The lender advanced $2.3m on a first mortgage on the basis of a $3.6m valuation. The lender ultimately the security for $1.7m. The first, second and third mortgagees all sued the valuer.
The trial judge found the valuer was found guilty of misleading and deceptive conduct and negligent. The valuer had negligently treated another property as comparable by failing to distinguish between the different markets in the north and south of the suburb in question.
The three lenders were awarded their loss of principal and also consequential losses of the opportunity to earn interest and other fees on the monies advanced. However these damages were then reduced by 25% by reason of their contributory negligence in failing to make proper inquiries about the couple’s capacity to service their loans.
The contributory negligence by the lenders was ignoring that the borrower did not have the capacity to service the loan, his previous payment history was unsatisfactory, his tax return stated that his income was nil.
The valuer appealed on the question of contributory negligence and the Court of Appeal increased the contributory negligence of the lenders from 25% to 50%.
The Appeal Court noted that it will not usually interfere with a trial court finding of contributory negligence. A just and equitable apportionment of responsibility necessarily involves a comparison of culpability, in terms of the degree of departure from the reasonable man test. However the primary judge failed to do this. The Appeal Court found that the primary judge did not distinguish between the valuer’s and the mortgagees’ culpability or the causal potency of each of their conduct to arrive at his finding of apportionment making the valuer’s default more than twice as responsible for the lenders’ loss.
There was no finding of gross negligence by the valuer to provide a rationale for the apportionment. Given the trial judge found that both had simply fallen below their respective standards, but one not more so than the other, the differing apportionment was incorrect. The Appeal Court held that their respective departures was as serious as each other and found the lenders contributory negligent to the extent of 50% not 25%.
The Appeal Court rejected the valuer’s contention that the second and third mortgagees were contributory negligent to a greater degree and noted that riskier lending practices did not affect their obligation to investigate the capacity of borrowers to service their loans because all three lenders required the couple to establish their ability to service their loans as a condition of their offers–they set the standard by which they all fell short.
The valuer also appealed the finding of consequential loss. The Appeal Court found that it is not essential to refer to particular transactions lost provided there is evidence before the court which shows that the lender lost an opportunity to make alternative advances. One method adopted by the court is to determine the value of the opportunity and then take account of the probability of realising it (which would take account of how many loans went bad in previous financial years and the chance that an alternative loan may not have been entered into). The primary judge found that the fact that the first mortgagee always had a prospectus on issue provided evidence of a strong demand for its loans and allowed 5% for the risk of default on any alternative loan and 80% for the probability of realising such opportunity. The Appeal Court agreed with this approach and dismissed the valuer’s appeal on this issue.