McKinnon & Ors v E. Surv Ltd

In April 1999 Mr Gordon McKinnon and his wife Delyth were considering purchasing a bungalow at 64 Herbert Road, Emerson Park, Hornchurch, Essex for their home. On 13^th April they instructed the Defendant company, then known as G.A.Valuation and Survey Limited, to provide an RICS/ISVA Homebuyer's survey and valuation report. They were duly provided with a report dated 15^th April 1999 prepared by Mr S. Barford, BSc ARICS of the Defendant company. The report was required by Mr and Mrs McKinnon's proposed mortgagee but its objective went further than merely satisfying the mortgagee. As the report itself stated:

“The principal objective of the report and valuation is to assist you to

•

make a reasoned and informed judgment on whether or not to proceed with the purchase

•

assess whether or not the Property is a reasonable purchase at the agreed price

•

be clear what decisions and actions should be taken before contracts are exchanged."

It is common ground that the Defendant's report was defective and negligently prepared in respects which will appear below and that the Claimants are entitled to damages assessed by reference to the difference between the price they paid for the property in reliance upon the defective report and the value of the property at the date of the valuation on 14^th April 1999. The issue which I have to decide is whether, if it is established that at the date of valuation the property was no longer subject to movement and has not been subject to movement since but it would not have been possible to establish that until after the date of purchase, it is appropriate to take those facts into account. In other words, in assessing damages, is the Court entitled to use hindsight? If the valuation is to be carried out only on the basis of the information that should have been contained in the report which the McKinnons should have received, then, on the figures which have been agreed, the McKinnons' damages will be £93,000. If, on the other hand, it is established that movement in the property had ceased at the date of purchase and it is proper to take this into account, then the Claimants will only recover £37,000.

The present proceedings were instituted on 21^st January 2002. In the light of the admissions made in the Defence, on 15^th April 2002 a judgment was entered for the Claimants for damages to be assessed. On 2^nd August 2002 the matter came before Master Bowman for directions. He directed that there be a trial of preliminary issues in the assessment of damages. There were three Schedules to the Order, the first of which contained the issues ordered to be tried, the second the Agreed Facts and the third two Assumed Facts.

I will set out first the Agreed Facts:

“1.

The Defendant at all material times carried on business as surveyors and valuers.

2.

In 1999 the Claimants were considering purchasing the freehold of a residential property situated at, and known as, 64 Herbert Road, Emmerson Park, Hornchurch, Essex RM11 3LL ("the Property") in order to occupy the same as their home.

3.

By an agreement made between the parties on or about the 13^th April 1999, the Defendant agreed that for reward it would inspect the Property and provide a written report upon its condition and value. The Defendant had been introduced to the Claimants by the Claimants' mortgage provider, Halifax plc, and the purpose of the Defendant's retainer was to allow the Claimants to obtain a loan by way of mortgage from Halifax plc.

4.

The Defendant duly inspected the Property and by a report in writing dated 15^th April 1999 valued the property at £185,000. The report stated (amongst other things):

"Movement

There are signs to suggest that the property has been affected by past minor structural movement as evidenced by sloping floors, distortion to internal door openings and hairline cracking to the rear elevation. So far as can be seen from the single inspection the movement appears longstanding, unlikely to be progressive, and within acceptable tolerances."

5.

In reliance on the Defendant's said report and valuation, the Claimants purchased the property, such purchase being completed on the 7^th June 1999 at a price of £185,000.

6.

There was an implied term of the agreement between the parties that, in inspecting the Property and reporting to the Claimants upon its condition and value, the Defendant would exercise reasonable skill and care. The Defendant further owed the Claimants a duty of care in negligence to take reasonable care in inspecting the Property, in valuing the Property and reporting to the Claimants upon its condition and value.

7.

