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FRAUD: When gross negligence is not enough
20 May 2016
Walker Morris LLP
Issue: Property Law Journal: June 2016
Following the ‘boom and bust’ of the mid-noughties, the courts have seen many instances of over-inflated
mortgage valuations giving rise to findings of professional negligence against surveyors. Pressure from
sheer volume of instructions, too casual an approach to obtaining and critically assessing comparables,
combined with over-reliance on, and misplaced optimism in, the continuance of a rising market, meant that
some surveyors fell below the standard of care required of them and overvalued properties, often causing
borrowers and mortgage lenders to suffer loss.
In such cases, as we reported in an earlier article published in PLJ333 (‘Boom,
bust and back to basics’ by Jonathan Brooks and Sandip Singh, July/August 2015)
the leading case of SAAMCo (South Australia Asset Management Corporation v
York Montague Ltd [1996]) provides that recoverable damages for claimants are
limited, or ‘capped’, at the sum which is the difference between the valuation given
and the true, non-negligent value at the date of valuation. Loss resulting from other
causes, such as, say, a fall in the market, would not generally be reasonably
foreseeable, and could not therefore form part of any damages award.
But what about cases in which a surveyor’s wrongdoing in providing an
overvaluation is more serious, more deliberate? What is the claimant’s legal cause
of action, what are the issues to watch out for and to what extent might
compensation be obtained?
Mortgage Express v Countrywide Surveyors –
establishing deceit
Jonathan Brooks is an
associate in the banking
litigation team at Walker
Morris. Walker Morris
acted for Mortgage
Express in the case
The elements of the tort of deceit were established in the case of Derry v Peek
[1889] and may be summarised as follows:
• a defendant must have made a false representation of fact;
• the false representation must have been made dishonestly, in the sense that the
representor had no real belief in its truth (whether knowingly or recklessly);
• the representation must have been intended to be relied upon; and
• the statement must in fact have been relied upon, causing the claimant loss.
In the case of Mortgage Express v Countrywide Surveyors Ltd [2016], heard early
in 2016, a surveyor, Mr Peter Driver, employed by the defendant (Countrywide
Surveyors), had received bulk instructions from mortgage brokers with whom he
had close connections and from whom it was alleged he received significant direct
remuneration. Mr Driver’s instructions were to provide capital and rental valuations
of 64 properties, all at one new-build development in Eastbourne. Mr Driver
subsequently provided rental valuations to Mortgage Express, the claimant lender,
which were ultimately determined to be at around twice the correct value. Mr Driver
provided 64 rental valuations of between £1,300 and £1,540 per calendar month,
whereas the correct values, as confirmed by experts for both parties, were in fact
£600 to £750 per calendar month.
‘E-mail
correspondence
abounds and is
often of so
informal a nature
that it is issued
without the same
level of thought
and care that a
writer may give to,
say, a more formal
letter or report.’
The claimant submitted that, in arriving at the valuations, Mr Driver did not provide comparable evidence or
justification for his stated values; he did not undertake appropriate inspections and investigations, yet he signed
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certificates to say that he had done so; he did not complete correct and appropriate paperwork; and he simply gave
the rental values that the instructing broker requested.
Not finding Mr Driver to be an honest witness, the court accepted the claimant’s submissions and acknowledged
that not even a finding of gross negligence would be enough to cover the surveyor’s conduct.
Instead, the court confirmed that, where a false statement is made (here, the overinflated rental valuations) without
the maker having any ‘honest belief’ (paras 160-164; Derry paras 374-375) in its truth, then deceit is established
and a claim for fraudulent misrepresentation may proceed.
Causation – an essential question
Establishing a negative – which, in this case, was Mr Driver’s lack of honest belief in the truth of his rental valuations
– is difficult enough. A further hurdle for a claimant to overcome, however, is the crucial question of whether the
defendant’s deceit actually caused the claimant’s loss. Integral to this issue is whether the claimant acted to its
detriment in reliance on the defendant’s misrepresentation.
