Capita Alternative Fund Services (Guernsey) Ltd & Anor v Drivers Jonas (A Firm)

Where professional negligence has demonstrably caused loss, uncertainty in quantification does not prevent recovery. The court must reach the most likely valuation on the available evidence, provided that its conclusion has a rational evidential basis.

In assessing diminution in value, the court considers the whole benefit acquired. Tax relief must therefore be credited where it was integral to the investment and arose immediately or almost immediately. The relief must be reflected on both sides of the valuation comparison. Whether taxation is relevant remains a fact-sensitive question.

Capita acquired a leasehold interest in a proposed factory outlet centre as trustee of an Enterprise Zone Property Unit Trust. It relied on Drivers Jonas's valuation and commercial advice. The investment failed, and Capita claimed that the property had been negligently overvalued.

Eder J held Drivers Jonas liable and awarded £18.05 million on a diminution-in-value basis, with interest from April 2001: [2011] EWHC 2336 (Comm). Drivers Jonas appealed on three grounds. It contended that the evidence did not establish the amount of any loss, that investors' tax credits should reduce the damages, and that interest should run only from April 2008.

The central questions were whether the judge had an evidential basis for his valuation, whether tax relief formed part of the value acquired, and when the compensable loss crystallised.

1. Appeal allowed in part. Gross LJ and Moore-Bick LJ held that the trial judge had a sufficient evidential basis for assessing substantial loss. Lloyd LJ dissented on that issue. The damages were nevertheless reduced from £18.05 million to £11,861,738 because the investors' tax relief had to be brought into account.

2. A judge is not bound by expert valuation evidence or by the figures advanced by the experts. Valuation is an art rather than a science, and the court may do the best it can with imperfect evidence. Its conclusion must, however, rest on a reasoned and rational evidential basis. Once the evidence established that the negligent valuation was substantially too high, uncertainty about the precise amount did not eliminate the loss. The judge was entitled to rely on the valuation expert's experience, the numerous unchallenged defects in Drivers Jonas's work and the other expert evidence as a cross-check: Gross LJ at [41]–[48]; Moore-Bick LJ at [77]–[82].

3. A valuer is negligent only if reasonable skill and care were not exercised and the resulting valuation fell outside the permissible range. Having determined the figure most likely to have been given by a competent valuer, the court assesses damages by reference to that figure. The judge was entitled to conclude that the proper projected rent was £19 per square foot rather than £27.50: [43]–[48].

4. The compensatory principle required the court to examine the market value of the whole investment. Tax considerations were integral to this Enterprise Zone scheme, and the investors became entitled to the tax credits immediately or almost immediately upon investing. Ignoring that benefit would produce an unreal measure of loss. The incidence of taxation is not relevant in every damages claim; the question is one of fact and degree: [54]–[59].

5. The tax relief had to be applied symmetrically. It was deducted from both the price actually paid and the competent valuation. Deducting it from only one side would be unfair and would distort the diminution-in-value comparison. The fact that the transaction would not have proceeded at the correct valuation did not alter that analysis: [60]–[61].

6. Income and Corporation Taxes Act 1988, section 469, together with regulations 3 and 4 of the Income Tax (Definition of Unit Trust Scheme) Regulations 1988, created statutory transparency between the trust and its investors. Their interests were synonymous for this purpose. Tax credits obtained by the investors were therefore relevant to the damages recoverable by Capita: [62]–[65].

7. The loss crystallised in April 2001 under the diminution-in-value analysis. Interest was therefore properly awarded from that date, notwithstanding the seven-year investment lock-in period. The appeal on interest was dismissed: [69]–[70].

1. Court of Appeal (Civil Division): By [2012] EWCA Civ 1417, allowed the appeal in part. It upheld the findings that substantial loss was proved and that interest ran from April 2001, but reduced damages to £11,861,738 to account for tax relief.
2. High Court, Commercial Court: By [2011] EWHC 2336 (Comm), Eder J entered judgment for Capita for £18.05 million, with interest from April 2001. He found negligent overvaluation and declined to reduce damages for investors' tax credits.