Strand, London, WC2A 2LL
B e f o r e :
| DAVID GOLDSTEIN
|- and -
|LEVY GEE ( A FIRM)
Mr. Robert Howe (instructed by Simmons & Simmons) for the Defendant
Hearing dates : 9th,10th,11th,12th,13th June 2003
Crown Copyright ©
Mr Justice Lewison:
The share valuation
"the price certified … by the Valuers acting as experts and not as arbitrators as being equal to the value of the shares offered valued without discount for minority holding as between a willing vendor and a willing purchaser as at the date of the Transfer Notice. The Valuers shall be entitled to engage surveyors to advise on the value of the Company."
"the Company's Auditors from time to time"
"the properties are to be valued at the deemed transfer date for sale as an entire portfolio"
"The properties are to be valued individually on an "open market" basis in accordance with the current RICS Appraisal and Valuation Manual (The Red Book)."
"We seem to be agreed that the valuation has to be done on a portfolio basis."
"The properties are to be valued, as a portfolio, on an open market basis (including both positive and negative values) based on your opinion of the best price at which the sale of the portfolio could be completed unconditionally …"
"The properties are to be valued, as a portfolio, on an open market basis (including both positive and negative values) based on your opinion of the best price at which the sale of the portfolio could be completed unconditionally, for a cash consideration on the date of the valuation" [on various assumptions]
"It is to be assumed that the portfolio will be sold on a standard contract requiring completion within twenty-eight days of exchange."
"I note that the properties are to be valued as a portfolio."
"As instructed, the properties have been valued as a portfolio, on an open market basis …
We have had regard to the general quality of the portfolio, the potential for rental growth, for the redevelopment opportunities and for future liabilities. We have concluded that the portfolio would need to be offered at a discount to the aggregate value of the component parts in order to achieve a sale on a standard contract requiring completion within 28 days of exchange. …
In arriving at the portfolio valuation, we have adopted an overall discount of 10% to reflect its particular characteristics."
The allegations of negligence
(1) It was wrong to instruct Jones Lang Wootton to value the properties "as a portfolio" rather than individually. This had the effect of reducing their value by 10 per cent;
(2) It was wrong to deduct tax contingently payable on all the properties, when there was no real prospect of a sale of all the investment properties. The proper deduction would have been a deduction for deferred tax on the trading stock and a small proportion of the investment properties;
(3) The deduction of 12.5 per cent for non-listed status and costs of realisation was inappropriate;
(4) It was wrong to assume that 75 per cent of the share options would be exercised. In truth, the figure of 75 per cent is not an assumption that 75 per cent of the share options would be exercised, but a 75 per cent probability that 100 per cent of them would be exercised.
How is negligence established?
"In an action for negligence against an expert, it is not enough to show that another expert would have given a different answer. Valuation is not an exact science; it involves questions of judgment on which experts may differ without forfeiting their claim to professional competence. The fact that a judge may think one approach better than another is therefore irrelevant… The issue is not whether the expert's valuation was right, in the sense of being the figure which a judge after hearing the evidence would determine. It is whether he has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession: see Bolam v. Friern Hospital Management Committee  1 W.L.R. 582 at p. 587, a well-known citation"
"As has been said, a forecast is always the forecaster's estimate of the most probable outcome, the mean figure within the range of foreseeable deviation. The judge appears to have assumed that if a figure would have been within the range of foreseeable deviation from the mean of a properly prepared forecast, it must follow that it would have been proper to put that figure forward as the mean. This proposition has only to be stated to be seen to be fallacious. There is no connection between the range of foreseeable deviation in a given forecast and the question of whether the forecast was properly prepared. Whether a forecast was negligent or not depends upon whether reasonable care was taken in preparing it. It is impossible to say in the abstract that a forecast of a given figure "would not have been negligent." It might have been or it might not have been, depending upon how it was done. Assume, for example, that the vendor had forecast $1.25m. and that the limits of foreseeable deviation would have been regarded as $50,000 either way. Assume that the forecast was unexceptionable in every respect but one: there had been a careless double counting of sales which, if noticed, would have reduced the estimate by $25,000. To that extent, the estimate has not been made with reasonable care. If on account of some compensating deviation the outcome is $1.25m. or more, the purchaser will have suffered no loss and the vendor will incur no liability. But if the outcome is less than $1.25m., their