Case No: A3/2015/1142
Neutral Citation Number: [2016] EWCA Civ 661
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr. Timothy Fancourt Q.C.
[2015] EWHC 773 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 1 July 2016
Before :

LORD JUSTICE MOORE-BICK
Vice-President of the Court of Appeal, Civil Division
LORD JUSTICE McCOMBE
and
LADY JUSTICE KING

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Between :

	TIUTA INTERNATIONAL LTD (in liquidation)	Claimant/
Appellant	
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	DE VILLIERS SURVEYORS LTD	Defendant/Respondent	

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Miss Joanna Smith Q.C. (instructed by Rosling King LLP) for the appellant
Mr. Alexander Hickey Q.C. (instructed by Reed Smith LLP) for the respondent

Hearing date : 21st April 2016

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Judgment
Lord Justice Moore-Bick : 
1.	This is an appeal against the order of Mr. Timothy Fancourt Q.C. giving summary judgment for the respondent, De Villiers Surveyors Ltd, on one issue relating to the claim by the appellant, Tiuta International Ltd, for damages for professional negligence. 
2.	The respondent is a surveyor. In February 2011 it was instructed by the appellant to value a partly completed residential development in Sunningdale, which the appellant was considering accepting as security for an advance to the developer. The respondent valued the property at £3.25 million in its current state of development and £4.9 million on completion. On the basis of that valuation the appellant made available to the developer a loan facility under which it advanced a total of £2,560,168.45 on the security of a first legal charge over the property.
3.	In November 2011 the developer approached the appellant seeking an increase in the amount of the facility to £3,088,252 on the same security. The appellant instructed the respondent to provide a fresh report and in November 2011 the respondent valued the property at £3.25 million in its then state of development and £4.9 million on completion. In another valuation carried out in December 2011 the respondent valued the property at £3.5 million in its current condition and £4.9 million on completion.
4.	The appellant agreed to provide the additional funds sought by the developer and did so by refinancing the facility, rather than by simply varying the original agreement. The amount outstanding under the original loan at that time was £2,560,168.45. In January 2012 the appellant opened a new account in favour of the developer in respect of the second facility. It advanced £2,560,168.45 to repay the amount outstanding under the first facility and further amounts from time to time as and when funds were drawn down by the developer. The parties entered into a fresh agreement in relation to the second facility. The original charge was released and a new charge was executed and registered at the Land Registry. 
5.	When the term of the second facility expired an amount of about £2.84 million remained outstanding. The loan was not repaid and the appellant appointed receivers to enforce its security. However, on sale the property realised only £2,141,280. The appellant therefore brought proceedings against the respondent to recover its loss. 
6.	In its particulars of claim the appellant alleged that the valuation report provided by the respondent in December 2011 had negligently overstated the value of the property and that it had suffered loss as a result. In its particulars of claim it put its case in the following way:
“16.	Had the Defendant taken reasonable care and given the Claimant such a valuation [i.e. a careful valuation] of the Property, the Claimant would not have made the Loan available to the Borrower and would not have incurred the losses it has now incurred.”
It was not part of the appellant’s case that the valuation given by the respondent in February 2011 had been negligent.
7.	Paragraph 16 of the particulars of claim invited the riposte from the respondent in paragraph 38 of its defence that at the time of the valuation in December 2011 the appellant had already advanced £2,560,168.45 to the borrower and therefore that, if the valuation in December 2011 had been negligent (which of course it denied), the appellant could not have suffered a greater loss than the amount by which the indebtedness had increased thereafter. The appellant’s response was that the second transaction with the developer in December 2011 and January 2012 was a separate transaction unrelated to the earlier transaction and therefore had to be viewed on its own.
8.	The respondent made an application under CPR Part 24 seeking summary judgment on the issue raised in paragraph 38 of its defence. There was, and remains, an issue between the parties whether the first loan was in fact discharged and a new loan advanced, but it was properly accepted, both below and in this court, that that was not a matter that could be determined on a summary application. The case therefore proceeded on the assumption that the appellant’s case in that respect was well-founded. Whether the valuation provided by the respondent in November and December 2011 was negligent is also in issue, but for the purpose of this appeal it must be assumed in the appellant’s favour that it was. 
