Case No: HC010C4637
Neutral Citation No: [2003] EWHC 390 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION 
Royal Courts of Justice 
Strand, London, WC2A 2LL

Date: 5th March 2003

Before:

THE HONOURABLE MR JUSTICE HART

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Between:

SPESHAL INVESTMENTS LTD
Claimant
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CORBY KANE HOWARD PARTNERSHIP LTD (TRADING AS HBSV)
Defendant
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Mr Mark Dight (instructed by Teacher Stem Selby) for the Claimant
Mr Michael Soole QC (instructed by Reynolds Porter Chamberlain) for the Defendant

Hearing dates: 4th–11th February 2003
Handdown Judgment: 5th March 2003
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JUDGMENT
MR JUSTICE HART:

1.	This is an action by the claimant against the defendants, a firm of valuers, for negligence. On 4th February 2000 the claimants advanced the sum of £1.9m to a company known as Cheyne Lodge Investment Limited (“Cheyne”) on the security of the properties described below (“the Properties”) and the personal guarantees of two of Cheyne’s directors. It claims to have done so in reliance on valuations of the Properties provided to it by the defendants which advised that the Properties had values in the aggregate (based on an “estimated restricted realisation price”(”ERRP”) of £2.99m. The loan was for a period of three months, later extended to four, and was intended to provide Cheyne with bridging finance in connection with its acquisition of the Properties pending the conclusion of long term re-financing arrangements then being negotiated between Cheyne and Nat West Bank. Cheyne failed to pay on the due date, the claimant appointed receivers, and the Properties were in due course sold in early 2001 for some £875,000.

2.	Expert valuers retained respectively by the claimants and the defendants (Mr N.C. Boyd of Edward Symmons & Partners and Mr P.E.N. Haigh of Humberts Leisure) have agreed for the purposes of this litigation that the aggregate value of the Properties which ought to have been advised to the claimant by the defendants on the information then available in December 1999, again on the ERRP basis, was £1.13m. The defendants concede that their valuation cannot be supported.

3.	The defendants further concede that, if they are liable to the claimant, the quantum of loss suffered by the claimant (assuming no reduction for contributory negligence) is £1.38m.

4.	ERRP as defined in the RICS Appraisal and Valuation Manual means an opinion as to the amount of cash consideration before deduction of costs of sale which the valuer considers, on the date of valuation, can reasonably be expected to be obtained on future completion of an unconditional sale of the interest in the subject property assuming;

a)   a willing seller;

b)   that completion will take place on a future date specified by the Client (and recorded in the valuer’s Report) which does not allow a reasonable period for proper marketing (having regard to the nature of the property and the state of the market);

c)   that no account is taken of any additional bid by a prospective purchaser with a special interest; and 

d)   that both parties to the transactions will act knowledgeably, prudently and without compulsion

5.	In the present case all relevant valuations on the ERRP basis specified 3 months as the date for completion of the hypothetical sale It will be noted that one of the elements in the definition is that both parties to the transactions are assumed to be acting “without compulsion”. This may suggest that an ERRP is something different from a Forced Sale Valuation (FSV). It is clear that the claimant proceeded on the basis that an ERRP was equivalent to a FSV, and it was not suggested on behalf of the defendants that it was wrong to do so. I understand that, subsequent to the events that I have to consider, the RICS has in fact abandoned ERRP as a basis for valuation of commercial property.

6.	The claimant is the wholly owned subsidiary of a company SGI Limited (formerly Zedfleet Limited), which is itself 100% owned by Mr Peter Shalson. The claimant was incorporated as a special purpose company the business of which was intended to be the advance of money by way of short term bridging finance to commercial property borrowers. It was set up in early 1999, its sole director being Mr Barry Wiseman. Mr Wiseman’s function was to find suitable potential borrowers and to do the necessary ground work in connection with the structuring of the potential loans. For doing so he was to be remunerated entirely by commission paid by the borrower in the event of the successful negotiation of the loan. The amount of that commission was a matter for him to negotiate with the borrowers but was not to exceed 2% of the sum advanced. Mr Shalson (wisely it may be thought) secured an agreement from Mr Wiseman that in the event of a default by a borrower Mr Wiseman would have to make monthly payments, for a maximum of 6 months, of amounts equal to his commission to be held by the company unless and until the arrears were discharged.

7.	The claimant employed solicitors to draw up a standard documentation for use in making such loans, including in particular a standard form of facility letter. The solicitors also produced a set of “Lending Criteria” for use by the claimant. The principal criterion was that the loan should be no more than 70% of the forced sale valuation as advised by the valuer.

8.	In June 1999 the management of SGI Limited was strengthened by the appointment of a financial controller, Mr Daniel Wolinsky, a chartered accountant. It became part of his role to review the financial viability of loan applications submitted to the claimant and recommended Mr Wiseman. This he would do in informal consultation with Mr Shalson (who worked in the same office), the final decision always being a matter for Mr Shalson. In their evidence both Mr Wiseman and Mr Wolinsky described themselves and Mr Shalson as acting as an informal “credit committee” for the purpose of considering the suitability of loans recommended by Mr Wiseman. This is a somewhat grandiloquent description of the highly informal arrangements which were in fact in place for considering the suitability of loans.

9.	The valuer who gave the valuations of the properties on which the claimant claims to have relied in this case was a Mr Ashton-Kane (who at the material time described himself, and to whom I shall refer, as “Mr Kane”). Until the autumn of 1999 he had been employed in the Manchester offices of Henry Butcher Smith Vincent Limited (“HBSV Limited”). In August 1999 the claimant had approached HSBV Limited with a view to its valuing some other properties on the security of which the claimant was proposing to lend to Cheyne. In November 1999, however, HBSV Limited was placed in receivership and Mr Kane co-founded and became a director of the defendants, who acquired from the receivers the assets of the Manchester and Leeds offices of HBSV Limited and traded as HBSV Chartered Surveyors.

10.	The Properties were the following:-

1)   Naventi’s Blackpool Lancashire. This consisted of 20 residential flats offering primarily studio accommodation, and a purpose built leisure club. It is within a short walk of Blackpool’s main retail area, Blackpool Tower and Central Pier. Mr Kane’s valuation was £1.5m. This may be compared with Mr Boyd’s valuation of £450,000 and Mr Haigh’s £800,000, and their ultimately agreed valuation of £595,000. The price apparently being paid by Cheyne for this property was £925,000.

2)   The Park Hotel, Morecambe Lancashire. This was a substantial detached purpose built hotel comprising 32/33 en suite bedrooms, public bar and function accommodation, within reasonable walking distance of the Promenade and Town Centre. It was valued by Mr Kane at £515,000. Mr Boyd’s valuation was £150,000 and Mr Haigh’s £200,000. Their agreed valuation was £170,000. The purchase price apparently being paid by Cheyne was £165,000.

