The value judgment -- key points of the recent CA judgment in Eagle Star v Banque Bruxelles Lambert SA

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On Monday 20 February 1995, the Court of Appeal reversed the first instance judgment of Mr Justice Phillips, given on 21 December 1993 in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd.

The Court of Appeal held that valuers who had negligently over-valued property in connection with property loans were liable for loss occasioned by the fall in the property market.Banque Bruxelles Lambert SA (BBL) made claims on Eagle Star Insurance C ompany Ltd (Eagle Star) under mortgage indemnity policies granted by Eagle Star to BBL in relation to loans made by them in 1989.

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The loans were made to single purpose companies owned by well known property investors, and were secured principally on substantial commercial investment properties.

The properties were valued by, amongst others, John D Wood Commercial Ltd (John D Wood), and both BBL and Eagle Star made claims against John D Wood in relation to the valuations.

BBL and Eagle Star settled their dispute prior to judgment but both pursued their claims against John D Wood.BBL claimed by way of damages the total sum advanced less recoveries made by them, including sale proceeds (or the agreed or current value of the property) plus interest.

Eagle Star claimed the sum paid to BBL pursuant to the settlement.

Mr Justice Phillips found that John D Wood did owe BBL and Eagle Star a duty of care in valuing the properties; that it was negligent in so doing; that BBL entered into the loan and Eagle Star granted cover in reliance on the valuation; and that they would not have entered into the loan or granted cover if an accurate valuation had been given.However, he reduced BBL's and Eagle Star's damages by an amount attributable to the fall in the property market, which was assessed by reference to the difference between the true value of the property at the time of the valuation and the ultimate realisation price (or agreed value at the date of assessment of damages).

This significantly reduced the damages payable by the valuers.Mr Justice Phillips made the deduction for sums attributable to the fall in the market on the basis of a novel approach, namely identifying the different heads of risk involved in the commercial venture in which the parties were involved, and deciding whether or not they had relied on the negligent valuation in relation to the risk which had now materialised.

He took the view that neither BBL nor Eagle Star were relying on the valuations to protect them against a fall in the property market.Prior to this judgment, no English case had addressed squarely the issue of the measure of damages for negligence of valuers, or any other professional adviser, who had given a valuation in connection with a loan where there had been a significant subsequent fall in the market.

In Baxter v FW Gapp & Co Ltd [1939] 2 All ER 752, the Court of Appeal held that where a lender had entered into a loan, in reliance on the negligent valuation, into which he would not otherwise have entered, he was entitled to the whole loss he suffered as a result of the valuers' breach of duty.

The Court of Appeal did not, however, expressly consider what the position would be where there had been a fall in the market.Valuers' negligence cases at the time of and prior to the judgment of Mr Justice Phillips appeared to accept that this principle also applied in cases where there had been a fall in the market, although none of the judgments contained any detailed consideration of the issue: HIT Finance v Lewis & Tucker [1993] 2 EGLR 321; Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd, 1 October 1993; United Bank of Kuwait v Prudential Property Services, 10 December 1994.However, Mr Justice Phillips' approach was followed in a number of subsequent cases: Nyckeln Finance Co Ltd v Stumpbrook Continuation Ltd [1994] 33 EGLR 93; BNP Mortgages Ltd v Goadsby & Harding Ltd, 19 April 1994; BNP Mortgages Ltd v Key Surveyors Nationwide Ltd, 25 June 1994; Mortgage Express Ltd v Bowerman & Partners, 11 May 1994.Eagle Star, represented by Lo vell White Durrant, appealed against the decision on the basis that it was commercially unrealistic to separate different heads of risk in this way and that the judge was precluded by principle and authority from taking this approach, in particular by Baxter v Gapp.The lenders or valuers (depending on which way their judgment had gone) in a number of the cases referred to above also appealed.

The Court of Appeal, consisting of the Master of the Rolls, Sir Thomas Bingham, and Lords Justices Morritt and Rose, gave a combined judgment on the issues relating to market fall in all the appeals on 20 February 1995.

A number of the parties to the appeals also appealed on other issues relating to both liability and quantum, but those parts of the appeals will be heard at a later date.The appeals covered a variety of different factual situations including loans by a commercial lender to an spv (special purpose vehicle) borrower secured on a commercial investment property; a loan to a developer in relation to a development site; loans made by centralised lenders; and residential property loans.

One of the appeals concerned advice given by a solicitor rather than a valuer.The Court of Appeal began by restating the basic principles relating to the assessment of damages for breach of contract and tort.

It then set out the questions which it was necessary to consider in cases where the adviser's negligence caused the plaintiff to enter into a loan or analogous transaction, namely: what is the duty which the valuer has broken; what is the loss for which the lender claims to be compensated; did the valuer's breach of duty cause the lender's loss; are the damages which the lender claims too remote; is there any reason of policy why the lender should not recover the compensation to which he would otherwise be entitled?In the absence of special conditions, and whether the duty is contractual or tortious, the valuer's duty to the lender is the same: to take reasonable care to give a reliable and informed opinion on the open market value of the property at the date of the valuation.

