New South Wales Supreme Court CITATION : Adelaide Bank Limited v DTS Property Services Pty Ltd [2008] NSWSC 1328 HEARING DATE(S) : 4/12/08 and 5/12/08 JUDGMENT OF : McDougall J at 1 EX TEMPORE JUDGMENT DATE : 4 December 2008 DECISION : See paras [40] to [44] of the judgment. CATCHWORDS : NEGLIGENCE - valuation of property - duty of care - negligent valuation - reliance on valuation - damages. CASES CITED : Adwell Holdings Pty Ltd v Smith [2003] NSWCA 103 Hann Nominees Pty Ltd v National Australia Bank Ltd [2000] FCA 454 Adelaide Bank Limited (Plaintiff) PARTIES : DTS Property Services Pty Ltd (First Defendant) R&J Roberts Pty Ltd (Second Defendant) Robert Gordon Arthur Roberts (Third Defendant) FILE NUMBER(S) : SC 50206/07 COUNSEL : V F Kerr (Plaintiff) SOLICITORS : Piper Alderman Solicitors (Plaintiff) Hunt & Hunt (First Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J 4 December 2008 50206/07 ADELAIDE BANK LIMITED v DTS PROPERTY SERVICES PTY LTD & 2 ORS JUDGMENT 1 HIS HONOUR: These proceedings concern five valuations made by the first defendant (DTS) given to the plaintiff (the bank). The valuations were given to the bank in support of applications for loan. The bank says that it relied upon the valuations in deciding, as it did, to make the loans. The bank says further that the valuations were performed negligently. In these proceedings, the bank sues to recover the amount of loss that it says it has sustained by reason of the allegedly negligent valuations. 2 The defendants did not appear on the hearing. As to DTS: I am satisfied that it was given notice of the hearing date, and of the material on which the bank proposed to rely. 3 As to the second defendant: apparently, some resolution has been reached between the second defendant and the bank, and the bank has discontinued the proceedings against the second defendant. 4 As to the third defendant (Mr Roberts): he was in court when the matter was listed for hearing, and apparently informed the Court that he did not propose to attend. 5 It is clear that a valuer may owe a duty of care to a person on whose account, or for whose benefit and use, it prepares a valuation. The standard of care imposed is that of the ordinary skilled person exercising and professing to have the skills of the valuer performing such work. 6 In the present case, I am satisfied that DTS did owe a duty of care to the bank. DTS was on the bank's panel of approved valuers. The letter of appointment made it plain that the bank would rely on valuations received from DTS in considering applications for finance. Each of the valuations that is in issue was provided on the basis that it was for the use of, among others, the bank and any mortgage insurer. 7 I am satisfied, also, that the bank did, in fact, rely on each of the valuations in issue. There is evidence of the bank's approval processes in the case of the five transactions to which the valuations relate. That evidence shows that the valuations were considered by officers of the bank, as part of the process of, in effect, ticking the boxes to ensure that the application met the bank's criteria. It might be noted that, in each case, a copy of the valuation was submitted with the application for loan, which application came from a "mortgage originator". 8 The first real area of dispute is whether the valuations were prepared negligently. The bank relies on the opinion of an expert, Mr James Juniper. Mr Juniper has prepared a report which deals with each of the five properties in question, and with each of the five valuations in question. 9 It is convenient to refer to the valuations by reference to the location of the subject property. There were two valuations relating to a property at Casula, one relating to a property at Prestons, one relating to a property at Woy Woy, and one relating to a property at Rose Bay. 10 The valuations that DTS ascribed to those properties were, respectively, $250,000, $330,000 (each of these relating to the Casula property, but at different times), $420,000, $1,900,000 and $2,650,000. 11 Mr Juniper valued each of those properties as at the date at which the relevant valuations spoke. Following the same order, the amounts that he derived of the fair market value at the relevant dates were, respectively, $195,000, $195,000, $330,000, $1 million and $1,750,000. 12 To the extent that it is relevant, the gross sale price obtained by the bank when it realized its securities (at dates from two to three years after the relevant valuations by DTS were made) were less again. 13 Mr Juniper accepted that established valuation practice recognised that two valuers, each acting reasonably and carefully, could differ in their opinions as to the value of a particular property at a particular date, and that a margin of some 10 per cent would not, of itself, indicate negligence on the part of one or the other. However, it is submitted for the bank, a difference substantially in excess of 10 per cent may, of itself, bespeak negligence: see, for example, Adwell Holdings Pty Ltd v Smith [2003] NSWCA 103 and Hann Nominees Pty Ltd v National Australia Bank Ltd [2000] FCA 454. 