3)   The West County Hotel, Millom Cumbria. This was a 9/10 bedroom pub/hotel situated on a split level site, 6 of the rooms being en suite. Millom is a small market town. Mr Kane valued this at £275,000. Mr Boyd valued it at £105,000 and Mr Haigh at £150,000. Their agreed valuation was £135,000. 

4)   The Wansfell Hotel, Seascale Cumbria. This was a traditional brick built hotel, offering 10 bedrooms with en suite facilities. To the rear was an extension, which in November 1999 was nearing completion, to provide a further 20 bedrooms, with en suite facilities, together with an unfinished bungalow. Mr Kane valued it at £700,000, Mr Boyd at £145,000 and Mr Haigh at £300,000. The agreed valuation of the two experts was £230,000. The purchase price apparently being paid by Cheyne was £220,000.

11.	It will be noted that, although they were ultimately able to agree valuations for my use, Mr Boyd and Mr Haigh started out fairly far apart, and certainly outside the tolerance one would normally expect of two competent valuers. This was partly attributable to a difference in approach to converting their open market valuations (OMV) to an ERRP. In the case of Naventi’s and the West County Hotel Mr Boyd’s and Mr Haigh’s OMVs were within acceptable valuation tolerances (Naventi’s: £1.05m, £1.075m, West County Hotel £225,000, £200,000) In the case of the Park Hotel their OMVs (£215,000, £270,000) differed because of the different views each took as to the amount of capital expenditure required. In the case of the Wansfell Hotel OMVs (£200,000 £390,000) the differences were attributable to the difficulty of valuing the unfinished and untried nature of the extension. Mr Boyd and Mr Haigh were able to agree broadly as to the turnover to be expected but took very different views as to the profit margin. Following discussions they were each able to agree to modify their initial views on this point and to meet in the middle.

12.	The principal reason for Mr Kane’s valuations (whether on the OMV or ERRP basis) being so much higher than the experts’ agreed valuations lay in the different assumptions he had made as to the turnover likely to be viewed by the market as achievable in each case.

THE ISSUES

13.	There are two issues between the claimant and the defendants The first is as to whether the claimant relied on the defendant’s valuations when making the advance on the 4th February and, if they did, whether such a reliance was reasonable It is the defendant’s case that the claimant “knew or ought to have known that the valuations were unreliable”. In his closing speech Mr Soole QC on behalf of the defendants placed greatest stress on the first way of putting this case, but did not abandon the second. He reminded me of the approach of Phillips J (as he then was) at first instance BBL SA v Eagle Star Insurance Company Limited & ors [1995] 2 All-E.R. 769, 793 and 796, that in order to establish reliance on a valuation, a lender had to do more than establish that, but for the valuation, it would not have, made the loan. It had to establish that it believed the valuation to be reliable. The correctness of this proposition was accepted by the Court of Appeal in Cavendish Funding v Henry Spencer [1998] PNLR 122 for the purposes of the appeal before it but not there definitively ruled on. It was accepted as correct before me by Mr Dight on behalf of the claimant.

14.	So far as concerns the proposition that, even if the claimant did rely on the valuations believing them to be reliable, they were unreasonable in doing so, there is in my judgment some danger of confusion. The claim is based on the premise that the defendants owed the claimant a duty of care in tort (the only relevant contract entered into by the defendants having been with Cheyne who were paying their fees). If the defendants did owe the claimants a duty of care in providing the valuations, and the claimant in fact relied on those valuations believing them to be reliable, the question whether it was “reasonable” for the claimant so to have relied appears to me to arise only in the context of considering whether it was contributorily negligent. If the proposition is that the caveats in the valuation reports (as to which see below) had the effect of negativing the existence of a duty of care, or of excepting the defendants from liability for a breach of it, then the issues relate to the nature of the relationship said to give rise to the duty of care and to the true construction of the provision alleged to exempt from liability. The question of the reasonableness of the reliance which was in fact placed on the valuations does not, it seems to me, arise at this stage. As I understood it, the defendants conceded the existence of a duty of care, and did not seek to argue that liability had effectively been excluded by the terms of the caveats. My approach is therefore to consider, first, whether there was actual reliance in the relevant sense and secondly to consider whether a case of contributory negligence has been made out.

15,	So far as contributory negligence is concerned, it was common ground that the question was whether the lender had failed to exercise an appropriate degree of skill and care in deciding to make the advance, and, if it had so failed, whether that failure had caused or contributed to the losses which the lender suffered In the present case the defendants argued that the claimant had been negligent in the following respects: (1) in relying on the valuations when it knew Mr Kane had been hampered by a lack of verifiable information in arriving at them, (2) in not paying adequate regard to the difference between Mr Kane’s valuations and the purchase prices of the properties being paid by Cheyne, (3) in not paying adequate regard to other valuations (“the Harrison valuations”), (4) in advancing a sum in excess of the purchase price being paid by Cheyne, (5) in not obtaining personal guarantees from individuals of established worth, but instead taking guarantees only from two directors of Cheyne (Messrs Donnachie & Langdon) who were not of proven worth, and not taking adequate steps to ascertain their financial worth, and (6) making the advance without any or any sufficient grounds for believing that Cheyne would be able to repay the loan when required or at all.

16.	The central issue of fact which I have to resolve concerns the contents of a telephone conversation between Mr Wolinsky and Mr Kane on the 8th or 9th December 1999. In order to put that conversation into context and to provide a general background to the issues of reliance and contributory negligence which arise, it is necessary to set out a fuller narrative of the background then I have so far given. Exploration of the background in the course of cross-examination at the trial threw up a number of further issues of fact not heralded by the pleadings, the resolution of which has a bearing on the credit worthiness of the witnesses.

17.	The story begins in early June 1999 when Mr Wiseman was approached by a Mr Brown of Cheyne who was seeking to borrow £3.75m by way of first charge over a mixed portfolio of properties valued at some £7m. The properties concerned (some 18 altogether which included the Properties) were said to be being made available by a Mr David Ross, who had fallen on hard times and had been left with no alternative other than to sell some of his properties to a “discreet” purchaser. Valuations of the properties, prepared principally by Harrison Willis & Moore of Barrow-in-Furness (Harrisons), were supplied to the claimant showing a total value (OMV) of £6.765m. By 16th June 1999 Mr Wiseman felt able on behalf of the claimant to write to Cheyne saying:–

“I confirm that in principle I have arranged funding for your purchase of the above portfolio, subject to my receiving the completed application form and the valuations being re-addressed to this company”.

His letter went on to say:

“depending on legal documentation I would advise completion within 10-14 days”.

