The scope of the Manchester Building Society and Khan Valuation Expert position – the Privy Court view

In Charles B Lawrence & Associates v Intercommercial Bank Ltd (Trinidad and Tobago) [2021] United KingdomPC 301the Privy Council was instructed to apply the reformulated “scope of obligations principle” Manchester Building Society2 and Khan3 to a negligence claim by an appraiser in which title to the secured land was also defective.

Although this is a call from Trinidad and Tobago, the applicable law is that of England. As such, this case provides useful information for appraisers, assignment attorneys and their insurers on how the court will now approach claims involving allegations of negligent appraisal. It will also be of interest to other professionals who wish to better understand the implications of Manchester Building Society and Khan for their practices. In particular, the case serves as a useful example of how the breadth of duty principle (as restated) can be applied between different professions in the same claim. Details and analysis of the Manchester Building Society and Khan cases can be found here.

Facts

Intercommercial Bank SA (the bank) instructed Charles B Lawrence & Associates (the Surveyors) to value land for the purposes of a proposed mortgage in favor of Singapore Automotive Trading Ltd (the borrower). The land was owned by Rafferty Development Ltd (the guarantor), who was to be the guarantor of the loan, offering the land as collateral.

Surveyors released their report in December 2008, valuing the land at $15 million, based on the following assumptions:

a) good marketable title to the land could be demonstrated; b) planning permission would be granted for the commercial development of the land; and c) the land was clear of all encumbrances with the vacant possession.

In February 2009, based on the report, the Bank loaned $3 million to the Borrower, with the land belonging to the Guarantor to serve as security for the loan. Although there was no contractual relationship between the Bank and the surveyors, all parties knew that the purpose of providing the report was to obtain a mortgage and that the Bank would rely on the report.

Both the borrower and the guarantor defaulted on the loan without a single payment being made. The Bank has appointed receivers to enforce the guarantee. It turned out that the land was only suitable for residential development, meaning it was worth much less than initially thought. The highest bid received for the land was $2 million. In March 2012, the Bank filed a lawsuit against the surveyors, seeking tort damages for the negligent preparation of the appraisal report.

To add to the Bank’s difficulties, it turned out that the guarantor did not in fact have a valid title to the land guaranteed, which meant that the mortgage had no value. In January 2013, the Bank sued its own conveyancing attorneys for negligent title investigation. This claim was settled for $2.4 million, but the claim against the surveyors went to trial.

The decision of the lower courts

At first instance, the High Court of Trinidad and Tobago decided that:

a) the Experts had a duty of care towards the Bank for their valuation report, even if the Bank had not retained them;

(b) The Surveyors failed in their duty to the Bank in two respects. First, they had valued the land on the basis that it could be developed commercially, when in fact it was only suitable for residential development, and the judge accepted evidence from the Bank’s expert that it was therefore only worth $2.375 million. Second, the surveyors had not sufficiently drawn the Bank’s attention to the fact that there were occupants on the land; and

(c) All losses suffered by the Bank were a result of the surveyors’ breach of duty and, after deducting the $2.4 million settlement, the remaining losses would be recoverable from the surveyors. No deduction would be made for contributory negligence on the part of the Bank.

The High Court assessed damages at $2,361,636.70 as of March 14, 2014 (the date of settlement with the Bank’s assignment solicitors). This was calculated on the basis of the loan amount of $3 million, plus the contractual interest rate of 15.75% until March 14, 2014, less the settlement sum of $2.4 million. . The judge therefore awarded damages of $2,361,636.70 plus contractual interest from March 14, 2014 to October 16, 2014, the date of the judgment.

The inspector appealed this decision to the Court of Appeal of Trinidad and Tobago, but this appeal was rejected, except on two points. First, the Court of Appeal held that the appropriate interest rate was the legal rate of 12%, rather than the contractual rate. Second, there should be a 20% deduction for the Bank’s own contributory negligence, for failing to send its own agents to inspect the land and verify that it was in fact vacant.

Appeal to the Privy Council

The surveyors then appealed to the Privy Council. The central question before the Court was whether all the losses were in fact the duty of the surveyors, in accordance with the principles set out in South Australian Asset Management Corporation v York Montague Ltd (SAAM Co), since restated by the Supreme Court in Manchester Building Society and Khan.

