House of Lords portcullis
House of Lords
Session 1997-98
Publications on the Internet

Judgments - Nykredit Mortgage Bank Plc. v. Edward Erdman Group Ltd.


  Lord Goff of Chieveley   Lord Jauncey of Tullichettle   Lord Slynn of Hadley
  Lord Nicholls of Birkenhead   Lord Hoffmann







My Lords,

    I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Nicholls of Birkenhead and Lord Hoffmann, with which I agree.


My Lords,

    I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Nicholls of Birkenhead and Lord Hoffmann, with which I agree.


My Lords,

    I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Nicholls of Birkenhead and Lord Hoffmann. I agree with their conclusions on the issues remaining to be decided.


My Lords,

    On 20 June 1996 your Lordships' House gave judgment in the present and two other appeals concerning the measure of the damages payable to lenders by valuers who negligently overvalued property provided as security. In the present appeal the House decided that, for the reasons given by my noble and learned friend Lord Hoffmann, the measure was limited to the amount of the overvaluation: see [1996] 3 W.L.R. 87, 104D. This comprised £1.4 million, being the difference between the incorrect value ascribed to the property by the valuers, namely £3.5 million, and the true value of the property at the date of valuation, since agreed by the parties at £2.1 million. This was the principal amount payable by the valuers to the bank as damages. The House adjourned the question of what interest should be awarded upon the damages. That is the primary question now before the House.

Interest on the damages

    Section 35A of the Supreme Court Act 1981 empowers the court to award simple interest on "all or any part of the debt or damages in respect of which judgment is given . . . for all or any part of the period between the date when the cause of action arose and . . . the date of the judgment". This raises the question of the date when the plaintiff bank's cause of action arose. The statutory power applies only to the period starting on that date. The bank claims that its cause of action arose in March 1990, at the date of the loan transaction, when it suffered an immediate loss. By December 1990, taking into account the continuing cost to the bank of providing the money lent and the diminishing value of the property as the market deteriorated, the bank had sustained its full allowable loss of £1.4 million. Interest should be paid on that amount from that date. The defendant valuers contend that the cause of action did not arise until the property was sold in February 1993. That was when the bank was visited with the consequence of the valuation being wrong.

    This seemingly narrow question, raised in the context of the payment of interest, has wide ramifications. In recent years there has been much litigation over the date of accrual of a cause of action in tort in respect of financial loss caused by professional negligence. The question usually arises in the context of a claim that an action has become time-barred, because time normally runs for limitation purposes from the date when the plaintiff's cause of action arose.

Accrual of a cause of action: actual damage

    As every law student knows, causes of action for breach of contract and in tort arise at different times. In cases of breach of contract the cause of action arises at the date of the breach of contract. In cases in tort the cause of action arises, not when the culpable conduct occurs, but when the plaintiff first sustains damage. Thus the question which has to be addressed is what is meant by "damage" in the context of claims for loss which is purely financial (or economic, as it is sometimes described).

    In Forster v. Outred & Co. [1982] 1 W.L.R. 86, 94, Stephenson L.J. recorded the submission of Mr Stuart-Smith Q.C.:

    "What is meant by actual damage? Mr Stuart-Smith says that it is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases. They are all illustrations of a kind of loss which is meant by 'actual' damage. It was also suggested in argument . . . that 'actual' is really used in contrast to 'presumed' or 'assumed'. Whereas damage is presumed in trespass and libel, it is not presumed in negligence and has to be proved. There has to be some actual damage."

    Stephenson L.J., at page 98D, accepted this submission. I agree with him. I add only the cautionary reminder that the loss must be relevant loss. To constitute actual damage for the purpose of constituting a tort, the loss sustained must be loss falling within the measure of damage applicable to the wrong in question.

    Take first a simple case which gives rise to no difficulty. A purchaser buys a house which has been negligently overvalued or which is subject to a local land charge not noticed by the purchaser's solicitor. Had he known the true position the purchaser would not have bought. In such a case the purchaser's cause of action in tort accrues when he completes the purchase. He suffers actual damage by parting with his money and receiving in exchange property worth less than the price he paid.

