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Following Graham Penn's summary of the BBL Appeal in last month's Banking World, it has now been announced that the matter will go to the House of Lords. This article looks at the legal reasoning behind this Court of Appeal decision, which is of significant importance to lenders.
The central issue in all six cases heard was the extent to which a lender was entitled to recover loss caused through a negligent valuation. In particular whether a lender was entitled to recover losses caused by a subsequent fall in the market value of the asset.
Prior to December 1993 the answer to the question 'to what damages is the lender entitled against the negligent valuer?' had been governed by the cases Robinson v Harman (1848) and Livingstone v Rawyards Coal Co. (1880) which deal with the general principles on which contractual damages are awarded. The principle of these cases was that where a party had suffered loss through negligence damages should be awarded to that party, as far as money can do it, to put the party in the same position as he would have been in if he had not suffered the loss.
The amount that a lender was entitled to recover from a negligent valuer had been decided by the Court of Appeal in the case of Baxter v FW Gapp & Co Ltd (1939) when it was ruled that the lender, where it could be shown that he would have lent nothing at all had he received a non-negligent valuation, was entitled to :
(i) The capital shortfall he had suffered, taking into account any sum realised on the sale of the property and any income received from it.
(ii) The cost of funding the loan (which he would not have made if he had received a non-negligent valuation) and;
(iii) The profit which he would have made had the loan performed properly (this last point was largely overturned by the House of Lords, in the case Swingcastle Limited v Alastair Gibson (a Firm) (1991)).
In late 1993, in the case United Bank of Kuwait Plc v Prudential Property Services Ltd, the first attempt at mounting what was to become the 'BBL' defence was seen. The valuer tried to run the...