9.	The application was heard by Mr. Timothy Fancourt Q.C. sitting as a Deputy Judge of the Chancery Division. He held that the “but for” test of causation was applicable in this case and that any negligence by the respondent in relation to the valuation in December had not caused the loss attributable to the original loan. The respondent was therefore liable only for any loss caused by the additional lending.
10.	Since it had to be assumed that the original loan had been repaid through the medium of the second loan, it is not surprising that the decision of this court in Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336, [2002] P.N.L.R. 35 played an important part in the argument before the judge and before us. In that case the claimant had advanced £49,500 to the borrower on the security of a property that had been negligently over-valued by the defendant. It later advanced an additional sum on the security of the same property following a second negligent over-valuation by a different surveyor. It did so by refinancing the first loan, i.e. by advancing the borrower an amount sufficient to pay off the first loan and provide the additional funds he required. The claimant brought proceedings against the defendant seeking to recover a loss caused by the first over-valuation, but the claim was dismissed on the grounds that the refinancing transaction had discharged the first loan in full and that therefore no loss flowed from that valuation. That decision was upheld on appeal.
11.	Miss Smith Q.C. submitted that in this case, as in Preferred Mortgages, the effect of the second transaction was to discharge the original loan and to create a new loan supported by fresh security. She argued that in those circumstances the simple application of the “but for” test, for which the respondent contended, would result in injustice, because the appellant would lose the benefit of any claim it had had in respect of the first over-valuation and the respondent, which had provided a negligent over-valuation in support of the second transaction, could not be held liable for the full extent of its breach of duty.
12.	Mr. Hickey Q.C. for the respondent submitted that a straightforward application of the “but for” test of causation in this case would not give rise to an injustice. However it was structured, the second transaction involved nothing more than an agreement to increase the amount of the original loan. It could have been achieved without the need for any amendment of the existing security and if the appellant had decided not to go ahead, it would have remained exposed to the borrower to the extent of the existing loan. It was a matter for the appellant how it chose to organise its business. If it did so in a way which involved the repayment in full of the original loan, it could not complain of the consequences. In support of his submissions he drew our attention to the decision of this court in Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629.
13.	It is convenient to digress for a moment to deal with Mr. Hickey’s submission on Swynson v Lowick Rose. He argued that the decision is authority for the proposition that in a case of this kind the court should look at the substance of the transaction rather than its form and that accordingly no significance should be attached to the fact that in the appellant’s books the first loan had been treated as having been repaid out of the second and that a new charge has been created.
14.	I am not sure that this argument is open to the respondent on this appeal. As I have already said, there is a live dispute between the parties over whether the second transaction was in fact anything more than an extension of the original loan, despite the manner in which it was formally structured and the fact that the first charge was released and a new charge created, and it was common ground below that that dispute could not be resolved in advance of trial. The case was therefore argued on the basis that there had been a refinancing in accordance with the position disclosed by the documents. 
15.	In any event, however, I do not think that the decision in Swynson v Lowick Rose supports Mr. Hickey’s case. That case concerned a claim by a lender for damages against a firm of accountants for negligence in the production of a due diligence report on the borrower. Loans had been made in 2006, 2007 and 2008. At the end of 2008 there was a refinancing under which the owner of the lender, Mr. H, himself provided funds to the borrower to enable it to repay the 2006 and 2007 loans. The defendant contended that it was not liable for any loss in respect of the 2006 or 2007 loans, because they had been repaid in full. By a majority (Longmore and Sales L.JJ., Davis L.J. dissenting) this court held that the repayment of those loans by means of the funds provided by Mr. H was collateral to the defendant’s breach of contract and did not therefore reduce its liability under established principles relating to mitigation of damage by virtue of avoided loss. In the view of Longmore L.J., to hold otherwise would have been to allow form to triumph over substance. Sales L.J. agreed, but Davis L.J. dissented on the grounds that it was not possible to ignore the fact that the borrower had repaid the 2006 and 2007 loans, albeit with funds lent to it by Mr. H. It is clear, however, that the court was concerned with the principles of avoided loss in the context of mitigation, in which it is well established that not every benefit which the injured party receives must be taken into account. Much will depend on the nature and origin of the benefit; if it is derived from a source unrelated to the defendant’s wrongful act, it will not be taken into account. In my view the decision is not authority for the broader proposition put forward by Mr. Hickey that in a context such as that of the present case the court is entitled to disregard the structure of a routine refinancing transaction in favour of what it regards as the substance of the case.
