Dennard v PricewaterhouseCoopers

The claimants sued PwC for negligently under-valuing their 50% interest in an 11-project PFI portfolio and for acting while allegedly conflicted in relation to Barclays. The court focused on whether the valuation engagement was subject to the terms of PwC's November 2004 Engagement Letter (including a £1m cap and time limits), whether PwC's Discounted Cash Flow assumptions (notably base discount rates, premiums for "equity only", and construction/ramp-up premia) were within the range a reasonably competent valuer could adopt, and whether any conflict of interest vitiated contractual protections. The judge held that the valuation engagement was an extension of the Engagement Letter, that PwC's choice of discount rates and an excessive premium for equity-only risk meant the May 2005 valuation fell below the range of reasonable valuations, but that the correct non-negligent valuation would have been materially lower than the later SMIF sale price. Applying causation and loss-of-chance principles (Allied Maples), the court awarded the claimants damages for the lost chance of obtaining a higher price from Barclays: £427,500. The court found no evidential basis to establish the asserted conflict produced a perverse incentive that would negate the contractual limitation.

Background and parties: The four individual claimants (major shareholders in the Rydon/Ryhurst group) alleged that PwC negligently undervalued Ryhurst's 50% interest in the RBIL portfolio of 11 PFI care projects (May 2005 valuation £5.1m) which led them to sell shares in Ryhurst to a Barclays vehicle (BEIF) in January 2006 for £5.5m; Barclays re-sold the portfolio in December 2006 to SMIF for a much higher price. The claimants also alleged PwC was affected by conflicts of interest because of PwC's relationship with Barclays and the prospect of future refinancing work.

Relief sought: Damages for breach of contract and/or negligence for the shortfall between the deal price and the value the claimants say should have been ascribed to their interest; alternatively damages for loss of a chance of achieving a better price.

Procedural posture: First instance trial in the Chancery Division before Mr Justice Vos; multiple factual and expert witnesses were called; parties agreed a list of issues the court must decide.

Issues framed by the court:

• Whether the valuation retainer was covered by the Engagement Letter terms (limitation/time bars).
• Whether PwC owed any common law duty beyond contract (ultimately not pursued).
• Reliance and entitlement to rely on PwC's valuation.
• Whether PwC's May 2005 valuation was negligent (discount rates, upsides, construction/ramp-up and equity-only premium).
• Whether PwC ought to have revised the valuation before January 2006.
• What non-negligent value should have been ascribed (May 2005 and Jan 2006).
• Would the sale to BEIF have proceeded but for any negligence (causation and loss of chance).
• Conflict of interest allegations and the legal consequences for limitation clauses.

Court’s reasoning and findings (concise):

• The court construed the contemporaneous emails of 2 March 2005 and concluded the valuation engagement was agreed as an extension of the Project Normandy 2 Engagement Letter; consequently PwC's contractual limits (including the £1m cap and time limits) applied to the valuation retainer.
• The claimants in fact relied on PwC's valuation and were contractually entitled to do so.
• On the law of negligent valuation the court applied the established approach (process and range): a valuer is negligent if they fall below the standard of a reasonably competent valuer, and the claimant must also show the valuation was outside the range reasonably open to competent valuers or that negligence in the process caused loss.
• Expert evidence was tested. The judge accepted that PwC's principal error was applying an excessive premium for "equity only" risk (PwC used an approach that produced high uplift in many projects) and that several of PwC's discount rates lay outside the range a reasonably competent valuer could adopt. PwC's treatment of refinancing, sinking funds and residual upsides did not, on balance, produce an excessive refinancing figure, but PwC's overall valuation was pushed down by the discount rate choices.
• The court determined a non-negligent valuation (May 2005) for the whole portfolio at about £8.8m (base case £7.4m plus refinancing/trapped cash upside ~£1.4m) with a reasonable range for total value of approximately £5.6m to £11.8m. PwC's May 2005 valuation £5.1m was below the lower end of that range.
• On causation the judge held the claimants would, in the ordinary course, have proceeded with the Barclays sale unless presented with a much higher valuation; the proper remedy was loss of a chance. Applying Allied Maples principles and assessing likelihoods, the court awarded damages for the lost chance that Barclays would have increased its offer — assessed at a 75% chance of Barclays increasing to an estimated most likely offer of £6.5m — yielding damages of £427,500.
• The conflict of interest case failed on the evidence: there was no clear factual basis to infer a perverse incentive to undervalue to obtain future Barclays business, and claimants' informed knowledge of PwC's relationship with Barclays further weakened the allegation for relief from contractual limits.

The court allowed the claim in part. It held that the valuation engagement was an extension of PwC's November 2004 Engagement Letter (so contractual limits applied), that PwC had been negligent in parts of its valuation process (principally by applying excessive premiums for equity-only risk and discount rates outside the reasonable range) such that the May 2005 valuation fell below the range a reasonably competent valuer could have adopted, and that the claimants were entitled to damages assessed by reference to the lost chance of achieving a higher price from Barclays. The court awarded damages of £427,500.