Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 13
A984/08	OPINION OF MORAG WISE, Q.C (Sitting as a Temporary Judge) in the cause SANTANDER UK PLC Pursuers; against ALLIED SURVEYORS SCOTLAND PLC Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: L. McNeill, Advocate; Lindsays

Defenders: R.W. Dunlop, Q.C.; Simpson & Marwick

25 January 2011

Introduction
[1] The pursuers are the successors to the rights and claims of Girobank plc ("Girobank"). As such, they are suing the defenders, who carry on the business of chartered surveyors from various addresses in Scotland, for breach of contract. The alleged breach is of an admitted term of the contract between the parties that the defenders would exercise with reasonable care the ordinary skill to be expected of ordinarily competent chartered surveyors in providing a valuation report. The valuation report in question was provided on 10 October 2001. The defenders' second plea-in-law is to the effect that any cause of action available to the pursuers has been extinguished by the short negative prescription. I heard a preliminary proof on that plea. Put shortly, the defenders contend that the concurrence of iniuria and damnum occurred in October 2001 and in any event prior to October 2003. Thus the action was time barred from October 2008. The pursuers' contention is that the concurrence of iniuria and damnum did not take place until 5 August 2005.

Agreed Evidence

[2] A detailed Joint Minute, No. 26 of process, was lodged at the commencement of the preliminary proof. There was a large measure of agreement between the parties as to the relevant facts. A number of productions relevant to the issue in dispute were also agreed. In light of the extent of the agreement on the evidence, I was advised by Mr McNeill that he did not intend to lead any oral evidence on behalf of the pursuers and he closed his case, that case comprising the Joint Minute and the productions referred to therein. Accordingly, the evidence upon which the pursuer later relied can be summarised in the following passages from the Joint Minute.

"2. On 2 October 2001 Girobank instructed the defenders to provide for Girobank plc (hereinafter "Girobank") a report and valuation of the leasehold interest of Fishlike Ltd (hereinafter "Fishlike") in the property at the Esplanade, Sea Beach, Aberdeen, from which Fishlike operated a licensed "Harry Ramsdens" restaurant (hereinafter "the property").

3. Fishlike's leasehold interest in the property was in terms of lease between Fishlike as tenant and Rossnow Leisure (Aberdeen) Limited as landlord dated 8 and 15 May 1998 (7/6 of process).

4. Valuations of the property were requested by Girobank on various valuation bases, as set out in page 2 of the report provided by the defenders, no. 6/1 of process.

5. The defenders accepted Girobank's instructions, and responded with a valuation report dated 10 October 2001 which forms no. 6/1 of process.

6. In 6/1 of process, the defenders valued the Estimated Realisation Price (Business Closed) of Fishlike's said leasehold interest in the property at £300,000.

7. The true valuation of the Estimated Realisation Price (Business Closed) of Fishlike's said leasehold interest in the property as at both October 2001 and October 2002 was £75,000.

8. Girobank offered Fishlike a term loan of £225,000, secured over the property, and Fishlike accepted that offer on 29 October 2001. Offer of loan and acceptance thereof form 6/11 of process. After accepting the offer Fishlike immediately drew down the full loan amount of £225,000 which had been released by Girobank to Fishlike by at latest 6 November 2001.

9. Girobank also offered Fishlike an overdraft facility of £75,000 which offer was again accepted by Fishlike on 29 October 2001. Offer of overdraft and acceptance thereof form 7/3 of process.

10. In accordance with the terms and conditions of said term loan, Fishlike (1) granted a standard security over Fishlike's leasehold interest in the property (7/7 of process); (2) granted the personal bond (6/2 of process) referred to in the standard security; and (3) procured an unsecured personal guarantee provided by its Director William Miller (6/3 of process).

11. On 16 October 2002, without any further valuation of the property having been obtained by them, Girobank offered to increase the term loan provided to Fishlike to the sum of £300,000. That offer was accepted by Fishlike on 17 October 2002, and the full amount of £300,000 was drawn down and released by 22 October 2002 that same day. Offer of loan and acceptance thereof form 6/6 of process.

12. Throughout the period from 6 November 2001 until and including 22 July 2005, Fishlike paid the monthly instalments due by them on the sad term loan in the correct amounts on the due dates. The total interest element in the monthly instalments so paid was £58,486.69.

13. 6/5 and 6/7 are what they bear to be, namely statements showing the outstanding balance from time to time on Fishlike's term loan for (respectively) the periods (i) 6 November 2001 to 24 October 2002; and (ii) 22 October 2002 to 22 July 2005.

14, 6/8 and 6/9 are what they bear to be, namely statements showing credit balances at close of business on 30 April 2004 of respectively £14,100.91 and £7,832.96 on Fishlike's current accounts numbers 165 8093 and 146 7514 with Girobank.

15. 7/4 is what it bears to be, namely a document setting out Girobank's lending policies including as to the exercise of devolved powers within Girobank as in force at the time of Girobank advancing funds to Fishlike as aforesaid.

16. 7/8 - 7/16 are what they bear to be, being accounts, balance sheets and similar documents prepared by the auditors of Fishlike for the dates and accounting periods shown on same.

17. Each of the documents referred to hereinbefore is what it bears to be, and may be treated as evidence in the cause without necessity of a witness speaking thereto.

18. Fishlike ceased trading at the property and the winding up of Fishlike commenced on 5 August 2005.

19. At no time prior to 5 August 2005 had Girobank sought to sell its rights under the term loan, Mr Miller's personal guarantee and the standard security."