16.	In order to determine what loss, if any, was caused by the respondent’s over-valuation in the present case it is necessary to identify correctly the nature of the transaction and the part the respondent played in it. The starting point is that the appellant was willing to enter into a new facility agreement with the developer under which part of the new loan would be used to repay the original loan. In Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd [1997] 1 W.L.R. 1627 their Lordships considered the measure of damages recoverable from a surveyor in respect of the negligent over-valuation of property. At page 1631H Lord Nicholls observed that in a case of this kind the basic comparison called for is between the amount of money lent by the plaintiff, which he would still have had, and the value of the rights acquired, normally the borrower’s covenant and the true value of the property. In the present case the borrower’s covenant had no value, so all that the appellant acquired was the value of the property.
17.	When a lender is considering making a fresh loan, part of which is to be used to re-pay an existing loan,  the purpose to which the new loan will be put is of no interest or relevance, either in fact or in law, to the person who is asked to value the property on which it is to be secured. The valuer is liable for the adverse consequences flowing from the lender’s entering into the transaction insofar as they are attributable to any negligent deficiency in the valuation.  In my view the judge’s application of the “but for” test failed to take into account the fact that the transaction was structured in such a way that the second loan was used to pay off the first. That would have been clear enough if it had involved a lender other than the appellant, but the fact that the lender was the same in each case does not in my view affect the analysis. The loan made under the second transaction was the means by which the borrower was enabled to pay off the first and it was the fact that the second loan was used to repay the first in full that released the respondent from any potential liability in respect of the first valuation. The second loan therefore stands apart from the first and the basic comparison for ascertaining the appellant’s loss is between the amount of that second loan and the value of the security.   
18.	The appellant entered into the second transaction in reliance on the respondent’s valuation. If the valuation had not been negligent, the appellant would not have entered into the second transaction, and would have suffered no loss on that transaction as a result. It would have been left with the first loan and the security for it, together with any claim it might have had against the valuer. However, that is of no relevance to the respondent in its capacity as valuer for the purposes of the second loan. The loss which the appellant sustained as a result of entering into the second transaction was the advance of the second loan, less the developer’s covenant and the true value of the security. If the value of the property was negligently overstated, the respondent will be liable to the extent that the appellant’s loss was caused by its over-valuation.
19.	Mr. Hickey suggested that, if the first valuation had been carried out negligently by another valuer, the effect of the appellant’s argument would be to transfer the liability of the first valuer to the respondent, which he submitted would be unfair. However, that overlooks the fact that the respondent valued the property itself in the expectation that the appellant would advance funds up to its full reported value in reliance on its valuation. There is nothing unfair in holding the respondent liable in accordance with its own valuation for the purposes of the second transaction. Similarly, he submitted that if the original valuation had been sound, it would be unfair to impose on the respondent a liability for that part of the indebtedness to which the lender was already committed. In my view, however, that is not unfair for the same reason. All this goes to reinforce the conclusion that the valuation carried out by the respondent in November and December 2011 was for the purposes of supporting a transaction that was factually and legally separate from that which had been carried out earlier in the year. The two were linked only in the sense that the second loan enabled the borrower to repay the first.
20.	For completeness, I should mention that Miss Smith reserved the right to argue on another occasion, if necessary, that Preferred Mortgages was wrongly decided. The nature of her argument seemed to be that the agreement to make a second loan should have been treated as nothing more than an agreement to increase the amount of the original loan. We do not need to decide that question and are in any event bound by the previous decision of this court, but the decision in Preferred Mortgages seems to me simply to reflect the nature of the transactions with which the court was concerned in that case. I very much doubt whether the court can or should disregard the way in which commercial parties have chosen to structure a routine business transaction of this kind.