Lordships think that the purchaser is entitled to say that if the estimate had been made with reasonable care, the figure put forward by the vendor as the mean and upon which he relied in fixing the price, would have been $25,000 lower. To this extent, he has suffered loss by reason of the breach of warranty. It is nothing to the point that the outcome is still within what would have been predicted as the limits of foreseeable deviation. His complaint is that the whole range of possible outcomes would have been stated as $25,000 lower. The purchaser has accepted the risk of any deviation attributable to factors which were unforeseeable, unknown or incalculable at the time of the forecast. He has accepted the risk of such deviation whether its true extent would have been foreseeable at the time of the forecast or not. But he has not accepted the risk of any deviation which is attributable to lack of proper care in the preparation of the forecast. The only tolerable forecast is one which, on its facts, was prepared with reasonable care." (Underlining added)
"Before I come to the facts of the individual cases, I must notice an argument advanced by the defendants concerning the calculation of damages. They say that the damage falling within the scope of the duty should not be the loss which flows from the valuation having been in excess of the true value but should be limited to the excess over the highest valuation which would not have been negligent. This seems to me to confuse the standard of care with the question of the damage which falls within the scope of the duty. The valuer is not liable unless he is negligent. In deciding whether or not he has been negligent, the court must bear in mind that valuation is seldom an exact science and that within a band of figures valuers may differ without one of them being negligent. But once the valuer has been found to have been negligent, the loss for which he is responsible is that which has been caused by the valuation being wrong. For this purpose the court must form a view as to what a correct valuation would have been. This means the figure which it considers most likely that a reasonable valuer, using the information available at the relevant date, would have put forward as the amount which the property was most likely to fetch if sold upon the open market. While it is true that there would have been a range of figures which the reasonable valuer might have put forward, the figure most likely to have been put forward would have been the mean figure of that range. There is no basis for calculating damages upon the basis that it would have been a figure at one or other extreme of the range. Either of these would have been less likely than the mean: see Lion Nathan Ltd. v. C. C. Bottlers Ltd., The Times, 16 May 1996."
"The valuation of land by trained, competent and careful professional men is a task which rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuer that he is obliged to proceed on the basis of assumptions. Therefore he cannot be faulted for achieving a result which does not admit of some degree of error. Thus, two able and experienced men, each confronted with the same task, might come to different conclusions without anyone being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work. The permissible margin of error is said by Mr Dean, and agreed by Mr Ross, to be generally 10 per cent either side of a figure which can be said to be the right figure, i.e. so I am informed, not a figure which later, with hindsight, proves to be right, but which at the time of valuation is the figure which a competent, careful and experienced valuer arrives at after making all the necessary inquiries and paying proper regard to the then state of the market. In exceptional circumstances the permissible margin, they say, could be extended to about 15 per cent, or a little more, either way. Any valuation falling outside what I shall call the "bracket" brings into question the competence of the valuer and the sort of care he gave to the task of valuation."
"Pinpoint accuracy in the result is not, therefore, to be expected by he who requests the valuation. There is, as I have said a permissible margin of error, the "bracket" as I have called it. What can properly be expected from a competent valuer using reasonable skill and care is that his valuation falls within this bracket."
"If the valuation that has been reached cannot be impugned as a total, then, however, erroneous the method or its application by which the valuation has been reached, no loss has been sustained, because, within the Bolam principle, it was a proper valuation."
"I conclude, therefore, on this section, that though there was a fault in the process of calculation, none the less a proper and acceptable process could properly have resulted in no, or no perceptible, difference to the end valuation; that is to say that the figure in fact reached by Mr Cohen was acceptable on the Bolam principle."
"Since Craneheath did not establish that the figure of £5.25m was wrong, then I agree with Mr Stow that Craneheath's action must fail. It would not be enough for Craneheath to show that there have been errors at some stage of the valuation unless they can also show that the final valuation was wrong. If authority be needed for so self-evident a proposition, it can be found in Mount Banking Corporation Ltd v. Brian Cooper & Co  2 EGLR 142 at pp. 144-5, 149."
