In that case, Swynson entered into a loan agreement with the borrower in reliance upon due diligence conducted by Lowick Rose. Upon the borrower failing to repay, Mr Hunt, Swynson’s controller and shareholder, made a further loan to the borrower to enable it to repay Swynson, which the borrower duly did with Mr Hunt’s funds. Mr Hunt and Swynson then sought to recover their losses from Lowick Rose for the negligent due diligence. It was held that Lowick Rose owed no direct duty of care to Mr Hunt. As a result, Mr Hunt was required to pray in aid various exceptions to the rules of recovery of damages, including that his second loan was a collateral benefit to Swynson (otherwise known as res inter alios acta) which did not extinguish Swynson’s loss.
The Supreme Court rejected all of Swynson and Mr Hunt’s arguments. The court was careful to emphasise that collateral benefits was a narrow exception to the general rules of recovery of damages (applied typically to receipt of charity or insurance payouts) and that the court must adopt a principled analysis when applying this rule of legal causation, rather than considering fairness and equity.
On 29 November 2017, the Supreme Court revisited these issues of recoverable loss in Tiuta v De Villiers.
Tiuta was a lender who had lent £2.5 million in funds to a developer in reliance upon a first valuation carried out by the surveyors’ firm, De Villiers. The developer sought additional funds and, after a second valuation by De Villiers, Tiuta agreed to provide further borrowing. However, rather than varying or extending the loan, or providing an additional loan, instead, Tiuta entered into a new replacement and restructuring loan of £3 million, £2.5 million of which was used to repay the first loan and the remainder of which constituted the additional lending.
When the developer failed to repay the loan, Tiuta brought a professional negligence claim against De Villiers. Tiuta alleged only that the second valuation was negligent, not the first; but it sought to recover the entirety of the £3 million loss from De Villiers because that was the amount of its second loan.
De Villiers argued that, at the time of the second valuation, Tiuta had already advanced £2.5 million and, if the valuation had been negligent, Tiuta could not have suffered a greater loss than the amount by which its indebtedness increased. Tiuta’s riposte was that the second loan was a separate transaction, unrelated to the earlier transaction and made in reliance upon the second valuation. De Villiers applied for summary judgment.
Timothy Fancourt QC, sitting (at that time) as Deputy High Court Judge, granted the summary judgment application. He held that the test to be applied when analysing the measure of damages was the “basic comparison” test laid down by Lord Nicholls in the House of Lords in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) at 1631, namely:
“… the comparison between (a) what the plaintiff’s position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff’s actual position.”
In Nykredit, Lord Nicholls further explained that:
“… in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower’s covenant and the true value of the property.”
The judge concluded that, if the second valuation had not been negligent, then Tiuta would not have lent the additional sums. But they would still have been exposed to the first loan of £2.5 million. In the “no negligence” world, Tiuta could not therefore recover for the first loan, to which they would always have been exposed.
Tiuta argued that the reason that they did not make a claim in respect of the first valuation and corresponding loan was because that loan had been fully redeemed by the second £3 million loan. The Court of Appeal’s controversial decision in Preferred Mortgages v Bradford & Bingley Estate Agencies Ltd established that there is no cause of action against the first valuer in those circumstances because the claimant has suffered no loss; the first loan was entirely repaid. Tiuta argued that the Preferred Mortgages decision meant that the usual “but for” causation test should not be applied because there is a new loan and a “fresh start”.
The judge disagreed and held that the fact that no claim lay in respect of the first valuation did not make the application of the “but for” test to the second valuation inappropriate or unfair. The summary judgment application was granted; and Tiuta appealed.
Court of Appeal judgment
The Court of Appeal allowed Tiuta’s appeal, by a majority. Moore-Bick LJ and King LJ held that the first instance judge’s decision failed to take account of the “fundamental fact that the transaction was structured in such a way that the second loan was used to pay off the first.” Moore-Bick LJ continued: “The second loan therefore stands apart from the first and the basic comparison for ascertaining Tiuta’s loss is between the amount of that second loan and the value of the security.”