18.	By the beginning of July an application form for bridging finance of £3.75m had been received from Cheyne and the claimant had instructed its solicitors (“Finers”) in connection with the proposed transaction. The Harrison valuations had also been re-addressed to the claimant, on the basis that their valuations represented an estimated realisation price of the properties allowing for a six month period for proper marketing. Harrisons indicated that the estimated’ realisation prices were the same as the Open market values, save in the cases of the hotel’ properties in Morecambe (the Grosvenor Hotel and the Park Hotel) where they advised a discount from OMV of 20-25%). Mr Wiseman asked Cheyne to seek confirmation from Harrisons that their valuations would hold good for the purposes of “a 90 day fire sale”. It is not clear to me whether the 90 day fire sale values ever were supplied’ by Harrisons. So far as the Properties are concerned the Harrisons OMV valuations were (1) Naventi’s £1m (2) The Park Hotel £500,000, (3) The Wansfell Hotel £450,000 (4) The West County Hotel £200,000. 

19.	The correspondence and other paperwork in relation to this proposed transaction appears to show that it was still live until at least the middle of July 1999. Thereafter, however, the form of the proposed lending to Cheyne changed. Cheyne now sought a short term bridging facility of £1.15m secured on 3 properties, namely Grosvenor Hotel Morecambe, the Ross Filling Station Millom, and The Horse & Groom, Gosport in Cumbria (“the First Advance”). It was in connection with this proposal that HBSV, Limited was first instructed. By letter dated 4th August 1999 HBSV was appointed by Mr Wolinsky (writing on Zedfleet Limited note-paper) to prepare “bank style” valuations of the Grosvenor Hotel and the Ross Filling Station, such valuations to include Forced Sale Value/ERRP valuations. It was made clear in the letter that responsibility for payment of the fees was a matter solely for them and Cheyne. The letter enclosed all the financial information relating to those properties available to the claimant from Cheyne, including the relevant’ Harrison valuations. The financial information included unaudited (but professionally prepared) figures for the turnover of various properties within the Ross portfolio (including the Properties).

20.	It may be noted that the Harrison OMV valuations for the Grosvenor Hotel and the’ Ross Filling Station were respectively £1m and £700,000. It may be that those two properties were originally envisaged as being potentially adequate to support the proposed lending of £1. 15m, and that this was the reason why HBSV Limited were originally appointed to value only these two properties. In fact, Mr Kane, who was given the task of valuing these two properties, came up with an ERRP for the Grosvenor Hotel of only £400,000 (significantly less than the Harrisons’ OMV), and a valuation of £850,000 for Ross Filling Station (appreciably higher than the Harrisons’ OMV). I infer that it may have been Mr Kane’s initial expression of opinion in relation of these two properties that led to the Horse & Groom being added to the package supporting the proposed lending of £1.15m. Mr Kane valued the Horse & Groom at £520,000 compared with Harrisons’ £590,000.

21.	By 30th September 1999 the claimant was in a position to, and did, issue a facility letter to Cheyne in respect of the proposed loan of £1.15m, and that loan (“the first advance”) was duly made on 19th October 1999. During the course of September or October (if not before) it is clear that Mr Wiseman became aware of the individual purchase prices at which Cheyne was proposing to purchase properties in the Ross portfolio. It appeared that Mr Ross was subject to the terms of an IVA and that the supervisors of the IVA had approved the apportionment of the global purchase price for the whole of the Ross portfolio amongst the individual properties and the apportionment, where applicable, of the individual purchase price as between the property and fixture and fittings. Nervousness on the part of Mr Wiseman as to possible Insolvency Act implications in relation to the purchases was allayed by advice from Finers that the supervisors of the IVA (partners in KPMG) would be joining in the relevant contracts.

22.	At a date which Mr Wiseman puts as in or around early November 1999, he was approached by Cheyne for a further advance to be secured on the Properties. He was told that the valuations to support such lending would once again be provided by Mr Kane, now acting through the defendants albeit trading as HBSV. He saw no objection in principle to this, although no steps were taken on behalf of the claimant or SGI formally to appoint Mr Kane or the defendants as valuers. In due course Mr Kane supplied the claimant with 4 valuation reports in relation to the Properties, that in relation to Naventi’s being dated 26th November 1999 and the other 3 being dated 2nd December 1999. I have already set out the ERRP valuations provided by those reports.

23.	Each of the reports followed a similar format. Paragraph 1 was in the following terms:

“1.   TERMS OF REFERENCE

1.1   We understand that this report and valuation is required to provide advice for loan security purposes in order to facilitate the proposed purchase of the subject property by Cheyne Lodge Investments Limited. 

1.2   This report is prepared in accordance with your recent, instructions and is subject to the assumptions, terms and conditions set out therein as confirmed by our letter of [4th August 1999] relating to previous valuations of properties comprised within the same portfolio.

1.3   The property was inspected on 17th November 1999 by Robert J I K and FSVA IRRV F Land Inst, a Director of this practice and this report has been prepared by him.

1.4   We confirm that this practice holds Professional Indemnity Insurance Cover in the sum of £5,000,000 in respect of each and every claim, placed with The Independent Insurance Company plc.”

24.	By a subsequent letter Mr Kane clarified that the reference in paragraph 1 2 in the reports to a letter of 14th October 1999 had been intended to be a reference to the letter dated 4th August 1999. The paragraph was identical in all 4 reports save as to the date of inspection. The report then proceeded to a description of the location of the property (paragraph 2), a description of the property (paragraph 3), observation on the condition of repair of the property (paragraph 4), services (paragraph 5), environmental and ground condition (paragraph 6), business rates (paragraph 7), planning and building regulations (paragraph 8), licences and certificates (paragraph 9), tender (paragraph 10), tenancies (paragraph 11), market conditions and trends (paragraph 12), general observations (paragraph 13), before arriving at the valuation advice in paragraph 14. This read (so far as material) as follows: -

“our valuations have been arrived at in accordance with the practice statements contained in the Royal Institution of Chartered Surveyors Appraisal and Valuation Manual. We have been instructed to provide our opinion of Open Market Value, Estimate Realisation Price and Estimated Restricted Realisation Price on the assumption of a sale within six months.

A detailed definition of these bases of value are provided in Appendix 1.”

25.	There then followed 3 paragraphs setting out the 3 different opinions. Each of the reports contained an Appendix 4 (not in fact referred to or explained in the body of the Report) which summarised turnover and profit figures for the Properties (and those which had been used as security for the First Advance). Although the report did not say so, these were in fact taken from figures supplied by Mr Ross to Cheyne.

26.	Paragraph 15 of each report was then in the following form:–

“15. GENERAL QUALIFICATIONS

15.1   We confirm that we have no material interest in the properties in question and that we have undertaken these valuations as independent valuers.

