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Judgment - Nykredit Mortgage Bank Plc. v. Edward Erdman Group Ltd.  continued

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    In D.W. Moore and Co. Ltd. v. Ferrier [1988] 1 W.L.R. 267 the measure of damages was the measure sometimes loosely referred to as the contract or warranty measure. Had the solicitor done his job properly the plaintiffs would have obtained the benefit of an effective restraint of trade covenant. As it was, they received a worthless covenant. They suffered damage when the transaction was entered into. Bell v. Peter Browne & Co. [1990] 2 Q.B. 495 is a similar type of case. The solicitors could and should have protected the plaintiff's continuing interest in the house he was transferring to his wife. He suffered damage when he parted with the house without that protection. Similarly in Baker v. Ollard & Bentley (1982) 126 S.J. 593: the solicitors failed to ensure that the plaintiff obtained security of occupation of the first floor as they could and should have done. She sustained loss when that occurred. Likewise in the insurance broker cases of Iron Trade Mutual Insurance Co. Ltd. v. J.K. Buckenham Ltd. [1990] 1 A.E.R. 808 and Islander Trucking Ltd. v. Hogg Robinson & Gardner Mountain (Marine) Ltd. [1990] 1 A.E.R. 826: the brokers should have obtained valid and effective insurance or reinsurance contracts. The plaintiffs suffered loss when the brokers failed to do so, since the voidable contracts were of less commercial value.

    In UBAF Ltd. v. European American Banking Corporation [1984] Q.B. 713 the measure of damages called for a comparison between the position of the plaintiffs as it would have been had they not made the loans and the position of the plaintiffs as participants in the loan agreements. The Court of Appeal, comprising Ackner and Oliver L.JJ., declined (at page 725E) to accept that it was self-evident that by entering into the transaction the plaintiffs were worse off. It was possible, even if unlikely, that the rights they acquired when they lent their money were at that time worth as much as the amount of the loans. The facts would need to be established at trial. Finally, of the English authorities, is First National Commercial Bank Plc. v. Humberts (a firm) [1995] 2 A.E.R. 673 where the court drew the distinction between the two different measures of damages. The evidence established that the financing deal made by the plaintiffs was less valuable than it would have been had the defendants' valuation been correct. As Saville L.J. pointed out, at page 676e, that was not the relevant measure of damages in that case. The relevant measure involved comparing what the plaintiffs paid out and what they received under the transaction. On the evidence the plaintiffs did not suffer any relevant damage when they parted with their money and entered into the transaction. It was not until after March 1984, within the limitation period, that their outlay plus cost of borrowing or notional profit obtainable elsewhere exceeded the value of the security.

    In Wardley Australia Ltd. v. Western Australia (1992) 109 A.L.R. 247 the High Court of Australia considered the meaning of "loss or damage" in the context of a cause of action for the recovery of loss or damage created by section 82 of the Trade Practices Act 1974. The court held that the indemnity given by the State generated a contingent liability and that the State, as the person misled into giving the indemnity by misrepresentations, did not suffer loss or damage for the purposes of the statutory cause of action until, in short, the contingency occurred. Of the wider observations made in the course of the judgments, Brennan J. stated that a transaction which involves benefits and burdens results in loss or damage only if an adverse balance is struck. Loss cannot be said to be suffered until it is "reasonably ascertainable" that by bearing the burdens the plaintiff is worse off than if he had not entered into the transaction.

    In the present case the borrower's covenant was worthless. The borrower defaulted at once, and the amount lent (£2.45 million) at all times exceeded the true value of the property (£2.1 million). Thus the cause of action arose at the time of the transaction (12 March 1990) or thereabouts. By December 1990 the bank had sustained its full allowable loss of £1.4 million. I would award simple interest on that amount from 12 December 1990 until judgment at the agreed rate of 0.4 per cent above LIBOR.