Evidence for the Defenders

[3] In addition to relying on certain aspects of the Joint Minute, evidence was adduced in the defenders' case from two witnesses, David McLintock and Hendry Stewart. Mr McLintock is a 55 year old retired banker from Glasgow. He now works as a consultant in the banking sector. He has been a Member of the Chartered Institute of Bankers in Scotland since about 1980. He worked for some 33 years as a banker with Bank of Scotland (subsequently HBOS) retiring in December 2008. During those years, he worked as a relationship manager, a credit controller and was a member of a Scotland wide corporate credit panel. He was chairman of the relevant credit panel in Glasgow and had extensive experience of resolving bad debt problems on behalf of the bank. He was also in charge of the lending control section of the bank in Glasgow. He had very significant experience of assessing credit valuations from a banking perspective. He was used to advising on lending criteria. I accepted that he was well qualified to express an expert view as a banker on the value of the rights held by Girobank in 2001 following the granting of a secured loan over the Aberdeen property. To this end, Mr McLintock had produced a report, No. 7/17 of process in which he expressed views on the matter. He spoke to that report. In essence, Mr McLintock expressed an independent view on the value of the bundle of rights acquired by Girobank in October 2001 in return for lending £225,000 to Fishlike. Those rights included 1) a standard security over Fishlike's interest in the property, 2) a personal bond or covenant by Fishlike and 3) a personal guarantee from Mr Miller the sole director of Fishlike.

[4] In his report and in evidence, Mr McLintock explained that the process of lending assessment has become increasingly sophisticated in recent years with lenders using computer generated models and credit scoring. However, two factors continue to be fundamental in the process. These factors are known as Viability and Safety. It is the analysis of Viability and Safety that enables the lender to calculate the strength of a business and determine the amount of debt they are willing to provide. In order to ascertain the value of Girobank's rights, a hypothetical transfer of those rights to another financial institute was postulated. The hypothetical acquirer would look at each of the three relevant rights and test them against the requirements of Viability and Safety. So far as the value of the security over the lease was concerned, Mr McLintock confirmed that he would rely upon the view of a chartered surveyor. As it had been agreed in this case that the true valuation of Fishlike's leasehold interest in the property at October 2001 was £75,000, he would rely on that. Then he would consider the viability of the business to generate profit. He would look for profits at the level of twice the interest charged. Where the ratio of profits to interest fell below 1.25:1 he would characterise the business as high risk. In that event the lender would fall back on the safety of the asset cover, in this case the value of the property over which security was being offered. Mr McLintock confirmed that if the viability of a company became problematic then the safety aspect became crucial to the lender. In essence the Estimated Realisation Price (Business Closed) would be the sum the lender would be likely to receive if the business ceased trading. It was apparent from the accounts of Fishlike that a lender would not provide any facilities without evidence of improved financial performance and adequate security being given. The accounts of the company to 31 October 1998 (No. 7/9 of process) indicated that at that time, Fishlike had been in a situation of balance sheet insolvency with a net asset deficiency of £100,317. In the following year (No. 7/10 of process) there was an increase in the net asset deficiency so that it stood at £176,865. The profit and loss account figure in the abbreviated balance sheet indicated substantial losses. In the abbreviated financial statements for the next year to 31 October 2000 (No. 7/11 of process) the company auditors reported that while the financial statements had been prepared on a going concern basis assuming continued operational existence for the foreseeable future, the validity of that basis depended upon the continued financial support from both the director (Mr Miller) and the bank. Mr McLintock confirmed that such a statement in company accounts indicated clear concern on the part of the auditors, albeit at that time there was no reason to conclude that the bank support would be withdrawn. The accounts for that period disclosed another unsuccessful trading year with the balance sheet net asset deficiency increasing to £336,504 due to increased loss in the profit and loss account of over £150,000.

[5] In the accounts for the year ended 31 October 2001 (No. 7/12 of process) the comment on the financial uncertainty of the company by the auditors disclosed a change from the validity of the going concern basis being dependent on the bank to being reliant on the continued financial support of the director. At that time there appears to have been a capital injection from Mr Miller which removed the balance sheet deficiency and left the company with a net balance sheet asset value of £28,182. However it was clear from the profit and loss account figure that there had been yet another very poor trading year with an increase in the profit and loss account deficit of £83,000. The later accounts to October 2002 (No. 7/13 of process) recorded the same fundamental uncertainty with Fishlike's financial position and the continued reliance on the director. By that time, there was again a balance sheet deficiency of £62,478 with losses in the profit and loss account of over £90,000. Having reviewed all of the available financial statements for the company, Mr McLintock confirmed that it was clear that the business generated significant losses between 1997 and 2002 inclusive with interest cover being well below the 1.25:1 level each year. The consequence of that was that anyone looking to acquire Girobank's interest would consider Fishlike to be in the high risk category and would not be willing to acquire the company's covenant without there being both tangible evidence that an improvement in the financial performance of the company in the short term was possible and also adequate security in place to ensure full recovery of the funds advanced in the event that trading did not improve.

[6] Looking at the October 2001 position, at that stage a lender would have access to the draft financial statements for the year to 31 October 2000 and management accounts to August 2001. In light of the extremely poor trading performance of the company illustrated by those documents, the Estimated Realisation Price (Business Closed) of the company's leasehold interest in the property would have a significant influence on the amount of facility that would be offered. Given that the interest cover ratio was negative for the preceding years a prospective lender would be very concerned. He concluded that the maximum amount a new lender would be willing to provide to Fishlike in October 2001 would be £75,000 as he considered that to be the value of the bundle of rights that would be acquired in return for the loan. However, he gave consideration also to the value of the guarantee that had been provided by the director, Mr Miller. This was an unsecured personal guarantee limited to £150,000. Mr McLintock agreed that this would give some additional flexibility but given that the guarantee was unsecured an issue arose as to whether it had any value at all. Girobank's lending criteria (No. 7/4 of process) provided that the secured value of any such guarantee would only be that of the supporting security. On that basis, Mr Miller's guarantee had no value. However, based on his lengthy experience, Mr McLintock was prepared to recognise that Fishlike had as its director an individual well known in the world of football with connections in broadcasting. A view might be taken even by a prudent lender that some sort of value could be attributed to the unsecured guarantee. He was prepared to attribute a value of £50,000 to it, namely one third of the maximum figure. Accordingly, Mr McLintock valued the bundle of rights held by Girobank at October 2001, including the guarantee, at £125,000, comprising the £75,000 true valuation of the leasehold interest on a business closed basis and £50,000 for the guarantee. In light of the company's poor trading performance, no allowance was made for Fishlike's covenant.