15.2   This report has been prepared on the basis of the information as provided by the vendors and the prospective purchasers’ agents, together with the, assumptions we have been obliged to make given the shortage of full factual information. We therefore reserve the right to amend our opinions of value should it transpire that any of our assumptions are incorrect or that the information supplied is erroneous. 

15.3   This report is private and confidential to Speshal Investment Limited. It may not be disclosed to any third party without our prior written consent, nor published in any documents or circular without our prior approval in writing as to the form and context in which it may appear. In breach of this condition, no responsibility can be accepted to third parties for the comments or advice contained herein.”

27.	Mr Wolinsky’s reaction to these reports was to write to Mr Kane on 6th December 1999. He raised a number of queries in relation to the Naventi’s report. He wanted to know how the ERRP was split between the health club and the flats. In relation to paragraph 14.1 he wanted confirmation that the reference to 6 months should be a reference to 3 months In relation to paragraph 15.2 he wrote -

“We can’t accept a caveat for shortage of information or the last sentence of this paragraph Please obtain such information as you require to give a reliable valuation”.

28.	An important conversation then took place on the telephone between Mr Kane and Mr Wolinsky. A contemporary annotation by Mr Wolinsky of his letter indicates against the reference to paragraph 14.1 that “error – is 3m” and against the queries on paragraph 15 2 “re-word”. A contemporary note by Mr Kane includes (so far as relevant) the following: -

“If no health club – what is value, without value of health club 

re-Jig caveat 15.2”

29.	I return below to the different versions of this conversation which were given in the witness box by Mr Wolinsky and Mr Kane. Mr Kane wrote to Mr Wolinsky on 13th December to deal with the points raised in the fax dated 6th December 1999. In relation to the split of the valuation figure of £1.5m between the health club and residential elements, he referred back to the telephone conversation to emphasise the artificiality of the apportionment which was being sought, but, subject to that warning, gave a figure of £890,000 for the residential element and a figure in the region of £600,000 “based upon current turnover figures of around £125,000” for the health club portion. The letter continued:–

“I confirm that the reference to 6 months in paragraph 14.1 should read 3 months. 

As regards the caveat within 15.2, I note your concerns and would point out that the intent is to ensure that your attention is drawn to the fact that the searches for information to enable the valuations to be carried out have, of necessity, been via a limited number of sources and that it is always possible that when solicitors carry out their pre-contract enquiries and title searches, certain of the information may transpire to be erroneous or incomplete. Nevertheless, I am happy to amend the wording to provide you with, hopefully, the comfort you require and would suggest the following alternative: 

“This report has been prepared on the basis of information obtained by proper diligent enquiry of various sources but has not included formal searches nor involved the obtaining of testaments of fact from any supplying source. Accordingly whilst the information supplied is assumed to be incomplete and accurate, we reserve the right to amend our valuation report should it transpire that any such inaccuracies materially affect our opinions of value.”

I trust you find this amendment to be acceptable and, assuming so, perhaps you could confirm same such that I may furnish you with suitably amended relevant pages of each report.”

30.	On 15th December Mr Wiseman wrote to Mr Kane also raising some queries in relation to Naventi’s and The Wansfell Hotel. The queries in relation to Naventi’s were answered by Mr Kane by reference to his written response to Mr Wolinsky’s letter and his answer in relation to The Wansfell Hotel reiterated that his valuation pre-supposed the extension to the hotel would be commissioned in readiness for the beginning of the season and would attract a significantly higher level of patronage as a consequent of the ongoing demand from BNFL. The written report does not itself contain this information, and the reference to reiteration must have been, in the context, to a telephone conversation which had taken place the previous day between Mr Kane and Mr Wiseman. Also on the 15th December 1999 Mr Wiseman did some calculation of what the maximum amount of the overall advance would be if the ERRP of Naventi’s was reduced from £1.5m to £1.2m.

31.	By a fax dated 17th December 1999 Mr Kane wrote to Mr Wolinsky saying:-

“in relation to the caveats relating to the information upon which the evaluations were based, I understand that you are happy with my proposed amendment and confirm I shall forward suitably amended pages in tonight’s post.”

32.	It is not entirely clear whether Mr Kane then did so. He was later asked to re-send the revised pages each of the reports and did so under cover of a fax dated 28th January 2000. The revised form of caveats then supplied was, although not identical to that contained in his letter dated 13th December 1999, for all practical purposes the same.

33.	On 20th December 1999 the claimant issued Cheyne with a facility letter for the proposed bridging finance of £1.9m secured on the Properties. On 11th January 2000 Finers drew Mr Wiseman’s attention to the fact that the valuations were well in excess of the purchase price for each of the Properties. On 15th January Cheyne sought an extension of 1 month for repayment of the first advance, to which Cheyne agreed on payment of 3% interest in advance (this appears to have been paid).

34.	On 28th January Mr Wolinsky rang Mr Kane. His record of the telephone conversation is as follows:-

DW/RK 28/1 telecon

“1 Properties valued as what they are

Ignores acumen of operator He’s made appropriate enquiries

His view of realistic turnover, realistic costs

His opinion of the value of what we would inherit

ERRP is least should get if sold in 3m. In his opinion, least we should get if sold in 3m. Ignores way actually operated. We’re taking no risk on how our borrowers will run the businesses. We’re not taking a risk on the cash flows of the businesses.

Valued as what they are, not shut down empty buildings. If went belly up, appoint LPA Receiver to continue operation and the sell as g.c. Invariably this is what’s done.

Naventis could sell off flats £890k

+ground floor, basement, pool, 15th floor reception etc

his valuation is what the market would pay

LPA RCVR would run club – probably keep same manager

Its least will get when sell, without taking account of how business are run. It is what market would pay”

35.	He had a further conversation with Mr Kane on 2nd February which records the following: -

“Wedlake Bell 	had a call on planning issue? RK not know RK asked how long.>10 yrs, understands is.
Established use
Thinks not an issue
No reason why Local Authority not be approached

DW – he should not have spoken
No reason to walk away from figures of valuations
Assumptions still accurate
As it stands still comfortable with figures/values, assumptions appropriate
He’s still happy with the values.”

RELIANCE

36.	One of the issues in the case which arose as a result of the expert banking evidence was the extent to which the Harrison valuations should have been taken into account in making the decision to lend. In relation to this Mr Wiseman committed himself to the proposition that it would always have been the intention of the claimant to appoint its own valuer before making its lending decision, and that he had always regarded the Harrison valuations as flawed on the information he had, they had been produced in uncertain circumstances, possibly at the instance of Cheyne or possibly at the instance of Mr Ross, and that he knew nothing of Harrisons as a firm. He therefore sought in evidence to give the impression that he had always taken the view that the Harrison valuations could be wholly discounted as a useful source of information for the claimant’s purposes. He maintained that he had only asked for those valuations to be re-addressed to the claimant, and to address themselves to the question of a “90 day fire sale,” as a matter of interest and not because the claimant was ever going to be faced with making a lending decision on the back of those valuations.

