Negligence

Citation

(1999), "Negligence", Property Management, Vol. 17 No. 4. https://doi.org/10.1108/pm.1999.11317dab.007

Negligence

The following case illustrates the ever growing sphere of influence of the tort of negligence and will cause concern to the accountants and lawyers who traditionally act as receivers.

Medforth v. Blake [1999] 29 EG 119 concerned a pig farming business owned by the claimant who had been running it on money borrowed from the Midland Bank. The loan was secured by two agricultural charges in the bank's favour made in July 1982. Both charges were in identical terms giving the bank the power to appoint receivers. The receivers were to have a number of powers to generally deal with the property and the business. The most crucial provision was as follows:

Any receiver or receivers so appointed shall be deemed to be the agent of the farmer and the farmer shall be solely responsible for his or their acts or defaults and for his or their remuneration.

The farmer's indebtedness increased and in 1984 the bank exercised its power to appoint receivers. It nominated two partners in a major accountancy firm. They ran the pig farm until September 1988 when new arrangements enabled the claimant to pay off the charges and the receivers were discharged.

The claimant made a number of complaints about the way in which the business had been run by the receivers. In particular, he asserted that the receivers had failed to negotiate discounts on bulk purchases of pig food that would have amounted to about »1,000 per week. He alleged that this amounted to a breach of their duty of care. The receivers argued that the only duty they owed to the claimant was a duty to act in good faith and this they had done.

The question for the court was the precise extent of the receivers' duty and this was tried as a preliminary issue. The trial judge ruled that the receivers' duty included an equitable duty of care. The defendants appealed against this ruling.

Before the Court of Appeal the defendants conceded that a mortgagee owes a duty of care to the mortgagor to get the best price when exercising a power to sell mortgaged property. Also that a mortgagee who takes possession of the property must account for the income that could have been generated by exercising due diligence. Furthermore, that a receiver would owe a duty of care to the mortgagee for the handling of the property. Yet, despite all of these concessions, the defendants argued that a receiver's duty to the mortgagor extended only to act in good faith.

This argument met with no sympathy from Sir Richard Scott VC who stated:

The proposition that, in managing and carrying on the mortgaged business, the receiver owes the mortgagor no duty other than that of good faith offends, in my opinion, commercial sense. The receiver is not obliged to carry on the business. He can decide not to do so. He can decide to close it down. In taking these decisions he is entitled, and perhaps bound, to have regard to the interests of the mortgagee in obtaining repayment of the secured debt. Provided he acts in good faith, he is entitled to sacrifice the interests of the mortgagor in pursuit of that end. But if he does decide to carry on the business why should he not be expected to do so with reasonable competence?

After a review of the case law his lordship concluded that the legal position is as follows:

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  A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption.

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  The duties include, but are not confined to, a duty of good faith.

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  The extent and scope of any duty additional to that of good faith will depend on the facts of the particular case.

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  In exercising the powers of management the primary duty of the receiver is to try to bring about a situation in which interest on the secured debt can be paid and the debt itself repaid.

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  Subject to that primary duty the receiver owes a duty to manage the property with due diligence.

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  Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor.

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  If the receiver does carry on a business on the mortgaged premises, due diligence required reasonable steps to be taken in order to do so profitably.

As this was merely a preliminary issue the court was not required to decide whether the defendants were actually in breach of their duty of care. Nevertheless this decision must be of interest to those professionals who may act as receivers or to the advisors of those whose businesses are taken into receivership.

The following case by contrast, illustrates a situation in which the law is reluctant to extend the ambit of negligence.

Barex Brokers Ltd v. Morris Dean & Co (a firm)[1999] PNLR 344

The defendant surveyor had provided a written valuation at the request of brokers acting for the borrowers. The valuation report was addressed to "the prospective lender of the applicant". It was expected that the loan would be made by Charles Mills Securities Ltd. but in the event they were unable to provide the loan and the plaintiff stepped in as lender. The money actually passed directly from the plaintiffs to the borrowers. However, the documentation was drawn up and completed in the name of Charles Mills Securities and the legal charge was registered in the same name. It was then transferred or assigned to the plaintiff.

The case actually arose out of an application by the plaintiff for an extension of time in which to serve a notice of appeal on the Rochdale County Court. In order to deal with the procedural problem, the crucial question for the Court of Appeal to decide was who made the loan?

Lord Justice Hutchinson concluded that what happened in law was that the loan was initially made by Charles Mills. A legal charge was executed in their favour and that charge was then assigned to the plaintiffs in return for the plaintiffs paying Charles Mills the amount which Charles Mills had in law advanced to the borrowers. The fact that the money had in fact passed directly to the borrowers was, he declared, irrelevant. "... reality is not necessarily the same thing as correct legal analysis."

The making of the loan was crucial for the creation of the duty of care. Hutchinson L J followed dicta of Lord Griffiths in Smith v. Eric Bush [1990] 1 AC 831,865 where he said "...the extent of liability is limited to the purchaser of the house. I would not extend it to subsequent purchasers."

Lord Hutchinson, therefore, concluded that any potential liability of the defendants crystallized at the moment the loan was made in favour of the maker of the loan and that duty cannot attach to anyone who may subsequently acquire by assignment the rights of the original lender. Thus, the defendants did not owe a duty of care to the plaintiffs.

This judgement may seem rather harsh and technical but it does have the virtue of being relatively easy to apply. Any other decision which acknowledged the factual reality of the way in which this particular loan was made would have been much less certain and thus more difficult to apply in future cases.