[7] Mr McLintock was also asked to express a view on the value of Girobank's rights on a hypothetical sale or transfer of them as at October 2002. His answer was the same as that he had given for October 2001. The company had not improved its performance despite the injections of capital and the accumulated loss in the profit and loss account had again increased.

[8] Under cross-examination, Mr McLintock confirmed that £75,000 was the level of debt a new lender would take on based on the relevant material about Fishlike's financial performance and value of the leasehold interest. He agreed that banks were interested in earning money through interest payments. He confirmed that the hypothesis he had used for valuation was primarily from the perspective of a bank looking to take over as lender. He had asked himself "how much would someone pay for this bundle of rights" or to put it another way "how much would the bank be prepared to lend?" He would not be minded to allow a debt of more than £75,000 to be drawn down had he been in the position of a prospective lender. In addition, he would be minded to provide an overdraft facility but he would require to see projections for the business. He confirmed that it was a regular occurrence in the banking world for a new lender to require borrowings to be reduced. Fishlike itself had previously owed a significant amount of money to the Clydesdale Bank. When it switched to Girobank the debt was reduced. In that particular instance it was reduced by an injection of capital. His educated guess was that the Clydesdale Bank had asked the director of the company to look for new banking arrangements. Mr McLintock was firmly of the view that a bank looking at the now agreed facts in relation to Fishlike and the property would ask itself vary carefully why it would wish to lend to the company at all. Given that Fishlike was not trading well and did not look as if it would do so in the future, much greater emphasis would be placed on the property valuation. Mr McLintock considered it unlikely that any bank would be willing to take on the value of the debt that Fishlike had with Girobank, given the difficulties with Viability and Safety. It was suggested to Mr McLintock that the accounts of Fishlike did not demonstrate any evidence that any improvement in the financial performance of the company would be possible. Mr McLintock agreed that was fair comment. A new lender might be interested in taking on Mr Miller's business a "trophy account" and to that extent Mr McLintock reiterated that he would as a banker be prepared to sanction a facility of up to £50,000 based on a reasonable value of the unsecured guarantee. The facts disclosed to Mr McLintock indicated that Mr Miller had been reluctant to give any guarantee and there was no suggestion that he would have given security. It was suggested to Mr McLintock that the approach he had taken of using a notional sale or transfer of the bundle of rights to a new lender presupposed a market. Mr McLintock confirmed that the banking world represented the market in question. It was then put to Mr McLintock that the issue of whether or not the bundle of rights he had been asked to value had any value at all was dependent on the bank being paid in full. In answer, Mr McLintock clarified that he would not know what bad debt provision, if any, existed in the arrangement between the original bank and any new lender. The new lender would not know of such a provision and would simply take a decision on what level of borrowings could reasonably be given. There were a number of methods by which the new banking arrangements might be put in place. The security given by Fishlike might be assigned or there might be a discharge of that security in a fresh security by the new bank. He agreed in principle that Girobank would be unlikely to assign or discharge their security without full repayment or at least payment of what they expected to get for their security. It was suggested to Mr McLintock that, given the poor performance of the business, and absent any tangible evidence of improvement it was unlikely that any transaction involving a new lender would proceed at all. Mr McLintock confirmed that as a new lender, he would look at the possibility of future performance but given the high risk situation and the poor past performance, he would fall back on the value of the security in deciding what to lend. As the agreed facts were that the Estimated Realisation Price (Business Closed) of the leasehold interest was £75,000, his view was that a new bank would be willing to take on a debt of that amount. If the Estimated Realisation Price (Business Closed) was higher, say £90,000, he would of course look at a case for lending that higher figure.

[9] The other witness called for the defender was Hendry Gordon Stewart. Mr Stewart is a 63 year old chartered surveyor and a partner with Ryden, Surveyors in Aberdeen. He qualified as a surveyor in 1973 and has been a fellow of the Royal Institute of Chartered Surveyors since 1984. In the course of his work he has had experience of valuing leasehold premises. He has also had experience of valuing the interest of a covenantee. He has provided advice to lenders in such situations. Mr Stewart confirmed that he was asked to look at the now agreed valuations of the leasehold interest in the property in this case. In his view, the true valuation of the Estimated Realisation Price (Business Closed) of Fishlike's leasehold interest was £75,000 as opposed to the defenders' valuation of £300,000. Mr Stewart had also considered, from his perspective as a surveyor, Mr McLintock's report. He had no difficulty with either the methodology or conclusions of Mr McLintock. He had had sight personally of the company accounts of Fishlike. Mr Stewart agreed with Mr McLintock's assessment that the value of Girobank's secured rights was £75,000. However, he would have been tempted to ignore the value of Mr Miller's personal guarantee altogether. He considered £50,000 to be at the higher end of any value he might put upon it. He knew Mr Miller personally and he regarded a value of £50,000 on an unsecured guarantee from him as a bit risky. Overall, he had no significant quarrel with the approach or conclusions of Mr McLintock. Mr Stewart's evidence was not challenged by cross-examination.

Submissions for Defenders

[10] In submissions Mr Dunlop invited me to sustain the defenders' second plea-in-law and dismiss the action. He referred to Article 4 of Condescendence and to Answer 4. He noted that the pursuers had given no indication of a lack of knowledge on their part that they had a cause of action in terms of Section 11(3) of the Prescription and Limitation (Scotland) Act 1973. The onus is squarely on the pursuers to aver that and they had not done so. Accordingly, the sole question for the court is whether iniuria and damnum concurred at any time prior to 20 November 2003, given that the Summons was signetted on 20 November 2008. It was clear that the choice of dates started with the end of October 2001 when the loan was made, October 2002 when the additional advance was made and August 2005 when Fishlike Ltd defaulted on the loan.