37.	I regret to say that I was unable to accept Mr Wiseman’s evidence on this issue. The contemporary documentary evidence from the June/July 1999 period gives every sign that he himself was hoping to be able to broker the lending then in contemplation by recommending to Mr Shalson that it should take place on the back of the Harrison valuations.

38.	I do not know what would have happened if such a recommendation by Mr Wiseman (to lend £3.75m on the back of Harrison valuations of something over £6m) had ever in fact been made. Nor do I know why it was that the proposed transaction transmuted in the course of time into the two distinct loan transactions which in the event took place. Mr Wiseman was able in cross-examination to venture no more than that it might have been that Cheyne had decided not to put up (or proceed with the purchase) of certain parts of the Ross portfolio, or that “we” had decided that some parts of the portfolio were unsuitable for inclusion in a security package.

39.	Mr Wolinsky was unable to throw further light on the matter. His evidence in cross-examination was that his recollection of the stage at which he first became directly involved was when the first advance was being considered. At that point it was he (according to his witness statement) who identified HBSV Ltd as a well respected firm of valuers with national coverage, and satisfied himself in a telephone conversation with Mr Eldridge of their Birmingham office that they had the necessary experience to provide the required valuations. His witness statement had however given some impression of involvement in June 1999. Mr Soole QC submitted that his evidence, coupled with his demeanour in the witness box, evinced an unsatisfactory desire to distance himself from the events of June and July, and that I should infer that some significant facts were being deliberately withheld from the court.

40.	While wishing to pay tribute to the force with which Mr Soole QC developed his submissions on this point, I was unpersuaded by them. I see no reason not to accept Mr Wolinsky’s evidence as to the stage at which he first became involved and his role in selecting HBSV Ltd. Whatever Mr Wiseman’s hopes may have been as to his ability to make a successful recommendation to Mr Shalson to proceed with the original proposals on the basis of the Harrison valuations, it is clear that the original proposal did alter from August onwards, and entirely plausible that in the process of establishing his new role at SGI Mr Wolinsky came relatively late into the picture. It is also understandable that neither Mr Wolinsky nor Mr Wiseman had been fully proofed on the detail of the early history of Cheyne’s proposals. Nothing in the original pleadings indicated that any of this background was relevant, let alone in issue. Even the amended Defence (amended as late as 10th January 2003) only prayed in aid the early history by relying on the fact of the Harrison valuations.

41.	I turn to the critical telephone conversation between Mr Wolinsky and Mr Kane which occurred in response to Mr Wolinsky’s faxed letter dated 6th December 1999. In his witness statement Mr Kane describes in detail how, as a result of the inquiries he had made in connection with his valuations for the first advance, he had come to the conclusion that the turnover figures emanating from Mr Ross with which he had been supplied had been deliberately understated, and how he had been told by Cheyne that Mr Ross was not to be trusted. He also describes the inquiries he had made, including inquiries of the local management at the Properties, in order to form his own view of turnover. He then describes the critical telephone conversation in the following terms:–

“66.   On 10 December 1999, I had a telephone conversation with Mr Wolinsky in which I explained that the caveat was necessary because I was not satisfied with the completeness, or veracity of the business accounts information provided to me Specifically, I told Mr Wolinsky of my and Cheyne’s suspicions that the accounts submitted by Ross and the figures provided by his accountants were deliberately understated. I told Mr Wolinsky that the accounts did not reflect what I had been told by the individual managers of the business. I believed that the turnover was much greater than was recorded in the business accounts. I said that I could not verify the information provided to me by the managers of the businesses as although I had requested access to trading figures I had not received them. Furthermore, the managers were not privy to this information. 

67.   Mr Wolinsky, following my conversation, appeared to appreciate that there was little more I could do to verify the information provided to me. I had asked for profit and loss accounts, and trading accounts, for each of the properties, but I had not received that information. Had Mr Wolinsky provided that outstanding information I would have reviewed my valuations. Whether or not I would have changed my advice would have depended on what the accounts recorded. 

68.   Mr Wolinsky’s concern appeared to be addressed at ensuring that the advance was made. He initially requested that I remove the caveat as he had in his fax of 6th December 1999 and when I again refused, that I “tone down” the caveat. In response to this telephone, discussion I wrote to Mr Wolinsky on 13th December 1999. I did not in this letter ‘set out the detail of my concerns, and in particular my doubts about Ross’s accounting information and other activities. Whilst I remained unprepared to change the substance of the original caveat, I was prepared to modify the language, in the knowledge that Zedfleet and the Claimant knew the full extent of my concerns and the actual basis upon which I had prepared the valuations. In particular, they knew that I had not been instructed and accordingly, was not proposing to carry out any further enquiries or investigations.

69.	I reluctantly agreed to revise the caveat as follows: … “This Report has been prepared on the basis of the information obtained by proper diligent enquiry of various sources but has not included formal searches nor involved the obtaining of testaments of fact from any supplying source Accordingly, whilst the information supplied is assumed to be complete and accurate, we reserve the right to amend our valuation report should it transpire that any such inaccuracies materially affect our opinions of value” (copy of letter dated 13th December 1999 at RAK1.9).

70.   I considered that Mr Wolinsky understood that 

•   I had not received the full factual and accounting information I required by the time that I prepared and sent my reports. Accordingly, I did not have full confidence in the valuations that I had given and they would only stand up if the information upon which I relied proved accurate.

•   My concerns surrounded the veracity of the information provided to me and its source. I had been obliged to conduct my own enquiries outside of accounting information to obtain a fuller picture of the financial position of the various business and thus provide a valuation (as required to comply with the RICS Guidance Notes on the valuation of properties where based on turnover – see extract at RAK 1.4)

71.   Mr Wolinsky and the Claimants had the opportunity upon receipt of my reports to request that I adopt a more cautious approach to the valuations, or carry out further investigations to verify the information provided to me. In fact,’ they did the opposite and sought to cover up my expression of concern by initially requesting that I remove the caveat, and when I refused, requesting that I tone down the wording in the knowledge that the basis of the valuations remained the same.”

42.	In his first witness statement Mr Wolinsky had simply said this:

“I was concerned by his general qualification at paragraph 15 of his report I recall speaking to Mr Kane on or around the 8th December 1999 in relation to the concerns raised in my letter of 6th December 1999. I emphasised to him that Speshal could not accept a qualification based on a shortage of information. Shortly after, I received written confirmation from Mr Kane that he was happy to amend the wording of the qualification in paragraph 15 to a revised wording he gave. A copy of his letter dated 13th December 1999 is attached at pages 7-9 in which he explains that the qualification was only subject to matters that could arise as part of the pre-contract enquiries and searches on title. He did not, as is suggested by the Defendant in its Replies, refer in that letter to the accuracy of information provided by the Borrower.”