    In the ordinary way the purchaser in this example will not know of the negligence of his valuer or solicitor when completing the purchase. Despite this his cause of action arises at the date of completion, and time begins to run for limitation purposes. In the past this meant, in an extreme case, that a plaintiff could find his cause of action time-barred before he even knew he had reason to bring proceedings against anyone. On occasions the courts have strained against this evident injustice when considering what is the date at which a plaintiff first suffered damage. By and large, this distorting feature no longer exists. Parliament has now remedied this defect in the limitation statutes. Under section 14A of the Limitation Act 1980, introduced by the Latent Damage Act 1986, the plaintiff in an action for damages for negligence now has the benefit of an extended limitation period where facts relevant to the cause of action are not known at the date when the cause of action accrued. This extended period embraces, in short, three years from the date when the plaintiff first had the knowledge required for bringing an action for damages in respect of the relevant damage, with a long stop period of fifteen years.

    More difficult is the case where, as a result of negligent advice, property is acquired as security. In one sense the lender undoubtedly suffers detriment when the loan transaction is completed. He parts with his money, which he would not have done had he been properly advised. In another sense he may suffer no loss at that stage because often there will be no certainty he will actually lose any of his money: the borrower may not default. Financial loss is possible, but not certain. Indeed, it may not even be likely. Further, in some cases, and depending on the facts, even if the borrower does default the overvalued security may still be sufficient.

    When, then, does the lender first sustain measurable, relevant loss? The first step in answering this question is to identify the relevant measure of loss. It is axiomatic that in assessing loss caused by the defendant's negligence the basic measure is the comparison between (a) what the plaintiff's position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff's actual position. Frequently, but not always, the plaintiff would not have entered into the relevant transaction had the defendant fulfilled his duty of care and advised the plaintiff, for instance, of the true value of the property. When this is so, a professional negligence claim calls for a comparison between the plaintiff's position had he not entered into the transaction in question and his position under the transaction. That is the basic comparison. Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property.

    However, for the reasons spelled out by my noble and learned friend Lord Hoffmann in the substantive judgments in this case, a defendant valuer is not liable for all the consequences which flow from the lender entering into the transaction. He is not even liable for all the foreseeable consequences. He is not liable for consequences which would have arisen even if the advice had been correct. He is not liable for these because they are the consequences of risks the lender would have taken upon himself if the valuation advice had been sound. As such they are not within the scope of the duty owed to the lender by the valuer.

    For what, then, is the valuer liable? The valuer is liable for the adverse consequences, flowing from entering into the transaction, which are attributable to the deficiency in the valuation. This principle of liability, easier to formulate than to apply, has next to be translated into practical terms. As to this, the basic comparison remains in point, as the means of identifying whether the lender has suffered any loss in consequence of entering into the transaction . If he has not, then currently he has no cause of action against the valuer. The deficiency in security has, in practice, caused him no damage. However, if the basic comparison throws up a loss, then it is necessary to enquire further and see what part of the loss is the consequence of the deficiency in the security.

    Typically, the answer to this further enquiry will correspond with the amount of the loss as shown by the basic comparison, for the lender would not have entered into the transaction had he been properly advised, but limited to the extent of the over-valuation. This was the measure applied in the present case. Nykredit suffered a loss, including unpaid interest, of over £3 million. Of this loss the amount attributable to Erdman's incorrect valuation was £1.4 million, being the extent of the over-valuation.

    The basic comparison gives rise to issues of fact. The moment at which the comparison first reveals a loss will depend on the facts of each case. Such difficulties as there may be are evidential and practical difficulties, not difficulties in principle.

    Ascribing a value to the borrower's covenant should not be unduly troublesome. A comparable exercise regarding lessees' covenants is a routine matter when valuing property. Sometimes the comparison will reveal a loss from the inception of the loan transaction. The borrower may be a company with no other assets, its sole business may comprise redeveloping and reselling the property, and for repayment the lender may be looking solely to his security. In such a case, if the property is worth less than the amount of the loan, relevant and measurable loss will be sustained at once. In other cases the borrower's covenant may have value, and until there is default the lender may presently sustain no loss even though the security is worth less than the amount of the loan. Conversely, in some cases there may be no loss even when the borrower defaults. A borrower may default after a while but when he does so, despite the overvaluation, the security may still be adequate

    It should be acknowledged at once that, to greater or lesser extent, quantification of the lender's loss is bound to be less certain, and therefore less satisfactory, if the quantification exercise is carried out before, rather than after, the security is ultimately sold. This consideration weighed heavily with the High Court of Australia in Wardley Australia Ltd. v. Western Australia (1992) 109 A.L.R. 247. But the difficulties of assessment at the earlier stage do not seem to me to lead to the conclusion that at the earlier stage the lender has suffered no measurable loss and has no cause of action, and that it is only when the assessment becomes more straightforward or final that loss first arises and with it the cause of action.