[11] So far as iniuria was concerned, it was clear that the only involvement of the defenders was in preparing the report No. 6/1 of process. They reported to the lenders and the complaint is that they breached the implied term of their contract with Girobank to take reasonable care in expressing their professional opinion. The controversial aspect of the case is when damnum occurred. The starting point, according to Mr Dunlop, was the decision in Dunlop v McGowans 1978 SC 22. It was the leading case on the concurrence of iniuria and damnum and involved a failure to serve a notice to quit timeously. Reading from a passage of Lord Wheatley at page 31, Mr Dunlop submitted that there could be only one point at which iniuria and damnum coincide. He pointed out that there is a difference between difficulties of valuation and an assessment of whether there is a loss. As soon as a party suffers the loss, the coincidence of iniuria and damnum occurs. As the value to Girobank of their rights was £75,000 from October 2001 onwards, the loss was there from that point. Mr Dunlop then referred to UBAF Ltd v European American Banking Corporation 1984 1 QB 713. Under reference to a passage in the judgment of Ackner LJ at 725, Mr Dunlop accepted that the question of when loss arose always depended on the evidence. Accordingly, in order to argue that the action was time barred, there required to be proof that what Girobank received was worth less than they paid for it. He noted, however, that in contrast to the UBAF case, the present proceedings were brought solely in contract. As the contract began and ended in October 2001, it was easier to see a point at which iniuria and damnum coincided. In October 2001 the pursuers contracted for a reasonably competent valuation and on the facts agreed for the purposes of these proceedings did not get it. In D W Moore & Co Ltd v Ferrie 1988 1 WLR 267 the Court of Appeal again held that there was no presumption that on negligent advice, damage occurred when the advice was acted upon and that it was a question of fact in each case whether actual damage had been established. However, Mr Dunlop drew attention to a passage from the judgment of Bingham LJ at (page 280) where the distinction is again drawn between the date when a cause of action arises and the problems of quantification of damages. The cause of action arises from the date damage is incurred, whether or not the pursuer is aware of it. Any harsh consequences of that are mitigated in Scotland by the provisions of Section 11(3) in appropriate cases. Had Girobank intimated to the defenders in November 2001 that they had discovered that the valuation provided was wrong as a result of negligence, it could hardly be said that the defenders could have succeeded in saying that the action was premature because loss had not yet been suffered. Loss was suffered the moment Girobank had lent money for a property worth far less than they had been advised it was worth when they made the decision so to lend. Mr Dunlop accepted his argument might be more difficult if Fishlike Ltd had been profitable or had significant cash reserves.

[12] Mr Dunlop then referred to a decision of the House of Lords in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd 1997 1 WLR 1627. In particular, he referred to the discussion by Lord Nicholls of Birkenhead in relation to a case analogous with the present one. In a passage at page 1631 Lord Nicholls of Birkenhead expresses the following view:

"More difficult is the case where, as a result of negligent advice, property is acquired as security. In one sense the lender undoubtedly suffers detriment when the loan transaction is completed. He parts with his money, which he would not have done had he been properly advised. In another sense, he may suffer no loss at that stage because often there will be no certainty that he will actually lose any of his money: the borrower may not default. Financial loss is possible, but not certain. Indeed, it may not even be likely. Further, in some cases, and depending on the facts, even if the borrower does default, the overvalued security may still be sufficient.

When, then, does the lender first sustain measurable, relevant loss? The first step in answering this question is to identify the relevant measure of loss. It is axiomatic that in assessing loss caused by the defendant's negligence, the basic measure is the comparison between (a) what the plaintiff's position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff's actual position. Frequently, but not always, the plaintiff would not have entered into the relevant transaction had the defendant fulfilled his duty of care and advised the plaintiff, for instance, of the true value of the property. When this is so, a professional negligence claim calls for a comparison between the plaintiff's position had he not entered into the transaction in question and his position under the transaction. That is the basic comparison. Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property."

At page 1632 Lord Nicholls of Birkenhead goes on to give instances of where the comparison in question will reveal a loss from the inception of the loan transaction. For example if the borrower is a company with no other assets, if its sole business comprises redeveloping and reselling the property and for repayment the lender may be looking solely to his security. In such a case, if the property is worth less than the amount of the loan, relevant and measurable loss will be sustained at once. In other cases, Lord Nicholls opines, the borrowers covenant may have value, and until there is default the lender may sustain no loss even though the security is worth less than the amount of the loan. Conversely, it is also pointed out that in some cases there may be no loss even when the borrower defaults because the security may still be adequate.

[13] Drawing on the passages referred to above, Mr Dunlop submitted that in this case the comparison is between (a) the money lent by Girobank and (b) the value of the rights acquired. The loss is the difference between the valuation as at £300,000 as opposed to the actual value of £75,000. The approach of Lord Nicholls in Nykredit according to Mr Dunlop showed that the court's task begins and ends with the comparison in question. In this case, the questions to be answered were (i) what did Girobank outlay and (ii) what did they get in return? Reference was also made to Law Society v Sephton & Co (a firm) 2006 2 AC 543. That case concerned the question of a contingent liability and the parties were agreed that this was not such a case. The decision is of interest, however, for its analysis of the Nykredit case. Lord Hoffman summarises the matter by opining that the point at which the lender suffers loss and damage is only when it is possible to say that he is on balance worse off than he would have been if he not entered into the transaction. (See page 551).

[14] Mr Dunlop argued that one way of looking at this case was to conclude that because Girobank did not get what they bargained for, the damage occurred at the same time as the breach. It was at that point that the balance was struck in a way adverse to Girobank. He submitted that any argument that loss and damage did not coincide until 2005 when Fishlike went into liquidation ran contrary to the ratio of Nykredit. Using the analogy of Nykredit, Mr Dunlop said that the true value of the bundle of rights held by Girobank was:

(1) the value of the borrower's covenant (nil);

(2) the value of the asset (£75,000); and

(3) the value of the guarantee (£0-£50,000).