43.	Under cross-examination he mentioned that the explanation given to him by Mr Kane in the telephone conversation was the same as that which he understood to be given by the subsequent letter dated 13th December. In his closing submissions Mr Soole QC described this evidence as frankly incredible.

44.	Such contemporary notes of the conversation as exist do not assist very much in resolving this issue of fact. The following considerations lead me, however, to prefer Mr Wolinsky’s account to that of Mr Kane.

45.	The first is that it is common ground that the central nature of the conversation was that Mr Kane would be writing to Mr Wolinsky to deal with the queries raised by the fax of 6th December and to provide a revised form of wording for the caveat to deal with Mr Wolinsky’s concern. His expressed concern was that the valuations should be ones upon which the claimant could rely. As Mr Kane’s subsequent letter showed, Mr Kane was keen if possible to meet that concern. That strongly suggests that, whatever may have been said in the course of the conversation, it was not intended by Mr Kane to bring home to Mr Wolinsky the fact that the valuations were not reliable.

46.	Secondly, the principal items of information which were of concern to Mr Kane were the turnover figures supplied by Mr Ross, and these he believed, as a result of his own independent inquiries to have been understated. He thought that his own assessments, based in part on information obtained from the managers, was more reliable. Nothing is said about this in the valuation reports (save for a glancing reference in the case of Naventi’s) or in his letter of 13th December. In evidence he explained that the reason for this silence on the point was a fear of defaming Mr Ross. This I find to be frankly incredible. Nothing would have been simpler for him than to write in his letter of 13th December “As I explained to you on the telephone, I have not felt able to rely on the accounting figures with which I have supplied and therefore …” What would, however, have been more difficult for him to do would have to complete the sentence. He could not go on to say “… I have used figures which I have obtained from the local managers which may themselves be completely wrong and I have myself neither the experience nor the resources to offer a useful opinion of my own” without thereby disclosing that he was not in fact competent to provide a valuation report. He was putting forward his valuations as being in accordance with the RICS Valuation and Appraisal Manual. That states that the valuer should, in the circumstances in which Mr Kane found himself, have primary regard to the market’s (my emphasis) perception of maintainable earnings. The fact of the matter is that, unknown to the claimant, Mr Kane, while he had some background experience of valuations in the leisure industry, had no experience of valuing hotels.

47.	Thirdly, the extent to which Mr Kane was in fact basing his valuations on possibly unreliable information supplied by managers as opposed to his own independent (albeit incompetent) assessment of maintainable earnings is far from clear. In relation to The West County Hotel, the information he received from the managers was that the ‘wet’ trade was good and would improve if there was an increase in letting levels, and that the wet trade accounted for 65% of the turnover. His evidence showed that, while he took account of this information in reaching a conclusion that the Ross figures were understated, his view of what the correct figures were was influenced by his own judgment as to occupancy rates and what bar takings for a bar doing a good local trade could be expected to be. In relation to The Wansfell Hotel, he appears to have relied, almost entirely on his own calculations of letting rates and bar takings. In relation to Park Hotel, he appears to have relied on the local management only to confirm his own views as to what the true occupancy levels were. Only in relation to Naventi’s does his valuation appear to have been based in part directly on a piece of information supplied by the management, namely a comment by the manageress that the takings of the leisure club had increased by 30 per cent in the last few months.

48.	The following further point should be noted in relation to Naventi’s. There is no suggestion in this case that Mr Kane formed a view that the historical turn-over figures with which he had been supplied were understated. It is only in relation to Naventi’s that his report makes reference to any reliance on information supplied by the manager (see paragraph 13.7 of his report), and it does not reveal whether, or how, the information has been used in arriving at the valuation figure. In fact, the information had been used to increase the most recent supplied turnover figure of £124,506 to a guess-timated £160,000. Yet when specifically addressing the question of the value of the leisure club in his letter of 13th December, Mr Kane leaves the impression (contrary to the fact) that he has been working off a figure of £125,000.

49.	Fourthly, if Mr Kane did bring home to Mr Wolinsky the lack of confidence in his own valuations in this telephone conversation, the contents of their subsequent telephone conversations on 28th and 30th January 2000 are inexplicable. Supported by his contemporary notes, Mr Wolinsky’s evidence was that Mr Kane did express confidence in his valuations in those conversations. I accept that evidence. It accords with my own impression of Mr Kane in the witness box. Despite the weight of expert evidence against him, he still at least half believes that his reports were reliable. Furthermore, as his own counsel recognised, Mr Kane is a man who is “eager to please” an interlocutor. I reject his evidence that in the telephone conversation he initially refused to alter the caveat and I reject his evidence that Mr Wolinsky understood, as a result of it, that he Mr Kane did not have confidence in his valuations.

50.	Taking that view of the evidence in relation to the conversation with Mr Wolinsky on 10th December, I take a similar one of the telephone conversation between Mr Kane and Mr Wiseman on 15th December said by Mr Kane to have had substantially the same content (see paragraph 73 of his witness statement). Mr Wiseman’s attitude should have been the straightforward one he expressed in the witness box: either Mr Kane was providing valuation reports which he was prepared to stand by or he was not. I do not believe that Mr Kane said enough to Mr Wiseman to bring home to him that the reports could not be relied upon.

51.	I have therefore reached the conclusion that both Mr Wolinsky and Mr Wiseman did rely (in the relevant sense) on the valuation reports. Their understanding of the intention behind the revised caveat was that indicated by Mr Wolinsky in his witness statement. I would add that, despite the undoubted peculiarity of the language in the first sentence (“.... testaments of fact from any supplying source ...”) the second sentence in any event purports to do no more than to reserve a right to the defendants to amend the valuation if inaccuracies in information should come to light. To give this a sensible meaning, the time at which any amendment might be made would have to be before the valuation was acted upon. I accept Mr Kane’s evidence that he was not expected by Mr Wolinsky to conduct any further searches for information. It was therefore only likely to “transpire” that the information supplied (query to or by Mr Kane) contained inaccuracies, if the claimant, before completion of the loan, came into possession of information which indicated that. That was unlikely to happen except as a result of something reported on by Finers in their Report on Title. That might well (and did) include new information on matters such as planning permissions. It was inherently unlikely to include new information relevant to the underlying value of the businesses carried out at the Properties, more especially since (with the single exception of Naventis) the valuation reports did not identify what information had in fact been relied on by Mr Kane.

