The Facts

Kenny & Good (‘KG") are real estate valuers who were engaged by Macquarie Bank to value a residential property in Sydney. KG assessed the property’s value at $5.35 million as it stood and $5.5 million upon completion of building work. The property’s true value at this time was actually about $4 million.

The valuation was expressly extended to allow others, such as the mortgage insurer MGICA ("MG"), to rely upon it. The valuation report said that the property was:

"suitable security for investment of trust funds to the extent of 65% of our valuation for a term of 3-5 years"

Relying upon the valuation Macquarie Bank lent the purchaser 65% of the valuation, $3.575 million. In June 1991 the mortgage was defaulted upon, and due to a decline in the market the property was only able to be sold for $2.65 million. MG, as mortgage insurer, was forced to pay Macquarie Bank the almost $2 million loss that it sustained.

The Federal Court held KG liable for all of MG’s loss.

The Decision and the Reasoning of the High Court

Upon appeal the High Court upheld the Federal Court’s decision. The High Court gave 4 separate judgements, reaching the same decision by different routes. KG had argued that it should only be held liable for the loss that actually flowed from it’s negligent valuation. That loss being the difference between its valuation and the true value of the property.

Justice Gaudron held that a valuer should not be liable for any damage that would have been suffered even if the property was initially worth what it was valued at. She decided against the valuer despite this reasoning, arguing that MG had not agued that part of the loss would have been suffered whether the valuation was correct or not.

Justice McHugh held that in the absence of special circumstances or an undertaking to the contrary, the valuer will not be held liable for the difference between the true value of the property and the price obtained upon it’s sale. He argued that the "true value" already takes into account possible declines in value and hence any sale at a lower price was not reasonably foreseeable by the valuer. Justice McHugh still held KG liable however as they hadn’t simply provided a once-off valuation, but had represented that the property would not decline to less than 65% of their valuation in the next 3 to 5 years.

The rest of the court recognised that this case was not a suitable forum for them to define the liability of valuers, given the circumstances involving the representation of the property retaining 65% of its value for 5 years. They contented themselves to say that in the circumstances of the case KG was liable for the full extent of MG’s loss.

Summary and Comments

In summary, this case seems to give lower court judges an excuse to go either way on the question of whether or not valuers can be held liable for losses arising out of declines in the market. Whilst Gaudron and McHugh expressly appear to rule this out, their comments do not go to the heart of the matter being decided and hence are not required to be followed by lower courts. In addition, in the humble opinion of this writer, their reasoning is flawed. Justices Gummow, Kirby and Callinan decided the case on its facts, using tighter and more appealing reasoning than that of either Gaudron or McHugh.