In my previous blog article I discussed the similarity of the approaches adopted by the courts in both England and Delaware in two valuation disputes. The English case, Barclays v Christie, Owens and Davies concerned the valuation of adjoining amusement arcades in the seaside town of Great Yarmouth. This had some further interesting facets which will resonate with many valuers.
The first point concerns the suitability and credibility of one of the valuation experts called to give evidence. The expert witness appointed for the claimant bank was criticised during the trial for relying on a report and valuation that had been largely prepared by a former colleague. The judge commented that it would have been far better if the expert had spelled out the extent to which he was reliant on this work. He found the extent of that reliance was considerable, and diluted the expert’s claimed experience and expertise. Because of this reliance, the witness was not as familiar with some of the underlying material as he otherwise would have been, and this caused him to make mistakes about that material under cross examination.
The same expert’s impartiality was also challenged on the grounds that he had advised the administrators of the borrower company on the sale of the Arcades. On this point the judge expressed surprise that the bank had chosen an expert whose previous involvement presented an obvious risk of lack of impartiality and conflict of interest. It would lead to a suggestion of inconsistency if the expert were to value the Arcades for the purpose of his evidence in a way that was out of line with his previous advice on value in the sale proceedings. There was a clear and obvious danger that he would not approach his role as witness with a completely open mind, but would instead be inclined, consciously or unconsciously, to express views which accorded with his previous advice to the administrators.
In spite of his criticisms of the bank’s expert the judge did not reject his evidence out of hand but indicated that he could not give some of his views as much weight as he might have done otherwise. While ultimately the judge found in favour of the bank, in other circumstances the appointment of an expert witness who relied on the work of others for his evidence and with question marks about his objectivity could have been fatal to their case.
The next point was a claim by the defendant valuers that the bank should have questioned the validity of assumptions made in the report before relying on the valuation. The assumptions made by the valuer included that: (a) the information provided was correct, (b) current trade was maintainable with the existing equipment and trade inventory, and (c) current market and normal trading conditions prevailed. The bank did not revert to the valuer and ask for its views on value without these assumptions, and it was argued that this showed that the bank had not relied on the valuation, or had not done so reasonably.
The judge was quite scathing in dismissing this assertion. He considered that there was an air of unreality about the suggestion that a prudent lender would have queried the assumptions. He also observed that querying the assumption that “current market and normal trading conditions would prevail” would lead to almost endless possibilities as to what might be substituted, and what effect that would have on value. It would not assist unless there was some reason to believe that market and trading conditions were likely to change in a material way, in which case it would be reasonable to expect the valuer to have based its valuations on that alternative premise in the first place.
The legal point determined here is, of course, consistent with the requirements of valuation standards. The valuation in question was carried out under the RICS Red Book, which has the same proviso as the International Valuation Standards (IVSs) that all assumptions made in a valuation must be reasonable to accept as fact in the context of the assignment without specific verification. Consequently, if the valuer in this case had reason to believe that any of the assumptions made were contrary to fact then either the assumption should not have been made or the matter drawn to the attention of the client bank. Valuation standards put the onus of determining whether an assumption is reasonable on the valuer, not the client.
The final point may only have been minor in the context of the case before the court but I highlight it because it again is consistent with the provisions of the IVSs. Counsel for the defendant valuer argued that limiting terms and conditions included in the report could be deemed to be incorporated into the contract to provide the valuation because the bank had raised no objection to them and had paid the valuer’s fee. The relevant condition was that the valuer had been provided with various information by the Bank and the borrower, had relied on that information and assumed it to be correct, and could take no responsibility “for any mis-statement, omission or misrepresentation made to it”. The judge was sceptical of this argument, although added that even if there was a deemed acceptance, he could not see how the particular condition would mitigate the valuer’s liability for its own negligence.
The IVSs, and for that matter the Red Book, require terms and conditions to be confirmed to the client before the report is finalised. This gives the client an opportunity to question any condition before the agreed service is provided, and from the valuer’s perspective means that, subject to those conditions being reasonable, they stand a much greater chance of being considered by a court as part of the contract even if the client has not explicitly agreed to the terms in writing.
The judge’s unwillingness in this case to accept that, even if deemed to be part of the contract, a generalised exclusion of responsibility for any mis-statement or misrepresentation of information could not limit the valuer’s liability is also echoed in the valuation standards. These provide that it is the responsibility of the valuer to design a “scope of work”, including all limitations and exclusions, that is appropriate for the purpose for which the valuation is required. And when information provided by another is to be relied upon, the standards also require the valuer to consider the credibility of that information. After all, the valuer is being relied upon as an expert and can reasonably expected to have a view on whether information provided is credible or not.
So, apart from the central issue of ensuring that your valuation is properly researched and prepared with due care, what are the other lessons from this case? It has emphasised the importance of ensuring that before any accepting any appointment as an expert witness a valuer must be meticulous in considering and disclosing any past involvement that may conflict with their duty to provide an impartial opinion to the court, and that any assistance required from others in reaching that opinion is limited in scope and fully understood. It has also highlighted the importance of adhering to valuation standards by ensuring that the limitations in the terms of engagement and any assumptions to be made are reasonable having regard to the purpose for which the valuation is required and are notified to the client in advance of the report.