It is agreed (for the purposes of these proceedings only) that, at the time of the Defendant's inspection, the following defects were present and that, in breach of contract and/or negligently, the Defendant failed to detect and report upon the same:

(a)

Two of the flank walls were tilting;

(b)

There was sloping to the brick courses to the rear elevation wall;

(c)

There was distortion to the external door and window openings;

(d)

The internal walls were out of alignment; and

(e)

There was movement of the timbers within the roof structure.

8.

It is further agreed ... that the Defendant failed to advise the Claimants to have further investigations carried out in respect of the Property so as to ascertain whether structural movement had ceased or was either continuing or likely to be continuing, and that the Defendant's failure so to advise constituted negligence and a breach of contract.

9.

Had the Claimants known the true value and condition of the Property they would not have proceeded to purchase the Property and occupy it as their home.

10.

It has been established by a report dated 5^th March 2001 of Mr D.J. Parrish FRICS, which the Defendant has adopted, that:

(a)

If it had been possible to establish that the property was not subject to movement as of the date of valuation, a reasonably competent surveyor would have valued the same at £148,000 but,

(b)

If the property was, or might be, subject to ongoing movement, a reasonably competent surveyor would have valued it at £92,000, subject to the outcome of tests."

Those being the Agreed Facts, I am asked to assume the following two further facts, namely:

Those being the Agreed Facts and the Assumed Facts, the issues ordered to be tried were formulated as follows:

It may be helpful before turning to the principles of law involved and the parties' respective submissions to record why the present issue arises for decision in this form. Following the McKinnons purchase of the property, they became concerned that the movement in the property was more severe than they had been advised and they commissioned a report from a structural engineer, Mr Peter Turner C Eng, MI Struct E. Mr Turner reported that the bungalow had suffered from moderate to severe distortion. He said that the Emmerson Park area was known to have suffered many heave recovery problems over the years after its development because many mature trees were felled before house building and the shrinkable clay soil subsequently swelled; these problems had, however, diminished over 15 or 20 years and he had not heard of a fresh problem of this nature in recent years. He thought it likely that the distortion in the house was caused by heave and that in all likelihood the heave recovery was spent. He felt that the evidence within the property, old repairs not having re-cracked, substantiated this. He advised, however, that there could be no certainty about this. It could however be demonstrated by precision level monitoring around the house perimeter: if 12 months passed with no recorded significant movement, that should be sufficient reassurance for a purchaser.

After the institution of these proceedings the parties instructed Mr D.J. Parrish FRICS of Gates, Parrish and Co as a single joint expert to prepare a valuation report. He was provided with a copy of Mr Turner's report. He recorded Mr Turner's opinion that the property was stable and not subject to continuing movement but that this could not be confirmed beyond all doubt unless level monitoring of the property took place. On the basis that the property was stable and not subject to continuing movement, Mr Parrish considered that it would have been mortgageable and insurable and he valued it at £148,000 (as against the purchase price of £185,000) so as to reflect the disadvantage of its having uneven floors and the other identified defects and the stigma which would have attached to a property which had suffered from past movement. On the assumption that the movement was continuing, he valued the property at £92,500 and he put its site value for redevelopment at £92,000. All these valuations were as at 14^th April 1999.

The Claimants submitted certain written questions to Mr Parrish which he answered in writing and at a conference on 30^th May 2001. In answer to the question whether, on the basis that it was presently unclear whether the movement to the property had stopped, it was correct that the property was presently unmortgageable and uninsurable, he replied:

“The property would currently be regarded as unmortgageable and uninsurable until such time as it can be confirmed that the movement has stopped."

In answer to the question:

“If so, is it correct that the subject property has a value that is no greater than site only? If that is not correct, please explain why not",

he replied:

“If the movement has not stopped and is continuing it is unlikely that the property has a value in excess of site value. However, if it can be shown that the movement has stopped (and this is the view of the engineer, Mr Turner) then the property would be saleable as it stands based upon a 20% discount in the defect free condition".