    Indeed, for the cause of action to arise only when the lender realises his security would be a highly unattractive proposition. It would mean that, however obvious it may be that the lender will not recover his money, he cannot start proceedings. He must wait until he manages to sell the property, a process which may be protracted. This would be a surprising stance for the law to take. It would be all the more surprising when one has in mind that a lender's cause of action against his negligent valuer for breach of contract, as distinct from a claim in tort, arises when the negligent valuation is given. If disaster were evident and the lender were to sue his valuer for breach of contract without waiting until he had realised his security, it is inconceivable that the court would award only nominal damages. The court would do its best to assess the loss. This prompted the trenchant observation of Bingham L.J. in D.W. Moore and Co. Ltd. v. Ferrier [1988] 1 W.L.R. 267, 280E:

    "If, in a contractual claim for negligence, the court would have awarded other than nominal damages, I do not see how it can be said that an action in tort based on the same negligence would have been bound to fail for want of any damage as an essential ingredient of the cause of action."

As Mr. Briggs Q.C. submitted, no accountant or prospective buyer, viewing the loan book of a commercial lender, would say that the shortfall in security against outstanding loans to defaulting borrowers did not represent a loss to the lender merely because the securities had yet to be sold. Realisation of the security does not create the lender's loss, nor does it convert a potential loss into an actual loss. Rather, it crystallises the amount of a present loss, which hitherto had been open to be aggravated or diminished by movements in the property market.

    I can see no necessity for the law to travel the commercially unrealistic road. The amount of a plaintiff's loss frequently becomes clearer after court proceedings have been started and while awaiting trial. This is an everyday experience. There is no reason to think that the approach I have spelled out will give rise to any insuperable difficulties in practice. In their practical conduct of litigation courts are well able to ensure that assessments of damages are made in a sensible way. It is not necessary, in order to achieve a sensible and fair result, to go so far as asserting that the plaintiff has no cause of action, and hence may not issue a writ, until the assessment can be made with the degree of precision that accompanies a realisation of the security. Further, within the bounds of sense and reasonableness the policy of the law should be to advance, rather than retard, the accrual of a cause of action. This is especially so if the law provides parallel causes of action in contract and in tort in respect of the same conduct. The disparity between the time when these parallel causes of action arise should be smaller, rather than greater.

    An alternative, less extreme possibility is that the cause of action does not arise until the lender becomes entitled to have recourse to the security. I am not attracted by this, as a proposition of law. This suggestion involves the proposition that until then, as a matter of law, the lender can never suffer loss, and the lender can never issue his writ, whatever the circumstances. That does not seem right to me. This proposition, like the date of realisation submission, loses sight of the starting point: that the lender would not have entered into the transaction had the valuer given proper advice. If the basic comparison shows a loss at an earlier stage, why should the lender have to wait until the borrower defaults before issuing his writ against the negligent valuer? There may be good reason why the lender wishes to start proceedings without delay.

    I recognise that in practice the basic comparison may well not reveal a loss so long as the borrower's covenant is performing satisfactorily. For this reason there is little risk of a lender finding his action statute-barred before he needs to resort to the deficient security. But it would be unwise to elevate this practical consideration into a rigid proposition of law.

    I must now comment briefly on the leading authorities in this field. With the possible exception of the Australian case of Wardley Australia Ltd. v. Western Australia (1992) 109 A.L.R. 247, the actual decisions in all these cases accord with the approach outlined above. In Forster v. Outred & Co. [1982] 1 W.L.R. 86 the plaintiff mortgaged her house to secure her son's indebtedness. She sustained loss as soon as she entered into the transaction. That was when her house became encumbered. Her cause of action against the solicitors arose at that date, even though no demand was made under the mortgage until two years later.