The conduct of the lender

Matthew Hirst reviews the implications for surveyors and lenders of last year's Court of Appeal decision in Platform Home Loans. Matthew Hirst is an associate solicitor at Dibb Lupton Alsop. December 1997 saw the Court of Appeal consider whether a restriction could be placed on the types of allegations of contributory negligence which could be considered when a lender sues a surveyor or other professional.

In the Saamco litigation in June 1996, the House of Lords distinguished between the provision of advice and the provision of information. Provision of a valuation was held to be information only.

The applicable measure of damage would therefore be the difference between the true valuation and the negligent valuation (known as the diminution cap), rather than the full losses incurred from the transaction (actual loss).

One of the first cases to consider the diminution cap was Platform Home Loans v Oyston Shipways in July 1996. The case concerned the valuation of a residential property.

At first instance, Mr Justice Jacob held the true valuation was only £1m as opposed to the £1.5m valuation provided by the defendant. He decided the actual losses of £651,749.51 were less than the diminution cap (which Judge Jacob wrongly calculated as including interest from the date of advance).

The judge made a deduction of 20 per cent for contributory negligence, citing the failure to insist on the completion of an application form in full which would have indicated that the property had previously been purchased for £375,000, in addition to the loan-to-value ratio of 70 per cent being too high.

The judge dismissed the lender's submission that he could make deductions only in respect of negligence which related to the valuation.

The defendant surveyors appealed in respect of the measure of damage applied and the calculation of interest. Platform cross-appealed in an attempt to restrict the contributory negligence finding solely to “relevant contributory negligence” relating to the valuation.

A number of first instance decisions preceded the appeal hearing, which attempted to deal with the question raised by Platform.

In the case of Interallianz Finanz v Independent Insurance in June 1997, Mr Justice Thomas restricted the finding to “relevant contributory negligence”. There followed a series of first instance decisions which followed the reasoning of Judge Thomas.

In December 1997 the Court of Appeal dismissed the argument that contributory negligence had to be in respect of matters relating to valuation.

In so doing, the court rejected the submissions that apportionment of damages was determined by the decision as to which measure of loss applied (that is, the diminution cap or actual loss). It also rejected the submission that if a court made a deduction from the cap it was making a double deduction.

The Appeal Court in Platform recognised that the application of the diminution cap did not amount to a deduction, since it was the limit of the potential claim against the surveyor.

There had been increasing focus on the lender's conduct in this type of litigation. Frequently it is the lender's conduct which occupies the bulk of the court's time at trial. The courts were therefore in a position to consider overall responsibility rather then isolating the conduct of just one party.

Had Platform's appeal been upheld, it would have been possible that evidence of mishandling by a lender as to a borrower's application may not have been brought to light.

Lenders' advisers may have been prompted to plead a diminution cap just below the actual loss in order to restrict the deduction to “relevant” contributory negligence only.

Since the actual loss continued to be the measure of damage applied against solicitors, it may have only been the solicitors who would be able to obtain deductions for the lenders' negligence where there were solicitor and surveyor defendants.

Recent criticism by both the Government and the Office of Fair Trading of certain conduct by lenders means that the ability of the court to consider each party's negligence will have huge relevance to future litigation.

The Court of Appeal decision will have already saved professionals and their insurers millions of pounds. It is important to reiterate that this has been achieved by the Court of Appeal not allowing a restriction on allegations of lender negligence.

The decision does not indicate which allegations will be accepted to the courts and neither does it indicate what percentage deductions will be made if any negligence is established. Indeed, the approach of the courts in respect of findings for contributory negligence has largely remained as conservative as the findings in the early 1990s.

The latest Platform decision has echoes of Saamco. In Saamco there was recognition that the limited role of the surveyor should place a limit on the potential claim. In Platform, it was determined that the application of that limit should not be allowed to hide the negligence of the lender.

Platform has been granted leave to appeal to the House of Lords. That appeal is likely to be heard by the end of this year.