Privy Council considers reformulated test for determining scope of duty of care owed by professional advisers

In the context of a claim brought by a bank against a valuer, seeking damages in respect of a negligent valuation report for land representing the bank's security, the Board of the Privy Council has allowed an appeal by the valuer on the basis that the losses claimed did not fall within the scope of the duty of care owed by the valuer to the bank: Charles B Lawrence & Associates v Inter-commercial Bank Limited (Trinidad and Tobago) [2021] UKPC 30.

This decision will be of interest to financial institutions as it is the first case to consider the Supreme Court's decision in Manchester Building Society v Grant Thornton [2021] UKSC 20 as to the proper approach to determining the scope of duty and the extent of liability of professional advisers in the tort of negligence, including the proper application of the principle laid down in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 (SAAMCO) (see our blog post: Supreme Court clarifies proper approach to SAAMCO and to determining scope of duty of care owed by professional advisers).

Following Manchester Building Society, the Board emphasised that in determining the scope of the duty of care, it is particularly important to consider the purpose of the advice or information being given (and therefore the risk being guarded against), and that the SAAMCO counterfactual test will not necessarily be applied in all cases, especially where to do so would be unhelpful.

In the present case, the Board found unanimously that it was clear, not least from the assumptions expressly specified by the valuer in the valuation report, that the purpose of the report was to value the property on the assumption that there was good legal title to the land. It was not the purpose of the valuer's report to advise on, or give information about, the title to the land. It was clear that the bank was not looking to the valuer's report to advise on, or give information about, the title to the land. That was a matter for a lawyer, not a valuer. Accordingly, the valuer was not liable for any loss attributable to a defect in title rather than to the overvaluation being based on commercial, not residential, use.

The Board also commented that applying the counterfactual test would contradict its findings that the loss attributable to the defective title was outside the valuer's scope of duty. The Board agreed that the counterfactual was of second-order importance as regards to establishing the scope of the duty and is a helpful cross-check of that scope in most but not all cases. This was one of the cases where it was unhelpful.

The decision is considered in more detail below.

Background

In December 2008, a bank (the Bank) was approached for a USD3 million loan to a company. It was agreed that by way of security, amongst other things, a related company (the Guarantor) was to provide a mortgage of land it owned.

In order to approve the loan and security, the Bank required the Guarantor to present to it a recent valuation of the land. A valuer (the Valuer) was instructed by the Guarantor to provide a valuation of the land. The valuation assumed, amongst other things, that: the Guarantor had good title to the land; planning permission would be granted enabling the land to be used for commercial rather than residential use; and, the land was free from all encumbrances with vacant possession. The Valuer valued the land at USD15 million. In reliance on that valuation, the Bank provided the loan to the company.

Both the company and the Guarantor subsequently defaulted on the loan without making any repayments. In 2010, the Bank appointed a receiver to enforce the security, but the highest bid it received was only USD2 million. It later emerged that the land could be used only for residential use, with the effect that the value of the land was actually USD2.375 million, not USD15 million.  Also, the site had occupiers and so was not a cleared site. In a separate twist, it also emerged that the Guarantor did not have good title to the land, so the security was worthless. The Bank consequently brought an action in negligence in 2012 against the Valuer. The Bank's case was that the Valuer owed it a duty to exercise due diligence in making the representations contained in the valuation.

The Bank also brought an action against its conveyancing attorneys in 2013 for failing to investigate the title properly; this action settled separately for USD2.4 million.

Decisions of the High Court and Court of Appeal of Trinidad and Tobago

The High Court's decision

The High Court held that the Valuer owed a duty of care to the Bank in respect of the valuation report, even though the Valuer was not instructed by the Bank. That duty had been breached in two respects: (1) the Valuer valued the land on the basis that it could be developed for commercial use, when it should have been valued on the basis that it was only appropriate for residential use; and (2) the Valuer failed to point out that there were occupiers on the land and so it was not a cleared site.

The High Court also found that all loss suffered by the Bank having entered into the loan was factually caused by the Valuer's breach of duty. Subject to the reduction required for the recovery from the settlement of the action involving the Bank's conveyancing attorneys, the High Court found that the remaining loss (calculated to be the loan value, plus contractual interest, less the settlement sum of USD2.4 million) could be recovered by the Bank from the Valuer. Moreover, there was no contributory negligence by the Bank.

