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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd [1997] UKHL 53; [1998] 1 ALL ER 305; [1997] 1 WLR 1627 (27th November, 1997)
URL: http://www.bailii.org/uk/cases/UKHL/1997/53.html
Cite as: (1998) 75 P & CR D28, [1998] 1 EGLR 99, [1998] 1 Costs LR 108, [1997] WLR 1627, [1997] UKHL 53, [1997] 1 WLR 1627, [1998] CLC 116, [1998] 05 EG 150, [1998] PNLR 197, [1998] 1 ALL ER 305, [1998] 1 All ER 305, [1998] Lloyd's Rep Bank 39, [1997] NPC 165

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Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd [1997] UKHL 53; [1998] 1 ALL ER 305; [1997] 1 WLR 1627 (27th November, 1997)

HOUSE OF LORDS

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

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE

NYKREDIT MORTGAGE BANK PLC.
(RESPONDENT)

v.

EDWARD ERDMAN GROUP LTD.
(FORMERLY EDWARD ERDMAN UNLIMITED CO.)
(APPELLANTS)

ON 27 NOVEMBER 1997

LORD GOFF OF CHIEVELEY

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.

LORD JAUNCEY OF TULLICHETTLE

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.

LORD SLYNN OF HADLEY

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.

LORD NICHOLLS OF BIRKENHEAD

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 WLR 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.:

    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:

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.
 

    In D.W. Moore and Co. Ltd. v. Ferrier [1988] 1 W.L.R. 267 the measure of damages was the measure sometimes loosely referred to as the contract or warranty measure. Had the solicitor done his job properly the plaintiffs would have obtained the benefit of an effective restraint of trade covenant. As it was, they received a worthless covenant. They suffered damage when the transaction was entered into. Bell v. Peter Browne & Co. [1990] 2 Q.B. 495 is a similar type of case. The solicitors could and should have protected the plaintiff's continuing interest in the house he was transferring to his wife. He suffered damage when he parted with the house without that protection. Similarly in Baker v. Ollard & Bentley (1982) 126 S.J. 593: the solicitors failed to ensure that the plaintiff obtained security of occupation of the first floor as they could and should have done. She sustained loss when that occurred. Likewise in the insurance broker cases of Iron Trade Mutual Insurance Co. Ltd. v. J.K. Buckenham Ltd. [1990] 1 A.E.R. 808 and Islander Trucking Ltd. v. Hogg Robinson & Gardner Mountain (Marine) Ltd. [1990] 1 A.E.R. 826: the brokers should have obtained valid and effective insurance or reinsurance contracts. The plaintiffs suffered loss when the brokers failed to do so, since the voidable contracts were of less commercial value.

    In UBAF Ltd. v. European American Banking Corporation [1984] Q.B. 713 the measure of damages called for a comparison between the position of the plaintiffs as it would have been had they not made the loans and the position of the plaintiffs as participants in the loan agreements. The Court of Appeal, comprising Ackner and Oliver L.JJ., declined (at page 725E) to accept that it was self-evident that by entering into the transaction the plaintiffs were worse off. It was possible, even if unlikely, that the rights they acquired when they lent their money were at that time worth as much as the amount of the loans. The facts would need to be established at trial. Finally, of the English authorities, is First National Commercial Bank Plc. v. Humberts (a firm) [1995] 2 A.E.R. 673 where the court drew the distinction between the two different measures of damages. The evidence established that the financing deal made by the plaintiffs was less valuable than it would have been had the defendants' valuation been correct. As Saville L.J. pointed out, at page 676e, that was not the relevant measure of damages in that case. The relevant measure involved comparing what the plaintiffs paid out and what they received under the transaction. On the evidence the plaintiffs did not suffer any relevant damage when they parted with their money and entered into the transaction. It was not until after March 1984, within the limitation period, that their outlay plus cost of borrowing or notional profit obtainable elsewhere exceeded the value of the security.

