Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (formerly Edward Erdman) (No 2)

A negligence cause of action for purely financial loss accrues when the claimant first sustains measurable loss within the scope of the defendant’s duty. For a negligent valuation of loan security, the court compares the lender’s no-transaction position with the value of the rights acquired, then identifies the loss attributable to the deficient security. Realisation of the security is not a prerequisite.

Interest on damages may run only from accrual of the cause of action. A costs order carries statutory interest from the date it is made, but cannot be antedated solely to trigger earlier interest. An appellate court has inherent power to order interest on money repaid when a lower-court order is set aside.

In an earlier judgment concerning three negligent-valuation appeals, the House held that the valuers’ liability to the lender was limited to the £1.4 million overvaluation: [1996] 3 WLR 87. It adjourned the question of interest on those damages.

The remaining issues were when the lender’s cause of action accrued for the purpose of section 35A of the Supreme Court Act 1981, whether the valuers could receive interest on Court of Appeal costs from a date before the House made its costs order, and whether interest could be awarded on damages and costs repayable after the earlier orders were set aside. The lender contended that measurable loss arose during 1990. The valuers argued that it arose only when the security was sold in 1993.

1. Disposition. Lord Nicholls delivered the principal speech and Lord Hoffmann agreed, adding reasons on the damages-interest calculation. Lord Goff and Lord Jauncey agreed with both speeches, while Lord Slynn agreed with their conclusions. The outstanding issues were therefore determined unanimously. Simple interest was awarded on £1.4 million from 12 December 1990 at 0.4 per cent above LIBOR. The valuers’ claim for antedated interest on costs was rejected. The House also affirmed its jurisdiction to award interest on sums ordered to be repaid.
2. Accrual of loss. Per Lord Nicholls, a cause of action in tort arises when the claimant first suffers actual damage. For financial loss, actual damage includes a detriment, liability or loss capable of monetary assessment, but it must be loss falling within the measure of damage applicable to the wrong. The definition stated in Forster v Outred & Co. [1982] 1 WLR 86 was approved, subject to that qualification.
3. Negligently valued security. Per Lord Nicholls and Lord Hoffmann, the initial inquiry compares the lender’s position without the transaction with the value of the rights actually acquired, including the borrower’s covenant and the true value of the security. If this comparison reveals loss, the court must identify the portion attributable to the deficient valuation. A valuer is responsible only for the adverse consequences of having insufficient security, not every foreseeable consequence of making the loan. This limitation concerns the scope of the duty, rather than causation or a damages cap.
4. The cause of action may arise immediately, although a performing borrower’s covenant can mean that no measurable loss then exists. Neither default nor sale of the security is an inflexible prerequisite. Sale ordinarily crystallises the amount of an existing loss; it does not create the loss. Here the borrower’s covenant was worthless, default occurred almost immediately, and the advance exceeded the property’s true value from the outset. The full recoverable loss had accrued by December 1990.
5. Interest on damages and costs. Section 35A of the Supreme Court Act 1981 permits simple interest only from the date the cause of action arose. Interest from an earlier date would have duplicated financing interest already included in the damages. Under the Judgments Act 1838, a costs order bears interest from the date of the order under the incipitur rule. Order 42 rule 3 could not be used solely to antedate a costs order and activate statutory interest. Kuwait Airways Corporation v Iraqi Airways Co. (No. 2) [1994] 1 WLR 985 was wrongly decided.
6. Consequential restitution. Per Lord Nicholls, an appellate court possesses inherent jurisdiction to unwind the practical consequences of an order which it sets aside. That jurisdiction includes ordering repayment and, in a suitable case, awarding interest on the amount repaid so that restitution is as complete as reasonably practicable.

1. House of Lords—current proceedings: In Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (formerly Edward Erdman) (No 2) [1997] 1 WLR 1627, the House unanimously determined the interest and consequential repayment issues left outstanding.
2. House of Lords—earlier judgment: On 20 June 1996, the House set aside the Court of Appeal’s order, varied the trial judge’s order by reducing the damages to £1.4 million, made consequential costs orders and adjourned the damages-interest question: [1996] 3 WLR 87.
3. Court of Appeal: The court had dismissed the valuers’ appeal with costs. Its order was subsequently set aside by the House.
4. Trial: The trial judge awarded damages and costs to the lender. The damages order was subsequently varied by the House.