Biggart Baillie Solicitors

Surveyor's Negligence and the effect of Disclaimers

Friday, May 21, 2010

by Robin Corbett and Alison  Grant

Recent years have seen a significant increase in the number of defaulting debtors and lender’s repossessions in both the domestic and commercial markets.  With market prices failing to live up to the figure initially lent, lenders have in some cases suffered significant losses on resale of the property.  In some instances, the losses have been so significant that the initial purchase transaction has come under scrutiny and the surveyor’s valuation report is one aspect lenders are looking at.

It may also be that parties who have invested in property on the strength of a report on market value are left holding an asset of significantly less value than the report suggested. Rightly or wrongly, they may suspect that the report exaggerated what the property was worth even before the market crash.  They try to blame the surveyor.

Establishing liability for professional negligence is not particularly easy.  For all professional work, a court will recognise a distinction between, on the one hand, negligence and, on the other hand, a mis-judgement which leads to adverse consequences.

In most cases the party who complains about inadequate professional services will be the party who instructed the services – the surveyor’s clients.  There will be a contractual relationship between the surveyor and the client.  The contract may not be in writing, and even where there is some writing such as standard terms of business a specific performance standard may not be stated.

The general rule, however, is that services must be provided at least to the standard to be expected of a reasonably competent and careful practitioner.

The leading case in professional negligence (Hunter v Hanley 1955 SC 200) says that the test of negligence is whether a professional person is proved to be guilty of such failure as no other member of that profession of ordinary skill would be guilty of, if acting with ordinary care.

In Hunter v Hanley the court said that in considering whether there is negligence the following needs to be proved:-

1. that there is a usual and normal practice; and
2. that in the particular case that practice was not adopted; and
3. that (crucially) in the particular case what was actually done was something which no professional person of ordinary skill would have done if he or she had been acting with ordinary care.

These are not necessarily easy matters to pin down.  Almost inevitably, if liability is disputed, the parties will require the evidence of experienced practitioners in the service area concerned.

Of course, once liability is established another whole debate arises about the extent of that liability.  That is, the often difficult question of what, if any, loss has resulted from the negligence.

This article, however, concentrates on liability, and now moves on to consider two aspects which surveyors (and indeed others who regularly provide professional opinions) need to be alert to.

Where a surveyor has contracted with one party to provide a valuation for a specific purpose, the valuation is negligent and that party has relied on the valuation and suffered loss as the result, the situation is relatively straightforward.   What about the situation where a valuation instructed by one party is relied on by another ? This is not uncommon, particularly in recent years when both lenders and purchasers were competing fiercely for market opportunities.It was far from uncommon for someone offering for a house to do so subject to survey. They would then have their lender instruct a valuation survey, and go ahead if told the house had “passed survey”. That is, they themselves relied on the valuation, and if it were negligent they might suffer loss – but there is no contract between the party suffering loss, and the service provider. The survey report may say that it is provided only for the lender’s benefit.

What is the liability of surveyors in those situations and what is the effect of disclaimers of liability ?

Liability to Third Parties

The principle that a surveyor will in certain circumstances be liable to a third party where the circumstances give rise to a duty of care is well established.  The case of Hedley Byrne v Heller & Partners Ltd ([1964] A.C. 465) established that a negligent (even if honest) misrepresentation can give rise to an action for damages for financial loss since a duty of care will be implied where a party seeking information from a person of skill trusts him to exercise due care and that party knew or ought to have known that reliance was being placed on his skill and judgement.  In Hedley Byrne, Company A, an advertising company, had placed a substantial forward order for company B based on a credit reference given by company B’s bank.  Company A relied on the reference, company B defaulted and company A suffered financial loss.  It was held that the bank owed a duty of care to company A.  

Of course, inaccurate valuations will not always lead to a finding of negligence.  It would have to be shown that no other reasonably competent surveyor would have made the valuation – a margin of error, typically 10 to 15% either side of the correct figure will be allowed.

Disclaimers

Disclaimers, either attempting to exclude or restrict liability or restricting what a valuation covers, are common in surveyors’ terms and conditions.  They will in some, but not all, circumstances operate to negate liability where a duty of care would otherwise be owed.

Disclaimers fall within the ambit of the Unfair Contract Terms Act 1977 (UCTA).  Section 16, which applies to Scotland, provides that a term of a contract or provision of a notice purporting to restrict or exclude liability has no effect if it was not fair or reasonable to incorporate it in the contract or rely on it.  It is for the surveyor to prove that it was.  All the circumstances pertaining when the liability arose or (but for the notice) would have arisen have to be considered. 

There is a substantial body of case law on the disclaimers and their effect and the following cases are just a selection which set out some of the issues to be considered when deciding whether the reasonableness test is met.

The first case in the English courts to recognise a duty of care where a valuation has been commissioned by one party but relied on by another was Yianni v Edwin Evans [1982] QB 438. 

Facts: -

• Purchaser applied for mortgage. Lender instructed surveyor to value property, purchaser paid a valuation fee.
• With the loan offer the lender sent the purchaser various documentation advising that the offer did not imply the price was reasonable and that applicants who wished to instruct their own survey for their own information and protection should instruct their own surveyor.
• The purchaser relied on the valuation provided to the lender.
• It later emerged the house was structurally unsound and required costly work carried out.

Decision: -

• The surveyor owed a duty of care to the purchaser despite the disclaimer.
• The transaction was a low value domestic conveyancing purchase and the purchaser was of ‘modest means’.  In these circumstances, it was foreseeable that a purchaser would have relied on the valuation.