    In Wardley Australia Ltd. v. Western Australia (1992) 109 A.L.R. 247 the High Court of Australia considered the meaning of "loss or damage" in the context of a cause of action for the recovery of loss or damage created by section 82 of the Trade Practices Act 1974. The court held that the indemnity given by the State generated a contingent liability and that the State, as the person misled into giving the indemnity by misrepresentations, did not suffer loss or damage for the purposes of the statutory cause of action until, in short, the contingency occurred. Of the wider observations made in the course of the judgments, Brennan J. stated that a transaction which involves benefits and burdens results in loss or damage only if an adverse balance is struck. Loss cannot be said to be suffered until it is "reasonably ascertainable" that by bearing the burdens the plaintiff is worse off than if he had not entered into the transaction.

    In the present case the borrower's covenant was worthless. The borrower defaulted at once, and the amount lent (£2.45 million) at all times exceeded the true value of the property (£2.1 million). Thus the cause of action arose at the time of the transaction (12 March 1990) or thereabouts. By December 1990 the bank had sustained its full allowable loss of £1.4 million. I would award simple interest on that amount from 12 December 1990 until judgment at the agreed rate of 0.4 per cent above LIBOR.

Interest on costs orders

    Judgment debts carry interest by virtue of the Judgments Act 1838. For this purpose an order for payment of costs ranks as a judgment. Interest on costs runs from the date on which the order for payment is made (the so-called incipitur rule), not from the (later) date on which the amount of costs is quantified (the allocatur rule). This was decided in Hunt v. R.M. Douglas (Roofing) Ltd. [1990] 1 A.C. 398.

    The application of this principle is straightforward in relation to the costs order made by your Lordships' House in the present case concerning costs incurred on the appeal to the House. But the costs order made by this House also embraced some of the costs incurred by the valuers in the appeal to the Court of Appeal. The Court of Appeal had dismissed the valuers' appeal with costs. This House set aside the order of the Court of Appeal, and varied the order of the trial judge by reducing the amount of damages. The House ordered the bank to pay the costs incurred by the valuers in respect of the appeal to the House and also, and this is the relevant part of the order, the costs incurred by the valuers in the Court of Appeal on the issue of quantum. In respect of the latter costs the valuers seek interest from the date on which judgment was given in the Court of Appeal, in like manner as would be the position if the Court of Appeal had on that date made an order for payment of those costs to the valuers. They seek an order similar to the backdated order which the Court of Appeal approved in Kuwait Airways Corporation v. Iraqi Airways Co. (No. 2) [1994] 1 W.L.R. 985.

    I have to say that in the Kuwait Airways case the court was lured into error. It let its heart rule its head. Statute apart, courts have no power to award interest on costs. The statutory power is found in sections 17 and 18 of the Judgments Act 1838. Before then interest was not recoverable on costs. The discretionary power to award interest conferred by section 35A of the Supreme Court Act 1981 does not apply because it is confined to the payment of interest on a debt or damages. In the Kuwait Airways case the court found an alternative source of jurisdiction in R.S.C. Order 42 rule 3, which provides:

Leggatt L.J. observed, at page 987E, that when the Court of Appeal reverses an order for costs given on a final judgment in the court below, it will ordinarily be just to backdate that part of its order as to costs which relates to the costs of the action.

    However desirable it might be for the court to have power to order the payment of interest on costs from a date earlier than the date on which the court gives judgment, I do not think such a power can be squeezed out of this rule. That would be to use the rule as a means of doing indirectly what the court has no power to do directly. Whatever is the ambit of this rule, it cannot be a proper use of the rule to backdate a judgment, so far as it relates to costs, with the sole object of thereby bringing into operation statutory judgment debt interest from a date earlier than the date on which in fact judgment was given. Interestingly, when giving some examples of when a court might backdate an order, Sir David Cairns in Covell Matthews & Partners v. French Wools Ltd. [1978] 1 W.L.R. 1477, 1487, gave a money judgment as a form of order which could clearly could not be backdated so as to carry interest under the Judgments Act 1838 from an earlier date.

    Indeed, the actual decision in the Kuwait Airways case illustrates the inappropriateness of using Order 42 rule 3 as a means to award a reasonable rate of interest on costs incurred in a lower court. Judgment Act interest attaches automatically to judgment debts, at the prescribed rate. In Kuwait Airways the relevant period covered by the proposed backdating was from 3 July 1992 to 21 October 1993. On 3 July 1992, the date of the trial judge's judgment, the prescribed rate of interest was 15 per cent, described by Nourse L.J., at page 990D, as an unnaturally high rate compared with base lending rate plus 2 per cent. The court had no power to vary the rate of interest payable on a judgment debt. To achieve the effect, which the court could not do directly, of reducing the applicable rate of interest, the court backdated the costs order, not to 3 July 1992, but to an intermediate date, 1 February 1993, so as to avoid unfairness to the paying party.