Interest on costs orders

    Judgment debts carry interest by virtue of the Judgments Act 1838. For this purpose an order for payment of costs ranks as a judgment. Interest on costs runs from the date on which the order for payment is made (the so-called incipitur rule), not from the (later) date on which the amount of costs is quantified (the allocatur rule). This was decided in Hunt v. R.M. Douglas (Roofing) Ltd. [1990] 1 A.C. 398.

    The application of this principle is straightforward in relation to the costs order made by your Lordships' House in the present case concerning costs incurred on the appeal to the House. But the costs order made by this House also embraced some of the costs incurred by the valuers in the appeal to the Court of Appeal. The Court of Appeal had dismissed the valuers' appeal with costs. This House set aside the order of the Court of Appeal, and varied the order of the trial judge by reducing the amount of damages. The House ordered the bank to pay the costs incurred by the valuers in respect of the appeal to the House and also, and this is the relevant part of the order, the costs incurred by the valuers in the Court of Appeal on the issue of quantum. In respect of the latter costs the valuers seek interest from the date on which judgment was given in the Court of Appeal, in like manner as would be the position if the Court of Appeal had on that date made an order for payment of those costs to the valuers. They seek an order similar to the backdated order which the Court of Appeal approved in Kuwait Airways Corporation v. Iraqi Airways Co. (No. 2) [1994] 1 W.L.R. 985.

    I have to say that in the Kuwait Airways case the court was lured into error. It let its heart rule its head. Statute apart, courts have no power to award interest on costs. The statutory power is found in sections 17 and 18 of the Judgments Act 1838. Before then interest was not recoverable on costs. The discretionary power to award interest conferred by section 35A of the Supreme Court Act 1981 does not apply because it is confined to the payment of interest on a debt or damages. In the Kuwait Airways case the court found an alternative source of jurisdiction in R.S.C. Order 42 rule 3, which provides:

    "(1) . . . a judgment or order of the Court . . . takes effect from the day of its date
    "(2) Such a judgment or order shall be dated as of the day on which it is pronounced, given or made, unless the Court . . . orders it to be dated as of some other earlier or later day, in which case it shall be dated as of that other day."

Leggatt L.J. observed, at page 987E, that when the Court of Appeal reverses an order for costs given on a final judgment in the court below, it will ordinarily be just to backdate that part of its order as to costs which relates to the costs of the action.

    However desirable it might be for the court to have power to order the payment of interest on costs from a date earlier than the date on which the court gives judgment, I do not think such a power can be squeezed out of this rule. That would be to use the rule as a means of doing indirectly what the court has no power to do directly. Whatever is the ambit of this rule, it cannot be a proper use of the rule to backdate a judgment, so far as it relates to costs, with the sole object of thereby bringing into operation statutory judgment debt interest from a date earlier than the date on which in fact judgment was given. Interestingly, when giving some examples of when a court might backdate an order, Sir David Cairns in Covell Matthews & Partners v. French Wools Ltd. [1978] 1 W.L.R. 1477, 1487, gave a money judgment as a form of order which could clearly could not be backdated so as to carry interest under the Judgments Act 1838 from an earlier date.

    Indeed, the actual decision in the Kuwait Airways case illustrates the inappropriateness of using Order 42 rule 3 as a means to award a reasonable rate of interest on costs incurred in a lower court. Judgment Act interest attaches automatically to judgment debts, at the prescribed rate. In Kuwait Airways the relevant period covered by the proposed backdating was from 3 July 1992 to 21 October 1993. On 3 July 1992, the date of the trial judge's judgment, the prescribed rate of interest was 15 per cent, described by Nourse L.J., at page 990D, as an unnaturally high rate compared with base lending rate plus 2 per cent. The court had no power to vary the rate of interest payable on a judgment debt. To achieve the effect, which the court could not do directly, of reducing the applicable rate of interest, the court backdated the costs order, not to 3 July 1992, but to an intermediate date, 1 February 1993, so as to avoid unfairness to the paying party.