21.	For these reasons I am of the opinion that the “but for” test of causation does apply in this case, but that when correctly applied it leads to the conclusion that the respondent is liable to the appellant for the whole of the loss flowing from the second negligent valuation. I would therefore allow the appeal.
Postscript
22.	As I mentioned earlier, the argument has proceeded on the basis of two fundamental assumptions: that the defendant was negligent in over-valuing the property in December 2011, and that the effect of the second transaction was to discharge the original debt. It was necessary to make these assumptions, because the matter came before the court by way of an application under Part 24. In my view, however, an issue of the kind raised by this appeal is generally better determined at trial on the basis of findings of fact, rather than on what is inevitably an hypothetical basis. If it had been thought desirable for the issue to be determined in advance of trial (which I think unlikely), it would have been better to direct the trial of a preliminary issue. That would have enabled both parties to call any relevant evidence and the court to make findings of fact that would provide a clear basis for its decision. As it is, if in the fullness of time the court decides that the defendant did not negligently over-value the property or that the second transaction did not result in the repayment of the first loan, the application and appeal may both prove to have been a waste of time and money.
Lord Justice McCombe :
23.	I am grateful to Lord Justice Moore-Bick for setting out the circumstances giving rise to the present proceedings and to this appeal. However, I find myself in disagreement with the conclusion to which he has come. For my part, I would dismiss the appeal, largely for the reasons given by the learned Deputy Judge, as supported by Mr Hickey’s arguments before us.
24.	Miss Smith for the appellant, in her attractive submissions, accepted that, on a straightforward application of the “but for” test of causation, the judge had been correct in his conclusion and that accordingly this appeal would be bound to fail. The judge noted that in Sienkiewicz v Greif UK Limited [2011] UKSC 10, Lord Brown of Eaton-under-Heywood said that, “the law tampers with the “but for” test of causation at its peril”. I see no reason to court that peril in this case. Further, it seems to me that the case for the appellant should be rejected because it simply fails to measure up to the facts of the case as pleaded and as verified as being true. 
25.	The second valuation has to be treated hypothetically as negligent. Thus, as pleaded by the appellant in paragraph 16 of the Particulars of Claim, and as verified (entirely realistically) by statement of truth by a director of the appellant, if a non-negligent valuation had been provided, the appellant would not have made “the Loan” (viz. the December 2012 loan – paragraph 10) at all. It would have had nothing to do with the re-financing arrangement and would have suffered the loss which had already arisen from the existing indebtedness.
26.	The assumed fact that the new loan was used in the appellant’s books to redeem the first advance, meaning that there might be no loss suffered in respect of the February 2011 advice, assuming that also to have been negligent, is nothing to the point. The appellants do not allege in these proceedings that the earlier valuation was negligent. I consider that the judge correctly analysed the position in paragraphs 20 and 21 of his judgment as follows: 
“20. In my view, there is nothing in the Preferred Mortgages decision that supports the claimant’s argument that causation should be decided on a different basis in such cases. The fact that no claim lies in respect of the first valuation does not make the application of the “but for” test to the second valuation inappropriate or unfair. The claim in respect of the second valuation must stand or fall on its own merits, in accordance with the principles explained by Lord Nicholls in Nykredit. There is no inconsistency between that approach and the decision in Preferred Mortgages: all the money advanced to the borrower is treated as having been advanced under the new facility, which was made in reliance on the November valuation, and the existing loan was repaid out of the new advance. But did that cause the claimant loss? The relevant comparison, for the purposes of determining factual causation of loss, is with the position in the no-negligence world. That was not an issue in Preferred Mortgages. If the defendant had valued non-negligently, and so the second loan facility had not proceeded, the claimant would have been exposed nonetheless to loss attributable to the existing indebtedness.
21. I can see the force of the argument that a causation test that allows a defendant to take into account a claimant’s existing exposure that it (the defendant) negligently caused, when it can no longer be sued for that negligence, is unattractive. But that argument would not apply where the existing exposure was not the defendant’s fault, or in a case where – as here – no allegation is made that the first valuation was negligent.”
Like the judge I do not find the application of the causation test “unattractive” when no allegation of negligence is levelled against the first valuation and the hypothetical loss of a claim (which has never been advanced) is merely attributable to the manner in which the appellant organised its book-keeping.
