Quantifying Lender Claims

By: Richard Senior

SAAMCO Revisited

Professional negligence claims involving lenders continue to be shaped by the principles established in the landmark SAAMCO judgment. Thirty years on, the courts remain focused on questions of scope of duty, causation and recoverable loss, making this an area of ongoing importance for insurers and legal professionals.

In this article, Richard Senior, Partner at Caytons, revisits the key authorities and considers how the courts are applying these principles today.

Introduction

Thirty years have now passed since the House of Lords heard the conjoined appeals of South Australia Asset Management Corporation v York Montague Limited, United Bank of Kuwait Plc v Prudential Property Services Limited, and Nykredit Mortgage Bank Plc v Edward Erdman Group Limited [1996] AC 191, universally known as 'SAAMCO'. The law has been revisited by the highest court on several occasions, most recently in Manchester BS v Grant Thornton [2021] UKSC 20, and must now be regarded as settled. Even so, lenders still routinely proceed with the footing that they are entitled to recover all their out-of-pocket loss.

This note reviews the proper approach with reference to SAAMCO and subsequent authorities.

A: Saamco

In each of the appeals under consideration, valuers had negligently undervalued properties offered as security for loans. The borrowers defaulted. The lenders went into possession. They sold the properties in the aftermath of a crash in the housing market.

The Court of Appeal proceeded on the basis that the extent of a valuer's liability turned on what the lender would have done in a counterfactual world in which the valuations had been correct.

In its analysis, a 'no transaction' case was one in which the lender satisfied the court that it wouldn't have made a loan at all if properly advised. In such a case, it is accepted the lender would be entitled to recover all reasonably foreseeable losses. These would include loss flowing from a collapse in the property market and the costs of obtaining possession of the property as well as marketing it for sale.

By contrast, a 'successful transaction' case — which, as Lord Hoffmann observed in the House of Lords, was really a disastrous transaction case — was one in which the court found the lender would have lent a reduced amount. In the Court of Appeal's assessment, the lender's recoverable losses would be limited to the difference between its actual loss and the loss it would have suffered if it had lent the lesser amount.

Lord Hoffmann (with whom Lords Goff, Jauncey, Slynn, and Nicholls agreed) concluded that this was the wrong starting point. He held that the necessary first step was to determine the scope of the valuer's duty. This involved enquiring into the purpose of the duty. He drew on the well-known case of Caparo v Dickman [1990] 2 AC 605, in which consideration of the statutory purposes of an audit report assisted the House of Lords in reaching the conclusion that the defendant auditors owed no duty to investors in the company.

Lord Hoffmann made a distinction between a case in which the purpose of the duty was to provide some of the information which would assist the other party in deciding what course of action to take, and another in which the duty was to advise on the course of action to take. He indicated that, in the first case, the defendant's liability would be limited to the consequences of the information being wrong; in the second, they would extend to all reasonably foreseeable consequences.

There was, unsurprisingly, no dispute about what the valuers were under a duty to do or what the purpose of it was. They were required to give an opinion on current market value, the purpose of which was to assist the lenders in determining whether the properties afforded adequate security for the loans in contemplation. This is obviously only one aspect of a more complex decision-making process. It followed on from Lord Hoffmann's analysis that this was an 'information' and not an 'advice' case. The valuers' liability was, therefore, limited to losses flowing from the valuation being wrong and not the wider losses consequent upon a crash in the market.

This is often referred to as the SAAMCO cap. The language of 'caps' has been judicially deprecated, but the effect is to place an upper limit on the valuer's liability.

The Court of Appeal had reasoned there would be no injustice in making the valuers responsible for losses attributable to market forces because they would equally be able to reap the benefit of a rising market, which reduced or extinguished the loss. Lord Hoffmann concluded that this failed to compare like with like. In the case of a rising market, he explained, the question was whether the lender had suffered a loss at all. By contrast, in the case of a falling market, it was which elements of the lender's loss fall to the valuer and which to the lender itself.

He gave a now well-known analogy of a mountaineer consulting a doctor about a concern with his knee, which the doctor negligently pronounced fit. The mountaineer then undertook an ascent, which he would not have attempted if properly advised, and was injured in an avalanche. Lord Hoffmann explained that, although the injury would not have happened but for the doctor's negligence, and avalanches were a foreseeable hazard in mountaineering, it could not be said that the doctor was liable for the injury. This, he explained, was because the injury would have been suffered even if the advice had been correct.

The question of whether the loss would have been suffered if the information had been right has come to be known as 'the SAAMCO counterfactual'.

