Not All Professional Errors Incur Liability

The Supreme Court considered a claim for damages (contract and tort) by a lender against a professional appraiser for his alleged negligence in the appraisal of a property under development, and whether the lender owed a duty of care.

In question

  • If a lender to whom a property valuation report has not been addressed has a duty of care and may seek to rely on that advice; the standard of reasonable care and skill; whether damages can be apportioned for contributory negligence and concurrent wrongdoing.

The background

The Plaintiff, Payton Securities Pty Ltd (“Payton Securities”), loaned $3,250,000 to Z&L Property Management Pty Ltd (“Z&L”) secured by a mortgage on a property in Diamond Creek, VIC (“the Property”).

Z&L was to develop the property into a group of residential lots. Bertacco Ferrier Pty Ltd (“Bertacco Ferrier”), appraised the property at the request of Payton Capital (which was another legal entity in a group of companies which included Payton Securities). Before advancing the loans, Payton Securities required confirmation from Z&L that the 28 lots of the first stage of the development concerned had been pre-sold. To that end, Z&L’s financial broker, seventh defendant MXW Finance Pty Ltd (“MXW Finance”), provided documents to Payton Securities indicating that the 28 lots were sold at a total price of $12,540,000 and that the deposit funds were held in the trust account of Z&L’s estate agent, first defendant Mason White McDougall (Hurstbridge) Pty Ltd (“MWM”). Documents provided by MXW Finance included a letter to this effect apparently on MWM letterhead.

It later emerged that MXW Finance had falsified the documents it provided by greatly exaggerating the number of pre-sales and that the deposit funds were not held by MWM as claimed. MWM denied preparing the relevant letter allegedly sent on its behalf.

Z&L defaulted and then went into liquidation. Payton Securities then took possession of the property and sold it, but suffered a shortfall on the loan. Payton Securities sought damages against seven defendants, including 4th defendant Bertacco Ferrier for its alleged negligence in valuing the property.

Prior to the hearing, Payton Securities settled its claims with two of the other defendants. The claim continued against Bertacco Ferrier alone for $1,467,940, after taking into account settlement monies received from the other two defendants. The court also had to determine the extent of the other defendants’ liability to Payton Securities as a result of Bertacco Ferrier’s proportionate liability defense, and the liability to Payton Securities of the other parties who were joined as defendants by Bertacco Ferrier.

The decision at trial

The court considered Payton Securities’ claim (in contract and tort) and whether Bertacco Ferrier had breached its duty of due diligence and jurisdiction in contract and tort to Payton Securities by negligently valuing the Super Lot (consisting of 24,490 square meters on the west side of the property).

The court dismissed the claim against Bertacco Ferrier and made the following findings:

Claim of Payton Securities in the contract

With respect to the contractual claim, it was argued that Bertacco Ferrier breached a contractual obligation to exercise due skill and care when appraising the property. The court observed that Bertacco Ferrier would have breached this duty if he had not exercised the care and skill normally exercised by a professional appraiser. Whether he had met the required standard of care had to be determined taking into account the circumstances at the time the assessment was made, and without the benefit of hindsight.

In assessing any breach of duty, the court stated that “the standard of reasonable care and skill is not a standard of perfection. Not all errors resulting in loss are due to negligence”.

It did not accept Payton Securities’ assertions that Bertacco Ferrier failed in its valuation to consider the area of ​​the Super Lot affected by a power line easement on the property, nor a high-density development project, or an infill development project.

However, the court found that Bertacco Ferrier was negligent because the valuation failed to take reasonable account of the significance of a proposed bushfire management overlay plan which had a impact on property. However, “Bertacco Ferrier’s negligence in preparing its valuation had no impact or significant impact on the assessment of the value of the property as a whole, or on that part of the value (related to the Super Lot ).” and “There is no negligence on the part of Bertacco Ferrier causing loss to Payton Securities.” The court described this as a “limited form of negligence”.