27.	Moreover, I agree that the hypothetical factual example set out by Mr Hickey in paragraph 35 of his skeleton argument before the judge does indeed, as he submitted to us, illustrates what I see as the fallacy of the appellant’s case. The example was this: 
“35. Suppose a Mr and Mrs Smith purchased a house some time ago. They have a mortgage which currently stands at a debt of £500,000. Years later Mr and Mrs Smith decide to convert the loft. They seek to borrow another £50,000 from their bank. Bloggs is asked by the bank to value the property. The valuer says (negligently) the property in its current condition is worth £600,000, whereas in fact in its present condition it is now worth no more than £500,000. The bank lends £50,000 on the strength of the negligent valuation. To reflect the fact that Mr and Mrs Smith have now borrowed a total of £550,000, new legal charges are drawn up and registered in that amount, replacing the previous charges. The loft conversion runs into problems, Mr and Mrs Smith default and on repossession the sale only recovers £400,000. A conventional analysis would only cap recoverable loss against Bloggs at £50,000 being the slice between £500,000 and £550,000 (other total losses falling outside Bloggs’s scope of duty). Bloggs could never have been liable for the existing indebtedness of £500,000 already lent, but on C’s analysis it now becomes liable for £150,000 even though the transaction in question led to a loan of £50,000.
28.	There is, to my mind, no true difference between Mr Hickey’s example and the facts of this case. In neither is there any case made that the original advance was made as a consequence of a negligent valuation. There is, therefore, no need to make such an assumption.
29.	As I said to Miss Smith in argument, I am reluctant to decide this appeal on a “pleading point”, however plausible the facts presently pleaded may be, viz. that if the December valuation had not been (hypothetically) negligent there would have been no further advance/new second loan at all. When asked how the claim might be pleaded in the alternative, Miss Smith said that the pleading defect (if such it was) was that there was no reference to the first loan at all; the pleading treats the second loan as a “stand alone” transaction. It was argued that the claim could be reformulated in six stages: 1. Plead the first loan; 2. Plead its redemption and extinguishment of the debt; 3. Plead that those facts are irrelevant to the scope of the respondent’s duty as regards the second valuation; 4. Plead that the second loan was a second replacement loan; 5. Plead that the lender should be treated as if it were a new lender; 6. Plead that, if it were not so treated, it would suffer prejudice by the loss of a right of action in respect of the first advance, which right it would have had absent negligence in the second valuation.
30.	I consider that, apart from this obviously contorted re-statement of the case, it simply does not accord with the known facts, if for no other reason than that the appellant was not a new lender and there is no reason at all why it should be so treated. Further, no “scope of the respondent’s duty” was defined. I would not be inclined to embark, in the course of an appeal, upon such a hypothetical reformulation, away from the obvious sense represented by the appellant’s present factual case, namely that if the second valuation had not been negligent, the appellant would not have entered the second transaction at all. If that is true, then it suffered no loss in respect of the existing indebtedness at the time of the second transaction. Moreover, it seems to me that the first loan is not mentioned in the present claim because it is immaterial to the claim in negligence that is made. 
31.	In so far as the appellant “lost” a potential claim in respect of the first valuation – a claim which it does not make in the proceedings at present - that result has been caused only by the way in which it chose to structure the second transaction. I can see no good reason to adjust the law of causation to avoid a problem of the appellant’s own making. There seems to me to be an inherent unfairness to the respondent if the manner in which the new transaction was set up should enable the appellant to saddle the respondent with liability in respect of advances made long before the allegedly negligent valuation was provided and in respect of which it already stood to make a loss. Thus, I take a different view from Lord Justice Moore-Bick of the arguments presented by Mr Hickey and summarised in paragraph 19 of my Lord’s judgment. When one is considering rival contentions as to “fairness” it seems to me that the safest – and indeed the fairest - course is to apply the basic “but for” test which Miss Smith accepts is fatal to her client’s appeal. It is for reasons such as this that I perceive that Lord Brown said that the law departs from the basic test at its peril. 
