The Supreme Court has ruled on the application of the ‘but for’ test for causation in a re-financing case.
Those readers who attended our Autumn Insurance Seminar will have heard us discussing the Court of Appeal decision in Tiuta International Limited (in liquidation) v De Villiers Surveyors Limited and looking forward to how the Supreme Court might apply the ’but for‘ test for causation when it heard the case the following week.
Today, the Supreme Court unanimously overturned the Court of Appeal decision. Lord Sumption, giving the only reasoned judgment, criticised the Court of Appeal’s approach and argued that the case turned on ordinary principles of the law of damages.
In April 2011, the claimant lender, Tiuta International, entered into a loan facility agreement with a developer in connection with a residential property development. Tiuta advanced £2,475,000 under this (first) facility on the basis of the defendant surveyor, De Villiers’, valuation of the development.
In December 2011, the developer sought further funds and, based on a further valuation by De Villiers, Tiuta advanced further funds. Under the (second) loan facility agreement, Tiuta advanced £3,088,252; £2,799,252 was used to discharge the developer’s existing indebtedness under the first facility and the remaining £289,000 was ‘new money’ to fund the development.
The developer defaulted and Tiuta brought a claim against De Villiers for negligently undervaluing the development in respect of the second facility. Importantly, Tiuta did not allege negligence in respect of the original valuation, which had been used for the first facility, which had been repaid in full.
The valuer contended that even if its second valuation was negligent (which it denied) the most it could be liable for was the ’new money‘ advanced under the second facility. It could not be liable for the funds which were used to discharge the first facility as the lender would have suffered that loss in any event. De Villiers therefore applied for a summary order dismissing that part of Tiuta’s claim which arose from the refinancing element of the advances under the second facility.
As the appeal arose out of an application for summary judgment, it was determined on facts which were either admitted or assumed to be correct. In particular, it was assumed that the valuations given for the purposes of the second facility were negligent and that, but for the negligence, Tiuta would not have advanced the sums under the second facility.
At first instance, the Deputy High Court Judge held that Tiuta’s losses were limited to the ’new money‘ but the majority of the Court of Appeal held that the Judge failed to take into account that the second facility was structured so as to pay off the indebtedness under the first facility. The Supreme Court disagreed with this approach.
The Supreme Court stated that the basic measure of damages is the sum which restores the claimant as closely as possible to the position that he would have been in if he had not been wronged. In a case for a negligent valuation where but for the negligence the lender would not have lent, this involves what Lord Nicholls in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd  called the “basic comparison” between (a) the position the claimant would have been in had the defendant not been negligent and (b) the claimant’s actual position.
The Supreme Court determined that the fact that the advance under the second facility was used to pay off indebtedness under the first facility did not require the Court to ignore the fact that Tiuta would have lost the sums which had been outstanding under the first facility in any event. The basic comparison envisaged in Nykredit assumes that, but for the negligent valuation, the claimant would still have had the money which the negligent valuation caused him to lend. In this case Tiuta would not have had that money, because it had already lent it under the first facility.
The Supreme Court rejected further arguments by the lender on the basis that the valuer might have contemplated being liable for the full amount of the advances under the second facility and/or that the use of the advance under the second facility to discharge the indebtedness under the first facility was a collateral benefit to Tiuta, which need not be taken into account when calculating Tiuta’s loss.
Lord Sumption made clear that the reasons for the judgment are sensitive to the facts, including those that were assumed for the purposes of the appeal and, in particular, he pointed out that different considerations might arise were it to be alleged that the valuer was negligent in relation to both facilities.
This remains a strange decision given that it proceeds on assumed facts, when facts are normally key to issues of causation.