"In the light of this the plaintiffs faced a formidable task in discharging their burden of proving that the figure of £1.1 m as an assessment of current turnover was erroneous. Without such a finding there could be no finding of negligence."
"Both cases were concerned with the quantification of damages and not with liability. Lion Nathan was concerned with breach of a warranty given on the sale of a business, and I feel quite unable to transpose the passages cited by counsel …analogically to the very different area of professional negligence."
"This is a bracket case. It was so approached by both surveyors. There will be other cases, most probably involving the valuation of premises on which an on-going business is conducted, where the bracket approach will be wholly inappropriate. None of what I have said so far in this judgment is intended to bear upon such cases."
"In order to determine whether the advice contained in the 12 June assessment was negligent, that is to say, whether the figures set out in the assessment were negligently stated, it was necessary, or if not necessary almost inevitable, that the court should form a view as to what was the correct or true value of the property; that is what would have been the correct figures to include in the assessment. That step has to be taken because a necessary step in determining whether a particular valuation was negligent is to consider the extent to which the valuation diverged from what would have been a correct valuation, and the reasons for that divergence."
"It has frequently been observed that the process of valuation does not admit of precise conclusions, and thus that the conclusions of competent and careful valuers may differ, perhaps by a substantial margin, without one of them being negligent: see for instance the often quoted judgment of Watkins J in Singer & Friedlander Ltd v. John D Wood & Co  2 EGLR 84 at p. 85G; and the House of Lords in Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co Ltd  A.C. 191 at p 221 F-G. That has led to the courts adopting a particular approach to claims of negligence on the part of valuers.
In the general run of actions for negligence against professional men:
"it is not enough to show that another expert would have given a different answer. …the issue is … whether [the defendant] has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession": Zubaida v. Hargreaves  1 EGLR 127 at p 128 A-B per Hoffmann LJ, citing the very well-known passage in Bolam v. Friern Hospital Management Committee  1 WLR 582 at p 587
However, where the complaint relates to the figures included in a valuation, there is an earlier stage that the court must be taken through before the need arises to address considerations of the Bolam type. Because the valuer cannot be faulted in any event for achieving a result that does not admit of some degree of error, the first question is whether the valuation, as a figure, falls outside the range permitted to a non-negligent valuer. As Watkin J put it in Singer & Friedlander at p 86A:
"There is, as I have said, a permissible margin of error, the "bracket" as I have called it. What can properly be expected from a competent valuer using reasonable skill and care is that his valuation falls within the bracket."
A valuation that falls outside the permissible margin of error calls into question the valuer's competence and the care with which he carried out his task. .. But not only if, but only if, the valuation falls outside the permissible margin does that inquiry arise. …
Various further considerations follow. First, the "bracket" is not to be determined in a mechanistic way, divorced from the facts of the instant case. … Second, if it is shown even at the first stage that the valuer did adopt an unprofessional practice or approach, then that may be taken into account in considering whether his valuation contained an unacceptable degree of error. … Third, where the valuation is shown to be outside the acceptable limit, that may be a strong indication that negligence has in fact occurred. … Some caution at least has to be exercised in this respect, because the question must remain, in valuation as in any other professional negligence cases, whether the defendant has fallen foul of the Bolam principle. To find that his valuation fell outside the "bracket" is, as is held by this court in Craneheath and also, I consider, by the House of Lords in Banque Lambert, a necessary condition of liability, but it cannot in itself be sufficient." (Underlining added)
"Where, as in the present case, criticism is addressed to factors such as rental value and yield which bear proportionately on the ultimately assigned value, the issues of the permissible range and of negligence are on any view inseparably linked. The value estimated results from the estimated rental values and yields. Where there is some discrete error, like that postulated in Lion Nathan Ltd v. C-C Bottlers  1 WLR 1438, it may be appropriate to examine more closely the nature of the valuer's engagement. Is it simply to produce an end result and to do so within the range of "reasonable foreseeable deviation?". Or may it be to exercise reasonable skill and care in the circumstances (including whatever instructions may have been given) both informing and in expressing an opinion on value? In Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co Ltd  Q.B. 375 when it was before this court the judgment given by Sir Thomas Bingham M.R. at pp. 403-404 lends some support to the latter analysis. On that basis, if, as a result of clearly identifiable negligence, a valuer arrives at a figure lower than he would otherwise have put forward, the line of reasoning indicated in the Lion Nathan case  1 WLR 1438 might still be applicable, although the end figure could not itself be said to fall outside the margin of legitimate valuation by valuers generally. It is however unnecessary to consider this point further on this appeal."
