Damages payable by valuers

Many of our clients have asked us whether, when suing valuers, they will be able to recover the loss caused by the post-GFC slump in values. Some lenders are unable to sell properties at any price and have asked us what they can recover from valuers in those circumstances. The answers to both questions are surprising and reassuring for lenders.

The valuer’s responsibility for drops in the market

In Kenny & Good v MGICA [1999] HCA 25 the lender’s mortgage insurer relied on a valuation provided to the lender. The valuer knew, and provided its report, on the basis that the lender and the insurer would rely upon it. The valuation was for $5.5 million. The true value at the time of valuation was about $4 million. The borrower defaulted. The lender eventually sold it for $2.6 million. The LMI paid the full amount of the lender’s loss and claimed that amount from the valuer. The trial judge allowed the full amount of the insurer’s loss. The valuer argued that the damages award should have been limited to the difference between the amount of the valuation and the true value of the property at the time of valuation – thus excluding the effect of a decline in property values. The High Court rejected this argument and awarded the lender its full loss (for different reasons).

Gaudron J said:

The interest that a mortgage lender seeks to protect is that, it should be able to recoup, by sale of the property, the amount owing under the mortgage. It is the risk that recoupment might not be possible that calls the valuer’s duty of care into existence.

Once the interest which calls the valuer’s duty of care into existence is identified as the interest of the mortgage lender in recouping what is due under the mortgage in the event of default, it is simply a matter of common sense to treat the loss arising from inability to recoup as flowing from breach of that duty.

Gummow J said:

It is simply unjust to place the risk of market fluctuations on a lender who would not have entered into a given transaction but for the defendant’s wrongful conduct.

Kirby and Callinan JJ said

The loss was caused by the negligence of the appellant. That loss was readily foreseeable. It was not in any way remote. In fact, it was foreshadowed by the instructions to the appellant which made clear the purpose for which the valuation was being sought was for lending purposes.

As a summary of the decision it is fair to say the but for test applies in Australia. Thus the damages award must put the lender back in the position it would have been but for the valuation being negligent. Two possibilities usually arise when applying this test: first that the loan would not have occurred and second, that the loan would have been for a much lesser sum.

Properties that cannot be sold in the current market

A recent decision of the Supreme Court of Western Australia, Utopia Financial Services v FOS [2012] WASC 279 (7 August 2012), has revived a novel approach for lenders stuck with properties that cannot be sold (and therefore left unable to crystallise their loss). In Utopia, the judge referred with approval to the decisions of Gwynne J in Lowenburg v Wolley (1895) 25 SCR 51.

In Lowenburg finance brokers who advised the lender to invest money in a first mortgage were found to be negligent in accepting a valuation of the land submitted to them by the mortgagor and were held liable to the lender for the loss. The finance broker was ordered to repay the amount advanced plus interest and the lender was ordered to transfer the mortgage (for what it was worth) to the finance broker. Gwynne J said:

I think, that the lender was betrayed into advancing the money upon the security of the mortgages by representations, which were untrue, and which the broker had no justification for making. His true measure of damages is therefore, the amount which he was so wrongfully induced to advance, together with interest at six per cent, he transferring all interest in the mortgage.

Whatever may be the real value of the security can only with certainty be ascertained upon a sale of the premises to realize the amount purported to be secured by the mortgage. I can see no justice in putting the lender to the delay and expense incident of determining the real value of premises.

The broker, having procured the lender to advance his money upon such representations, must reimburse him to the full amount of the principal advanced and six per cent interest, and must look to the mortgage security for his indemnity. The wrong to be redressed was his, and the burden to reinstate the lender in the position in which, but for their wrong he would be, lies upon them.

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