Banking update: report and review on cases

Valuing the correct property

When valuing a property for mortgage purposes, there is an inherent obligation on the surveyor to inspect and value the right property.

This might seem obvious, but it took the Court of Appeal decision in Platform Funding Ltd v Bank of Scotland (PLC) (formerly Halifax PLC) to confirm this. A borrower misled the valuer into inspecting the wrong property. When the property was subsequently repossessed and sold, there was a shortfall which the claimant sought to recover from the valuer. The defendant argued that the valuation could not be construed as giving an unqualified assurance that the valuer had inspected the property to which the report related.

The Court of Appeal found that in the standard surveyor's retainer to inspect and value a specific, identified property, there is an inherent unqualified obligation to inspect and value the correct property. Inspection and valuation of a different property is a breach of contract, despite the surveyor exercising reasonable skill and care. By certifying that the property had been inspected, when it had not been, the valuer was in breach of a contractual warranty and so liable.

Things to consider

Ensure that a property is sufficiently and correctly identified in the instructions to value in order to impose an unqualified obligation on the surveyor. The surveyor will then be liable to the lender despite fraud being perpetrated on him by a borrower. It will be up to the surveyor to pursue the borrower for an indemnity in the unlikely event that it would be worth it.

Certainty is essential

Parties should be clear as to what security is required and what has been offered to avoid loans being unsecured.

In National Westminster Bank PLC v Garland and Barron, the defendants' company required a short extension of its overdraft facility. The bank's position was that in agreeing the further facility, it had relied on the defendants' fraudulent misrepresentations that they would agree to execute a legal charge over a property owned by one of the defendants and a third party as security. Drawings on the facility commenced. No legal charge was executed, although the defendants deposited the deeds to the property at the bank. The defendants' business relationship ended and the company was placed in administration by the bank.

The court found that it was likely that none of the parties had any clear idea of the distinction between a legal charge and a security by way of deposit of title deeds. To prove fraudulent misrepresentation, the bank had to show that when the first defendant stated he was willing to execute a formal charge over the property, he had no genuine belief in the truth of that statement. Mere delay in fulfilling a promise was unlikely, without more, to amount to evidence that the promise was given without any intention of fulfilling it. There was insufficient evidence to find that the first defendant had offered to execute a legal charge, as opposed to offering an informal security by way of deposit of the title deeds, let alone that he had been fraudulent.

Things to consider

Request and obtain unequivocal evidence confirming a borrower's intention to create a legal charge to avoid any uncertainty.

State's bank account not immune

A foreign state's bank account used for commercial purposes will not be immune from enforcement action.

This was confirmed in Orascom Telecom Holdings SAE v Chad and others and Citibank NA (third party). Orascom held an arbitration award against the state of Chad and applied for a third party debt order in respect of money held by Citibank on Chad's behalf. Orascom argued that the money and property in the account in question was used or intended to be used for commercial purposes and not for sovereign purposes such as the repayment of Chad's debts to the World Bank. It therefore fell within the State Immunity Act 1978 Section 13(4) which permits enforcement of arbitral awards against such property of a state which would otherwise be immune from the jurisdiction of the UK courts.

The court agreed. Contracts or transactions for the supply of goods and services, a loan, or other transaction for the provision of finance, qualified as commercial transactions within s13(4), even if entered into by the state in the exercise of its sovereign authority. The account here operated to receive the proceeds of the supply of oil and for the repayment of loans by the World Bank and others and that was sufficient to fall within s13(4). There was no immunity from execution against the bank account and the third party debt order was made against Citibank.

Things to consider

Not all accounts held by a foreign state will be immune from enforcement action. The purpose of the funds in the account will need to be determined to ascertain whether a third party debt order is appropriate or not.

Court considers disabilities

The courts must take account of a party's mental disabilities when granting orders for possession.

In Knowles v Knowles, the defendant was severely mentally disabled. He failed to comply with the terms of a consent order and the claimant applied for a possession order. The defendant did not attend that hearing as he was too unwell and was not represented. The defendant later applied to set aside that order. The judge found the defendant to be lucid and articulate and that there was no sufficient reason for his non-compliance with the earlier consent order. He refused to stay the writ of possession. The defendant contended that in making the contested orders the judge had failed to take sufficient account of his mental disabilities and that he had been unrepresented at crucial hearings. He also alleged that without legal representation, he had not realised the importance of complying with the terms of the consent order.

The Court of Appeal confirmed that the courts are acutely aware of the problems of unrepresented persons appearing against represented persons and that fact is taken into account in decision making. Although the defendant did have a serious mental disability, the evidence he provided did not indicate that, by reason of that disability, he had been unable to comply with the terms of the various orders. That was fatal to the defendant's arguments. The judge had given consideration to the defendant's problems and had exercised his discretion accordingly.

Things to consider

The courts must treat all parties fairly and although they will often bend over backwards to assist an impaired or unrepresented party, they cannot treat such a party more favourably if the nature of the disability or non-representation has no baring on the order being made or that party's ability to comply with it.