Charles B Lawrence & Associates v Intercommercial Bank Limited

A bank (the "Lender") was approached for a US$3m loan to a company.  It was agreed that by way of security, a related company (the "Guarantor") was to provide a mortgage of land it owned.  In order to approve the loan and security, the Lender required the Guarantor to present to it a recent valuation of the land.  

A valuer (the "Valuer") was instructed by the Guarantor to provide the valuation. The valuation assumed that: (i) the Guarantor had good title to the land; (ii) planning permission would be granted enabling the land to be used for commercial rather than residential use; and (iii) the land was free from all encumbrances with vacant possession. The Valuer valued the land at US$15m. In reliance on that valuation, the Lender provided the loan to the company.

Both the company and the Guarantor defaulted on the loan without making any repayments.  As a result, the Lender appointed a receiver to enforce the security. However, the highest bid it received was for US$2m. It then emerged that the land could be used only for residential purposes, and that the true value of the land was US$2.375m rather than US$15m, as specified in the valuation. It also transpired that the Guarantor of the loan had no legal title to the mortgaged land, so the security was worthless.  The Lender issued a claim against the Valuer seeking damages in the tort of negligence for a negligent valuation report.

The Lender recovered a substantial sum (US$2.4m) in settlement of its separate claim against its lawyers for negligence in relation to the Guarantor's defective title to the land.  In assessing the damages for the negligent valuation, the central question for the Privy Council to decide was how the scope of duty principle applied on the unusual facts of the case. 

The High Court of Trinidad and Tobago had ruled in favour of the Lender as follows:

• (i) applying Caparo Industries Plc v Dickman [1990] 2 AC 605, the Valuer owed the Lender a duty of care in relation to the valuation report (even though the Lender was not the Valuer's client);
  
  
• (ii) there was a breach of duty of care by the Valuer in two respects.  First, the Valuer had valued the land on the basis that it could be developed commercially whereas it should have been valued on the basis that it could only be developed for residential use.  Secondly, the Valuer failed adequately to draw attention to the fact that there were occupiers on the land so that it was not a cleared site; and
  
  
• (iii) all the loss suffered by the Lender was caused by the Valuer's breach of duty, and, subject to deducting the loss recovered in the settlement with the Lender's lawyers, was recoverable from the Valuer.

The High Court assessed the damages at US$2,361,636.70 (being the loan paid plus the contractual rate of interest minus the settlement sum of US$2.4m paid by the Lender's lawyers).

The Trinidad and Tobago Court of Appeal upheld the decision of the High Court. However, the Court of Appeal suggested there should have been a 20% reduction in the damages awarded by the High Court for the Lender’s contributory negligence. The Valuer appealed the Court of Appeal’s decision.

The central submission on appeal was that the decisions of the Trinidad and Tobago Court of Appeal and High Court were incorrect as a matter of law because they were contrary to the scope of duty principle established in SAAMCO and recently considered in Manchester Building Society and Khan. 

The Valuer submitted that the loss suffered by the Lender should be split into two distinct categories: (1) loss suffered because the land was overvalued as being for commercial use rather than residential (assuming that there was good title to the land); and (2) loss suffered because title to the land was defective.  It was argued that the second type of loss was outside the scope of the Valuer's duty of care and therefore irrecoverable because it was the job of the lawyers and not the Valuer to investigate title to the land.

The Privy Council agreed with the Valuer and emphasised that it was particularly important to consider the purpose of the advice or information being given in determining the scope of the duty of care (as was made clear by the Supreme Court in Manchester Building Society and Khan).  Here, the purpose of the Valuer's report was to value the property on the assumption that there was good legal title to the land.  It was not for the Valuer's report to advise on, or give information about, the title to the land and it was clear the Lender was not looking to the Valuer's report with regard to title.

Consequently, the proper calculation involved deducting US$2.375 from the amount of the loan (US$3m) on the basis that that was the valuation of the land for residential use and assuming the Guarantor had good title, resulting in a recoverable loss of US$625,000.

After correctly applying the scope of duty principle in the Valuer's favour, the Privy Council noted that the Lender's settlement with its lawyers was irrelevant for the purposes of the Lender's claim against the Valuer as the loss attributable to the defective title fell outside the Valuer's duty of care.

The Valuer's failure to draw sufficient attention to the fact that there were occupiers on the land had no effect on the Privy Council's findings, for two reasons: (1) this additional finding of negligence was merely a different breach of the same duty of care in valuing the land and had no impact on the scope of that duty; and (2) the evidence in relation to the occupiers and the nature of their occupation was unclear.

The SAAMCO case laid down the principle that a valuer is not liable in the tort of negligence (or in contract) for loss caused by a valuer's negligence that falls outside the scope of the valuer's duty of care. The counterfactual test put forward by Lord Hoffman in SAAMCO asks – would the claimant still have suffered the same loss if the information or advice had been correct?  If the answer is "yes", the scope of the duty does not extend to the recovery of that loss.  In Manchester Building Society and Khan, the Supreme Court held that the counterfactual was a useful test / cross-check in some but not all cases, and that it was subordinate to the main scope of duty analysis and must not supplant it.

Applying the scope of duty principle to the facts of this case, the Privy Council held that it was clear (and was indeed specified by the Valuer in its valuation report), that the purpose of the Valuer’s report was to value the property on the assumption that there was good legal title to the land.

The Privy Council acknowledged that application of the SAAMCO counterfactual would contradict the finding that the defective title loss was outside the scope of the Valuer's duty of care.  Had the valuation of US$15m been correct, the Lender would still have entered into the loan, taking the mortgage over the land as security, but would not have suffered the same (or any) loss because, as the land would have been worth US$15m (assuming no defect in title), the Lender would have had adequate security to cover the Guarantor's default.  The Privy Council emphasised the Supreme Court's finding that the counterfactual is of second-order importance and is a helpful cross-check of the scope of duty in most but not all cases. 

This decision will be of real interest to financial institutions. The Privy Council emphasised the significance of considering the purpose of the advice or information sought to establish the scope of the duty of care. In future commercial transactions, clearly agreeing the scope of the client's instructions and recording them in detail will be critical. In the context of valuation reports in particular, any assumptions and the purpose of the valuation should be outlined as clearly as possible.