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A lender has had its level of contributory negligence increased
on appeal, from 25% to 50%.
Facts
As previously reported on pages 188 and 189 of the September
2011 edition of this journal, this case arose from a loan
transaction whereby the lender lent $2.8 million to borrowers
secured by a mortgage. This loan was in reliance upon a valuation
by a valuer, who valued the property at $3.6 million. The borrowers
defaulted and were unable to repay the loan, so the lenders sued
the valuer.
At first instance (Angas Securities Ltd & Ors v Valcorp
Australia Pty Ltd [2011] FCA 190), the court found that the
valuation was negligent and the valuer had misled and deceived the
lender. This was because the valuer had placed greater reliance on
sales that were not 'comparable'. However, the lender was
also found guilty of contributory negligence, assessed at 25%. The
finding of contributory negligence was based upon the lender's
failure to undertake certain serviceability enquiries of the
borrowers, prior to granting the loan.
On appeal, the valuer submitted that it could not be said that
its negligence reflected a substantially greater degree of
departure from the conduct of a reasonably competent valuer than
did the negligence of the lender reflect a departure from the
conduct of a reasonably prudent lender.
Although the valuer initially submitted that the court should
find that the lender was liable for 100% of its loss (on the basis
that the primary judge found that "had the [serviceability]
enquiries been made the loan would not have been made"), this
was not accepted.
In the end, the court found that, having regard to the relative
culpability of each party and because the reasons of the primary
judge did not disclose a basis to "distinguish between the
causal potency of the impugned conduct of each party", it was
just and equitable that each of the parties should be found equally
responsible for the loss suffered. On that basis, the lender was
found guilty of contributory negligence to the extent of 50%.
Impact
This case is a stark reminder that a valuer will not be
'automatically' liable for the entirety of any loss that is
suffered by a lender who lends in reliance upon a valuation.
Especially in respect of any failure by a lender to carry out
proper due diligence or adequate assessment/consideration of the
means and ability of the borrower to repay the principal loan,
interest and other charges (as was the issue in this case), it is
likely that a significant reduction for contributory negligence
will be made against the lender.
Although, in this case, the lender submitted that it viewed the
security as the principal consideration of whether the loan would
be made (meaning that serviceability became a secondary
consideration), there was still an obligation on the lender to make
a proper assessment of serviceability.
This appeal further demonstrates the need for lenders (even
those who profess to be security lenders) to properly conduct their
enquiries about a borrower's ability to service the loan. It is
not sufficient for a lender who does not solely rely on security to
claim that it was focusing on security as opposed to
serviceability.
In a case, unlike this, where a lender alleges a total security
loan (that is, a loan where little or no regard was had for the
borrower to demonstrate an ability to repay the principal and
interest repayments on the loan), that lender's loan to value
ratio would need to be at a lower than usual level. Valuers should
be very wary of accepting instructions for a valuation for mortgage
purposes where the lending is security lending. Know your
client's basis of doing business.
This publication is intended as a general overview and
discussion of the subjects dealt with. It is not intended to be,
and should not used as, a substitute for taking legal advice in any
specific situation. DLA Piper Australia will accept no
responsibility for any actions taken or not taken on the basis of
this publication.
DLA Piper Australia is part of DLA Piper, a global law firm,
operating through various separate and distinct legal entities. For
further information, please refer to www.dlapiper.com
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