In the Mortgage Express case the parties agreed that the relevant date by which reliance had to be established was
the date of completion of the 64 mortgage loans. If the mortgages were not completed in reliance on the
overvaluations, then Mr Driver’s deceitful production of those overvaluations could not have caused the claimant’s
loss. In those circumstances the cause of action would not be complete and the claim for damages would fail.
What was in issue was whether there had been any break in the chain of causation in relation to some of the
valuations and loan applications, such that Mr Driver’s fraudulent representations had been modified or withdrawn
and no longer inured at the date of completion. As per the case of Cramaso LLP v Ogilvie-Grant [2014]:
Where a misrepresentation does not have continuing effect, for example because it is withdrawn or lapses or
because the other party discovers the true state of affairs before the contract is concluded, it cannot induce the
other party to enter into the contract and therefore… cannot give rise to a remedy in damages for any loss.
Facts of the case
The valuations in question had all been carried out between early April and late June 2005. Mr Driver then left
Countrywide Surveyors on 30 June 2005 and was replaced by a Mr Ramsden. Shortly afterwards, on 8 July 2005,
Mr Ramsden was asked to transcribe one of Mr Driver’s valuations onto a mortgage application form for another
lender. This type of instruction, often known as a ‘retype instruction’, is a frequent and acceptable practice. It is a
request made to a valuer by a financial institution for a mortgage valuation which has been provided to another
financial institution to be ‘retyped’ onto its own form of valuation report. Retype requests are common as a potential
borrower shops around for a mortgage. The institution relies on the inspection and report which were originally
carried out for the earlier institution, so long as the original valuation was provided within an acceptable time period,
often not longer than three or six months prior. A retype instruction does not generally involve the surveyor carrying
out any additional inspection, valuation, research or updating. In this instance, however, Mr Ramsden felt that Mr
Driver’s valuation was significantly overstated. That prompted, almost immediately, extensive investigations within
Countrywide Surveyors into all of Mr Driver’s valuations carried out for the same mortgage brokers.
On the afternoon of 19 July 2005 Countrywide Surveyors sent an e-mail to the claimant, which referred to the
possibility of overvaluation on an unspecified number of rental valuations carried out by Mr Driver at the
development in question, and requested the opportunity to review the (as yet unspecified) valuation advice before
any further lending decisions were made.
On 29 July 2005 the claimant sent an e-mail to Countrywide Surveyors showing 21 properties at the same
development which had been valued by Mr Driver and asking for the rental values to be reassessed.
In response to the claimant’s e-mail of 29 July, on 25 August 2005 Countrywide Surveyors sent an e-mail to the
claimant, attaching a schedule listing those 21 properties. No warnings were given, no mention was made of any
fraud and there was no request for reliance not to be placed on the original valuations, but the schedule set out Mr
Driver’s original valuations and Countrywide Surveyors’ revised valuations and left it to the claimant to cross-check
those figures.
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As an aside, it was clear on the evidence that, during their internal investigations, representatives of Countrywide
Surveyors quickly became aware of the issues with Mr Driver and his valuations, the number of properties involved,
the extent of the inaccuracies and their strong suspicions of fraud; and that they could have revealed much more to
the claimant, and earlier, than they chose to do. The judge commented that, had the claimant’s case been pleaded
in contract, it was likely that Countrywide Surveyors would have been found to be in breach. However, with the case
being pleaded in fraud, the key question was simply whether the communications that Countrywide Surveyors did
have with the claimant were sufficient to correct the false valuations, and therefore to break the chain of causation.
Application of the law
The High Court reiterated that the crucial question was whether the correspondence between 19 July and 25 August
2005 had the effect of withdrawing or correcting rental valuation advice originally provided by Mr Driver; that the
burden of establishing the modification rested on the person making it (here, Countrywide Surveyors); and that the
modification must be sufficiently clear in all the circumstances.
The judge also confirmed that where a modification is made in written documents, the court is required to consider
the meaning which is reasonably (that is, objectively) conveyed to the recipient, but in the context of the particular
(subjective) facts of the case, bearing in mind any specific features of the party to whom the representations were
made.