At the conference Mr Parrish was asked certain further questions by Mr Mendoza, Counsel for the Claimants. He confirmed that the property was unmortgageable and uninsurable while doubt persisted as to whether it is still moving. He confirmed that the surveyor should have recommended further investigations. He was asked whether, given the uncertainty which would have emerged if the McKinnons had been given proper advice, that would have meant that the true value of the property was site only. He said that that was so only if the uncertainty had persisted; the reality would have been that investigations would have been recommended and taken place. He did not accept that the property would have had no value other than site value because, he said, a purchaser would have taken the investigation further. He accepted that it was almost inevitable that, if a purchaser was advised that a building would require monitoring for 12 months, he would buy a different property. He accepted that, when a valuation was given on 14^th April 1999, it should have been site value only subject to the outcome of any tests.

On 25^th June 2001 Mr Parrish wrote enclosing a signed attendance note of the conference but clarified this last answer as follows:

“(a)

If I am asked at the present time what the value would have been on 14^th April 1999, I would agree this would be site value only subject to the outcome of any tests as it has not yet been confirmed whether or not the property has ceased moving.

(b)

The valuation given by the Defendant valuer at 14^th April 1999 should have been expressed as being provisional subject to the outcome of the tests. His valuation would not necessarily have had to be based upon site value only and could have been a higher figure provided the valuer reserved the right to amend the valuation in the light of the outcome of further tests and investigations by engineers."

For the Claimant Mr Mendoza puts his case in the following way. A proper non-negligent report would have identified the full extent of the movement, raised a query as to whether or not that movement had ceased and advised that monitoring was necessary to ascertain whether or not the property had stabilised. (This is common ground.) Whether or not the property had indeed stabilised remains unclear. The Claimants' contention is that in assessing damages the property should be valued on the basis that it was then uncertain as to whether or not the structural movement had ceased; the outcome of subsequent monitoring of the movement is irrelevant; one must approach the matter on the basis of a hypothetical sale between informed parties; one is looking for how much the Claimants overpaid, for which purpose one needs to know how much they should have paid armed with a proper report; at the date of purchase, the purchaser would not have known if the building had stopped moving.

Mr Mendoza then referred me to the statements in Jackson & Powell on Professional Negligence, 5^th Ed at paras 9-130, 9-133, 9-136 and 9-138 and to the authorities of Phillips v Ward [1956] 1 WLR 471; Watts v Morrow [1991] 1 WLR 1421 and Perry v Sidney Phillips [1982] 1 WLR 1297 as authority for the proposition that the proper measure of damages where a surveyor has negligently overvalued a property for a purchaser is the difference between the value of the property in the condition described and its value as it should have been described, assessed at the date of the breach. One is not concerned, he submitted, with the value of what the purchaser got assessed with the benefit of hindsight. What has to be considered is the impact on valuation of any defects, or the risk of defects, as at the date of the valuation.

To demonstrate the irrelevance of subsequent events, Mr Mendoza took me to Daisley v B.S. Hall [1972] 225 EG 1553 (very properly drawing my attention to the fact that this case was criticised in the dissenting judgment of Peter Gibson LJ in Gardner v Marsh and Parsons [1997] 1 WLR 489). In that case the Claimant had bought a house for £13,250 near to which was a row of poplar trees. They relied on a survey which made no mention of the poplar trees. The Judge held that a reasonably skilled surveyor would have appreciated that the presence of poplars might be hazardous and warned of the risk of future damage and that a purchaser properly advised of the risk would not have paid more than £11,500 for the house. In fact, the trees were felled some 3 years after the Claimant's purchase and the Judge accepted that the risk of future subsidence was now negligible. The Defendants argued that the Court should take this into account; the Plaintiffs that the Court was not entitled to take into account the subsequent reduction of risk and that the proper time to look at the assessment of loss was the time of the breach. The Judge accepted the Plaintiff's submissions, observing that what is sauce for the goose, is sauce for the gander.

