The Supreme Court considered a claim for damages (in contract and tort) by a lender against a professional valuer for its alleged negligence in valuing a property that was being developed, and whether the lender was owed a duty of care.
- Whether a lender to whom a land valuation report was not addressed is owed a duty of care and may seek to rely on that advice; the standard of care of reasonable care and skill; whether damages may be apportionable for contributory negligence and concurrent wrongdoing.
The plaintiff, Payton Securities Pty Ltd (‘Payton Securities’), lent $3,250,000 to Z&L Property Management Pty Ltd (‘Z&L’) secured by a mortgage over a property at Diamond Creek, VIC (‘the Property’).
Z&L was to develop the Property into a group of residential lots. Bertacco Ferrier Pty Ltd (‘Bertacco Ferrier’), valued the Property at the request of Payton Capital (which was another corporate entity in a group of companies which included Payton Securities). Prior to advancing the loans, Payton Securities required confirmation from Z&L that all 28 lots in the first stage of the relevant development had been presold. To that end, Z&L’s finance broker, the seventh defendant MXW Finance Pty Ltd (‘MXW Finance’), forwarded Payton Securities documents stating that all 28 lots had been sold at a total price of $12,540,000, and that the deposit monies were held in the trust account of Z&L’s estate agent, the first defendant Mason White McDougall (Hurstbridge) Pty Ltd (‘MWM’). The documents provided by MXW Finance included a letter to that effect apparently on MWM’s letterhead.
It later emerged that MXW Finance falsified the documents it provided by significantly overstating the number of pre-sales and the deposit moneys were not held by MWM as asserted. MWM denied that it had prepared the relevant letter purportedly sent in its name.
Z&L defaulted and was later placed into liquidation. Payton Securities then took possession of and sold the Property, however suffered a shortfall on the loan. Payton Securities claimed damages against seven defendants, including the 4th defendant Bertacco Ferrier for its alleged negligence in valuing the Property.
Prior to the hearing, Payton Securities settled its claims with two of the other defendants. The claim continued against Bertacco Ferrier alone for $1,467,940, after allowing for the settlement sums received from the other two defendants. The court also had to determine the extent of the other defendants’ liability to Payton Securities as a result of Bertacco Ferrier’s proportionate liability defence, and the liability to Payton Securities of other parties who were joined as defendants by Bertacco Ferrier.
The decision at trial
The court considered Payton Securities’ claim (in contract and tort) and whether Bertacco Ferrier was in breach of its duty to take reasonable care and skill owed in contract and tort to Payton Securities in negligently valuing the Super Lot (consisting of 24,490 square meters on the western side of the Property).
The court dismissed the claim against Bertacco Ferrier and made the following findings:
Payton Securities’ claim in contract
In relation to the claim in contract, it was argued that Bertacco Ferrier had breached a contractual obligation to exercise due skill and care in valuing the Property. The court observed that Bertacco Ferrier will have breached that obligation if it failed to exercise the standard of care and skill ordinarily exercised by a professional valuer. Whether it had met the requisite standard of care had to be determined having regard to the circumstances at the time the valuation was carried out, and without the benefit of hindsight.
In assessing any breach of duty, the court commented that 'the standard of reasonable care and skill is not a standard of perfection. Not every error resulting in loss is negligent'.
It did not accept Payton Securities’ claims that Bertacco Ferrier had in its valuation failed to consider the area of the Super Lot affected by a power line easement over the property, nor a proposed high density development, or a proposed infill development.
However, the court did find that Bertacco Ferrier was negligent because the valuation failed to consider to a reasonable extent the significance of a draft bushfire management overlay plan which impacted the Property. However, 'Bertacco Ferrier’s negligence in preparing its valuation had no impact or no significant impact on the assessment of value for the Property as a whole, or on that portion of value (which related to the Super Lot).' and 'There is no negligence on the part of Bertacco Ferrier causing loss to Payton Securities.' The court described this as a 'limited form of negligence'.