Reliance and causation: a practical analysis
Applying the above principles to this case, the court noted that there were several different categories of claim to
determine:
A) mortgage loans completed before 19 July 2005 (before any correspondence concerning the possibility that Mr
Driver may have overvalued took place);
B) mortgage loans completed between 19 July and 25 August 2005;
C) mortgage loans completed after 25 August 2005 in respect of properties listed in the claimant’s own e-mail to
Countrywide Surveyors dated 29 July 2005; and
D) mortgage loans completed after 25 August 2005 in respect of properties not listed in the claimant’s e-mail dated
29 July 2005.
Bearing in mind both the commercial context – in particular, Countrywide Surveyors was an experienced panel
valuer for the claimant, carrying out high volumes of mortgage valuation instructions and being well aware of the
claimant’s lending processes and its responsibilities to conveyancing solicitors and borrowers to turn loans around
quickly – and the recipient within the claimant (a Mr Vaughan, the claimant’s third-party relationship manager), the
court concluded that the e-mails of 19 July and 25 August were insufficient to withdraw or correct Mr Driver’s
deceitful valuations in respect of categories A, B and D.
The court explained that, while an astute lender may have appreciated from the correspondence that all of Mr
Driver’s valuations were suspect and while it may have been negligent for the claimant to continue to lend in
reliance upon them, the case of Redgrave v Hurd [1881] established that negligence on the part of the claimant
does not preclude reliance, and therefore does not break the chain of causation. Redgrave confirmed that it is not a
defence to an action for deceit that a person to whom the representation was made might with reasonable diligence
have discovered that it was untrue. As a matter of law, the reasonableness (or otherwise) of the claimant’s reliance
is irrelevant: it is the fact of reliance which matters.
The court did find, however, that the claimant’s own e-mail of 29 July 2005, which asked for rental valuations at 21
properties to be reassessed, together with Countrywide Surveyors’ response of 25 August, did have the effect of
withdrawing the original valuations for those properties. Reliance, and therefore causation, was not therefore made
out in respect of those properties, and the category C claims failed.
The claimant succeeded in all other categories of claim.
Comment
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There is a high bar for proving deceit. It is a difficult task which can have devastating reputational consequences
and should not be embarked upon lightly. Overcoming the causation hurdle is often very difficult for a claimant to do.
This is particularly so in the age of modern communication. E-mail correspondence abounds and is often of so
informal a nature that it is issued without the same level of thought and care that a writer may give to, say, a more
formal letter or report. This can often result in the inadvertent break in the chain of causation.
However, as the Mortgage Express case shows, it is reassuring that, where a claimant really has been the victim of
serious wrongdoing, the law can provide an effective remedy. Not only does a deceit claim take a case outside the
realm of professional negligence where SAAMCo may limit financial recovery, but also it means that claimants do
not have to worry about the (partial) defence of contributory negligence.
This case does not make any new law. However, in today’s climate where fraud, including mortgage fraud, is on the
rise, it is a clear reminder of the key legal components of a claim for deceit or fraudulent misrepresentation, and a
useful illustration of how the courts will apply those principles in practice.
For more on the compensation calculation in deceit claims, please watch out for the second of our two articles on
Mortgage Express, to follow shortly.
Key points
• Deceit, or fraudulent misrepresentation, may provide an effective remedy as an alternative to a professional
negligence claim.
• Unlike professional negligence claims, compensation for fraud will not be limited by the SAAMCo ‘cap’, nor will it
be affected by any contributory negligence.
• As well as proving that a false representation was made dishonestly, a fraud claimant must establish the crucial
elements of reliance and causation.
CASE(S) REFERENCED:
Cramaso LLP v Ogilvie-Grant, Earl of Seafield & ors [2014] UKSC 9
Derry v Peek (1889) 14 App Cas 337
Mortgage Express v Countrywide Surveyors Ltd [2016] EWHC 224 (Ch)
Redgrave v Hurd (1881) 20 Ch D 1
South Australia Asset Management Corporation v York Montague Ltd [1996] UKHL 10
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