This decision was followed and the reasoning expanded by Smith v Eric S Bush ([1990] 1 AC 831):-

Facts: -

• Lender instructed surveyor to carry out inspection and valuation of property.
• Mortgage application form and report contained a disclaimer of liability for the accuracy of the report, it was made clear the survey was not a structural survey and recommended that the purchaser should seek an independent survey. 
• Purchaser received a copy of the valuation report prepared stating that no essential repairs were necessary. 
• Purchaser relied on the valuation report and purchased the property, which it subsequently emerged, had structural problems.

Decision: -

• The surveyor did, despite the disclaimer, owe a duty of care to the purchaser.
• There was a contract between the purchaser and the valuer.  Since the valuer knew that the purchaser was paying for the valuation and that the valuation would be relied on, there was a voluntary assumption of responsibility to the purchaser.
• UCTA applies to disclaimers attempting to exclude a duty as well as those excluding liability.
• In the circumstances (low value conveyancing transaction), it was unreasonable to allow the valuer to rely on the clause.

Lord Templeman’s reasoning in deciding the disclaimer wasn’t sufficient was: -

• The valuer was a professional, paid for his services and he knew that 90% of purchasers did not instruct their own valuation;
• Most purchasers cannot afford a second valuation and so there is pressure on them to rely on the valuation prepared for the lender;
• The purchaser trusts the lender and that they will appoint trustworthy qualified valuers;
• The valuer knows that if he fails to exercise the required standards of skill and care, the consequences to the purchase could be disastrous.

Lord Griffiths set out some general issues that should be considered when deciding whether an exclusion of liability clause is fair and reasonable: -

1. Were the parties of equal bargaining power? 
2. Would it have been reasonably practicable to obtain the advice from an alternative source, taking into account issues such as cost and time?
3. How difficult is the task being undertaken for which liability is being excluded? 
4. What are the practical consequences of the decision on the question of reasonableness?
5. In the particular circumstances of the case the question of who employed the surveyor and paid his fees was material.

The approach of the courts therefore towards disclaimers in transactions involving the purchase of residential property by a purchaser of modest means seems generally to be that disclaimers will fall foul of the UCTA reasonableness test.  There has not appeared to have been a huge amount of importance put on the wording of the disclaimer or the way in which it has been brought to the attention of the aggrieved party – even where the wording is clear and provided to the purchaser in several formats, policy considerations have won over.

By contrast, the courts have been more reluctant to rule that a surveyor cannot rely on a disclaimer where the transaction is commercial or is a residential transaction but of higher valuer or has commercial elements. 

::  Omega Trust Co Ltd v Wright Son & Pepper ( [1997] PNLR 425 CA)

Facts: -

• Valuer provided borrower with valuation of three commercial properties in central London which contained a disclaimer to the effect that the report was for the private and confidential use of the clients and should not be produced to or relied upon by third parties without written authority of the surveyors.
• Borrower applied to Omega for a loan and valuer retyped a copy of the valuation to Omega.  Omega could not lend the full amount so applied to an associate company and sent a copy of the report addressed to Omega to that company.
• Borrower defaulted and properties had to be repossessed.

Decision: -

• The Court of Appeal held that the second lender wasn’t a ‘client’ in terms of the disclaimer wording and that the disclaimer was reasonable in terms of the test set out under UCTA. 
• The commercial nature of the transaction was important – the second lender was commercially aware and was in a position to instruct an independent valuation.

::  Bank of Scotland v Fuller Peiser

Facts: -

• The bank sought damages from firm of surveyors alleging negligence in relation to a valuation of a hotel.
• The purchaser had instructed the valuation.
• The bank requested from the valuer delivery of the valuation report to assist with the processing of the loan.
• The valuation contained a disclaimer whereby the authors accepted “no responsibility whatsoever to any party other than the client”
• Following default on the loan, the bank repossessed the hotel and suffered a loss.
• The bank sought to rely on the valuation report and argued that the disclaimer was ineffective because it was contained in communication addressed to the purchaser and to avoid liability to the bank a separate communication should have been sent.  The bank argued that since the it had requested the valuation in connection with the loan application the valuer should have realised the bank were using it for security purposes and it was not unfair or unreasonable to find the surveyor’s liable to the bank.

Decision: -

• The disclaimer was not ineffective because of the way it had been communicated and the text was clear and was unambiguous in that it clearly stated no responsibility was being assumed to anyone other than the client.
• The test of reasonableness was satisfied as the transaction was a commercial one and the bank could have obtained their own advice as they were of equal bargaining power and had the financial means to do so.

McCullagh v Lane Fox & Partners ([1996] 1 EGLR 35)

Facts: -

• An estate agent’s particulars of sale for property described property as having a certain size of plot.  The particulars contained a disclaimer of liability.
• The purchaser bought the property and the plot turned out to be smaller than advertised.

Decision: -

• The disclaimer was a fact to be considered when deciding whether the defendant had assumed responsibility for the statement under the Hedley Byrne principles and was sufficient in this case to remove liability.
• The trading position of the estate agents and the opportunity and means of the purchaser to have his own survey carried out was important in the decision (the price being paid was £800,000).

In summary, actions against surveyors for negligent valuations look set to continue to increase. The sharpest increase will likely be cases brought by lenders and larger investors who have lost out in the recent market crash but there will continue to be actions brought by homebuyers who have lost out either in terms of losses suffered on resale or defects and structural problems not highlighted in the survey.  Disclaimers will not always operate to allow a surveyor to avoid liability and the courts will tend to be supportive of a party’s claim where that party was not of an equal bargaining power to the party who obtained the valuation.  It has to be said that the circumstances of each individual case will be looked at individually although the principles such as those set out in Smith v Eric Bush will give guidance.

For further information please contact Robin Corbett by email(rcorbett@biggartbaillie.co.uk) or Alison Grant by email (agrant@biggartbaillie.co.uk) or by phone on 0141 228 8000.