14 In the present case, the percentage difference (expressed as a percentage of Mr Juniper's valuations, not of the DTS valuations) is, again, in the same order, respectively, 28 per cent, 69 per cent, 27 per cent, 90 per cent, and 51 per cent. 15 If it be accepted that Mr Juniper's valuations do indicate the fair market value of the properties in question at the relevant time - and that is the unchallenged effect of his evidence - then those differences of themselves bespeak negligence. 16 That is not the end of the matter. Mr Juniper reviewed each of the valuations performed by DTS. He identified significant defects in each of them, apart from the over-valuations which, in his opinion, they demonstrated. 17 As to the first Casula valuation, Mr Juniper expressed the opinion that DTS failed to make any appropriate allowance for certain negative features of the property (which he identified), and relied on comparable sales which, in his view, were in no way comparable. The same comments apply as to the second Casula valuation. 18 As to the Prestons valuation, Mr Juniper noted that DTS had relied on comparable sales, of which Mr Juniper could find no evidence. Further, he said, DTS failed to have regard to sales of comparable properties that were very proximate in both location and time. Use of those sales would have indicated a significantly lower figure. Perhaps most clearly, Mr Juniper pointed out, DTS had failed to have regard to the sale of the very property itself, to the borrower from the bank, some three months before the DTS valuation date. That sale was for a price of $336,000, some $84,000 less than the amount of the DTS valuation. 19 As to the Woy Woy valuation, Mr Juniper said that DTS had overstated the living areas in the individual townhouses that comprised the property, in circumstances where actual areas are a matter of significance to value. Further, Mr Juniper said, the properties relied upon as comparable sales were in no real sense comparable, but the valuation prepared by DTS made no allowance for that. Finally, Mr Juniper said, the DTS valuation simply multiplied out the valuation of one townhouse by four (there being four in the block), and arrived at the total as a value. Mr Juniper said that this failed to have any regard to the costs of completing the strata subdivision by converting the single title into four separate strata titles. 20 As to the Rose Bay valuation, Mr Juniper pointed out that there was a very significant over-statement of the living area in the DTS valuation. There was use of inappropriate comparable sales, and a failure to make use of other comparable sales. Had truly comparable sales been used, a lower valuation should have been achieved. Finally, DTS used a so-called sale which had not, in fact, occurred. 21 I am satisfied, on the basis of the evidence, that each of the valuations was performed negligently. 22 As I have said, I am satisfied that the bank relied on each of the valuations in making the credit decision that it did. 23 Before I turn to the question of loss, I will deal with the position of Mr Roberts. Mr Roberts was joined as a defendant only after DTS, in its defence, had suggested that he bore some responsibility for the allegedly negligent valuation of the Woy Woy property. Mr Juniper's evidence does indicate that Mr Roberts had some involvement. However, it provides no basis for thinking that whatever it was Mr Roberts did was done negligently. Nor is there any independent reason for concluding that Mr Roberts was negligent in whatever he did. 24 Further, there is nothing in the evidence to which the Court was taken that would show that Mr Roberts was aware that he was doing the work, not just for DTS, but for the bank as a client of DTS. Accordingly, there is no basis, on the evidence, for concluding that Mr Roberts owed any duty of care to the bank. 25 For those reasons, the case against Mr Roberts must fail. 26 I return to the question of damages. The bank put its case on the primary basis that, if it had been given "correct" valuations - i.e., valuations that reflected a value in line with the figures derived by Mr Juniper - then the transactions would not have proceeded. That is relatively clear in some cases. 