In any event, the court found that Payton Capital retained Bertacco Ferrier, and not Payton Securities. In addition, there was no evidence to support a finding that Payton Capital retained Bertacco Ferrier as the undisclosed agent for Payton Securities. To the contrary, the court found that there was an intention by Payton Capital and not Payton Securities, to retain Bertacco Ferrier.
On that basis, the contractual claim of Payton Securities failed.
The claim in tort
The court found that Bertacco Ferrier did not owe a duty of care to Payton Securities because the valuation was not addressed to Payton Securities and because it was not reasonably foreseeable that the Bertacco Ferrier Valuation would be relied upon by Payton Securities for the purposes of a second mortgage mezzanine loan.
The court identified two critical factors in finding that a duty of care was not owed by Bertacco Ferrier to Payton Securities. First, Bertacco Ferrier believed entirely reasonably that the only entity which might rely upon its valuation was Payton Capital, not Payton Securities. 'If any claim in tort was open, it would be open only to the contracting party and addressee of the alleged negligent misstatement, Payton Capital'. Further, 'there was no assumption of responsibility to a wider class. Bertacco Ferrier in fact expressly disclaimed responsibility to anyone but Payton Capital.'
Second, 'it was not reasonable for Bertacco Ferrier to contemplate that a loan would be advanced in reliance on the Bertacco Ferrier Valuation otherwise than by a first mortgagee lender. There was no expectation on the part of Bertacco Ferrier that its valuation would be used for the purposes of a high risk mezzanine finance loan, much less any assumption of responsibility by Bertacco Ferrier towards a lender of this kind.'
Any reliance by Payton Securities on the Bertacco Ferrier valuation was not reasonable and if any loss resulted from that reliance (which was not found), the loss was not reasonably foreseeable.
Contributory negligence and apportionment
The Court rejected an argument by Payton Securities that it could not be found contributorily negligent because the 'risk of harm' as referred to s 66 of the Wrongs Act 1958 dealing with contributory negligence, was a reference to the same risk of harm in s 48 of the Wrongs Act, which addresses the general principles on the existence on negligence and, specifically, the reasonable precautions a defendant is supposed to take against an identified risk of harm.
In this case, Payton Securities submitted it could only be contributorily negligent if it overvalued the property, which was the same risk that Bertacco Ferrier was to address.
The Court disagreed on the basis that it identified the risk of harm as economic loss, not the narrow formulation put forward by Payton Securities, which 'conflates the event that Bertacco Ferrier was required to take reasonable steps to protect against with the harm that flows to Payton Securities from that event.'
The plaintiff otherwise conceded its claim was an apportionable claim within the meaning of ss 24AE & AF of the Wrongs Act 1958. Bertacco Ferrier argued that the primary cause of the loss was the fraudulent conduct of the directors of the developer company, aided by the financier and the real estate agent, and that its liability should therefore be significantly reduced or extinguished. After reviewing the evidence, the court determined that if it had been necessary to apportion liability, it would have allocated 55% to the borrower company directors, 17.5% to the financier and 27.5% to the valuer Bertacco Ferrier.
However, given the liability findings, the claim against the valuer was dismissed.
Implications for you
The case ultimately turned on there being no contractual relationship between Payton Securities and the valuer, Bertacco Ferrier, who was retained by Payton Capital.
The cases serves as a reminder on the importance of :
- A clear written retainer i.e. setting out the scope of services to be provided by the adviser to the principal, who is clearly identified (noting the absence of a contractual relationship may impact any claim in tort / contract);
- A clear statement of opinion from the adviser stating the instructions received from the principal, and any qualifications, questions or reservations they have (if relevant) in reaching their opinion, and
- A clearly worded disclaimer that the advice/opinion has been prepared on the basis that it may only be used or relied on by the person to whom it is addressed.
Finally, it is worth noting the comment, which can perhaps be applied to other professionals and not just valuers, that the standard of reasonable care and skill to which a professional adviser is to be held is not 'a standard of perfection', and that that they may not be held liable for every error.