"In my judgment, it is clear, from both lines of authority to which I have referred, that a court should be slow to find a professionally qualified man guilty of a breach of duty of skill and care towards a client (or third party) without evidence from those within the same profession as to the standard expected on the facts of the case and the failure of a professionally qualified man to measure up to that standard. It is not an absolute rule, as Sachs L.J. indicated by his example, but, unless it is an obvious case, in the absence of the relevant expert evidence, the claim will not be proved."
The permissible range
Willing buyer and willing seller
Instructions to Jones Lang Wootton
"In my opinion the shares should have been valued on the basis of an orderly sale of the properties assuming the company to be a going concern. [Para. 3.20]
I agree with Mr Hindley's assertion that the only circumstances in which a property portfolio would be valued on the assumption that it would be sold in its entirety to one purchaser is on the break-up of the company. [Para. 3.23.11]"
"if the 10% discount is attributable to JLW's valuation of the properties as a single portfolio to be sold to a single purchaser, the application of such a discount is inappropriate."
"The value of a company is deemed to be the price for which the ownership of the company would be transferred between a willing buyer and a willing seller on an arm's length basis. Clearly, any willing buyer of Marchday would be buying the company's property portfolio in its entirety.
On this basis, Levy Gee's instruction to value the company's principal asset, namely its property portfolio, "as a portfolio", seems to me to be entirely appropriate. A valuation of the entirety of the company's properties, as a single asset, must, after all, be consonant with the objective of valuing the property company's shares: the shares represent the property assets as a whole. There is no direct relationship between individual shares and individual properties."
"the application of a portfolio valuation is incorrect, would not have been requested by a reasonably competent valuer of the shares, and would, of necessity, depress the value of the shares."
"Although the shareholder is a co-owner of the company, he is not a co-owner of its assets. This is not a legal quibble, but a reality which goes to the very essence of a share and the nature of a company."
"In order to be prudent, for the purposes of this valuation, any potential tax that would be payable on the disposal of any of the company's assets shown in the balance sheet, should be deducted from the values of those assets. This procedure has been assumed notwithstanding the fact that in open market negotiations, some discount might be given for the deferred element of this taxation liability."
"It could normally be appropriate to discount the potential charge to take account both of the fact that it would be over stating the net asset value of the company to ignore the tax charge, but also to recognise the fact that there is no immediate intention to dispose of the properties concerned and therefore no actual crystallisation of the tax charge."
Discount for non-listed status
Conclusions thus far
(i) The properties should not have been valued on a portfolio basis. There is no permissible range.
(ii) Mr Synett made too great a deduction for contingent tax. The permissible range is 35 to 65 per cent, and the most likely figure is 50 per cent.
(iii) Mr Synett made a deduction for non-listed status based on an error of principle. But his deduction was within the permissible range, which is between 0 and 12 ½ per cent. The mean figure is 6 ¼ per cent.
(iv) Mr Synett was not negligent in making a deduction to reflect a 75 per cent probability that the options would be exercised. The permissible range is between 50 and 75 per cent. The mean is 62 ½ per cent.
The end result
(i) Portfolio discount: 0 per cent
(ii) Contingent tax: 65 per cent
(iii) Discount for lack of marketability: 12.5 per cent
(iv) Probability of exercise of options: 75 per cent
(i) Portfolio discount: 0 per cent
(ii) Contingent tax: 35 per cent
(iii) Discount for lack of marketability: 0 per cent
(iv) Probability of exercise of options: 50 per cent