Lenders can face claims of contributory negligence

There is an increase in the incidence of mortgage arrears and consequently an increase in lenders attempting to enforce recoveries against borrowers through the courts. Lenders will be looking to recover these losses if they are unable to recover the money from their borrowers, so professionals who advise in relation to these subject transactions will find themselves in the firing line for recovery claims. However, in making such claims lenders are leaving themselves open to counter claims of contributory negligence.

The raft of case law which arose out of the last property market slump in the 1990s defines (amongst other issues) the concepts of causation, the scope of the duty owed by professionals and contributory negligence as mechanisms by which the courts can limit the liability of negligent professionals.

A plea of contributory negligence is not available to a professional defendant in every claim. For instance, if a claim is framed in contract or deceit alone contributory negligence is not available to a defendant as a means to reduce the level of recoverable damages. A plea of contributory negligence is available to a defendant by virtue the Law Reform (Contributory Negligence) Act 1945. Section 1 of the Act states that where a person suffers damage:

“as a result partly of his own fault and partly of the fault of any other person or persons…the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage”

In the case of Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (1997) a two stage test was used which will be applicable to most professional negligence cases:

• What was the overall damage suffered by the lender as a consequence of the defendant’s report?




• Which part of the loss is recoverable against the defendant?

In most claims against negligent surveyors or other such professionals where the lenders’ actual loss was greater than the overvaluation, the damages awarded by a court have been “capped” at the level of the overvaluation.

In the event that only part of a lender’s loss is recoverable from the professional then it might not be appropriate to apply for a further reduction for contributory negligence. The position was considered by the House of Lords in Platform Home Loans v Oyston Shipways Ltd (2000) following which the law appears to be that if the lender’s negligence contributes to the decision to lend then it can be considered contributory negligence, but the reduction in damages can only be applied to the lender’s total losses not to capped damages. For example, where a lender’s total losses are lower than the difference between a negligent and a non-negligent valuation of a property then the damages will be recoverable but are not likely to be reduced any further by the courts.

In Banque Bruxelles Lambert, the House of Lords concluded that the lenders total losses came within the scope of the Act and should be reduced for contributory negligence. A 20 percent reduction for contributory negligence was applied to total losses of over £600,000 resulting in an adjusted loss of just over £489,000. That sum was below the over valuation (£500,000) and therefore it was not just and equitable to reduce the over valuation figure further, as to do so would have been a double deduction.

When can a lender be criticised as being imprudent? To succeed in a plea of contributory negligence, a defendant will need to establish that the lender acted with a lack of care or in a manner which contributed to its own losses. It is possible for a successful plea of contributory negligence to result in a reduction of damages, or to even extinguish liability. Whether the lender is a bank or a building society will have an impact on the standards of lending deemed responsible by the courts, as will the nature of the loan and in particular whether it was a commercial or residential loan.

In the case of Housing Loan Corporation v William H Brown (1999) the Court of Appeal restated the approach to lender’s contributory negligence. In that case there had been a non-status loan and in the circumstances the court decided the lender’s contributory negligence merited a reduction in damages of 75 percent.

Whether or not there is a finding of contributory negligence against a lender will depend on all the facts surrounding a loan. The courts have not made findings that certain acts/omissions by lenders are of themselves always contributory negligent, so a non-status loan will not always be contributory negligent. The acts/omissions which have historically given rise to findings against lenders and which are likely to be relevant to the next round of lender claims are matters such as the following:

• The lack of investigation into the borrower’s means, either non-status loans or loans which are not fully investigated.




• Failure to take up references and to adequately investigate the borrower.




• Failing to ascertain the purpose for which a loan is required.




• Failing to pick up on warning signs from the transaction.




• Failure to comply with its own lending criteria/guidelines.




• Failing to properly consider a valuation.




• Lending an excessive percentage of the property valuation.

The two cases which set the scene for findings of contributory negligence against lenders and which again arose out of the property crash of the 1990s were Bristol & West Building Society v Fancy & Jackson(a Firm) (1997) and Nationwide Building Society v Balmer Radmore (1999). In Bristol & West the court reduced damages for contributory negligence where the lender had loaned more than 75 percent of the value of the security. In the Nationwide case there was a finding of 75 percent contributory negligence against the lender in circumstances which included failing to investigate the borrowers income, failure to obtain a bank reference or heed previous arrears, and making a loan of 90 percent of the valuation.

We are likely to see cases coming through the courts during the next few years in which there will be much higher reductions of damages for contributory negligence than we have seen in the past. In the period of boom leading up to the recent slump we have seen loans of 90 percent and above as common place. We have also seen an increase in non-status/self certified loans and buy–to–let (dubbed “lie-to-bet”) loans. The scene has been set for some interesting arguments concerning the appropriate level of reduction of damages, and on the back of that further debate concerning the entitlement of defendant professionals to disclosure of all lenders’ documents relevant to lending decisions.

Did we learn anything from the litigation which followed the property crash of the 1990s? It seems that if nothing else we have a framework of case law which will assist with the assessments of new cases.

Julie Bowker
Partner
Dispute Resolution
Halliwells LLP
0161 618 4555
Julie.bowker@halliwells.com