De Villiers argued that the effect of Tiuta’s argument was to transfer liability for the first valuation onto the second valuation, but the majority in the Court of Appeal disagreed. Moore-Bick LJ held that De Villiers valued the property in the expectation that Tiuta would advance funds up to its reported value and there is nothing unfair about holding De Villiers liable for its second valuation up to the amount of the second loan.
In a strong dissenting judgment, McCombe LJ upheld the first instance judge’s decision. His Lordship noted that Tiuta itself accepted that, on a simple application of the “but for” causation test, its argument would fail. Tiuta’s argument was that there should be an exception to the general principle because of the Preferred Mortgages decision, but McCombe LJ saw no reason to depart from that usual test. McCombe LJ concluded that:
“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.”
Pausing there, the effect of the Court of Appeal’s decision in Tiuta would have left professionals exposed to earlier lending decisions merely because of the way a lender structured their subsequent lending; lenders would have been encouraged to refinance every extension sought to an earlier loan.
Supreme Court judgment
In a welcome and succinct judgment, the Supreme Court gave the Court of Appeal’s analysis short shrift. Lord Sumption (who gave the leading judgment, with which their Lordships unanimously agreed) considered that the result was “perfectly straightforward” and turned on ordinary principles of the law of damages. After reciting the “basic comparison” test laid down by Lord Nicholls in Nykredit, Lord Sumption explained that the majority reasoning in the Court of Appeal obliged the court to ignore the fact that the lender would have lost the advances under the first facility in any event. As to the argument that the valuer for the second valuation would have contemplated being liable for the full amount of the advances under the facility, Lord Sumption pointed out that this confused what was within the reasonable contemplation of the parties with the question of what loss in fact resulted from that breach of duty; the valuer could not be liable for more than the difference which his negligence had made, simply because he contemplated that on hypothetical facts different from those which he actually obtained, he might have been. (In other words, the question of scope of duty or remoteness governed which losses actually suffered were recoverable, but did not render losses not actually suffered recoverable merely because if they had been suffered they would have fallen with the scope of duty.)
As in Swynson, Tiuta attempted to argue that the application of the second loan was a collateral benefit to the lender, which they were not obliged to take into account in computing their loss. Lord Sumption reiterated his own judgment in Swynson: collateral benefits are confined to those whose receipt arose independently of the circumstances giving rise to the loss, including insurance payouts and disability benefits. Tiuta’s second loan was plainly not a collateral benefit; as Lord Sumption explained, the concept of collateral benefits is concerned with collateral matters, not the very transaction which gave rise to the loss.
On that basis, the first instance judge’s decision was restored.
The Supreme Court’s decision is a clear decision based on the ordinary application of the “but for” causation test, which reinforces the points made in Swynson that legal causation exceptions under the doctrine of res inter alios acta should be kept within narrow confines.
In the meantime, lenders would be well advised to consider their loan refinancing options carefully. In Swynson’s case, as Lords Sumption and Mance explained, Mr Hunt could have lent funds directly to Swynson, which would have been regarded as collateral. In Tiuta’s case, the lender could have simply extended or varied the existing loan, which would mean that they could still sue on the first valuation in respect of the first extant and undischarged loan.
It is also relevant to note that Tiuta was a summary judgment application; therefore, as the first instance judge noted, it was still open to Tiuta to plead that the first valuation was negligent and to plead that some loss has been suffered as a result of that negligence. Lord Sumption left this point open too, when he noted in his judgment that:
“… I would agree that if the valuers had incurred a liability in respect of the first facility, the lenders’ loss in relation to the second facility might at least arguably include the loss attributable to the extinction of that liability which resulted from the refinancing of the existing indebtedness.”
In other words, the Preferred Mortgages rule means that what would be a good claim against the first valuer will be lost on remortgage, and the loss of that chose in action could be recoverable against the second valuer. However, it will be for lenders and their advisers to consider how any losses incurred on the first loan might be recoverable (for example, by way of a loss of chance claim) so that those losses on the first loan do not fall down a black hole.