Duty of Care - Case Law

Question 1

Hedley Byrne Vs Heller & Partners 1964

Answer 1

Main Point - Duty of Care. The court found the relationship to be sufficiently proximate for there to have been a duty of care.

Case - Hedley Byrne (Marketing Agency) asked Heller (Bank) about the financial performance of one of its clients Eazipower Ltd. Heller vouched for Easipower who subsequently went bankrupt. Hedley sued Heller.

Held - The court found the relationship to be sufficiently proximate for Heller to owe a duty of care to Hedley Byrne. If it had not been for a disclaimer Hedley would be required to pay damages.

The decision extends to valuers if they were to misrepresent information that could potentially affect a third party. Also, a disclaimer can emit some liability.

Question 2

Singer & Friedlander Vs John D Woods & Co 1977

Answer 2

Main Point - Duty of Care/Negligence/Margin of Error.

1. There is a duty of care required when preparing a valuation report that is to be relied upon by a lender.
2. Failure to inspect & relied upon the information given without verification of the fact.
3. The allowable margin of error is 10% or 15% in exceptional circumstances.

Case - Merchant bankers Singer & Friedlander lent money to Lyon Homes Ltd relying on a valuation of a 140-acre site out of Gloucester prepared by JD Woods & Co. Lyon Homes defaulted leaving S&F out of pocket, S&F then sued JD Woods.

Junior valuer inspected who relied upon advice of rezoning from farmland to residential that did not occur. Valuer failed to consider that the property had been valued 11 months earlier for $620k and assessed a MV of $2.2M.

JD Woods argued that valuation was not an exact science and queried what the benchmark for an allowable margin of error was.

Held -

1. The allowable margin of error is 10% or 15% in exceptional circumstances.
2. There is a duty of care required when preparing a valuation report that is to be relied upon by a lender.
3. Valuer found to be Negligent

Question 3

Corisand Investments Vs Druce 1979

Answer 3

Main point - Duty of Care. A valuer must guard against overconfidence in a ‘high’ market. Adjustments to a mortgage recommendation should be made if market conditions are uncertain or if there is a likelihood conditions may change.

Case - Corisand lent money to Albine Properties as a 2nd mortgage on a hotel near the end of a ‘property boom’ Property values declined and proceeds of the sale went to 1st mortgage leaving Corisand out of pocket. The valuation was for mortgage lending purposes, the market crashed, the client went bust and the property sold at a substantive discount.

Held - Claim against valuer was successful. Held that values should:

1. Exclude or identify ‘speculative content’ of valuation for lending in view of forced realisation of security.
2. Guard against overconfidence in a higher market, consider what the property might reasonably be worth in 6-12 months.
3. Temper mortgage recommendations if there is a chance of a fall in the market.
4. Valuations should exclude removable contents such as chattels.

Question 4

Yianni Vs Edwin Evans & Sons 1982

Answer 4

Main Point - Duty of Care

1. There is a duty of care owed to a purchaser (3rd party).
2. The doctrine of proximity limits the ‘distance’ that the report can be relied upon i.e. to the parties directly involved.

Case - Edwin Evans & Sons valued a property for the Building Society. Yianni (purchaser) relied upon the valuation despite being told that it was prepared for the Building Society (lender), was confidential and that they should obtain their own valuation. Defects subsequently found in the structure had a cost to repair that was greater than the assessed value of the improvements. The plaintiffs brought an action against the valuers for negligence. The defendants admitted negligence but contended that they only owed a duty of care to the Building Society.

Held - Valuer liable to Yianni (3rd party) given they were ‘sufficiently proximate’. It was also held that it was common knowledge that valuation reports prepared for the Building Society were relied upon by their clients (i.e. Yianni should have been able to rely upon the report).

Question 5

Main Duty of Care Cases

Answer 5

1. Hedley Byrne Vs Heller & Partners 1964 - Duty of care to 3rd party who is considered to be sufficiently proximate
2. Singer & Friedlander Vs John D Woods & Co 1977 - Duty of care to bank / negligence - inspection & zoning / margin of error 10-15%.
3. Corisand Investments Vs Druce 1979 - Guard against overconfidence & comment on market conditions
4. Yianni Vs Edwin Evans & Sons 1982 - Duty of care owed to 3rd party