Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd

The House considered when a lender's cause of action for negligent overvaluation accrues for the purpose of awarding simple interest under section 35A of the Supreme Court Act 1981 and for limitation. The court reaffirmed that the valuer's duty is limited to loss caused by the deficiency in the security and that a cause of action in tort arises when the claimant first sustains measurable, relevant loss attributable to that deficiency. Where, on the basic comparison between the plaintiff's actual position and the position if the valuation had been correct, loss is shown at an earlier date the lender's cause of action accrues then; it is not necessary to wait until realisation of the security. The House therefore awarded simple interest on the agreed damages of 1.4 million from 12 December 1990 at 0.4 per cent above LIBOR. The court also held that the appellate court has inherent power to order repayment of sums and to award interest on sums ordered to be repaid, but that R.S.C. Order 42 rule 3 cannot be used to backdate costs orders in a manner which has the effect of producing interest on costs that statute does not permit.

The lender (Nykredit) sued valuers (Erdman) for negligent overvaluation of property provided as security for a loan. The House had already decided the proper measure of damages was the amount of the overvaluation (1.4 million) and adjourned the question of interest. The principal issues were (i) the date on which the lender's cause of action arose for the purpose of awarding interest under section 35A of the Supreme Court Act 1981 and for limitation, and (ii) whether the court could award interest on costs or backdate costs orders so as to attract interest from an earlier date.

The court framed the issues as whether loss "suffered" for tort accrual means the date of entry into the transaction, the date of default or sale of the security, or some other date when loss attributable to the valuation becomes measurable. The House reiterated the proper comparator for loss is the lender's actual position compared with the position had the valuation been correct, and that the valuer is liable only for the loss attributable to the deficiency in security. The House rejected the submission that no cause of action arises until the security is realised or until the lender becomes entitled to have recourse to the security. The court emphasised practical and evidential difficulties do not negate accrual where loss is demonstrable earlier.

The House concluded that, on the facts, the borrower defaulted almost immediately and the lender had suffered its full allowable loss by 12 December 1990. Simple interest at the agreed rate of 0.4 per cent above LIBOR was awarded on  million from that date until judgment. The court held that appellate courts have inherent power to order repayment and interest on sums to be repaid as part of effectuating the unravelling of prior orders, but that R.S.C. Order 42 rule 3 cannot be used to backdate orders so as to manufacture statutory judgment debt interest on costs for periods where statute does not permit it. The House therefore refused to allow the valuers to obtain interest on certain costs for earlier periods by backdating.

Appeal dismissed in respect of the valuers' contention that the cause of action did not arise until realisation of the security; the House held the cause of action arises when the lender first sustains measurable loss attributable to the deficient valuation and awarded simple interest on  million from 12 December 1990 at 0.4% above LIBOR. The House further held that appellate courts have inherent power to order repayment and interest on sums ordered repaid but rejected the use of R.S.C. Order 42 rule 3 to backdate costs orders so as to create statutory judgment interest that statute does not permit.

The case reached the House of Lords on appeal from the Court of Appeal. The House had earlier (20 June 1996) given judgment on the substantive issue of measure of damages ([1996] 3 WLR 87) determining that damages were limited to the amount of the overvaluation. The present judgments resolve the remaining issues of interest on damages, interest on costs and the power to order repayment with interest after setting aside earlier orders.