    In my view the Kuwait Airways case was wrongly decided. The court has no power to order interest as asked by the valuers in this case. Order 42 rule 3 cannot properly be used to fill a lacuna in section 35A of the Supreme Court Act 1981. This rule is intended to confer a power which, of its nature, is exceptional. This is so even though the requirement for "special leave of the court" is no longer included in the rule. But the principle espoused in the Kuwait Airways case would mean that it would be the standard practice to antedate part of the costs orders made by the Court of Appeal. That would be a misuse of the power. I agree with the observations of Bankes L.J. in Belgian Grain and Produce Co. Ltd. v. Cox & Co. (France) Ltd. [1919] W.N. 317.

Interest on repayable damages and costs

    The effect of the decision of this House given last June was that some of the money previously paid by the defendants to the plaintiff as damages and costs, pursuant to orders of the Judge and of the Court of Appeal, fell to be repaid to the defendants. This has given rise to the question whether, when ordering repayment, the House has jurisdiction to award interest on the money ordered to be repaid.

    I am in no doubt that the answer to this question is yes. The court has no general, inherent power to order the payment of interest. But the situation now under consideration is not directed at requiring a defendant against whom the plaintiff has a cause of action to pay interest on money to which the plaintiff's cause of action entitles him. Nor is it directed at requiring him to pay interest on unpaid costs. Rather, when ordering repayment the House is unravelling the practical consequences of orders made by the courts below and duly carried out by the unsuccessful party. The result of the appeal to this House was that, to the extent indicated, orders made in the courts below should not have been made. This result could, in some cases, be an idle exercise unless the House were able to make consequential orders which achieve, as nearly as is reasonably practicable, the restitution which this result requires. This requires that the House should have power to order repayment of money paid over pursuant to an order which is subsequently set aside. It also requires that in suitable cases the House should have power to award interest on amounts ordered to be repaid. Otherwise the unravelling would be partial only.

    This power seems to me to fall squarely within that range of powers which are necessarily implicit if a court of law possessed of appellate functions is to carry out its prescribed functions properly. It is, as such, a power derived from what is usually referred to as the inherent jurisdiction of the court. It is a power equally possessed by the Court of Appeal consequential upon orders made by it. The only surprising aspect of this power is that its existence has not previously arisen for decision.


My Lords,

    I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Nicholls of Birkenhead, with whom I agree. I add some words of my own only upon the question of the proper method of calculating the interest payable to the lender, Nykredit Mortgage Bank Plc. ("Nykredit"), upon the damages of £1.4 million which it recovered from the valuers, Edward Erdman Group Ltd ("Erdman").

    Section 35A of the Supreme Court Act 1981 gives the court power to award interest on "all or any part of the debt or damages in respect of which judgment is given . . . for all or any part of the period between the date when the cause of action arose and . . . the date of the judgment." It is accepted that in principle Nykredit should be awarded interest upon the judgment but there are disputes, first, as to the date upon which the cause of action may be said to have arisen and, secondly, as to the way in which the discretion conferred by section 35A should be exercised.

    Nykredit say that the cause of action arose as soon as the money was lent. On 12 March 1990 it advanced £2.45 million on the security of a property which, it is now agreed, was worth only £2.1 million. It therefore suffered immediate loss and damage in the sum of £350,000 and this loss subsequently increased as the value of the property fell and the arrears of interest mounted. It cannot recover more than £1.4 million, because this is the amount by which Erdman overvalued the security. But the loss reached this amount by December 1990 and therefore Nykredit should be entitled to interest on £1.4 million from that date. It does not claim interest from the date of the advance because its £1.4 million claim to damages includes special damage in the form of interest which it had to pay until December 1990 on money borrowed to fund the loan: compare Wadsworth v. Lydall [1981] 1 W.L.R. 598. An award of interest under the statute from the earlier date would therefore be double counting.

    On the other hand, Mr. Berry Q.C. who appeared for Erdman, says that no cause of action accrued until Nykredit sold the mortgaged property in February 1993. The only loss for which Erdman was responsible was loss attributable to the deficiency in the security and such loss could not be determined until the security had been realised.