    In my view the Kuwait Airways case was wrongly decided. The court has no power to order interest as asked by the valuers in this case. Order 42 rule 3 cannot properly be used to fill a lacuna in section 35A of the Supreme Court Act 1981. This rule is intended to confer a power which, of its nature, is exceptional. This is so even though the requirement for "special leave of the court" is no longer included in the rule. But the principle espoused in the Kuwait Airways case would mean that it would be the standard practice to antedate part of the costs orders made by the Court of Appeal. That would be a misuse of the power. I agree with the observations of Bankes L.J. in Belgian Grain and Produce Co. Ltd. v. Cox & Co. (France) Ltd. [1919] W.N. 317.

Interest on repayable damages and costs

    The effect of the decision of this House given last June was that some of the money previously paid by the defendants to the plaintiff as damages and costs, pursuant to orders of the Judge and of the Court of Appeal, fell to be repaid to the defendants. This has given rise to the question whether, when ordering repayment, the House has jurisdiction to award interest on the money ordered to be repaid.

    I am in no doubt that the answer to this question is yes. The court has no general, inherent power to order the payment of interest. But the situation now under consideration is not directed at requiring a defendant against whom the plaintiff has a cause of action to pay interest on money to which the plaintiff's cause of action entitles him. Nor is it directed at requiring him to pay interest on unpaid costs. Rather, when ordering repayment the House is unravelling the practical consequences of orders made by the courts below and duly carried out by the unsuccessful party. The result of the appeal to this House was that, to the extent indicated, orders made in the courts below should not have been made. This result could, in some cases, be an idle exercise unless the House were able to make consequential orders which achieve, as nearly as is reasonably practicable, the restitution which this result requires. This requires that the House should have power to order repayment of money paid over pursuant to an order which is subsequently set aside. It also requires that in suitable cases the House should have power to award interest on amounts ordered to be repaid. Otherwise the unravelling would be partial only.

    This power seems to me to fall squarely within that range of powers which are necessarily implicit if a court of law possessed of appellate functions is to carry out its prescribed functions properly. It is, as such, a power derived from what is usually referred to as the inherent jurisdiction of the court. It is a power equally possessed by the Court of Appeal consequential upon orders made by it. The only surprising aspect of this power is that its existence has not previously arisen for decision.

LORD HOFFMANN

My Lords,

    I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Nicholls of Birkenhead, with whom I agree. I add some words of my own only upon the question of the proper method of calculating the interest payable to the lender, Nykredit Mortgage Bank Plc. ("Nykredit"), upon the damages of £1.4 million which it recovered from the valuers, Edward Erdman Group Ltd ("Erdman").

    Section 35A of the Supreme Court Act 1981 gives the court power to award 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." It is accepted that in principle Nykredit should be awarded interest upon the judgment but there are disputes, first, as to the date upon which the cause of action may be said to have arisen and, secondly, as to the way in which the discretion conferred by section 35A should be exercised.

    Nykredit say that the cause of action arose as soon as the money was lent. On 12 March 1990 it advanced £2.45 million on the security of a property which, it is now agreed, was worth only £2.1 million. It therefore suffered immediate loss and damage in the sum of £350,000 and this loss subsequently increased as the value of the property fell and the arrears of interest mounted. It cannot recover more than £1.4 million, because this is the amount by which Erdman overvalued the security. But the loss reached this amount by December 1990 and therefore Nykredit should be entitled to interest on £1.4 million from that date. It does not claim interest from the date of the advance because its £1.4 million claim to damages includes special damage in the form of interest which it had to pay until December 1990 on money borrowed to fund the loan: compare Wadsworth v. Lydall [1981] 1 W.L.R. 598. An award of interest under the statute from the earlier date would therefore be double counting.

    On the other hand, Mr. Berry Q.C. who appeared for Erdman, says that no cause of action accrued until Nykredit sold the mortgaged property in February 1993. The only loss for which Erdman was responsible was loss attributable to the deficiency in the security and such loss could not be determined until the security had been realised.