32.	I would add that it seems to me that the appellant’s case amounts to this. “If the respondent’s second valuation had represented the true value of the property we would have been able safely to lend the full amount of both the existing indebtedness and the new advance, as an entirely new loan, and would not have found ourselves unable to recover the full amount advanced.” The appellant is not saying, “But for the negligence we would not have made the second loan” (as presently pleaded); but rather is now saying, “We would have made it (in spite of the negligent advice) because we were entitled to treat the advice as accurate.” Those, to my mind, however, are not causation arguments at all. They are arguments based upon a supposed warranty by the respondent that the property in question was worth the value that the respondent placed upon it. That claim is not made and I am not satisfied that it could be made on the present facts. 
33.	It seems to me that the appellant’s case requires one to ignore an important element of the factual background, namely that the appellant was already in danger of being unable to recover the amount advanced on the first loan at the time when it chose to make the second. I see no reason to ignore that factual reality in the face of the appellant’s express concession that on a normal application of the usual rules of causation this appeal must fail.
34.	For these reasons, therefore, I would dismiss this appeal. However, notwithstanding the fact that I find myself in disagreement with Lord Justice Moore‑Bick on the issue on this appeal, I entirely agree with what he says in his “postscript” to the judgment in paragraph 22 above.
Lady Justice King :
35.	I agree with Lord Justice Moore-Bick for the reasons given.
36.	I would in particular endorse Lord Justice Moore-Bick’s analysis of Swynson v Lowick Rose in that I too am of the view that that decision is not authority for the proposition that the court is entitled to disregard the structure of a routine refinancing transaction in favour of what it regards as the substance of the case.
37.	The respondents had accepted instructions from the bank to value the development site in question. They accepted those instructions, in their professional capacity,  in the knowledge that their valuation was sought in order to inform the bank in making a decision in respect of the developer’s application for a loan to be secured on the development. I agree that it is of no interest to the respondents the purpose to which the new loan is to be put. Had the respondents wished to limit their exposure they could have done so by way of terms and conditions negotiated by them when accepting instructions to value the development site. 
38.	Lord Justice McCombe regards it as inherently unfair if the respondents are “saddled” with the liability referable to the first loan as a consequence of the way the bank chose to structure the second transaction. In my view the other side of that coin is that it could be said to be inherently unfair that, where both parties are commercial organisations, a negligent valuer could use an attack on the legitimate working practices and systems of the appellant as a means of escaping part of the consequences of his or her negligence. In the same way as it is, and was, for the appellant to organise its business affairs, so too was it for the respondents to organise theirs, namely to provide a valuation in respect of the property as a whole in accordance with their instructions; having done so they did not seek to place any limitation on their potential exposure. On the contrary, as noted by Lord Justice Moore-Bick, the respondents valued the property in the expectation that the appellant would advance funds up to its full reported value in reliance on its valuation.
39.	Mr Hickey submitted, by reference to worked examples set out in his skeleton argument, that it would be unfair to impose upon the respondents a liability for that part of the indebtedness to which the appellant was already committed. I agree with Lord Justice Moore-Bick that there is nothing unjust in holding the respondents liable in accordance with their own valuation, prepared specifically for the purposes of the second transaction. In my judgment absent any specific agreement to the contrary, it is irrelevant how the appellant dealt with the money which it had advanced on the strength of the negligent valuation.
40.	As Lord Justice Moore-Bick said at paragraph 17, the judge’s application of the “but for” test failed to take into account that the transaction was structured in such a way that the second loan was used to pay off the first. The repayment of the first loan and creation of an entirely new loan with fresh security and a new legal charge executed and registered at the Land Registry, had collateral consequences for both the appellant and the respondents which support the proposition that the second transaction stands apart from the first loan. The appellant was thereafter denied the opportunity to claim against the respondents in relation to any alleged negligence in respect of the first loan and equally the respondents for their part were released from any potential liability in respect of that first valuation. As a consequence, in my view the second loan is entirely independent from the first loan and it is in that context that the “but for” test should have been applied. Had the judge done so he would have concluded that, had there not been a negligent valuation, the appellant would not have entertained the second transaction and his loss is the total advance of the second loan less the developer’s covenant and the true value of the security.