B: Nykredit

In Nykredit v Edward Erdman (No 2) [1998] 1 All ER 305, Lord Nicholls made the illuminating observation that (emphasis added):

…for the reasons spelled out by my noble and learned friend Lord Hoffmann in the substantive judgments in this case ([1996] 3 All ER 365, [1997] AC 191), a defendant valuer isn't liable for all the consequences which flow from the lender entering into the transaction. He isn't even liable for all the foreseeable consequences. He isn't liable for consequences which would have arisen even if the advice had been correct. He isn't 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.

The inherent risk in lending is that the borrower might prove unable or unwilling to meet the terms of the loan agreement. This is counterbalanced by the reward of receiving interest payments if he does and is mitigated by taking a charge over the property. In making a loan, the lender accepts that, in the event of default, they may need to obtain possession of the property and market it for sale. The costs involved are the consequences of the risk.

There is a risk that the security might be inadequate from day one if the property is worth less than is assumed. The lender guards against this risk by obtaining an opinion from the valuer and, in principle, is entitled to compensation equal to any undervaluation. Conversely, the risk that property prices might fall between the date of the loan and the date of obtaining possession is one which the lender takes upon itself.

C: Platform home loans

Lord Millett provided further elaboration, obiter, in Platform Homes Loans v Oyston Shipways [2000] 2 AC 190, in which he said (emphasis added):

It's necessary to recapitulate what this House has laid down in relation to the assessment of damages in cases of the present kind. Two calculations are required. The first is a calculation of the loss incurred by the lender as a result of having entered into the transaction. This is an exercise in causation. The main component in the calculation is the difference between the amount of the loan and the amount realised by enforcing the security.

The second calculation has nothing to do with questions of causation: see the Nykredit case, at p. 1638, per Lord Hoffmann. It's designed to ascertain the maximum amount of loss capable of falling within the valuer's duty of care. The resulting figure is the difference between the negligent valuation and the true value of the property at the date of valuation. The recoverable damages are limited to the lesser of the amounts produced by the two calculations.

It's to be observed that neither amount is an element or component of the other. Either may be the greater, for they are the results of completely different calculations. In mathematical terms, they bear the same relationship to each other as a-b does to c-d. The figure produced by the second calculation is simply the amount of the overvaluation. It isn't the loss or any part of it and cannot be equated with the amount of the loss sustained by the lender in consequence of the overvaluation. The two are the same only in a case where the lender has advanced 100 per cent. of valuation.

It's sometimes lost on lenders that they cannot turn SAAMCO on its head and recover the difference between the actual valuation and true market value when this sum exceeds the loss which they have suffered.

D: Manchester Building Society

Any discussion of SAAMCO must now be seen through the lens of Manchester BS v Grant Thornton [2021] UKSC 20. Most of the Supreme Court indicated that the proper approach is to pose a series of questions:

a. Is the complaint actionable in the tort of negligence?

b. What was the purpose of the duty owed?

c. Was the duty breached?

d. Did the breach cause a loss?

e. Is there a sufficient nexus between the duty owed and the loss alleged?

f. Is the loss irrecoverable because it's too remote, because there is a different cause, or because the claimant has failed to mitigate his loss?

The court concluded that the 'information' and 'advice' labels were overly rigid and liable to mislead. It preferred to see a spectrum with cases where the professional 'has assumed responsibility for every aspect of a transaction in prospect for his client' at one end and those in which he 'contributes only a small part of the material on which the client will rely in deciding how to act' at the other.

Importantly for our purposes, the majority viewed a claim against a valuer as the paradigm case in which it's readily possible to say that the professional's duty is limited. Although it would no longer be appropriate to refer to a lender's claim against a valuer as an 'information case', the allocation of risk remains unchanged.

The majority of the Supreme Court recognised that, outside straightforward cases such as these, the SAAMCO counterfactual is capable of being manipulated to produce an unnatural result. They concluded the emphasis should be placed on the purpose of the defendant's duty, as was Lord Hoffmann's starting point. In their analysis, the SAAMCO counterfactual was a cross-check rather than determinative of the outcome.

At first sight, this might be thought to call into question whether it remains logical to say that a valuer isn't responsible for losses which would have been suffered if its valuation had been correct. It can be seen, however, that the same result is arrived at by establishing the purpose of the duty. As Lord Nicholls recognised in Nykredit, it's a question of which risks the valuer assumed responsibility for and which the lender took on itself.

In his concurring judgment, Lord Leggatt gave a lucid restatement of the policy rationale behind SAAMCO which is worth quoting at length:

…it's necessary to return to the purpose for which a lender commissions a valuation and the role which the valuation is reasonably expected to play in the lender's business decision. The purpose of the valuation is to provide the lender with an opinion on which it's entitled to rely of the current market value of the property offered as security for the loan. Clearly, the value of the security is an important consideration for a mortgage lender. It's, however, by no means the only factor relevant to the decision whether to make the loan. The lender will also need to assess the credit risk in lending to the particular borrower — a matter for which the valuer has no responsibility. In addition, the valuer is normally asked to assess only what the property is currently worth and not to forecast what it will be worth at a future date when the lender may need to enforce the security. As Lord Hoffmann said in SAAMCO at p 210F: 'a valuer provides an estimate of the value of the property at the date of the valuation. He doesn't undertake the role of a prophet'.