The Valuer appealed the High Court's decision.

The Court of Appeal's decision

The Court of Appeal upheld the decision of the High Court. However, the Court of Appeal suggested there should have been a 20% reduction in the damages awarded by the High Court for the Bank's contributory negligence, i.e. its failure to send its own officers to inspect the land which would have revealed the presence of occupiers.

The Valuer appealed the Court of Appeal's decision.

Decision of the Board of the Privy Council

The Board found in favour of the Valuer and allowed the appeal for the reasons explained below.

The scope of duty principle

The Board noted that the central issue to be considered was the correct approach to determining the scope of duty owed by the Valuer to the Bank, especially in light of the recent decision of the UK Supreme Court in Manchester Building Society (which had been handed down subsequent to the decisions of the lower courts in Trinidad and Tobago). From this Supreme Court decision, the Board highlighted the following key principles:

• In determining the scope of the duty of care, it is particularly important to consider the purpose of the advice or information being given. This is judged on an objective basis by reference to the purpose for which the advice is being given. In the case of negligent advice given by a professional adviser, one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk.
• The counterfactual test put forward by Lord Hoffmann in SAAMCO should be regarded as a flexible and useful cross-check for deciding on the scope of the duty of care in most but not all cases. In applying the counterfactual test (and extending it to advice as well as information in line with the Supreme Court’s criticism of that distinction), one asks, in summary, would the claimant still have suffered the same loss if the information or advice had been true? If the answer is “yes”, the scope of the duty does not extend to the recovery of that loss. If the answer is “no”, the scope of the duty does extend to the recovery of that loss.

Application of the scope of duty principle

The Board held that it was clear, not least from the assumptions expressly specified by the Valuer in the valuation report, that the purpose of the Valuer's report was to value the property on the assumption that there was good legal title to the land.

The importance of the purpose of the advice or information

The Board highlighted that it was not the purpose of the Valuer's report to advise on, or give information about, the title to the land. It was clear that the Bank was not looking to the Valuer's report to advise on, or give information about the title to the land. That was a matter for a lawyer, not a valuer.

The Board commented that it was therefore seeking to exclude from the total loss factually caused to the Bank by the Valuer's negligence that element of loss which was outside the scope of the Valuer's duty of care because it was attributable to the defect in title rather than to the overvaluation being based on commercial, not residential, use. In the court's view, the commercial, rather than residential, overvaluation loss, but not the defective title loss, was within the scope of the Valuer's duty of care. That conclusion followed from the purpose of the advice or information given by the professional and hence the risk which was being guarded against.

On the basis of the above, in calculating the Valuer's potential liability, that meant taking the amount of the loan (USD3 million), deducting USD2.375 million on the basis that was the valuation of the land for residential use (assuming the Guarantor had good title), leaving USD625,000.

The SAAMCO cross-check counterfactual test

The Board noted that applying the counterfactual test would contradict its findings that the defective title loss was outside the Valuer's scope of duty. That was because, had the valuation of USD15 million been correct, the Bank would still have made the loan, but would not have suffered any loss (as the Bank would have had adequate security to cover the Guarantor's default in repaying the loan). The Board commented that this (emphasis added): "…reinforce[d] the point made by the Supreme Court that the counterfactual is of second-order importance as regards establishing the scope of the duty and is a helpful cross-check of that scope in most but not all cases. This is one of the cases where it is unhelpful."

The settlement with the conveyancing attorneys

The Board commented that, when the scope of duty principle was correctly applied, the settlement with the conveyancing attorneys was irrelevant for the purposes of the Bank's claim against the Valuer. This was because the defective title loss was outside the scope of the Valuer's duty, and it had already been excluded as irrecoverable by the Bank from the Valuer.

The negligence in relation to the occupiers

The Board found that the finding of negligence in relation to the occupiers had no bearing on the reasoning in relation to the scope of the duty of care owed by the Valuer. It was another incidence of breach of the same duty of care, and the evidence was not clear on whether the occupation had actually reduced the value of the land.

Accordingly, for the reasons given above, the Board allowed the Valuer's appeal.