The value of those rights had to be compared with the money lent. If an adverse balance was struck then actual loss occurred. Even if one added on all the interest paid by Fishlike between 2001 and 2005, that would only go to measure of damages not to the sustaining of loss. Accordingly, what the court required to calculate was what interest was likely to be paid. While it was pled that Mr Miller continued to pay interest, again if one distinguished when loss occurred from the quantification of that loss, one came back to the concurrence being in October 2001.

[15] Reference was then made to decisions from this jurisdiction, in particular Osborne & Hunter Ltd v Hardie Caldwell 1999 SLT 153 and Jackson v Clydesdale Bank plc 2003 SLT 273. In the former, where a company was advised by a firm of chartered accountants to lend a sum of money to a third party, and to act as guarantors and the third party did not repay the loan leaving the company liable, the company sued the accountants alleging professional negligence. The decision of the Second Division was to the effect that where the pursuers averred that they should never have been advised to lend to the third party, prima facie the concurrence of iniuria and damnum was when the money had been lent, but that every case depended on its own circumstances and that proof before answer would be necessary to determine the issue of time bar. In the latter case, Lord Eassie, having analysed all of the relevant authorities from Dunlop v McGowans through to Nykredit agreed that close examination of the actual facts would normally be required before any decision was reached. According to Mr Dunlop, if the evidence that the financial standing of Fishlike Ltd in 2001 was so parlous that all that mattered was the value of the security, then clearly loss arose at the time the loan was made. There was clear evidence of that being the situation in this case. In looking to see what was outlaid by the pursuers in this case, one could take into account the interest they would have earned on the money had they not lent it. However it was accepted that this would be balanced by monies likely to be paid by the borrower. The money lent was £225,000 by 6 November 2001 and £300,000 by 22 October 2002. As compared with that, what was the value of the rights acquired? On the evidence of Messrs McLintock & Stewart it was effectively beyond doubt that as at October 2001 and October 2002, the bundle of rights held by Girobank was less than the money outlaid. Thus from October 2001 onwards, the value of the rights acquired was much less than the sum outlaid by the pursuers who were accordingly worse off. Again the three aspects of the bundle of rights were reiterated. The true value of the security was £75,000, the unsecured personal guarantee was worth £50,000 at its highest and there was no value in the covenant because of the company's trading record. Thus the value of the bundle of rights was a maximum of £125,000 both at October 2001 and at October 2002. This created a deficiency of £100,000 at October 2001 and £175,000 at October 2002 on the available evidence. The method used by Mr McLintock in valuing the bundle of rights was that of the hypothetical sale in which a willing buyer and willing seller are assumed. Whichever date is chosen, there was actual material loss and the prescriptive period started to run from October 2001 which failing October 2002.

[16] Finally, Mr Dunlop made a submission that I should take into account that no contradictory evidence had been led by the pursuers on behalf of the pursuers. Accordingly the most favourable inferences should be drawn from the defenders' evidence.

Submissions on behalf of the Pursuers

[17] For the pursuers, Mr McNeill agreed with Mr Dunlop that the proper approach was to say that the lender suffered loss and damage only when it was possible to say that he was on balance worse off as a result of the negligence. His contention was that it was not until 5 August 2005 when Fishlike closed its doors on insolvency that the pursuers could be said to be worse off. Turning first to No. 6/1 of process, Mr McNeill noted that the report had given valuations on a number of bases but that only the Estimated Realisation price on a "doors closed" basis was called into question.

[18] Counsel for the pursuers identified the question for the court as being whether there was a point earlier than 5 August 2005 at which it could be said that the lender was, on balance, worse off by reason of the negligence upon which the action is predicated. If there was no earlier point at which the pursuers could sue for a loss, then there could be no claim. He submitted that the balancing exercise required to take into account a number of factors. First, while he accepted the distinction between loss and measure of loss, he argued that the loss had to be a meaningful loss in the sense of a loss that can be sued for. He referred to paragraphs 10 and 12 of the agreed evidence in the Joint Minute. In particular he pointed out that what the bank received in return for the loan was payment of interest. It was agreed that the total interest received by the bank was £58,486.69. Mr McNeill accepted that he could not disagree that Girobank would not have lent the money other than in return for the standard security, the personal bond and the unsecured personal guarantee referred to in paragraph 10 of the Joint Minute.

[19] Mr McNeill contended that it was not possible, in October 2001, to say that the lender was, on balance, worse off. He noted that Mr McLintock had said in evidence that on his hypothesis a customer would be seeking to change bank again and the bank he approached would consider its position. That potential acquirer, the bank, would not itself have laid out more than £75,000. Mr McNeill accepted that it was established by the evidence that no bank would have paid more than £75,000 for the bundle of rights available in October 2001. However, he said that it was not established that a situation would ever have occurred where Girobank would have received less than the amount that they had lent, namely £225,000. He argued that the defenders had failed to show that the value of Girobank's rights were worth less than £225,000. He said that there was no evidence that the guarantee, for example, would have resulted in less than £150,000 for the bank. He suggested that Mr Miller could have offered security had the issue been raised. So far as the company's covenant was concerned, Mr McNeill conceded that in deciding how much it was prepared to expose itself for, a bank would not have ascribed any value to the covenant at all. He said that the evidence led did not establish the value of the covenant for anything other than the context of a new banker, which would make up its mind about what it was prepared to lend.