The Experts argued that the Bank actually suffered two distinct and separate losses:

  1. the loss suffered as a result of the overvaluation of the land; and
  2. the damage suffered as a result of the defective land title.

The surveyors argued that the second loss fell outside their obligation to the Bank. They were not instructed, nor expected, to investigate title to the land. The Bank has appointed lawyers for this purpose. The correct measure of damage, according to the surveyors’ calculations, was the amount of the loan of $3 million, minus the actual value of the land (or $2.375 million). Of this sum ($625,000), an additional 20% deduction must be made for contributory negligence, together with any accrued interest on this final sum.

The Bank argued that the appraisal report had been commissioned for the purposes of the loan and that as such all reasonably foreseeable losses it would have suffered as a result of the decision to contract the loan, based on the higher assessment, fell within the scope of the experts. of duty. The Bank added that it would not have granted the loan at all if it had known of the presence of the occupants.

Privy Council Judgment The Privy Council accepted the surveyors’ calculation of damages and unanimously upheld their appeal. In doing so, the Court quoted two passages from the Manchester Building Society:

the extent of the duty of care assumed by a professional adviser is governed by the purpose of the duty, assessed objectively by reference to the purpose for which the advice is given…4

in the case of negligent advice given by a professional adviser, we try to see against what risk the obligation was supposed to protect, and then we try to see if the loss suffered represents the materialization of this risk.5

And the next passage from Khan:

In considering the question of the scope of the obligation in the context of the provision of advice or information, the court seeks to identify the purpose for which such advice or information was given. Where the plaintiff has sought advice on a risk or on a proposed activity which involved that risk, the court asks: “what was the risk which the advice or information was intended and reasonably intended to address?”.6

The Privy Council concluded that the purpose of the report, as made clear in the report itself, was to assess the land on the assumption that it was a good title. The purpose of the report was not to give advice or provide information on land title. The fact that the Bank had its own lawyers advise on title and handle the assignment confirmed this view.

The loss caused by the title defect must therefore be deducted from the recoverable losses from the Experts. These losses were assessed as the value of the land at the date of the loan, assuming good title, or $2.375 million.

The Privy Council concluded that no credit should be given for the settlement reached with the lawyers (the $2.4 million), the reason being that these settlement funds were attributable to the defect of title, constituting a separate loss, severable from losses recoverable from the Surveyors.

Based in particular on Khan, the Privy Council concluded that the overstatement loss fell within the surveyors’ obligation, but not the defective title. In Khan, the doctor had been approached to give an opinion on the risk of the patient being a carrier of the hemophilia gene and not to give general advice on the risks of pregnancy. In this case, the surveyors had been approached to provide advice on the value of the land, but not the legal title.

The court also considered the application of the SAAM Co counterfactual test. While Manchester Building Society and Khan relegated this test to a useful “cross-check”, the Privy Council nevertheless found it useful to apply the test: would the plaintiff still have suffered the same harm if the information/advice had been correct? If the answer is “yes”, the scope of the obligation does not extend to this loss; conversely, if the answer is “no”, the obligation extends to the recovery of that loss. Applying this test, the Privy Council concluded that if the advice had been correct such that the land was worth $15 million, then the Bank would have suffered no loss. , as it would have had adequate security (provided there was no title defect). This reinforces the view of the Supreme Court expressed in Manchester Building Societythat the counterfactual is a useful “cross-check” to assess the extent of the obligation in most, but not all, cases.

Commentary and key takeaways

The Privy Council decision shows how courts will now approach the question of the extent of a professional’s obligation, whether lawyer, doctor, surveyor, accountant, by ascertaining the purpose for which the advice/information was provided and analyzing whether the losses continue to flow from the risk against which the advice/information was intended to protect.

The Privy Council also reinforced the Supreme Court’s view that the SAAM Co the counterfactual test has been relegated to a useful but secondary consideration in determining the extent of a professional’s obligation.

This case also raises interesting questions about contributoryness between co-accused. Section 1 of the Civil Liability (Contribution) Act 1978 states that; “…any person responsible for damage suffered by another person may recover the contribution of any other person responsible for the same damage (jointly with him or not).” The essential ingredient is that the damage must be the same. From the above analysis, with more emphasis on the connection between the act of negligence and the cause of the loss, it seems that the parties will have the opportunity to argue that the damage is in fact different and therefore falls outside the scope of Article 1, in order to avoid contribution claims.

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