Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd  UKSC 77,  All ER (D) 202 (Nov)
The Supreme Court allowed a valuer’s appeal and held that, assuming the appellant's valuation of a development property had been negligent, the respondent financier, which had loaned money to the developer on the basis of the valuation, could not recover in damages that proportion of the loan which the developer had used to discharge his debt under a previous loan facility provided by the respondent. The court held that the measure of damages was the difference between the respondent’s actual loss and the loss it would have suffered had it not made the second loan as a result of the appellant's assumed negligence. In this case, the respondent would not still have had most of the money which the appellant’s valuation had induced it to lend, because it had already lent that amount under the first loan facility. Therefore, the respondent’s loss was limited to just the new money advanced under the second loan facility.
What was the background to the case?
The respondent was a lender of business finance and had entered into a loan facility agreement with a property developer, based on a valuation of the development property by the appellant firm of surveyors. Advances under the facility were secured by a charge over the property. The respondent and the developer later entered into a second facility agreement under which most of the loan was to refinance the developer’s indebtedness under the first facility, with a much smaller sum constituting new money advanced for the completion of the development. The advances under the second facility were based on a new valuation of the development by the appellant and were secured by a new charge over the property.
When the respondent went into administration shortly afterwards, the developer had not repaid the loan. The respondent’s receivers enforced its security, but the sale price of the property was less than the developer’s debt. The respondent accordingly brought proceedings to recover its loss, claiming damages from the appellant on the basis that its valuation for the second facility had been negligent and, but for that negligence, it would not have made the advances under the second facility. The respondent did not allege negligence in respect of the valuation for the first facility owing to the principle in Preferred Mortgages Ltd v Bradford and Bingley Estate Agencies Ltd  EWCA Civ 336,  All ER (D) 122 (Mar).
The appellant sought summary judgment, arguing that, even assuming it had been negligent in its second valuation, the advances under the first facility would still have been unpaid, so the respondent would have suffered that loss in any event. Therefore, the appellant maintained it could only be liable by way of damages for the new money advanced under the second facility: it could not also be liable for the respondent’s loss as a result of the advance it made under the second facility to discharge the developer’s indebtedness under the first facility.
The judge at first instance in the Chancery Division gave summary judgment for the appellant, but the Court of Appeal held that the respondent should be able to recover the full loss that it claimed had resulted from the second valuation.
The appellant appealed to the Supreme Court.
What did the Supreme Court decide, and why?
Lord Sumption, with whom the other four Justices agreed, decided that the facts of the case were entirely straightforward and that the appeal turned on ordinary principles of the law of damages, namely the application of the compensatory principle and the basic comparison as identified by Lord Nicholls in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2)  1 All ER 305.
In his view, if the appellant had not been negligent in reporting the value of the property for the purpose of the second facility, the respondent would not have entered into the second facility, but it would still have entered into the first. On that hypothesis, the respondent would have been better off in two respects.
First, it would not have lost the new money lent under the second facility but would still have lost the original loans made under the first.
Second, the loans made under the first facility would not have been discharged with the money advanced under the second facility, so that if the valuation prepared for the first facility had been negligent, the irrecoverable loans made under that facility would in principle have been recoverable as damages. However, there being no allegation of negligence in relation to the first facility, the latter point did not arise.
Thus, Lord Sumption said, the respondent’s loss was limited to the new money advanced under the second facility. He rejected the respondent’s argument that the use of the second loan to discharge the first loan was a collateral benefit which should be taken out of account in computing loss.
Having identified the general rule that where a claimant had received a benefit attributable to events which had caused his loss, it had to be taken into account unless it was collateral, Lord Sumption referred to Lowick Rose LLP (in liquidation) v Swynson Ltd  UKSC 32,  3 All ER 785 in which it was held by the Supreme Court that as a general rule ‘collateral benefits are those whose receipt arose independently of the circumstances giving rise to the loss’.
It was his view that the discharge of the existing indebtedness out of the advance made under the second facility ‘was plainly not a collateral benefit in this sense'. This was because it did not confer a benefit on the respondent and because even if there was a benefit, it was not collateral as it was required by the terms of the second facility—thus it was not sufficiently independent.
To what extent is the judgment helpful in clarifying the law in this area? Are there still any unresolved issues practitioners will need to watch out for?
It is clear that Lord Sumption was of the view that the law on causation was already sufficiently clear and that the decision at first instance in this case was demonstrably correct. Grey areas may now perhaps surround cases in which there has been negligence in relation to the first transaction, in which case it would appear that the court would, or might, take a different view—the decision of Preferred Mortgages, approved in Swynson, renders it impossible to sue for negligence on a first loan in circumstances where it has been replaced by a second loan.
Insofar as collateral benefits are concerned, the decision provides a little more flesh on the bones of Swynson, in particular as to what may be regarded as collateral benefits. Leaving aside the well-known category of benevolent benefits, Lord Sumption stated that: 'The paradigm cases are benefits under distinct agreements for which the claimant has given consideration independent of the relevant legal relationship with the defendant, for example insurance receipts or disability benefits under contributory pension schemes. These are not necessarily the only circumstances in which a benefit arising from a breach of duty will be treated as collateral, for there may be analogous cases which do not exactly fit into the traditional categories. But they are a valuable guide to the kind of benefits that may properly be left out of account on this basis.’
How does the decision fit in with other developments in this area of law?
The Supreme Court clearly followed and applied existing principles and was not persuaded to extend the concept of collateral benefits to fit the particular facts of the case.
What are the implications for practitioners? What will they need to be mindful of when advising in this area?
A key issue for practitioners will be the extent to which negligence in relation to a first transaction (subsequently replaced by a second transaction) will now need to be investigated so as to facilitate an argument based on loss of a chance in relation to the loss caused by reason of that negligence. This was a solution that was expressly identified by the judge at first instance in this case.
Joanna Smith QC appeared for the respondent in this case.
Interviewed by Robert Matthews.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.