Form over substance? The ‘But For’ Test after Tiuta

04 Nov 2016

The case throws up an interesting issue as to both the application and scope of the ‘but for’ test in professional negligence claims by lenders against valuers where there has been re-financing of the original lending transaction. The fact that the Court of Appeal was split in its decision, and the fact that an application for permission to appeal is currently outstanding to the Supreme Court, demonstrate the complexities of the legal position.

The Facts

The facts of the case were straightforward enough. The Claimant (“Tiuta”) was a lender who instructed the Defendant valuer (“De Villiers”) to value a partly completed residential development (“the Property”). The relevant chronology of events was as follows:

  • In February 2011 De Villiers valued the Property at £2.3m in its present condition and £4.4m Gross Development Value (“the February Valuation”)
  • On the basis of the February Valuation, Tiuta advanced the developer a short term loan of £2.3m secured by a first legal charge over the Property.
  • In November 2011, the developer sought an increase in the facility to just over £3m, still to be secured against the Property. Consequently, Tiuta instructed De Villiers to carry out a fresh report. By that report De Villiers valued the Property at £3.25m in its then condition with a GDV of £4.9m (“the November Valuation”).
  • In December 2011, De Villiers carried out further valuations of the Property in which it valued it at £3.4m (and subsequently £3.5m) in its current condition and confirmed its GDV of £4.9m (“the December Valuation”).
  • Tiuta agreed to provide the developer with the additional funds but, crucially as it turned out, did so by refinancing the facility rather than providing a top up in respect of the original loan. In other words, Tiuta opened up a new account for the developer into which it transferred £2.5m indebtedness to represent the monies from the advance used to discharge the original facility and hence release of the original charge, together with a further £500k facility. The whole of this borrowing was secured by a fresh charge and a fresh loan agreement.
  • At the expiry of the term of the second facility the loan then outstanding of £2.84m was not repaid and, after a sale of the Property Tiuta was still expected to suffer a shortfall.
  • Tiuta therefore brought proceedings against De Villiers for its loss alleging that the December Valuation negligently overstated the value of the Property.  No allegation was made that the February Valuation was negligent. The sum claimed by Tiuta was £890,000 consisting of the £2.84m advance together with £200,000 funding interest and costs less the £2.1m estimated sale proceeds.

The proceedings came before the court in the form of an application for summary judgment on the part of De Villiers. For the purpose only of that application, it was assumed in De Villiers’ favour that (i) the November and December Valuations were negligent, (ii) the first loan was discharged and a new loan advanced, and (iii) Tiuta relied on the November and December Valuations in granting the new facility to advance up to £3m.

The First Instance Decision

On 20 March 2015 the application came before Timothy Fancourt QC sitting as a Deputy High Court Judge. The crux of De Villiers’ submissions before the Judge was that it was unarguable that any loss attributable to the £2.5m was caused by any negligence in the December Valuation, because the developer already owed Tiuta that sum at that time; that sum having been advanced on the basis of the earlier February Valuation which was not challenged in the proceedings. It therefore argued that even had the valuation not been negligent, Tiuta would still have suffered that loss and, accordingly, the “but for” test was not satisfied. It maintained that that was the position regardless of the redemption of the first loan and charge.

In response, Tiuta contended that the whole of the £3m was advanced by the second facility, in reliance on the December Valuation, because this was a completely new loan, with different terms and a new facility fee.

The Judge looked at matters through the lens of the well-established “but for” test as set out by Lord Nicholls in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No. 2) [1997] 1 WLR 1627 at 1631D-E and sought to carry out the comparison as set out by Lord Nicholls:

“…between (a) what the plaintiff’s position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff’s actual position.”

Had the December Valuation not been negligent, Tiuta would not have advanced any further monies. In those circumstances it would still have been left with an indebtedness of £2.5m secured over an inadequate security and therefore it was always exposed to that loss. To that extent the Judge said that De Villiers’ negligence did not factually cause that loss. However, despite the “powerful” logic of that argument, the Judge found that this overlooked the consequence of the redemption of the first loan.

The effect of redemption was considered by the Court of Appeal in Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] PNLR 35. In that case, in March 1997 the lender advanced £49,500 to a borrower secured by a charge against their residential property in reliance on a valuation by Bradford & Bingley of January 1997. In November 1997, a further sum of approximately £8,000 was advanced to the borrower based on a valuation by Countrywide of October 1997. The lender sued Bradford & Bingley for negligent overvaluation.  The case came before the court on the trial of a preliminary issue as to whether Bradford & Bingley was responsible for the loss sustained by the lender in reliance on its valuation report of March 1997. There was a dispute between the parties as to whether there was an effective re-mortgage. It was argued by the lender that there was no such re-mortgage because, although on the face of it there had been such a re-mortgage after apparent redemption:

“this was simply an internal book-keeping exercise within the appellants, necessitated…by the inability of the appellants’ computer system to enable them to provide second mortgages, or otherwise amend existing mortgages.  Hence the only way in which a further advance could be made to an existing lender was by way of redemption and re-mortgage.” [8]

Counsel for Preferred Mortgages urged the Court of Appeal to consider the “true nature of the transactions” and “the reality” of the situation; namely that the borrower’s liability under the original loan continued.  Reliance was placed on the fact that it was Preferred Mortgages’ own funds which had been used to pay off the existing indebtedness, for accounting purposes, and that in no way therefore discharged the borrower’s liability under that original loan which would only have been the case had the payment come from a third party. The difficulty with this argument was that Counsel for Preferred Mortgages also accepted in argument that there was:

“no way in which, after the events of November 1997, the appellants could have relied upon the terms of the original mortgage to obtain any relief against the borrower. It follows that he has accepted that the legal effect of the events of November 1997 was effectively to discharge the borrowers’ liabilities under that mortgage, and to replace them with obligations under the new mortgage. One would have to find amongst the facts some startlingly clear answers that that was not to be the true consequence in relation to the responsibility of the respondents before full effect should not be given to that accepted legal consequence.” [per Lord Justice Latham at paragraph 12]

The Court of Appeal did not find such startlingly clear answers and consequently was satisfied that the original mortgage was redeemed on 19 November 1997 and had no continuing life thereafter. The Court of Appeal then considered the “but for” test in Nykredit but appeared to deal with the case in fact by reference to the scope of Bradford & Bingley’s duty, stating at paragraph 29 of the judgment:

“In any case such as this, the important question is, what is the scope of the duty of care undertaken by the valuer? The scope of the duty of care is determined by the transaction itself. As Lord Nicholls indicated [in Nykredit], it is in relation to the transaction that one determines the liability of the valuer. The transaction in the present case was the mortgage which was granted on the basis of the respondent’s valuation in January 1997. That transaction resulted in no loss to the appellants by reason of the fact that that mortgage, which was the consequence of the valuation, was fully redeemed. It follows that, although there might have been an inchoate liability to the appellants by the respondents as a result of the assumed negligent over valuation between March and November, once November came and that mortgage was fully redeemed that liability ceased because that transaction had pro tanto been satisfactorily completed.”

The Judge at first instance in Tiuta therefore correctly noted that on the basis of Preferred Mortgages the legal position was that once the loan was fully redeemed no loss was suffered and Tiuta therefore no longer had a right of action against De Villiers in respect of the February Valuation. On that legal analysis, Tiuta had had no option but to claim only in respect of the November/December Valuations.

Tiuta attempted to persuade the Court that the normal “but for” causation test should not apply, a position it said was supported by Preferred Mortgages itself, and/or it should not be applied because otherwise the loss would fall into a black hole. Tiuta did accept that seeking to depart from the “but for” test was a “novel point of law” but was sufficiently arguable to avoid summary judgment. The Judge disagreed because, in his judgment:

  • There was nothing in Preferred Mortgages which supported Tiuta’s argument that causation should be decided on a different basis.
  • The fact that there could be no claim in respect of the first valuation did not make the application of the “but for” test to the second valuation inappropriate or unfair, that claim had to stand and fall on its own merit.
  • Where the first valuation was negligent, the remedy would not fall into a black hole even if the lender could not sue the valuer in respect of it because of the no loss point; the “but for” test would permit the loss of that claim to be part of the lender’s loss against the second valuer.

The Judge therefore granted De Villiers’ summary judgment on the basis that the “but for” test of causation was applicable to the case and any negligence by De Villiers had not caused the loss attributable to the original loan; De Villiers was only responsible for the loss caused by the additional lending.

Court of Appeal Decision

Tiuta appealed to the Court of Appeal which, on 1 July 2016, handed down its judgment granting the appeal by a majority of 2-1 (Lord Justice McCombe dissenting). Giving the first judgment, Lord Justice Moore-Bick stated that in his view the Judge had:

“failed to take into account the fact that the transaction was structured in such a way that the second loan was used to pay off the first.That would have been clear enough if it had involved a lender other than the appellant, but the fact that the lender was the same in each case does not in my view affect the analysis.The loan made under the second transaction was the means by which the borrower was enabled to pay off the first and it was the fact that the second loan was used to repay the first in full that released the respondent from any potential liability in respect of the first valuation.The second loan therefore stands apart from the first and the basic comparison for ascertaining the appellant’s loss is between the amount of that second loan and the value of the security.” [17]

On the assumption that if the December Valuation had not been negligent, Tiuta would not have entered into the second transaction Lord Justice Moore-Bick considered Tiuta would have suffered no loss on that transaction.  On that basis therefore he stated that:

