The benefits of hindsight

In Canada Square Operations Ltd v Kinleigh Folkard & Hayward Ltd (17 September 2015, unreported), the claimant claimed against the defendant valuers for providing a negligent valuation, upon which the lender (who had assigned its rights to the claimant) relied in advancing ?a mortgage to the borrower ?in March 2006. 

The borrowers made regular payments until January 2007, ?but then payment became erratic until a final payment was made in January 2008. The property was subsequently repossessed and sold. The claimant sought the shortfall from the defendant and issued proceedings to recover ?the same on 23 October 2013.

The case is interesting for a number of reasons, including reliance (as there were two valuations) and limitation, although this article concentrates on the latter.

In this case, the issue was whether the cause of action in tort was statute barred. In his judgment, Mr Recorder Halpern QC summarised the basic comparison test in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd [1998] 1 ALL ER 305, which requires the court to value both the security and the borrower’s covenant, and to see whether, and if so when, their combined values became worth less than the amount outstanding from time to time under the mortgage. It was also held that there can only be one date on which the cause of action accrues.

In considering the matter, Halpern QC held that ‘the burden is on the claimant to establish a prima facie case that the cause ?of action accrued on a date within the limitation period; if that is established, the burden shifts ?to the defendant to show that it accrued outside the limitation period’.

Forms of hindsight

In determining the value of the borrower’s covenant, Halpern QC adopted the test of whether (i) the covenant appears good and (ii) interest payments are being duly made. In assessing the value of the covenant, he addressed whether hindsight should be taken into account. 

In doing so,the recorder distinguished between two types of hindsight: the first related to unexpected events that occur after the making of the loan, such as the borrower winning the lottery, and the second related ?to events which confirm or throw light on trends or risks that were apparent at the relevant date. ?In considering the same, he ?cited Lord Hoffman’s statement ?in South Australia Asset Management Co Ltd v York Montague Ltd (SAAMCO) [1996] ?27 EG 125: ‘The court was not obliged to take the borrower to be the prosperous tycoon which everyone thought him to be at the date of the valuation but could have regard to the fact that he had afterwards been shown ?to be a fraudulent bankrupt.’ 

He concluded that the ?second form of hindsight ?should be taken into account ?in assessing the value of the borrower’s covenant, so that parts of the expert evidence adduced by the expert – which the claimant objected to on the grounds of hindsight – were indeed permissible, and the court considered the missed payments, broken promises, ?and eventual bankruptcy of the borrowers, among other things. 

It was held that the claimant had discharged the prima facie burden of showing that the loss had not accrued by March 2006; however, Halpern QC found that the position changed upon considering the defendant’s expert evidence,  and accepted that his assessment of the ?value of the covenant left ?a considerable shortfall. ?He therefore concluded that the valuer had discharged the burden of showing that loss accrued in March 2006.

It was held that the claimant had failed to discharge the ?prima facie burden of showing that the loss had not accrued ?by 2 February 2007. The gap between the value of the security and the sum outstanding on that date was £18,550. Halpern QC said that if he was wrong about that date, he was satisfied that the claimant also failed to show the loss had not accrued in subsequent months, in particular by 2 June 2007, by which time the borrowers had paid nothing since March 2007.

This case shows the importance of looking into ?the detail of the facts, including the second form of hindsight, ?in respect of the borrower’s covenant in the context of the Nykredit test. Failure to do so could mean solicitors missing ?key limitation deadlines.

Eleanor Kilner is a solicitor at Weightmans@Weightmans www.weightmans.com