Inaccurate valuations: Liability for losses

The House of Lords has placed important restrictions on loses that can be claimed to arise from the provision of inaccurate information, an important extension to the limitations in the Caparo line of cases dealing with negligent mis-statements.

The House of Lords has placed important restrictions on the losses that can be claimed arising from the provision of inaccurate information.

Where the only duty (either in contract or tort) is to give information, the level of damages is limited to the loss directly attributable to the inaccuracy of the information and does not extend to all the consequences attributable to it. Thus valuers who had given inflated property valuations were only liable for an amount up to the difference between the negligent valuation and the true value at the time of the valuation, not for all losses sustained by banks, some of which were attributable to the property crash (South Australia Asset Management v York Montague Ltd., United Bank of Kuwait plc v Prudential Property Services Ltd, Nykredit Mortgage Bank Ltd v Edward Erdman Group Ltd., The Times Law Report, 24th June, 1996).

Valuation cases

All the cases involved negligent valuations given to banks, on the basis of which they lent money secured on property. The borrowers defaulted. The banks' losses could not be recovered from the sale of the properties mainly because of the property crash.

Most of the arguments in the cases focused on the level of damages and in particular whether they should take into account losses subsequently suffered solely as a result of the property crash.

If the lenders had known the true value of the properties they would not have lent. On this basis the Court of Appeal had ruled that the lenders were entitled to their entire foreseeable loss which would ordinarily be the difference between the sums lent and the actual amount recovered.

The lenders sued the valuers under valuation contracts. It is common practice in such cases to claim in both tort and contract; the House of Lords' judgment sets out principles which are equally applicable to both claims.

Duty of care

The Lords focused on whether the kind of loss the banks had suffered was the type of loss in respect of which the valuers owed the banks a duty of care. Lord Hoffmann cited Caparo Industries PLC v Dickman [1990] 2 AC 605 in this connection.

Where valuers had simply provided information, they only owed a duty for the direct consequences of the information being wrong not for all losses suffered. A duty of care which imposed upon a valuer responsibilities for losses which would have occurred even if their valuation had been correct was not fair or reasonable. The normal level of damages for a negligent valuation would therefore be the difference between the negligent valuation and the correct valuation or, if less, the lender's total loss.

The Lords distinguished between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action to take. In the latter case, the adviser must take reasonable care to consider all the potential consequences of that course of action. A market crash may be one of those potential consequences. But where a duty is simply to provide information, the giver of the information will, if negligent, only be responsible for the foreseeable consequences of the information being wrong.

Extension of Caparo

The cases are an important extension of the limitations in the Caparo line of cases. Caparo itself took a restrictive approach to any extension of the duty of care beyond the person(s) directly intended by the maker of a statement to rely on it. These valuation cases restrict the types of loss in respect of which a duty of care may be owed.

Neville Byford of Lovell White Durrant, who commonly act for lenders and insurers against valuers, says "The decision will obviously disappoint lenders because the House of Lords has not upheld the Court of Appeal's decision. But valuers may still bear a large part of the loss, particularly in cases where the negligent valuation is far greater than the actual valuation".

Practical implications

The House of Lords' decision may well have broader application beyond property valuations. In practice the key issue is likely to be the distinction drawn between providing specific information and general advice. This distinction is crucial to the scope of the duty of care for potential losses.

There is often a fine line between the two. For example, an accountant may simply value shares or give more general advice on a share purchase transaction. If advice is only given in relation to value, the accountant should state clearly that this is the case in its terms of retention. This will help to avoid any inference that it has undertaken a wider advisory role with a corresponding extension of its duty of care for potential losses.CJM

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