The case also illustrates the courts' unwillingness to interpret liberally the decision in Smith v. Eric Bush. This must be good news for surveyors.

Jameson v. Central Electricity Generating Board [1999] 2 WLR 141

This case concerned an action against joint tortfeasors. It should be remembered that joint tortfeasors are persons whose share in the commission of the tort has resulted from concerted action in the furtherance of a common design. For example, principal and agent; partners. Their liability is joint and several. However, the important point for this case is that the release under seal, or by way of accord and satisfaction, releases all. This is not the case with concurrent tortfeasors.

The facts of the case are simple, if sad. Mr Jameson was dying from malignant mesothelioma. He had claims against Babcock and the Central Electricity Generating Board (CEGB). Shortly before his death he settled his claim against Babcock, for »80,000 which was less than the full amount of his claim against the joint tortfeasors which was put at £130,000. The terms on which the money was paid were "...in full and final settlement and satisfaction of all the causes of action in respect of which the plaintiff claimed in the statement of claim." Before receiving any of the money under the settlement Mr Jameson died. His widow then sought to bring a dependency claim under the Fatal Accidents Act 1976 against CEGB, the alleged joint tortfeasors with Babcock. CEGB argued that the settlement with Babcock was a bar to the widow's claim. The argument failed in the Court of Appeal but succeeded in the House of Lords.

Their Lordships decided that the answer to the question of whether the widow's claim was barred depended on the construction of the settlement agreement. The critical question was not whether the plaintiff had received the full value of the claim in the settlement with Babcock but whether that sum was intended to be in full satisfaction of the tort. It was held that as the money was accepted in full and final satisfaction of all his causes of action in the statement of claim the claim against CEGB was thus barred.

The lesson from this case is that where there are joint tortfeasors the plaintiff in any settlement negotiations must make it clear that he is reserving his rights to proceed against any other tortfeasors.

100 Old Broad Street Ltd and others v. Sidley and others [1999] EGCS 65

Briefly, the defendants were engaged to advise on the impact of an intended development at 100 Old Broad Street in the City of London on the neighbour's right to light. In January 1990 the defendants advised, wrongly, that the proposed development would have insufficient impact on the neighbour's rights to warrant injunctive relief. If the plaintiffs were sued the outcome of such an action would be a "relatively modest award of damages." Subsequently another firm of experts advised that the proposed scheme would have an impact on the neighbour's right to light such as to warrant an injunction. Negotiations with the neighbour revealed that they would be unwilling to settle for monetary compensation and all design work on the scheme was halted in June 1991. In October 1991 a revised scheme which avoided the legal problems was brought out but by this time the country was in recession and the plaintiffs had concluded that a speculative office scheme in the City of London had become uneconomic. In November 1993 the plaintiffs issued a writ alleging negligence on the part of the defendants. However, in January 1994 the economic climate had changed once again and the developers restarted with a radically new plan which fronted onto London Wall rather than Old Broad Street. Full planning permission for the new scheme was granted in October 1995 and the building was constructed.

At a hearing before the Official Referee in 1996 the plaintiffs claimed damages of »11.122 million for wasted expenditure on design and other professional fees over the period January 1990 to June 1991. Alternatively, they claimed »2.932 million being the reasonably foreseeable costs that the plaintiff would have incurred on amending the original Old Broad Street Scheme if they had been correctly advised in January 1990. The defendants admitted a breach of contract but contended that their advice was not the cause of either head of damage. At the trial this was accepted and the plaintiff was awarded only nominal damages. The plaintiffs appealed.

The full report of the case is not available at this time and thus the arguments cannot be analysed. However, the appeal was dismissed on the following grounds: First, the trial judge was correct in finding on the evidence that even if correct advice had been given the plaintiffs would have acted in the same manner, revising the original scheme and then abandoning it for the duration of the recession, and finally building the current scheme which was more advantageous to them. Thus the fees expended on the two original Old Broad Street schemes would have been wasted in any event. It followed that the defendant's negligence, although a factual cause of the increased expenditure, was not the "effective" or "dominant" cause of the plaintiff's loss. (Monarch Steamship Co. Ltd v. A/B Karlshamns Oljefabriker [1949] AC 196; Quinn v. Burch Bros (Builders) Ltd [1966] 2 QB 370; Galoo Ltd v. Grahame Murray (a firm) [1994] 1 WLR 1360.) The defendants could not be held liable for a loss that would have occurred in any event even if the advice had been accurate. (Per Lord Hoffman in South Australia Asset Management Corpn v. York Montague Ltd [1996] 2 GLR 93 also Lee R (1997) "A valuer does not need a crystal ball" Property Management Vol. 15 No. 1).

Second, in deciding what the plaintiff would have done if properly advised the relevant date was June 1991 when the cause of action arose. The claim for the alternative head of damages rested on the proposition accepted by the House of Lords in Ruxley Electronics and Construction Ltd v. Forsyth [1996] AC 344, that damages may be claimed for the anticipated cost of rectifying a breach provided that the intention to rectify is genuine and reasonable in the circumstances. However, it is also a rule that a change in the relevant circumstances between the date when a cause of action arose and the date of the trial should be taken into account when assessing damages (per Lord Hoffman in SAAMCO (supra) p. 97B). Although the plaintiff did initially have a claim any intention to rectify was abandoned when the plaintiffs adopted the new London Wall scheme before the trial in 1994. Thus to allow recovery under this head would be to compensate the plaintiffs for a loss they had not suffered.