By: James Dymock

At a glance

  • In Charles B Lawrence & Associates v Intercommercial Bank Ltd [2021] UKPC 30, the Privy Council considered the loss that was recoverable by a lender from a valuer (and solicitor).
  • The matter involved a valuer who had completed a negligent valuation of a property, which was used as security for a loan. The property was subsequently found to be worthless because the title was defective.
  • The decision provides guidance on the application of the scope of duty principle set out in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, and recently adopted by the New Zealand Courts.
  • While the decision is relevant to valuers, it also serves as a timely reminder for solicitors, financial advisers and accountants.

Scope of duty analysis in New Zealand

  1. The High Court in Body Corporate 207624 v Grimshaw & Co [2023] NZHC 979 and Court of Appeal in PGG Wrightson Real Estate v Routhan [2023] NZCA 123 recently approved the scope of duty analysis adopted by the English Supreme court in in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (MBS).
  2. MBS refines the analysis in the seminal case of South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (SAAMCO), which sets out that a professional will only be liable for damage that falls within the scope of their duty. The test is relevant to professionals providing information as part of a larger transaction. The duty analysis now focuses on the purpose of the professional role and the risk that has been assumed.
  3. While the analysis set out in MBS appears simple, it can easily be misapplied. The Privy Council decision of Charles B Lawrence & Associates v Intercommercial Bank Ltd [2021] UKPC 30 provides some helpful guidance on the application of the scope of duty analysis where two different professionals are involved in the same transaction.

Charles B Lawrence & Associates v Intercommercial Bank Ltd [2021] UKPC 30

Background

Intercommercial Bank Ltd (Bank) was approached for a loan by Singapore Automotive Trading Ltd (Borrower). The security for the loan was land owned by a related entity (Guarantor). The Guarantor instructed Charles B Lawrence & Associates (CBL) to provide a valuation of the land.

CBL valued the property at US$15m, on the basis that:

  • a good marketable title could be shown
  • planning permission would be granted for commercial development of the land, and
  • the land was free from all encumbrances with vacant possession.

Relying on the valuation, the Bank lent US$3 million to the borrower with a mortgage over the land as security.

The Borrower and Guarantor defaulted on the loan without making any repayments. The Bank appointed a receiver to enforce the security. Through that process, the highest bid received was US$2 million. It was also discovered that the secured land could be used only for residential purposes, and that the true value of the land was US$2.36 million rather than US$15 million. The Bank then issued a claim against CBL.

The Bank subsequently discovered that the Guarantor did not have good title to the secured land, which meant the mortgage was of no value. The Bank settled the claim against its lawyers regarding the defective title.

The High Court and Court of Appeal held that CBL was liable for all of the bank’s loss, less a 20% deduction for contributory negligence.

Privy Council Decision

The key issue on the appeal to the UK’s Privy Council was whether the lower courts were correct that all the losses claimed fell within the scope of CBL’s duty. Applying MBS and Khan, the Privy Council noted that in determining the scope of a professional’s duty of care, it was important to consider the purpose of the advice or information being given.

CBL argued that the Bank had suffered two distinct losses because:

  • the secured land was overvalued due to an assumption it could be used for commercial use rather than residential use, and
  • the title to the land was defective.

CBL argued the second loss was outside of its duty and, therefore, irrecoverable as it was not part of the valuer’s role to investigate the title to the land. That was the responsibility of the conveyancing solicitor.

The Privy Council agreed with CBL and held that that the purpose of CBL’s report was to value the property on the assumption that there was good legal title to the land. It was not CBL’s role to advise on, or give information about, the title to the land. It was also clear that the Bank was not looking to CBL’s report to advise on, or give information about, the title to the land. That was a matter for a lawyer, not a valuer.

The Privy Council determined the loss factually caused to the Bank by the defect in title should be deducted from the losses recoverable from CBL. This was assessed as the true value of the land on the date of the loan on the assumption that there was good title in the sum of US$2.375 million and gave a recoverable loss of US$625,000.

Implications for valuers and other professionals in New Zealand

The cost of compliance is weighing on a lot of professions, and this has resulted in attempts to streamline processes with standard terms and conditions. This decision emphasises the importance of agreeing and recording the scope and purpose of the work and ensuring that any limitations or assumptions relied on are clearly set out in the retainer or work product.

Spending an extra five minutes tailoring the engagement to the instructions will go a long way towards protecting a professional, whether an accountant, valuer, solicitor or financial adviser.