27 As to the first Casula loan: the borrower sought some $200,000. $130,000 was required to pay out an existing loan secured over the property. The balance was said to have been required for business or investment purposes. On the figures, there was a significant balance - some $70,000. Had a value in line with Mr Juniper's valuation of $195,000 been given to the bank then, applying the bank's loan to valuation ratios applicable at the time, the maximum loan would have been about $156,000. Thus, allowing for the costs of discharge, the borrower would have had less than $26,000 for the purported other investments purpose. The figures show that he drew down the total amount of the loan very quickly. On the basis of that material, I infer that, if the loan had been limited to $156,000, it is unlikely that the borrower would have accepted it. I think that he would have looked elsewhere for the greater funds that, apparently, he needed. 28 There can be no doubt of the position in relation to the second Casula loan. A valuation anywhere near the figure derived by Mr Juniper would not have supported any advance whatsoever. 29 The Prestons property is in a somewhat different category. That property was owned by the same person who owned the Casula property. The loan sought was $336,000 (80 per cent - the appropriate loan to valuation ratio - of the DTS valuation). Had the property been valued at Mr Juniper's figure, then the maximum loan would have been $264,000. There was no mortgage over the Prestons property that needed to be discharged. Thus, on the face of things, the full amount of the loan was (and would have been) available to the borrower. 30 There is no evidence of the borrower's purpose. The only evidence is that he drew down $270,000 within a month of the loan's being made available to him and the balance some two months later. 31 I am not satisfied, on the basis of that material, that the transaction would not have proceeded if the valuation provided by DTS had been in line with Mr Juniper's suggested fair market value. Thus, the damages in relation to the Prestons loan need to be calculated on the basis that a loan would have been made, but would have been limited to $264,000. 32 As to the Woy Woy property: the loan application assumed a value of $2.2 million, and sought a loan of $1.76 million. The borrower was prepared to accept the loan of $1.52 million dollars that was offered, based on the DTS valuation of $1.9 million. 33 It is clear that the borrower had been "shopping around". I infer from that that, whilst he may not have needed the full amount that he sought ($1.76 million), it is unlikely that he would have taken something substantially less than $1.52 million. 34 On the basis of Mr Juniper's fair market value for Woy Woy of $1 million, the maximum loan would have been some $800,000. That is a little more than half of the amount that the borrower sought. In those circumstances, I infer, if the DTS valuation had been as Mr Juniper said it should have been, this transaction would not have proceeded. 35 A similar conclusion applies, although for somewhat different reasons, in relation to the Rose Bay loan. The amount that was sought was some $2.1 million. Of that, some $1.9 million was to be used to refinance an existing loan with another lender, which had a registered mortgage over the security property. It was a condition of the bank's approval that this existing loan be paid out in full. 36 If the Rose Bay property had been valued at the fair value ascribed by Mr Juniper ($1.75 million), the maximum loan available would have been $1.4 million. That was insufficient to pay out the other lender. In those circumstances, as I have said, I am satisfied that the transaction would not have proceeded. 37 Thus, for all but the Prestons loan, I am satisfied that damages should be assessed on a "no transaction" basis. In the case of the Prestons loan, damages should be accessed on a "different transaction" basis. 38 As to the two Casula loans, the evidence demonstrates that the damages, on a "no transaction" basis, are $145,010 as at 28 February 2007. For the Woy Woy loan, on the same basis but as at 11 April 2007, the damages are $811,875. On the Rose Bay loan, on the same basis but as at 3 January 2007, the damages are $946,745. 39 On the Prestons loan, the damages on the "different transaction" basis are shown by the evidence to be, as at 13 April 2007, $68,655. 40 The bank should have judgment against DTS for those amounts together with interest from the dates to which I have referred up until the date of entry of judgment. I direct the entry of judgment accordingly. 41 There is no reason why costs should not follow the event and I order DTS to pay the bank's costs. 42 There should be judgment for Mr Roberts on the claim against him. There is no reason why costs should not follow the event. I order the bank to pay Mr Roberts' costs of the proceedings. 43 In the circumstances leading to Mr Roberts' joinder, it is appropriate that the costs payable by DTS to the bank include costs payable by the bank to Mr Roberts and I so order. 44 I direct the plaintiff to bring in a draft order to give effect to these reasons and to bring in with it an affidavit verifying the calculation of interest. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.