In case you hadn’t noticed, the UK has been in the grip of a recession for the past few years and with it, claims for professional negligence have proliferated. While this may be great news for lawyers (at least those who are not on the receiving end) it’s not so good for surveyors, as more and more houses that they valued are repossessed and sold at a loss. Mortgage companies in particular are dusting down the valuations to see if they can recover their losses and claim for surveyor negligence.

Liability to a third party

To bring a claim for negligence, a claimant needs to prove three things:
1. that the surveyor owed a duty of care to the Claimant;
2. that the surveyor breached that duty of care; and
3. the Claimant suffered a loss.

It is often the loss that everyone focuses on but in fact the first thing that needs to be determined is whether a duty of care is owed. In short, some form of relationship or “nexus” needs to be established between the surveyor and the mortgagee before we can start thinking about whether damages can be claimed.

Mortgagees usually insist that the purchaser has a valuation and/or survey for mortgage purposes and in many instances it will be left to the purchaser to organise and pay for a survey/valuation. As such, the Purchaser and Surveyor will have a contractual relationship. However, there is often no such relationship with the mortgage company. In these situations, is a duty of care still owed to the mortgage company by the surveyor?

The short answer is, yes. It has long been established that a third party can bring a claim if they relied on the advice of an expert. The 1964 case of Hedley Byrne & Co Ltd –v- Heller & Partners Ltd established this legal premise. Here, the bank gave a glowing statement about its client’s creditworthiness which a third party (Hedley Byrne) relied upon in deciding to invest in the client’s company. Unfortunately, the company failed, leaving Hedley Byrne with a significant financial loss. Despite no contractual relationship with the Defendants, the Court decided that the bank did owe a duty of care to Hedley Byrne. The Court identified a variety of factors that needed to be present: the relationship between the parties had to be particularly close, that damage could be reasonably foreseeable if the third party relied on the statement and, importantly, it needs to be fair, just and reasonable in all the circumstances to impose a liability.

This relationship was examined further in the 1997 case of Reeman –v- Department of Transport. In this case, Lord Bingham identified three prerequisites before a claim for negligence could be considered: the statement must be ‘plaintiff-specific’, it must be ‘purpose-specific’ and it must be ‘transaction-specific’.

Plaintiff-Specific

Lord Bingham stated that, when the statement – or valuation – is given, the surveyor must be able to identify who the claimant is or, importantly, which “group” the claimant belongs to. It is probably better to look at an example to illustrate this.

In the defining case of Smith –v- Eric S Bush 1990 UKHL 1, the mortgagee instructed the surveyor to carry out a valuation of the premises. Mr Bush, the surveyor, knew that the purchaser, Mrs Smith, was paying for the valuation and wrote to her, disclaiming any potential liability that he may have with regards to her. He carried out the valuation and said that no essential repairs were required. This was wrong. Mrs Smith relied on the report and bought the house. Not long later, bricks from the chimney collapsed through the roof, smashing into the loft. Mrs Smith sued the surveyor. The surveyor relied on the disclaimers and the fact that his instructions came from the mortgagee.

I will deal with disclaimers later, but the important point of this case, is that it is a good example of the ‘Plaintiff-Specific’: the Court held that the surveyor knew that Mrs Smith was paying for the report and that the report would be relied upon. As such, the surveyor voluntarily assumed a responsibility towards her.

There is a limit on this “voluntary assumption of responsibility”. In this instance, the transaction was relatively low in value and so the Court held it would be unreasonable for the surveyor not to accept responsibility. A different decision was made in the 1997 case of Omega Trust Co. Ltd –v- Wright Son & Pepper. In that instance, the surveyor was valuing three large commercial properties in London. The Court decided that as this was a commercial transaction and one of value, the (commercial) parties were quite capable of looking after themselves and should have obtained their own valuations rather than relying on the valuation of the other party.

Further, the surveyor’s report was handed onto, in effect, a fourth party of whom he was unaware. Again, the Court concluded that the surveyor was entitled to know to whom his valuation was to be shown and so it would be unreasonable to impose liability where the nexus was so remote. In short, it was not ‘plaintiff-specific’.

‘Purpose-specific’

Exactly what it says on the tin. “The statement must be made for the very purpose for which the actual plaintiff has used it” (per Bingham LJ). Another law report helps illustrate this; the 1990 case of Mariola Marine Corp –v- Lloyds Register of Shipping. Mariola Marine Corp were purchasing a boat from its vendor and in doing so, relied on a safety certificate provided by the vendor and prepared by Lloyds Register of Shipping. Later, the boat was found to be defective.

There were two distinguishing features of this case. Firstly, Lloyds Register of Shipping only carry out safety checks. It is not for their marine surveyors to determine whether the purchase is a good buy or whether the boat is defective or not. Secondly, although Lloyds Register of Shipping knew that the vendor was selling the boat, they did not know who the purchaser was and the Court decided that as a result, there was no nexus between the parties.

‘Transaction-specific’

Lord Bingham describes this category as being where “the statement must be made with reference to the very transaction into which the plaintiff has entered in reliance on it”.

The 1998 case of Barex Brokers Ltd –v- Morris Dean & Co is a classic example. Here, the surveyor was instructed by the purchaser in the full knowledge that the valuation was for mortgage purposes and the mortgagee would rely upon it. The surveyor was happy with this. The mortgage company accepted the valuation, entered into a mortgage with the purchaser and paid over the funds. They then assigned the benefit of the charge to Barex Brokers Ltd.

Subsequently, Barex Brokers Ltd tried to bring a claim for what they considered was a negligent valuation of the premises. However, the Court was not prepared to accede to their request. The Court very much took the view that the surveyor did not know that the charge was likely to be assigned so could not anticipate that Barex Brokers would try to rely on it (‘plaintiff-specific’). Importantly though, the Court concluded that the report had been prepared for the very specific transaction between the original mortgagee and the purchaser. Once the legal charge had been entered into, liability was crystalised at that stage; the duty of care could not be extended.

Disclaimers

So, is there any way a surveyor can limit its liability? I have already touched on the issue of disclaimers. These can be easily overridden if the Court decides that there is sufficient proximity between the surveyor and the Claimant. However, this is not the only test.

The Unfair Contract Terms Act 1977 (UCTA) does allow disclaimers but only if they are reasonable and pass the tests set out in s2 and s11 of the Act. Some of the questions the Court might ask itself when determining whether the disclaimer is reasonable or not were suggested by Lord Griffiths in Smith –v- Eric S Bush:

• Are the parties of equal bargaining power?
• Would it be reasonably practicable for the person who relied on the report to have obtained their own? Was there sufficient time? What was the cost?
• How difficult is the task being undertaken by the surveyor?
• Who instructed the surveyor? Who paid his fees?

In the Smith case, Mrs Smith was an individual, it was a low value transaction and the task was relatively easy; In the Omega Trust case, the parties were commercial entities, it was dealing with three commercial properties and the parties could easily have obtained their own reports.

Before preparing a report, surveyors are best advised to try and identify who is going to be relying on the report so they can gear their statement to all the parties. It would probably be a good idea for them to identify these parties in the report itself, as well as specifying the exact purpose the report is being prepared for.

Despite UCTA, a disclaimer may be of some benefit to the surveyor, especially in commercial transactions.

If you would like to discuss any of the issues arising in this article, please call Emma Slade at Slee Blackwell on 01392 423000.