52.	That leaves only a final point made by Mr Soole QC, namely that the claimant’s case was fundamentally flawed by its failure to adduce evidence from Mr Shalson himself as to his reliance on the defendants’ valuations. Had I taken a different view of the other issues of fact, and been persuaded that Mr Wolinsky and Mr Wiseman were not really relying on the reports but simply using them as an excuse for carrying into execution a plan of lending that the claimant, for “other reasons”, had determined on at an earlier stage, the absence of direct evidence from Mr Shalson would no doubt have had some significance. On the findings I have in fact made, I do not think it does. The clear inference to be drawn from Mr Wolinsky’s evidence was that Mr Shalson and he had made the decision on the same basis, namely in reliance on the defendants’ reports. There was no suggestion (certainly not one that was put to Mr Wolinsky) that Mr Shalson had some separate motivation for making the loan, or in doing so on the basis of reports which he knew to be unreliable.

53.	For these reasons the defendants’ case that they are not liable to the claimant at all must, in my judgment fail. I turn therefore to consider the issue of contributory negligence.

CONTRIBUTORY NEGLIGENCE

54.	On this question I was assisted by the expert evidence of Miss Craighead (for the claimant) and Mr Hudson (for the defendant).

55.	Miss Craighead is a highly experienced banker with direct experience over a period from 1982 to date of commercial property lending. In her written report she identified the material points in the claimant’s actions as (1) that the loan to value ratio was 64% (2) that the period of the loan was 3 months (3) that the interest payment was taken in advance and (4) that directors’ guarantees were taken. On each point she opined that the claimant’s lending procedures had been more prudent than is typical of normal lending practice. Her report then went on to deal with specific allegations which were being made on the pleadings as they then stood. In particular she thought it reasonable to take directors’ guarantees, that it had been additionally prudent to have done so, and that it was reasonable to do so without investigating the directors’ personal financial positions. She pointed out that one consequence of having done so in the present case. was that useful co-operation had been obtained from one of the guarantors in procuring the ultimate sale of the Properties. Given that loans of this kind are typically made to special purpose companies with no assets other than the properties being financed, and that repayment was expected to be made from a re-financing, the claimant could not be criticised for having dealt with Cheyne, a company of no independent worth and whose financial position had not been investigated. Her evidence was that a lender would normally rely on a valuer to make explicit any relevant assumptions which he had not verified for himself, that the original wording of the caveats would have been regarded by many lenders as no more than boiler-plate, and that Mr Wolinsky had acted prudently in questioning the wording of the original caveat. She would have expected a lender to accept a valuation with the revised form given its ‘tighter’ wording and the accompanying explanation in the letter of 13th December. Mr Wolinsky had been additionally prudent in seeking the further clarifications and’ confirmation which he did on 28th January 2000.

56.	Mr Hudson has an even more impressive pedigree as a banker than Miss Craighead, but one which did not include as great a direct specialist experience of property lending at the coal face. No attempt to summarise his written evidence can hope to do justice to the mandarin quality of his prose style, and in what follows I attempt no more than to identify the points which he made. His starting point was what would be expected of a prudent bank. He shared Miss Craighead’s view that an upper limit of 70% in the loan to value ratio was a prudent one, and the restriction of value to FSV a wise one. The actual ratio of 63.5% was well within prudent limits. What was missing from the claimant’s lending. criteria was a number of other matters some or all of which would normally be covered in a prudent bank’s lending manual, viz 

(1)   Steps to ascertain the bona fides of customers. 

(2)   Confirmation of the borrower’s resources and business plan. 

(3)   Satisfactory evidence that repayment will in fact be feasible. 

(4)   Evidence that the borrowers have a genuine equity risk in the transaction, and to this end the imposition of limits on the ratio of loan to purchase price and (if necessary) the imposition of personal guarantees.

(5)   Further security, if appropriate.

(6)   Procedures for producing written letters of instruction to valuers.

57.	In relation to the reports themselves, Mr Hudson was of the opinion that, but for the caveats, they met all the reasonable requirements of a prudent lender. In relation to the original caveats, he read them as referring to information supplied by Mr Ross and by Cheyne rather than more optimistic information obtained from the hotel managers. He thought that the claimant was reasonable in not accepting the original wording, but that if the claimant’s evidence as to the telephone conversation on 10th December 1999 were preferred to Mr Kane’s “it would in my view have been reasonable to rely on the amended caveat, but only if they had insisted that its wording be expanded to make its intended meaning clear.” He regarded the failure of the claimant to assemble information about Cheyne and its owners as falling short of the fundamental banking tenet of “Know Your Customer”, and that the paltry information obtained about the guarantors would have led a prudent lender to conclude that the guarantees served no useful purpose. A prudent lender would also have made detailed inquiries of NatWest as to the likelihood that the long-term financing would in fact materialise.

58.	To my mind, the most persuasive parts of his written evidence related to purchase price. His evidence was that it is important for the lender to know that the purchase price is higher than the amount of the loan, so that the borrower has an equity risk in the venture. 100% financing (or more as in this case) was “highly unusual” in commercial property lending. It is “standard practice” for banks to impose limits on the ratio of loan to purchase price as well as on the loan to value ratio. In the present case, had the figures been analysed, it would have been apparent that “there were wild discrepancies between purchase price and valuation, putting in doubt the reliability of the latter” and, moreover, that .the effect of the transaction would be to leave Cheyne with cash in hand. He concluded that no prudent lender, faced with these figures, would have proceeded with the loan: it would have invited Mr Kane to re-visit his valuations and would have reduced the loan to 75% of the purchase prices.

59.	He further criticised the claimant for not having had regard to the fact that the defendant’s valuations were considerably in excess of the Harrison valuations. The L/V ratio on the basis of the latter would have been a “whopping”, and by any measure wholly imprudent, 93.2% of Harrisons’ figures. This should have aroused suspicions as to the reliability of the defendants’ valuations.

60.	Miss Craighead’s report had been silent on the question of the disparities between the purchase price and the valuations, and between the two sets of valuations. Neither point had been specifically raised on the pleadings at the time at which she made her report. Nevertheless her failure to advert to these facts in her report was, I thought, surprising In a Joint Statement produced by herself and Mr Hudson she agreed that a prudent lender would have questioned wide disparities between purchase price and valuation, and that the disparities could put in doubt the reliability of the valuation. She agreed also that a prudent lender would have had regard to the disparities between the Harrison valuations and those of the defendants In cross-examination, she denied that 100% financing was unusual in commercial property lending, suggesting that there was no logical difference between a loan to an existing owner in excess of 100% of the original cost to him of the property and a loan to a purchaser of an excess over the purchase price. She said that banks do commonly lend in this way but that “if the paramount concern is the avoidance of risk one wouldn’t”. I do not think that the question whether it is standard practice for banks to impose loan to purchase price limits was ever put to her in terms. She agreed that in the present case the discrepancies of the purchase prices were such as to call for a reasonable explanation. On the question of the Harrison valuations she would have expected the claimant to have noted them only to reject them: that firm had no reputation that she knew of, and the claimant had acted reasonably in disregarding them in the light of the obscurity surrounding the circumstances in which they were originally obtained.