    A determination of the date upon which the cause of action arises is important not merely for the purposes of an award of interest under the Supreme Court Act 1981 but also for the purposes of limitation under the Limitation Act 1980. Under the latter statute, time runs from when the cause of action "accrued." Mr. Berry argued that this was not necessarily the same date as that upon which the cause of action "arose" within the meaning of section 35A of the 1981 Act but I think that the words have the same meaning.

    In order to decide when the cause of action arose, it is first necessary to recall, by reference to your Lordships' earlier judgment, precisely what the cause of action was. It was for breach of the duty of care owed by the valuer to the lender, which existed concurrently in contract and in tort. Your Lordships identified the duty as being in respect of any loss which the lender might suffer by reason of the security which had been valued being worth less than the sum which the valuer had advised. The principle approved by the House was that the valuer owes no duty of care to the lender in respect of his entering into the transaction as such and that it is therefore insufficient, for the purpose of establishing liability on the part of the valuer, to prove that the lender is worse off than he would have been if he had not lent the money at all. What he must show is that he is worse off as a lender than he would have been if the security had been worth what the valuer said. It is of course also the case that the lender cannot recover if he is, on balance, in a better or no worse position then if he had not entered into the transaction at all. He will have suffered no loss. The valuer does not warrant the accuracy of his valuation and the lender cannot therefore complain that he would have made more profit if the valuation had been correct. But in order to establish a cause of action in negligence he must show that his loss is attributable to the overvaluation, that is, that he is worse off than he would have been if it had been correct.

    It is important to emphasise that this is a consequence of the limited way in which the House defined the valuer's duty of care and has nothing to do with questions of causation or any limit or "cap" imposed upon damages which would otherwise be recoverable. It was accepted that the whole loss suffered by reasons of the fall in the property market was, as a matter of causation, properly attributable to the lender having entered into the transaction and that, but for the negligent valuation, he would not have done so. It was not suggested that the possibility of a fall in the market was unforeseeable or that there was any other factor which negatived the causal connection between lending and losing the money. There was, for example, no evidence that if the lender had not made the advance in question, he would have lost his money in some other way. Nor, if one started from the proposition that the valuer was responsible for the consequences of the loan being made, could there be any logical basis for limiting the recoverable damages to the amount of the overvaluation. The essence of the decision was that this is not where one starts and that the valuer is responsible only for the consequences of the lender having too little security.

    Proof of loss attributable to a breach of the relevant duty of care is an essential element in a cause of action for the tort of negligence. Given that there has been negligence, the cause of action will therefore arise when the plaintiff has suffered loss in respect of which the duty was owed. It follows that in the present case such loss will be suffered when the lender can show that he is worse off than he wold have been if the security had been worth the sum advised by the valuer. The comparison is between the lender's actual position and what it would have been if the valuation had been correct.

    There may be cases in which it is possible to demonstrate that such loss is suffered immediately upon the loan being made. The lender may be able to show that the rights which he has acquired as lender are worth less in the open market than they would have been if the security had not been overvalued. But I think that this wold be difficult to prove in a case in which the lender's personal covenant still appears good and interest payments are being duly made. On the other hand, loss will easily be demonstrable if the borrower has defaulted, so that the lender's recovery has become dependent upon the realisation of his security and that security is inadequate. On the other hand, I do not accept Mr. Berry's submission that no loss can be shown until the security has actually be realised. Relevant loss is suffered when the lender is financially worse off by reason of a breach of the duty of care than he would otherwise have been. This is, I think, in accordance with the decisions of the Court of Appeal in UBAF v. European American Banking Corporation [1984] Q.B. 713 and First National Commercial Bank Plc. v. Humberts [1995] 2 All E.R. 673.

    In the present case, the lender defaulted almost at once, well before the date in December 1990 from which Nykredit claims interest. There was ample evidence of relevant loss having been suffered before that date. The House therefore has jurisdiction to award interest from then under the 1981 Act. But how should the discretion be exercised? Nykredit claim interest on the whole sum of £1.4 million from 12 December 1990. By that time, Nykredit had sustained the whole loss attributable to the overvaluation. Simple interest at the agreed rate of 0.4% over LIBOR should therefore be paid on £1.4 million from that date.


© 1997 Crown Copyright


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