[20] Mr McNeill's primary point was that, if there was in fact no sale or assignation of the bundle of rights concerned and where the payments of interest are being maintained, then it may be very difficult to establish loss. He contended that the situation put forward by the defender in evidence was entirely dependent upon the borrower going to a new bank and asking them to take over. The hypothesis required that new bank to agree to do so under certain circumstances. However, Mr McNeill argued, there was no evidence before the court that what the borrower could have offered the new bank was as much as had been lent by Girobank. Accordingly, if the pursuers had wanted to demonstrate a loss and sue the defenders in 2001, they would have required to show that because the valuation of the security was only £75,000, the borrower was not going to pay them as much as they had lent. He submitted that the perceived loss would never arise from the negligence in question.

[21] Mr McNeill drew attention to Article 2 of Condescendence at page 7 of the Closed Record where an averment appears that the reasonable inference to be drawn from the defenders' opinion of the Estimated Realisation Price (business closed) of the leasehold interest was that, in the event of enforcement, the value would be at least £300,000. He accepted that had the pursuers known that that was not the case, they would not have made the loan. He referred to a passage of Lord Nicholls in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd 1997 1 WLR 1627 where it is opined that, "ascribing a value to the borrower's covenant should not be unduly troublesome". Where the borrower's covenant has value, he argued, there may be no loss incurred.

[22] Mr McNeill agreed with Mr Dunlop that there is a computation to be carried out, the purpose of which is to establish when the loss first occurred. In order to determine whether there was a loss he argued, one cannot appropriately ascribe to an element in the computation a value which is derived from a situation where there is no evidence that that situation was ever going to arise. The situation spoken to by Mr McLintock was not a situation from which one could draw an inference about the value of the personal covenant. Mr McNeill did not suggest that the defenders' computation exercise looking at the three elements of the value of the security, the value of the borrower's covenant and the value of the unsecured personal guarantee was in any way inappropriate. His submission was rather that there was either no evidence or insufficient appropriate evidence that the line had passed where on balance there was loss to the lender as at October 2001.

[23] So far as October 2002 was concerned, Mr McNeill said that the same proposition applied although he accepted that it was harder for him to sustain the inference that the lender could not be said to be on balance worse off at that date. His argument in relation to 2 October 2002 was that if the valuation cannot be ascribed based on Mr McLintock's evidence because the scenario he hypothesised was unlikely to occur at that time, then from the point of view of Girobank, it was sitting on a personal guarantee that, so far the bank are concerned, might have produced £150,000. Mr Miller had assets that could have been secured. So far as the personal covenant by Fishlike was concerned, on any view the company had undertaken to pay, without fail, capital and interest.

[24] Mr McNeill accepted that as at October 2002, there had been no further injection of capital into the business, but it remained the case that the company was making payments of interest and capital towards the loan. He accepted that it was easier for the line to be crossed in October 2002 because the loan had increased to £300,000, no capital had been injected and the company's trading losses were increasing. He accepted that the court could look at Mr McLintock's evidence at least to the extent that he explained how he would assess the situation as a banker for Fishlike. Mr McLintock had said that a bank might well want a customer like Mr Miller and that that had to be taken into account.

[25] Ultimately, Mr McNeill accepted that it may easily be concluded that the line between being the lender being on balance, not worse off and being worse off had been passed at that point. However, he invited me not to so conclude because, taking the combination of the basic security of £75,000, the personal covenant that was still functioning and the £150,000 personal guarantee, it could not be said that the point of concurrence of iniuria and damnum had arrived.

[26] It was accepted for the pursuers that Mr Dunlop was correct to assert that as no contradictory evidence had been led against him, the interpretation most favourable should be put upon the evidence adduced by him. Mr McNeill also sought to make the point that a distinction could be drawn because there was no evidence that the pursuer paid for the report and indeed it was a condition of the loan (No. 6/11 of process) that the borrower would pay for the valuation report. Mr McNeill contended that the reason why a contract gives rise to a loss is because the payer has paid for advice. If that advice turns out to be wrong, a claim arises. Where one is seeking to identify the earliest stage at which loss incurred, there was no point to be made that the claim was contractual not delictual unless payment is also proved.

[27] In submitting that the concurrence of iniuria and damnum did not arise until August 2005, Mr McNeill argued that because all payments were made until that date and that the "fatal blow" occurred on 3 August 2005, then from the point of view of the pursuer iniuria and damnum coincided at that point. It was for the defender to make good the plea of prescription and the onus had not been discharged. The pursuers' position was that they could not have raised proceedings before Fishlike stopped making the payments. For example on 30 April 2004 the sum due by Fishlike under the term loan was £275,516. It could not be said that proceedings could have been raised at that point.

Reply for the Defenders

[28] In a brief reply, Mr Dunlop was clear that he made no concession that the onus was on him in relation to his plea. He accepted that there were conflicting Outer House decisions on the point and he advised me that a decision was awaited from Lord Menzies in the case of Pelagic Freezing (Scotland) Ltd v Lovie Construction Ltd and Another where the point had been raised. Mr Dunlop's submission was that, once the evidence is out, onus is relatively unimportant unless the evidence was very finely balanced.

[29] On the issue of whether actual loss was proved, while Lord Nicholls in Nykredit gave examples, it was important not to elevate these into points of principle. He submitted that all the evidence in this case pointed one way.

[30] On the issue of the appropriate method of valuation, Mr Dunlop queried what valuation would be appropriate in a case such as this if it was being contended that hypothesising a sale with a willing buyer and a willing seller was somehow inappropriate. There were numerous examples of the courts using the hypothetical sale as a method of assessing value in appropriate cases. Reference was made to Grays Timber Gray's Timber Products Ltd v Commissioners for Her Majesty's Revenue and Customs 2009 SLT 307, Transport for London v Spirerose Limited 2009 4 All ER 810 and Bocardo SAV v Star Energy 2010 2 WLR 204.

[31] Mr Dunlop submitted that it could not be said on any view of the evidence that the personal guarantee of Mr Miller had a value of £150,000. In any event, as a worst case scenario for the defenders at October 2002, even had the personal guarantee been worth that amount and one took into account the payments of interest made, then loss was still incurred by then because the total value would be less than £300,000 which was the sum lent at that time.

