Smith v Eric S. Bush (a firm)

The House of Lords held that a valuer instructed by a mortgagee (and paid ultimately by a purchaser) who knows that the purchaser will probably be shown and rely on the valuation owes the purchaser a duty in tort to exercise reasonable skill and care when carrying out the inspection and valuation. Notices purporting to exclude or disclaim liability for negligence fall within the scope of the Unfair Contract Terms Act 1977 (see sections 1(1), 2(2), 11(3) and 13(1)) and are therefore subject to the statutory reasonableness test. Applying the statutory tests and the relevant factors (including the vulnerability of purchasers, the small fee structure and the foreseeability of loss), the Lords concluded that the disclaimer relied on in this case did not satisfy the requirement of reasonableness and was ineffective, so the claimant was entitled to damages.

Background and facts:

• The appellant firm (Eric S. Bush) prepared a mortgage valuation/report for the Abbey National Building Society concerning a modest residential property. The prospective purchaser, Mrs Smith, paid an inspection fee to the society and received a copy of the report before purchasing the house. The report contained a prominent disclaimer stating that no responsibility was accepted to the purchaser.
• Mrs Smith later discovered serious structural defects which the valuer had failed to detect. At trial the valuer was found negligent and damages were awarded; the Court of Appeal affirmed that the disclaimer was ineffective under the Unfair Contract Terms Act 1977.

Procedural posture and relief sought:

• The valuer appealed to the House of Lords seeking to overturn the Court of Appeal's decision that the disclaimer was ineffective and to avoid liability in negligence.

Issues framed by the court:

1. Whether a valuer instructed by a mortgagee owes a duty of care in tort to a purchaser who will probably be shown and rely on the valuation;
2. Whether a disclaimer or notice excluding liability for negligence falls within the Unfair Contract Terms Act 1977; and
3. If so, whether the particular disclaimer satisfied the Act's requirement of reasonableness (section 11(3) and section 2(2) read with section 13(1)).

Court's reasoning (concise):

• The Lords concluded that where the valuer knows the purchaser has paid (or contributed to) the fee, knows that the report will probably be shown and relied upon by the purchaser, and that foreseeable negligence would cause economic loss, there is sufficient proximity and foreseeability to impose a duty of care in tort. Authorities such as Cann v Willson, Candler v Crane and Hedley Byrne were treated as supportive of imposing liability in such contexts.
• The court read the Unfair Contract Terms Act 1977 as applying to disclaimers which would otherwise prevent a duty of care coming into existence; section 13(1) prevents exclusion by notices which exclude the relevant obligation or duty, and section 11(3) requires that reliance on such notices be fair and reasonable having regard to the circumstances when the liability arose (or would have arisen).
• Applying the reasonableness test, the court took into account consumer vulnerability, the modest fee and the routine nature of mortgage valuations, the foreseeability and magnitude of purchasers' loss, and the availability and cost of alternative protections. On those factors the disclaimer relied upon was not reasonable in the context of ordinary house purchases.

Wider context:

• The Lords emphasised that their decision concerns modest residential properties and typical mortgage valuations; different considerations may apply to high value, commercial or specialist valuations.

The House of Lords dismissed the valuer's appeal. The Lords held that (1) a valuer instructed by a mortgagee and aware that the purchaser will probably be shown and rely on the valuation owes the purchaser a duty to exercise reasonable skill and care; (2) disclaimers of liability are notices falling within the Unfair Contract Terms Act 1977 and must satisfy its reasonableness requirement (sections 1(1), 2(2), 11(3) and 13(1)); and (3) on the facts the disclaimer was not fair and reasonable and was ineffective, so the valuer remained liable in negligence.

Trial: judge found the valuer negligent and awarded damages (amount recorded at trial). Court of Appeal: upheld the trial judge and held the disclaimer ineffective under the Unfair Contract Terms Act 1977 (reported as Smith v Eric S. Bush [1988] Q.B. 743). House of Lords: appeal dismissed [1990] UKHL 1; [1990] AC 831.