61.	In my judgment Miss Craighead’s evidence did not meet the central point being made by Mr Hudson as to the disparity between the purchase prices and the valuations. This was not only that the result was to leave Cheyne with no equity risk in the transaction. So far as that is concerned, I accept that lending practices may different, although I do not agree that there is no difference in risk between the two types of transaction posited by Miss Craighead. The importance of the purchase price point in the present case seems to me simply to be this. A lending strategy such as the claimant’s places all its eggs in the basket of the valuation. If valuations were always right, a lender such as the claimant would be taking no risk at all. It is accepted, however, that all lending involves risk. Here that risk was precisely that the valuation reports might be wrong. A lender in the claimant’s position must therefore address itself properly to assessing the likelihood of that particular risk materialising.

62.	In the present case there were only two possible explanations for the wild disparities. On the one hand Cheyne had found itself with a fantastic bargain on its hands. In relation to the Ross portfolio as a whole it had the opportunity to acquire property worth (according to Harrisons) some £6.75m for £3.75m. So far as the Properties were concerned it was apparently obtaining property worth £2.99m (defendant’s valuation) for £1.6m. On the other hand, the possibility was that the valuers had got it wrong. In order to assess which of the two possibilities were more likely the claimant needed to examine both critically.

63.	It is clear that the claimant did notice the discrepancies, and was given an explanation of them by Cheyne with which it was satisfied. What appears to have persuaded it were the following elements of that explanation: first that Mr Ross was selling discreetly and in a quasi-forced sale situation; secondly that the properties were all being sold as one lot, and thirdly that the prices attributed to the particular properties were the result of apportionments done by KPMG as supervisors of Mr Ross’s IVA and had been tax-driven.

64.	While I do not doubt that these explanations were given to, and accepted by, Mr Wiseman, the claimant was in my judgment much too ready to accept them without critical analysis. However convincing the forced sale explanation may have seemed in June 1999 when a very early sale of the whole portfolio was being contemplated, it looks lame in the context of contracts which were not exchanged until the middle of October. The ‘job lot’ explanation has some merit in the context of the original proposal, but a good deal less force in the context of a discrete later sale of the Properties. In any event, these two explanations themselves ought in my judgment to have raised a suspicion in a lender’s mind as to why the apparently experienced but financially distressed businessman Mr Ross should have been prepared to sell at an undervalue to Cheyne and to wish to do so “discreetly”. Some anxiety on this point on Mr Wiseman’s part is shown by his obtaining the reassurance from Finers in October 1999 that there would be no problems from an insolvency point of view because the supervisors of the IVA would be joining as parties to the sale contracts. Reassurance on that score would have removed the possibility that the claimant was becoming a party to some collusive device to remove Mr Ross’s assets from the reach of his creditors. But, by the same token, it should have alerted the claimant to the probability that the KPMG supervisors would not themselves join in the sale unless satisfied that they were doing so at a proper price. The probability is that those supervisors would have obtained or would be obtaining their own valuations for that purpose.

65.	In my judgment a prudent lender in the position of the claimant should have concluded on the basis of the limited information which it had that the explanations it had been given by Cheyne for the disparities were unsatisfactory on their face, and that there was therefore a serious possibility that the true explanation for the wild discrepancy lay in the unreliability of its own valuer. That possibility was increased by the fact that his valuations, at least in relation to the Properties, were also very substantially in excess of the Harrison valuations originally put forward by Cheyne.

66.	Faced with the dilemma presented by such a conclusion, what should the claimant have done? One possibility would have been to withdraw altogether from the transaction. Another would have been to commission further valuations from another independent valuer. A third, suggested as appropriate by Mr Hudson, would have been to ask the defendants to review and explain their valuation calculations and to impose a loan to purchase price limit on the loan. He also suggested that it would have been appropriate for them to ask for similar explanations from Harrisons, and to make further inquiries of Cheyne as to the circumstances in which the prices had been negotiated and the Harrison valuations had been obtained.

67.	In my judgment these were all steps which the claimant should have considered taking had they reached the conclusion, at which I think they should have arrived. It is not possible to say what the result of them (apart from the first) would have been. Had they limited themselves to a more searching inquiry of Mr Kane it is possible that the course of events would have continued unaltered: he told me that he would not have changed his opinion of value in the light of knowledge of the purchase prices (which he did not in fact know) any more than he changed it in the light of the Harrisons’ valuations (which he did). It is also entirely possible that he would have stuck to his guns on his estimates of turnover. More searching inquiries by the claimant of Mr Kane’s methodology might well, however, have significantly increased doubts as to his reliability and competence which this hypothesis assumes that the claimant would already have had. It seems to me fair to conclude that, by its failure to subject the question of the reasons for disparities (of both varieties) to the critical analysis to which a prudent lender would have subjected them, the claimant deprived itself of a significant chance which it would otherwise have had of avoiding the loss which it suffered as a. result of relying on Mr Kane.

68.	I am not satisfied that the claimant was contributorily negligent in any other respect. The guarantees cannot be said to have had no useful purpose: although they provided no significant additional financial security, they had a function in securing the personal commitment of the directors to the transaction. I do not think that they were being relied on to do more than this. So far as concerns the prospects of securing successful refinancing by NatWest is concerned, Mr Hudson’s opinion that there should have been direct discussions with NatWest seems to me to be a counsel of perfection. From the limited information available it appears that at the material time matters were, subject to one point, proceeding satisfactorily in that department. The qualification is that NatWest, although at one point apparently happy to lend on the defendants’ valuations (once re-addressed to itself), at a late stage introduced a requirement that new valuers should be appointed. That may have been a late appreciation on its part that the defendants were not the same entity as HBSV Ltd, or it may have been because they had concluded for other reasons that the existing valuations were unreliable. One does not know. On any view the change of tack would only have served to confirm doubts as to the reliability of the defendants’ valuations which, on my analysis, the claimant should already have had.

69.	I consider it appropriate to reduce the damages payable by the defendants by 20% to reflect my findings as to the contributory negligence of the defendants. A higher reduction would in my view be unjust. A valuer who gives negligent valuations as egregiously wrong as these cannot lightly be excused any part of his prima facie liability to pay for the full consequences of his negligence. A lesser reduction would risk appearing to be a recognition of an almost token nature only of some carelessness on the claimant’s part Something more than a merely token reduction in the award is in my judgment required.