[32] In the event that it might be perceived that it would be unfair to the pursuers for the prescriptive period to start running as far back as October 2001, that perceived unfairness was the very reason why Parliament had enacted Section 11(3) of the 1973 Act making an exception where the party had no knowledge of the liability until after the concurrence of iniuria and damnum.

Discussion
[33] This action is raised in relation to a contract completed in October 2001 under which the defenders expressed an opinion on valuation to Girobank. The duties of care owed by the defenders to Girobank in terms of that contract were to produce an appropriate valuation report. The valuation report they provided on 10 October 2001 gave a value for the Estimated Realisation Price (doors closed) of the leasehold interest in the relevant property of £300,000 when the true valuation thereof was £75,000. The Summons in this action was signeted on 20 November 2008, more than seven years from the date on which the defenders reported.

[34] Section 6 of the Prescription and Limitation (Scotland) Act 1973 provides inter alia:

(1) If, after the appropriate date, an obligation to which this section applies has subsisted for a continuous period of five years -

(a) without any relevant claim having been made in relation to the obligation and

(b) without the subsistence of the obligation having been relevantly acknowledged,

then from the expiration of that period the obligation shall be extinguished ..."

There was no dispute that any obligation of the defenders would fall within section 6. The issue is when a relevant claim in respect of that obligation could first have been made. The defenders assert that any obligation arose in October 2001 when they reported because at that time there was a concurrence of iniuria and damnum. The pursuer's case is that no loss was suffered by Girobank until 5 August 2005 when the borrower, Fishlike Limited, ceased trading and was ultimately wound up. It is clear that in circumstances such as those averred in this case, there can be only one point at which iniuria and damnum coincide - Dunlop v McGowans 1978 S.C. 22 at 31, confirmed by Lord Keith of Kinkel in the House of Lords, 1980 SC (HL) 73 at 81. It was accepted that the question of when loss arises depends on the evidence and that without proof of when what Girobank received was worth less than they paid for it, the plea of prescription cannot be upheld. In this context there are now a number of views expressed in the Outer House as to where the burden of proof lies in relation to the short negative prescription. That discussion is summarised in a recent decision of Lord Menzies, Pelagic Freezing (Scotland) Limited v Lovie Construction and another
[2010] CSOH 145 at paras. 86-95. In the present case, I do not consider the matter to be of central importance, where the evidence has been led and particularly where nearly all of the facts in relation to the dates on which the crucial events occurred were agreed in a joint minute. However, I would respectfully agree with the Opinion of Lord Menzies in Pelagic Freezing (Scotland) Limited that where it does matter, the view expressed in Richardson v Quercus (unreported, 25 March 1997), that once the question of prescription has been raised it is for the pursuer to prove that his title to sue has been preserved, is the preferable one.

[35] In any event, in this case detailed evidence of the value of the bundle of rights acquired by Girobank in return for making the loan was led by the defenders and I now turn to examine that. I have no hesitation in accepting both David McLintock and Hendry Stewart as credible and reliable witnesses. The primary evidence on the issue of value came from Mr McLintock who is an experienced retired banker. He was an impressive witness who gave his evidence in a calm but authoritative manner. He was quite clear that the exercise he had been instructed to carry out was to envisage a hypothetical sale or assignation of Girobank's rights in order to assess the value of those at two particular dates, namely October 2001 and October 2002. The three elements comprised (1) the standard security over Fishlike's interest in the property, (2) a personal bond or covenant by Fishlike Limited and (3) a personal guarantee from Mr Miller, the sole director of Fishlike. The evidence that the value to Girobank of their right under the standard security was £75,000 was unchallenged, supported by paragraph 7 of the joint minute and unequivocally supported in cross-examination of the witness by Mr McNeill. There was no real challenge either to the proposition that the personal bond or covenant by Fishlike had no value given the state of its balance sheet and history of trading losses. While the point was made repeatedly for the pursuers that the bank lent money in order to receive interest and that the monthly instalments due by Fishlike were paid between 2001 and 2005, in my view that amounts to no more than an agreement as to the fact of monies paid. It may also have a bearing on the ultimate measure of loss. There was simply no case put by the pursuers of any concrete value that could be attributed to the personal bond or covenant of Fishlike and I have no hesitation in accepting Mr McLintock's opinion that it was valueless both at October 2001 and October 2002. The issue of what value, if any, could be placed on the personal guarantee from Mr Miller raised a more interesting question. The personal guarantee was unsecured and thus the bank could have no assurance that they would receive any sum from Mr Miller. However Mr McLintock considered that there was a value in Mr Miller's business as a potential "trophy account" and to that extent a bank might sanction a facility of up to £50,000 based on the reasonable value of the unsecured guarantee. As the facts disclosed to Mr McLintock indicated that Mr Miller had been reluctant to give any guarantee and there was no suggestion that he would have given security, the value he was prepared to put the guarantee seemed to me to be prudent and appropriate. Mr Stewart, the surveyor, who knew Mr Miller personally regarded it as risky to put any value on an unsecured guarantee from that individual. However, as Mr Stewart's area of expertise was primarily in property valuation and he had not undertaken the comprehensive exercise of valuing the bundle of rights acquired by the bank for the loan I consider that Mr McLintock's evidence on this matter is to be preferred. In summary, the overwhelming and largely unchallenged evidence at the preliminary proof leads me to conclude that the total value of the bundle of rights secured by Girobank in return for the loan made by them of £225,000 in October 2001, increased to £300,000 in October 2002, was £125,000 on both dates.