[Tiuta] would have been left with the first loan and the security for it, together with any claim it might have had against the valuer.  However, that is of no relevance to [De Villiers] in its capacity as valuer for the purposes of the second loan.  The loss which [Tiuta] sustained as a result of entering into the second transaction was the advance of the second loan, less the developer’s covenant and the true value of the security.  If the value of the property was negligently overstated, [De Villiers] will be liable to the extent that [Tiuta’s] loss was caused by its overvaluation.” [18]

Lady Justice King, who agreed with Lord Justice Moore-Bick also said:

“The respondents had accepted instructions from the bank to value the development site in question.  They accepted those instructions, in their professional capacity, in the knowledge that their valuation was sought in order to inform the bank in making a decision in respect of the developer’s application for a loan to be secured on the development.  I agree that it is of no interest to the respondents the purpose to which the new loan is to be put.  Had the respondents wished to limit their exposure they could have done so by way of terms and conditions negotiated by them when accepting instructions to value the development site.” [37]

Both Lord Justice Moore-Bick and Lady Justice King considered that the “but for” test did apply, but that when correctly applied it led to the conclusion that De Villiers was responsible for the whole of the loss as stated above.  It seems that they did not consider Preferred Mortgages to be an obstacle to that conclusion because they were applying the “but for” test in the context of the second loan being entirely independent from the first loan which was consistent with the effect of redemption.

By contrast, in his forceful dissenting judgment Lord Justice McCombe endorsed the Judge’s conclusions and reasoning and thought that Tiuta’s case required him:

“to ignore an important element of the factual background, namely that the appellant was already in danger of being unable to recover the amount advanced on the first loan at the time when it chose to make the second.  I see no reason to ignore that factual reality in the face of the appellant’s express concession that on a normal application of the usual rules of causation this appeal must fail.”

In essence therefore, Lord Justice McCombe considered that the majority were not properly applying the “but for” test and were applying form over substance.

De Villiers has applied for permission to appeal to the Supreme Court contending that the Court of Appeal has not properly applied the “but for” causation test in accordance with Nykredit.  The nub of the application appears to be that the majority in the Court of Appeal focused on the commercial expectations of the parties rather than the factual position at the date of valuation.


Despite submissions to the court to disapply the standard “but for” causation test, both the Judge at first instance and the Court of Appeal considered it correct to apply that test and proceeded to purport to do so, albeit with very different results.  The first point to note therefore is that the courts are, at least on the face of it, seeking not to enter into the “peril” of tampering with that test as warned against by Lord Brown of Eaton-under-Heywood in Sienkiewicz v Greif UK Limited [2011] UKSC 10.

The law as it currently stands on the basis of the Court of Appeal’s decision is obviously favourable to lenders and worrying to valuers. A lender can now be confident that it can recover its full loss in the event of a negligent valuation, not just the amount by which any refinancing exceeds the original advance, and it will make no difference to its claim whether it has carried out a full refinancing exercise or a top up of the original loan. The lender would be wise however to take advantage of the clarity offered by the Court of Appeal and structure its borrowing so that it is always granting a fresh loan backed with new security, and possibly on further different terms to the original loan.

A valuer who is being instructed in relation to what appears to be a ‘top up’ and who has had no prior involvement with the loan, will now need to be very careful to set out the limited scope of its duty in its retainer or attempt to limit its liability to that top up amount.  Alternatively, they will want to seek some comfort as to the nature of the refinancing to establish whether it is being granted as a genuine ‘top up’ or whether a redemption is being effected. Discovery of such information and limitation of scope of duty / limitation of liability may however not be easy for a valuer in practical terms since many will often be instructed routinely on the basis of a lender’s standard terms which are not amenable to negotiation.

It remains to be seen whether the Supreme Court will grant permission to appeal. On the one hand, it would be beneficial for it to weigh in on the correct application of the “but for” test given the number of claims which may fall into a similar category to Tiuta. However, the Court of Appeal was keen to point out, (by way of postscript from Lord Justice Moore-Bick), that the whole debate of this point by Tiuta and De Villiers may be a purely academic and costly exercise as it is based on assumed facts which, it is understood, remain hotly contested. In those circumstances, the Supreme Court may decide not to get involved; however, it will still be necessary to consider its forthcoming judgment in Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629 which is due to be heard between 21 and 24 November 2016. The case concerns a claim by a lender for damages against a firm of accountants for negligence in the production of a due diligence report on the borrower and whether the lender can recover damages representing loans that were repaid by the borrower. In Swynson Lord Justice Davis expressly endorsed the finding in Preferred Mortgages. The appeal is likely to focus on the principle of res inter alios acta but it is possible that the Supreme Court may also take the opportunity to pass comment on whether courts should be looking at the substance of a transaction rather than its form. Given the reasoning of the Court of Appeal in Tiuta, that may impact on the effect of the principle in Preferred Mortgages to scenarios such as Tiuta found itself in.


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