Mr Mendoza also referred me to Hoagly v Edwards [2001] EGCS 46, where damages were awarded against a negligent surveyor to include a price reduction that could have been negotiated by a properly informed purchaser to take account of the possibility that remedial work might be required in the future.

Finally he drew my attention to Gardner v Marsh and Parsons [1997] 1 WLR 489 where the majority of the Court of Appeal held:

“That the proper measure of damages was the difference between the price paid by the Plaintiffs and the market price of the property in its defective condition at the time of their purchase; that assessing the market price of the defective property required a hypothetical sale of the property in its defective condition; that the measure of damages could not be determined on the basis that if the Defendant had spotted the defect it would have been remedied before sale."

In that case, a serious structural defect, which the Plaintiffs' surveyor had missed when they bought a long lease of a maisonette, was subsequently remedied by the landlords at their own expense. The Defendant's argument was that, had the defect been discovered by the survey and drawn to the attention of the landlord developer, they would have forthwith remedied it at their own expense and there would have been no diminution in the maisonette's value. The trial Judge and the Court of Appeal declined to accept this submission as being unsupported by the evidence. The Court also held, Peter Gibson LJ dissenting, that the landlord's action in repairing the property was not part of a continuous transaction in which the purchase of the lease as a result of the Second Defendant's negligence was the inception but was res inter alios acta, collateral to the negligence and too remote to be taken into account in assessing the Plaintiff's damages.

For the Defendant, Mr Althaus reminded me that I am required by the formulation of the preliminary issue to assume that monitoring and the other available evidence will establish that, as of June 1999, the movement had ceased. He pointed out that the critical value is variously described in the cases as summarised in paragraph 9-130 of Jackson and Powell as (i) the market value of the property as at the date of purchase in its true condition and (ii) the market value of the property at the date of purchase as it should have been described. These are not necessarily the same thing, because the second (“as it should have been described”) by definition cannot make use of hindsight but the first (“true condition”) can. One must therefore be cautious in applying formulations derived from cases in which the present question was not in issue. In Phillips v Ward (supra) and Watts v Morrow (supra), the issue was whether diminution in value or cost of remedial works was the right measure. In Perry v Sidney Phillips, the issue was the date at which the diminution should be measured. In none of these cases was the Court being asked to decide between the value in the condition which should have been reported and value in the property's true condition.

Mr Althaus then submitted that the Claimant's approach overlooked several principles of the law of damages. The most important of these was the principle that the measure of damages should be that sum of money which will put the party who has been injured in the same position as he would have been in if he had not sustained the wrong for which he is being compensated. It would also offend the principle (called by Mr Althaus the "Bwllfa principle" after Bwllfa and Merthyr Dare Steam Collieries Limited v The Pontypridd Waterworks Co [1903] AC 427) that, when assessing compensatory damages, the Court should not speculate where it knows and should therefore take into account all the information which is available to it at the time of making the award. Thirdly, the Claimant's approach failed to apply the principle (called by Mr Althaus "the Avoided Loss principle") that where the Claimant takes steps to mitigate the loss to him consequent upon the Defendant's wrong and these steps are successful, the Defendant is entitled to the benefit accruing from the Claimant's action and is liable only for the loss as diminished.

In support of all these principles, Mr Althaus referred me to the judgments in the Court of Appeal in Kennedy v Van Emden [1996] PNLR 409. In that case a Plaintiff had paid a premium for an assignment of an underlease of a flat. At the date of the assignment it was illegal for the assignor to charge any premium but the prohibition was removed by later legislation, so that it was now open to the Plaintiff to assign the flat at a premium. The Court of Appeal held, dismissing the appeal, that the Judge had been right to take into account the subsequent change in the law on the basis that, where the Court knew of subsequent facts reducing the Plaintiff's loss, regard should be had to them. The Judge rejected the Plaintiff's claim on all three grounds relied upon by Mr Althaus in the present case, namely:

It is certainly correct, as contended by Mr Mendoza, that in surveyors' negligence cases the proper measure of damages is generally the difference between the value of the property in its assumed good condition (as it was described) and its value in the bad condition which should have been reported to the client (as it should have been described): see the formulations of Denning LJ and Morris LJ in Phillips v Ward (supra) at pages 473 and 476. That general rule is, however, only a prima facie rule which has to be applied in the light of the overriding principle stated by Lord Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at page 39, namely that the measure of damages is:

“that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation in reparation."