    A determination of the date upon which the cause of action arises is important not merely for the purposes of an award of interest under the Supreme Court Act 1981 but also for the purposes of limitation under the Limitation Act 1980. Under the latter statute, time runs from when the cause of action "accrued." Mr. Berry argued that this was not necessarily the same date as that upon which the cause of action "arose" within the meaning of section 35A of the 1981 Act but I think that the words have the same meaning.

    In order to decide when the cause of action arose, it is first necessary to recall, by reference to your Lordships' earlier judgment, precisely what the cause of action was. It was for breach of the duty of care owed by the valuer to the lender, which existed concurrently in contract and in tort. Your Lordships identified the duty as being in respect of any loss which the lender might suffer by reason of the security which had been valued being worth less than the sum which the valuer had advised. The principle approved by the House was that the valuer owes no duty of care to the lender in respect of his entering into the transaction as such and that it is therefore insufficient, for the purpose of establishing liability on the part of the valuer, to prove that the lender is worse off than he would have been if he had not lent the money at all. What he must show is that he is worse off as a lender than he would have been if the security had been worth what the valuer said. It is of course also the case that the lender cannot recover if he is, on balance, in a better or no worse position then if he had not entered into the transaction at all. He will have suffered no loss. The valuer does not warrant the accuracy of his valuation and the lender cannot therefore complain that he would have made more profit if the valuation had been correct. But in order to establish a cause of action in negligence he must show that his loss is attributable to the overvaluation, that is, that he is worse off than he would have been if it had been correct.

    It is important to emphasise that this is a consequence of the limited way in which the House defined the valuer's duty of care and has nothing to do with questions of causation or any limit or "cap" imposed upon damages which would otherwise be recoverable. It was accepted that the whole loss suffered by reasons of the fall in the property market was, as a matter of causation, properly attributable to the lender having entered into the transaction and that, but for the negligent valuation, he would not have done so. It was not suggested that the possibility of a fall in the market was unforeseeable or that there was any other factor which negatived the causal connection between lending and losing the money. There was, for example, no evidence that if the lender had not made the advance in question, he would have lost his money in some other way. Nor, if one started from the proposition that the valuer was responsible for the consequences of the loan being made, could there be any logical basis for limiting the recoverable damages to the amount of the overvaluation. The essence of the decision was that this is not where one starts and that the valuer is responsible only for the consequences of the lender having too little security.

    Proof of loss attributable to a breach of the relevant duty of care is an essential element in a cause of action for the tort of negligence. Given that there has been negligence, the cause of action will therefore arise when the plaintiff has suffered loss in respect of which the duty was owed. It follows that in the present case such loss will be suffered when the lender can show that he is worse off than he wold have been if the security had been worth the sum advised by the valuer. The comparison is between the lender's actual position and what it would have been if the valuation had been correct.

    There may be cases in which it is possible to demonstrate that such loss is suffered immediately upon the loan being made. The lender may be able to show that the rights which he has acquired as lender are worth less in the open market than they would have been if the security had not been overvalued. But I think that this wold be difficult to prove in a case in which the lender's personal covenant still appears good and interest payments are being duly made. On the other hand, loss will easily be demonstrable if the borrower has defaulted, so that the lender's recovery has become dependent upon the realisation of his security and that security is inadequate. On the other hand, I do not accept Mr. Berry's submission that no loss can be shown until the security has actually be realised. Relevant loss is suffered when the lender is financially worse off by reason of a breach of the duty of care than he would otherwise have been. This is, I think, in accordance with the decisions of the Court of Appeal in UBAF v. European American Banking Corporation [1984] Q.B. 713 and First National Commercial Bank Plc. v. Humberts [1995] 2 All E.R. 673.

    In the present case, the lender defaulted almost at once, well before the date in December 1990 from which Nykredit claims interest. There was ample evidence of relevant loss having been suffered before that date. The House therefore has jurisdiction to award interest from then under the 1981 Act. But how should the discretion be exercised? Nykredit claim interest on the whole sum of £1.4 million from 12 December 1990. By that time, Nykredit had sustained the whole loss attributable to the overvaluation. Simple interest at the agreed rate of 0.4% over LIBOR should therefore be paid on £1.4 million from that date.


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