In any event, the court found that Payton Capital retained Bertacco Ferrier, not Payton Securities. Further, there was no evidence to support a conclusion that Payton Capital retained Bertacco Ferrier as an undisclosed agent for Payton Securities. On the contrary, the court concluded that there was an intention on the part of Payton Capital and not Payton Securities to retain Bertacco Ferrier.

On this basis, Payton Securities’ contract request failed.

The tort claim

The court found that Bertacco Ferrier owed no duty of care to Payton Securities because the valuation was not directed to Payton Securities and because it was not reasonably foreseeable that Bertacco Ferrier’s valuation would be relied upon by Payton Securities for the purposes of a second mezzanine mortgage.

The court identified two critical factors in concluding that a duty of care was not owed by Bertacco Ferrier to Payton Securities. First, Bertacco Ferrier quite reasonably believed that the only entity that could rely on its assessment was Payton Capital, not Payton Securities. “If a tort action were to be brought, it would only be brought against the contracting party and recipient of the alleged negligent inaccuracy, Payton Capital.” Moreover, ‘there was no accountability to a larger class. Bertacco Ferrier has in fact expressly disclaimed liability to anyone except Payton Capital.

Second, “it was not reasonable for Bertacco Ferrier to contemplate that a loan would be advanced based on Bertacco Ferrier’s valuation other than by a first mortgage lender. There was no expectation on the part of Bertacco Ferrier that its valuation would be used for the purposes of a high-risk mezzanine loan, let alone any assumption of liability by Bertacco Ferrier to such a lender.

Any reliance by Payton Securities on Bertacco Ferrier’s valuation was not reasonable and if any loss resulted from such reliance (which was not found), the loss was not reasonably foreseeable.

Contributory negligence and apportionment

The Court rejected an argument by Payton Securities that it could not be found guilty of contributory negligence because the “risk of harm” as referred to in section 66 of the Wrongs Act 1958 dealing with contributory negligence, was a reference to the same risk of harm in section 48 of the Wrongs Actwhich deals with the general principles on the existence of negligence and, more specifically, the reasonable precautions that a defendant is expected to take against an identified risk of harm.

In this case, Payton Securities argued that it could only be contributorily negligent if it overvalued the property, which was the same risk Bertacco Ferrier had to manage.

The Court disagreed on the basis that it identified the risk of harm as economic loss, not the narrow formulation put forward by Payton Securities, which “confuses the event against which Bertacco Ferrier was required to take reasonable steps to protect itself against the damage that results for Payton Securities from this event.

Plaintiff further admitted that his claim was an apportioned claim within the meaning of Sections 24AE and AF of the Wrongs Act 1958. Bertacco Ferrier argued that the main cause of the loss was the fraudulent behavior of the directors of the development company, aided by the financier and the estate agent, and that its liability should therefore be considerably reduced or extinguished. After reviewing the evidence, the court determined that if liability had to be apportioned, it would have awarded 55% to the managers of the borrowing company, 17.5% to the financier and 27.5% to the expert Bertacco Ferrier .

However, given the findings on liability, the claim against the expert was dismissed.

Consequences for you

The case ultimately turned on the lack of a contractual relationship between Payton Securities and the appraiser, Bertacco Ferrier, who was retained by Payton Capital.

The cases serve as a reminder of the importance of:

  • A clear written mandate, i.e. setting out the scope of services to be provided by the adviser to the principal, which is clearly identified (noting that the absence of a contractual relationship may affect any tort claims/ contractual);
  • A clear statement of opinion from the advisor indicating the instructions received from the manager, and any reservations, questions or reservations they have (if any) in reaching their opinion, and
  • A clearly worded disclaimer stating that the notice/notice has been prepared on the basis that it may be used or relied upon only by the person to whom it is directed.

Finally, note should be taken of the comment, which may perhaps apply to other professionals and not just appraisers, that the reasonable standard of care and skill to which a professional adviser should be held is not “a standard of perfection”, and that they cannot be held responsible for any errors.

Payton Securities Pty Ltd v Bertacco Ferrier Pty Ltd M Osborne J [2022] CSV 394

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