As Lord Denning put it in Phillips v Ward, the injured person is to be fairly compensated for the damage he has sustained, neither more nor less. That the prima facie rule may have to yield to, or at least be applied in the light of, the overriding principle appears from the judgments of Bingham LJ in County Personnel Limited v Alan R. Pulver and Co [1987] 1 WLR 916 at page 925 and in Watts v Morrow [1991] 1 WLR 1420 at page 1444.

In this case, if the Defendant had acted with reasonable skill and care, the Claimants would never have bought the bungalow. The consequence of the Defendant's negligence is that the Claimants have acquired an asset, the property, which they would otherwise not have acquired at all and have parted with another asset, the purchase monies, which they would otherwise have retained. I agree with Mr Althaus' submission that the application of the fundamental compensatory principle in these circumstances suggests that the Claimant should be entitled to recover damages representing the value of the asset he lost after giving credit for the value of the asset he obtained and which he has retained. Thus he should recover the difference in value of those two assets (together with interest to compensate him for being out of pocket in the meantime).

The Claimants obtained and have retained a property now known to be worth, on the assumption that it was not suffering from further movement, £148,000 at June 1999 values. If the Claimants were paid £93,000 in damages, they would receive a windfall and be over-compensated. They bought the property believing that it did not suffer from ongoing movement. On the assumed facts, it did not and does not suffer from ongoing movement. Why, I ask rhetorically, should they be compensated by an award of damages equal to that they would have been entitled to if the property had suffered from ongoing movement?

The prima facie rule set out in paragraph 20 above will produce a result compatible with the overriding principle if the Court admits hindsight evidence. This will prevent the Claimant's being over-compensated by retaining an asset worth £148,000 at June 1999 values and receiving £93,000 in damages. In my judgment, the Court not only may but must admit hindsight evidence in accordance with the Bwllfa principle. This is a general principle of law applicable to cases where compensatory damages are to be assessed. It applies in solicitors' negligence actions - see Kennedy v Van Emden (supra) and Charles v Hugh James Jones and Jenkins [2000] 1 WLR 1278 - and in surveyors' negligence actions: see Morgan v Perry (1974) 229 EG 1737 at page 1740. As Schiemann LJ said in Kennedy v Van Emden:

“There is no advantage in the court, sitting at a time when all the facts are known, putting itself notionally into the position of ignorance it would have been in had it been assessing the damages on the day after the wrong was inflicted. This would be to add pointless and avoidable uncertainties."

This is not strictly a case of mitigation or avoided loss but I see no reason why the prima facie rule should be taken to exclude this principle of the law of damages. Mitigation does not appear to have been explicitly argued in Daisley v Hill, which may explain the decision. The case was said to have been wrongly decided by Peter Gibson LJ in Gardner v Marsh and Parsons (nothing being said by the other Judges to the contrary) on grounds which, with respect to the Learned Lord Justice, I find wholly convincing. I do not regard Daisley v Hill as authority that events subsequent to the date of purchase are necessarily irrelevant. Indeed, I accept Mr Althaus' submission that the Gardner case shows not that the avoided loss principle is inapplicable to surveyors' negligence cases but that it is applicable, provided that there is a sufficient nexus between the mitigating event and the transaction giving rise to the damage, that is that it is not too remote. If subsequent events mitigating the loss can go to diminish the damages, then there is no reason why the subsequent ascertainment of the true state of affairs at the valuation date should not go in diminution of the damages.

I therefore propose to answer the preliminary issues in the following way: