge Belcher said the claimants’ evidence was not addressed to the correct issue which was the date of knowledge of material facts, but instead to when they might have a cause of action. The liquidation of Alpine put them on notice that the value of their investment property 015

Mr Atique Rehman and Mrs Tahira Shaikh v Jones Lang Lasalle Limited (2013) EWHC

Other News Withdrawal of appeal – Emmet Thomas Scullion v Bank of Scotland PLC (trading as Colleys) (2011) EWCA. The buy-to-let investor’s appeal to the Supreme Court has been withdrawn. Our November 2011 newsletter reported on the Court of Appeal decision which had reversed the decision of the court below, the CA finding that no duty was owed by the mortgage valuer to a third party purchaser of a buy-to-let property.

Contact Us For more information please contact: Nigel Plant, Partner T: 0844 245 5251 E: nigel.plant@plexuslaw.co.uk

Peter Court, Partner T: 0844 245 5208 E: peter.court@plexuslaw.co.uk

Jeremy Newman, Partner T: 0844 245 5262 E: jeremy.newman@plexuslaw.co.uk

T: 0844 245 4000

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