Lender’s claims–assessment of damages between professionals

It is quite likely in professional negligence claims against surveyors that other professionals, in particular solicitors, will be co-defendants. One such case came before Mr. Justice Christopher Clarke in February 2009. The case in question was Nationwide Building Society (formerly Cheshire Building Society) (“CBS”) vs (1) Dunlop Heywood (“DHL”) Limited and (2) Cobbetts (a firm). The background is that CBS made two loans to a company called Goldgrade Properties Limited (“Goldgrade”) in 2005. In February 2005 CBS instructed DHL to value a property in Priory Road, Aston, Birmingham (“the Property”). Mr McGarry, a director of DHL, produced a valuation, valuing the Property at £16m with the benefit of two new leases and £10.5m with vacant possession. In reliance upon this valuation, CBS advanced £10.5m to Goldgrade in April 2005.

In September 2005, CBS was again asked to advance a further £1m to Goldgrade against the security of the property. DHL was asked to confirm that the original valuation figures still applied, and again, through Mr McGarry DHL confirmed that the valuations were still good. CBS therefore made the further advance of £1m to Goldgrade.

CBS discovered that it had been a victim of mortgage fraud. The proposed new leases of the property were bogus and the true vacant possession of the property was only about £1.5m. CBS suffered significant losses when Goldgrade defaulted on the loan. CBS commenced proceedings against both DHL and Cobbetts, the solicitors who had acted for CBS in relation to its loans to Goldgrade. As against DHL, it alleged deceit and in December 2007 CBS obtained summary judgment against DHL on their claims in deceit with damages to be assessed.

CBS’s claim against Cobbetts was that Cobbetts had acted negligently in failing to spot the fraud. On October 17, 2008 CBS accepted a CPR Part 36 offer made by Cobbetts in the sum of £5,585,001. In addition, Cobbetts paid CBS’s costs agreed at £555,000. Factored into that settlement was a discount of 50 percent for contributory negligence on the part of CBS. In view of the fact that the issue of contributory negligence did not come before the Court, the basis upon which discount was agreed between the parties is not clear.

When the matter came before Mr. Justice Clarke in February 2009 he was asked to determine two issues:
The assessment of the quantum of CBS’s claim against DHL in deceit; and
The contribution which DHL should make to Cobbetts. Cobbetts had made a claim against DHL for a
contribution towards the sums it paid out to CBS pursuant to the Civil Liability (Contribution) Act 1978 (“the 1978 Act”).

In assessing the quantum of CBS’s claim against DHL, Mr. Justice Clarke determined that CBS was entitled to recover its losses directly flowing from CBS’s reliance on DHL’s fraudulent statement as to the value of the property including consequential losses and loss of profit. CBS was entitled to recover damages to put it into the position it would have been in had the statement not been made. There was no requirement that CBS’s losses should be foreseeable by DHL. Mr. Justice Clarke determined that CBS was entitled to recover its total losses amounting to £15,464,106. Factored into the assessment of loss was not only the amount lent to Goldgrade, and lost interest, but also the cost of management and staff time in dealing with the fraud and investigating possible further frauds against CBS, loss of retail deposits, additional wholesale funding costs, the loss of opportunity to make mortgage loans, the loss of opportunity to reduce backstops and loss on a 12 month retail bond. Those losses amounted to £21,674,107. From that figure the Judge deducted what he assessed to be the value of the property at the date of trial and the recovery CBS had made from Cobbetts, producing a final figure of £15,464,106.

When Mr Justice Clarke came to consider the contribution which should be made by DHL to Cobbetts, he determined that it was not equitable to take the assessment of the total claim against DHL as his starting point. In accordance with the 1978 Act, any person liable in respect of any damage may recover a contribution from any other person liable in respect of the same damage. Mr. Justice Clarke concluded that the “same damage” was the sum for which Cobbetts would have been responsible subject to the defences of contributory negligence and contractual limitation (Cobbetts had a limit of liability in their contract of £5m). He assessed that sum as the net amount advanced to Goldgrade plus lost interest, less the value of the Property, £13,200,179. He then considered what percentage, if any, should be taken into account for contributory negligence.

He considered the 50 percent agreed between CBS and Cobbetts as an appropriate discount. Accordingly, £13,200,179 was reduced to £6,600,090. The Judge then considered the proportion of that figure the two defendants should contribute to CBS. He concluded that DHL should bear 80 percent and Cobbetts 20 percent. Cobbetts had settled with CBS for £5,585,001 and therefore were entitled to recover from DHL £4,264,983. Insofar as costs were concerned, the Judge determined that Cobbetts were entitled to a contribution from DHL of £333,000, which was assessed using a similar method. DHL was therefore liable to pay Cobbetts a total of £4,597,983 inclusive of costs.

The Nationwide case illustrates not only the difference between assessment of damages for deceit (the losses need not be reasonably foreseeable) and in negligence but also the position taken by the Courts in relation to the assessment of
respective contributions between co-defendants.

Please note however, that in order to succeed in recovering a contribution from a co-defendant in accordance with the 1978 Act, both parties must be liable in respect of the same damage. By way of contrast to the Nationwide case, in Royal Brompton NHS Trust vs Hammond [2002], an architect failed in his claim for contribution against a contractor because the two of them were not responsible for the same damage. The claims against the contractor were for delay and the claims against the architect were for impairment of the employer’s liability to proceed against the contractor because of the grant of extension certificate.

Julie Bowker, Partner
Dispute Resolution, Halliwells LLP
Julie.bowker@halliwells.com