[36] The evidence must then be considered against the agreed test formulated in Nykredit Mortgage Bank Plc v Edward Erdman Group Limited 1997 1 WLR 1627. Adopting Lord Nicholls' characterisation at page 1631 as submitted by Mr Dunlop, the approach is to make the comparison between (a) what Girobank's position would have been if the defenders have fulfilled their duty of care and (b) Girobank's (now the pursuers) actual position. The pursuers assert on record that Girobank would not have entered into the loan transaction had the defenders fulfilled their duty of care and advised of the true value of the property. The pursuers' case then is that had they known, in October 2001 that the Estimated Realisation Price (business closed) of the leasehold interest in the property was only £75,000 they would not have lent to Fishlike at all. As they relied on the valuation, they lent £225,000, subsequently increased to £300,000. In return they received rights valued at £125,000 as at October 2001. The value of the rights did not change between October 2001 and 2002. Additional sums were provided. The gap between the value of the rights and the money lent increased.

[37] Of course, some consideration ought to be given to the issue of the monthly repayments made by Fishlike which totalled £58,486.69 by 22 July 2005. Had they not made the loan, Girobank would not have received those payments. On the other hand, had they not made the loan they would have retained the sum of £225,000 which they could have used to make money from another borrower. No calculation was provided of whether the amount of interest they could have earned on £225,000 was more or less than the sums they received from Fishlike. However, as Mr Dunlop pointed out, even if one took no account of the interest they could have earned by retaining the fund and took full account of all of the interest payments made by Fishlike, Girobank were still, on balance worse off from October 2001 when they made the initial loan. In my view, the only relevance of the facts now agreed on this point is that it might be said, at best for the pursuers, that one can assume that, as at October 2001, Girobank had a reasonable prospect of receiving future interest payments of £58,486.69. On that basis, they incurred a loss when they advanced the loan. As indicated previously, however given that the valuation dates are October 2001 and October 2002, the future interest payments go more to measure of loss than when it occurred.

[38] There was ample evidence that Fishlike Limited was in a parlous financial state both prior and subsequent to October 2001. The company had a very modest net balance sheet asset value of £28,182 as at 31 October 2001 after a capital injection from the sole director. By October 2002 there was a balance sheet deficiency, as had been the case in the years leading up to 2001 of tens of thousands of pounds. The significance of that is that, in the absence of having any comfort on viability, the lender could only rely on the value of the security.

[39] Taking the evidence as a whole, I am in no doubt that the cause of action in this matter arose in October 2001 when Girobank lent Fishlike £225,000 having been advised that the leasehold interest over which they would take a standard security in return was worth £300,000 when its true valuation was only £75,000. In the absence of any evidence whatsoever to contradict Mr McLintock's view that the unsecured guarantee from the sole director had a value of no more than £50,000, it is clear that a loss occurred at the time of the making of the initial loan. Girobank could have sued the defenders from that point onwards. Had I not been so satisfied, I would in any event have found that by October 2002 it was even clearer that the concurrence of iniuria and damnum had occurred. By then there was again a balance sheet deficiency with significant trading losses and an increase in the level of borrowing to what was thought to be the full value of the Estimated Realisation Price (business) of the leasehold property.

[40] I cannot accept Mr McNeill's argument that the pursuers could not have raised proceedings before Fishlike stopped making the payments. Mr McLintock gave evidence that two factors were fundamental to the process of assessing a loan. These factors are known as viability and safety. Had any assessment of viability and safety been made in October 2001 using the true valuation of Fishlike's leasehold in the property, the pursuers could have raised proceedings against the defenders for the loss arising from the alleged breach of duty. It is in this context that the difference between the occurrence of loss and the measure of damages becomes important. Specific quantification of Girobank's loss would have been affected by the fact that Fishlike were, between November 2001 and August 2005 continuing to make payments to them. However, that quantification has no real bearing on the point that I must decide, namely when iniuria and damnum coincided.

[41] If of course, it were the case that Girobank had proceeded for four years in ignorance of the negligent act and consequent loss they had suffered they would have a basis for praying in aid Section 11(3) of the 1973 Act. They have not done so, however, and no suggestion was made that such an argument would be available to them.

[42] The other argument made by the pursuers which must be addressed is the contention that I should not rely on the evidence of Mr McLintock because the hypothetical situation he envisaged would not occur or there was no evidence to suggest it would occur.

[43] There are numerous situations in which a sale between a willing buyer and a winning seller is hypothesised in order to attribute a value to an asset or a bundle of rights in a situation where no actual sale has taken place or is likely to take place. There are many examples of such a valuation approach being accepted by the Court including those referred to by Mr Dunlop, Grays Timber Products Limited v Commissioner for Her Majesty's Revenue and Customs 2009 SLT 307, Transport for London v Spirerose Ltd 2009 4 All ER 810 and Bocardo SAV v Star Energy 2010 2 WLR 204. Further, the Court has often used the hypothesis of a sale between willing buyer and willing seller in valuing assets at a historic date for the purposes of financial provision on divorce under the Family Law (Scotland) Act 1985 regardless of whether or not those assets are likely to be disposed of. (See Sweeney v Sweeney 2004 SC 372 at 380). More closely analogous to the present case, where a surveyor is sued for negligently advising that a property is worth significantly more than its true valuation and a party relies on that advice in purchasing the property, it is likely that an independent expert will require to express an opinion on what that true valuation was. That evidence would be required regardless of whether the purchaser had any intention of selling the property he had paid too much for on the basis of the negligent advice. Indeed, for the purposes of this action, Mr Stewart, the surveyor, expressed a view that the true valuation of Fishlike's leasehold interest at certain dates was £75,000. He did so using his expertise as a surveyor adopting as a benchmark the price that he might advise someone to acquire it for. Accordingly, I reject the argument that valuation of a bundle of rights using the hypothesis of a willing buyer/assignee and willing seller/assignor is in any way inappropriate in proving when loss occurred for the purpose of prescription.

Conclusion

[44] For the reasons stated above, I have reached the conclusion that any obligation of the defenders to make reparation to the pursuers was extinguished by the short negative prescription by the end of October 2006 and in any event prior to the end of October 2007.

[45] I shall sustain the second plea-in-law for the defenders. I will have the case put out By Order to deal formally with disposal and all questions of expenses.