It's obvious that the value of the property mortgaged as security for the loan may subsequently go up or down. The risk that the value of the property will go down is a commercial risk which the lender takes. That doesn't mean that the lender's willingness to take this risk is unqualified. The lender may only be willing to take this risk on the understanding that the property is currently worth what the valuer advises it's worth: that necessarily follows where the lender proves that, had the property not been overvalued, it would not have made the loan. But what can be inferred from the fact that the lender did in fact make the loan is that the lender was willing to bear the risk (without relying in this regard on the valuer) that the property would in future be sold for less than the valuation figure in so far as this would have been so even if the valuation had been accurate. To that extent, any loss suffered by the lender can fairly be said to be a consequence of risks inherent in the lending transaction, including the risk of a fall in property prices, and not of the only risk for which the valuer can fairly be held responsible, namely, the risk that the valuation was overstated.

D: Charles B Lawrence

Claimant lawyers were quick to conclude that Manchester Building Society tilted the balance decisively away from defendants. Whether that might be a fair assessment in complex accountants' liability claims of the sort under consideration in that case, it cannot be said of valuers' claims. A few months after judgment was handed down in Manchester Building Society, the Privy Council applied its learning in the valuer's case of Charles B Lawrence v Intercommercial Bank [2021] UKPC 30.

The defendant valuer advised that the plot of land which was to stand as security was worth $15m. This was predicated on several declared assumptions, one of which was that the borrower had good and marketable title. The bank lent $3m. On the borrower's default, it sought to market the property. The best offer it received was $2m. It subsequently emerged that the borrower did not have title, and the security was in fact worthless. The bank made a claim against the attorneys who acted in the transaction, and settlement terms were agreed.

The High Court of Trinidad and Tobago held that the valuer had been negligent and was liable for all the lender's reasonably foreseeable losses, subject only to deduction of the settlement with the attorneys. The Court of Appeal dismissed the valuer's appeal.

It was more success before the Privy Council. The panel accepted its submissions that it was necessary to separate the loss attributable to the valuation being wrong from that attributable to the defect in title. It agreed that the proper approach was to deduct the true market value of $2.375m from the amount of the loan to arrive at $625,000. It then applied a discount for contributory negligence.

It was left unsaid in Manchester Building Society what was to be done if cross checking with the SAAMCO counterfactual resulted in a contradictory result. The panel noted that this occurred here as the bank would have had sufficient security if the valuation had been correct. It concluded that the counterfactual should be discarded as unhelpful.

E: Hope Capital

SAAMCO left open the theoretical possibility that a set of facts might arise in which a valuer assumed responsibility for advising the lender on a course of action, although it's not easy to see how this would ever happen in practice.

In Hope Capital v Alexander Reece Thomson [2023] EWHC 2389 (KB), the lender made an unconvincing attempt to persuade the court that the valuer should be liable for all its reasonably foreseeable losses. The gravamen of its argument appeared to be that market value was of critical importance to that lender's decision making. This would appear to have been a retreat to the discredited reasoning of Steggles Palmer.

The judge had no difficulty in dismissing the argument. He held that there was nothing on the facts of the case to elevate it beyond the run-of-the-mill valuer's claim. He found it improbable that an extended duty would arise without it being clearly documented.

Having decided the case on entirely orthodox SAAMCO grounds, he went on obiter to consider what the position would have been if he had accepted the claimant's arguments. On this footing, he indicated that he would not have accepted the defendant's argument that the actual extrication costs were excessive.

F: Conclusions

The law is now well settled. In the ordinary course, the limit of the valuer's liability will be the difference between its valuation and true market value. It will not be responsible for losses flowing from the borrower's default or market conditions, however reasonably foreseeable they might be.

If, however, the lender's actual loss is less than the amount of the undervaluation, this will be the ceiling of its recovery in damages.

In theory, an exceptional case might arise in which a valuer assumed responsibility for advising the lender on whether to lend to the borrower and in what amount. In practice, however, it's hard to imagine either a valuer being prepared to accept such a burden or a lender wishing to delegate considerations within its own sphere of expertise to an advisor without that expertise.

Given the generality of the note, it should not be treated as specific advice in relation to a matter as other considerations may apply. Therefore, no liability is accepted for reliance on thisn'te. If specific advice is required, please contact one of the Partners at Caytons, who will be happy to help.