The duty was not, as was argued in one case, a duty limited to safeguarding the lender against loss amounting to the difference between the over-valuation figure and the true value of the property.The Court of Appeal stated that the valuer knows that the lender seeks and obtains his valuation in order to guide him in deciding whether he will lend on the security of the land in question and, if so, how much he will lend.

Both the valuer and the lender appreciate that if the valuer over-values the property, the lender may lend more than he would have been willing to lend if the property had been correctly valued.

The valuation is given so that the lender knows the current value of the property offered as security.

The risk both have in mind is the risk that the lender will either lend when otherwise he would not, or that he will lend more than he would be willing to lend on a correct valuation of the land offered as security for the loan.The Court of Appeal also, however, made it clear that they accepted that it was no part of the valuer's duty to advise the lender on future movements in property prices, whether nationally or locally, and the valuer is not asked to predict what will happen in the future.

The belief among buyers and sellers that prices are likely to move upwards or downwards may have an effect on current prices and, to that extent, such belief may be reflected in the valuation.

However, the valuer's concern is with current value only; the court accepte d that the valuation was not sought to protect the lender against a future decline in property prices.All the cases before the Court of Appeal rested on a finding that, if the valuer had not negligently over-valued the property, no loan would have been made.

There was no issue as to the correctness of the approach that, in these circumstances, the lender should be indemnified against all the loss suffered as a result of entering into the transaction, but the central issue in the appeal was whether the part of the lender's loss which was attributable to a fall in the property market was, in fact, caused by the breach of any duty which the valuer undertook.The argument that a fall in the property market was not foreseeable was not pursued by any of the parties, but the Court of Appeal made it clear that they would not have entertained any such argument.Although occasional reference was made in argument to policy considerations, it was not argued that the lender should be denied compensation otherwise recoverable on policy grounds.

The court stated expressly that it was not asked to rule that the lender was disentitled on policy grounds to recover that part of his loss which was attributable to the fall in the property market, and it did not do so.The question of causation was the central issue in the case.

It was accepted that the valuer's negligent over-valuation caused the lender to advance the money to the borrower.

The argument was rather that the negligent over-valuation did not cause that part of the lender's loss which was attributable to the fall in the property market.The valuers argued that loss due to the fall in the market was not sufficiently linked to the negligent valuation, as they had no duty to advise on future movements of the markets or to protect the lender against the risk of a fall.

They did not cause the fall in the market.

They contended that the lender's loss was caused by market forces, not the negligence of the value.The response of Eagle Star and the lenders was that the established principles relating to assessment of damages do not permit the valuer to escape liability.

The valuer's negligence caused the lender to enter into a transaction he would not otherwise have entertained and from which he could not escape at will, and there was no question of remoteness or failure to mitigate.

The fall in the market was readily foreseeable and was not a new intervening cause; if the extent of the fall was a surprise, the possibility of a fall was not.Eagle Star and the lenders also argued that it was commercially unrealistic to seek to separate the risk of negligent over-valuation and the risk of a fall in the market, and to ascribe different causes to each.

There was one transaction and one loss.

If in the case of commercial property the valuer over-valued the property, he was likely to have over-valued the revenue which the borrower would draw from it.

The borrower might have been able to avoid committing any of his own funds to the purchase of the property as a result of the over-valuation.

In any of these events, the risk of default by the borrower was enhanced, the protective effect of any deduction made by the lender in advancing his loan was reduced, and the prospective loss to the lender, in the foreseeable event of a market fall, was increased.The Court of Appeal accepted the arguments of Eagle Star and the lenders.

They held that Baxter v Gapp was binding on the Court of Appeal and that, moreover, after a detailed review of case law, general principle and the clear trend of English authorit y favoured their position.The court held that Mr Justice Phillips had been wrong to distinguish between the risk of over-valuation and the risk of market fall, and between the valuer's duty in relation to each.

The valuer's duty was to take reasonable care to give a reliable and informed opinion on the open market value of the land in question at the date of the valuation.

If the valuer over-valued the land, it was foreseeable that the lender would lend on inadequate security, perhaps in circumstances where, properly advised, he would not have lent at all.

It was foreseeable that the borrower might default and, if he did, the lender's recovery would depend on what the land might fetch at the time of realisation.

This would, foreseeably, depend on how the market moved.The court accepted that it would give rise to artificial distinctions if the loss attributable to the consequences of one element of the single decision whether or not to lend could be divided up, as the valuers suggested, in considering the liability of the advisers to the lender.The court recognised that in many cases there would be more than one source of advice which went to the final decision.

If all sources of advice were negligent it would lead to untold and unnecessary complication if it were necessary for the lender to establish separate losses against each of them.

The lender should be entitled to recover the whole of his loss once, but from any one of the three, and it would be left to the three negligent advisers to take contribution proceedings against each other.

It would then be for the court to apportion liability on the basis of what was just and equitable, having regard to the extent of that person's responsibility for the damage in question, pursuant to the Civil Liability (Contribution) Act 1978.The court granted leave to appeal to the House of Lords to any party which wished to do so.

It is not yet known whether any party will take this up.

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