[104] In the case of a loan transaction, while it might be possible to say that, from the outset, the security was less valuable than expected, it does not inevitably follow that the transaction will result in a loss. Particularly is that the case where the loan is not repayable until a later date, or where the valuation of the property taken as security was made both on an "as is" and on an "on completion" basis, (each of which was the situation here) since there is always the possibility of later events or market forces resulting in some increase in its worth. Indeed, had the Westlakes Project not proceeded, the value of the mortgaged property could have been substantially higher."
26 In Key Nominees Pty Ltd v Ace Insurance Ltd [2008] NSWDC 62 Johnstone DCJ had a similar issue to determine. The claim was one made by a mortgagee in respect of a valuation of land resulting in a loan by the mortgagee secured by mortgage over the land. The claim was a s 6 claim and the issue was when the cause of action accrued. The valuation was dated 18 May 2004 and the loan was made shortly thereafter. The valuer overvalued the land by some $300,000 with the result that the mortgagee lent well above its seventy per cent lending ratio. The borrower subsequently defaulted and property was sold at public auction pursuant to the mortgagee's power of sale on 30 September 2005. The amount recovered was insufficient to meet the principal amount of the loan and the accruals of interest.
27 It was not disputed that no loss was suffered at the time the Plaintiff entered into the mortgage and advanced the loan in reliance on the overvaluation, and it was agreed that any loss remained contingent until actual loss eventuated. However, the Defendant submitted that the contingent loss became actual when the borrower defaulted because it was the default that gave rise to the right to exercise the power of sale and the loss. The Plaintiff submitted that actual loss occurred only upon sale because it was only at that time that there could be any certainty of a shortfall.
28 Johnstone DCJ said:
"[18] I disagree with both propositions. In my view the correct principle is that stated by Gaudron J in Kenny & Good Pty Ltd v MGICA (1992) Ltd and what she is there doing is explaining the Wardley principle and its application, so as to determine when, in the case of a mortgage transaction, the contingent loss becomes actual, because recoupment is rendered impossible. That occurs when it has become reasonably ascertainable, by objective evidence, that sale will result in a loss. Default is not the contingency, because even where default has occurred, unless it is reasonably ascertainable that sale will result in a loss, the loss remains prospective. That a sale would result in a shortfall is a question of fact. It is not required, as a matter of law, for an actual sale to occur, as was made clear in NSW Aboriginal Land Council v Ace Global Markets Ltd . So long as there is evidence that a sale would produce a shortfall, the contingency is fulfilled and the prospective loss becomes actual. It may be, for example, that a sale will assist in the quantification of the ultimate loss, but it is not the sale that is the contingency that gives rise to actual loss."
29 The Plaintiff in the present case submitted that, to the extent that there was any tension between HTW on the one hand and Wardley on the other, the HTW line of authority was binding because the High Court in HTW considered Wardley and explained the effect of that decision.
30 The Plaintiff next submitted that there was no real distinction between a purchase (as in HTW) and a mortgage (as in Kenny & Good). This is because the lender is getting something of less value than it thought it was. The Plaintiff pointed to the fact that if the lender wanted to assign the security it would have something of a lesser value than it ought to have had and that it would have had if there had been no negligent valuation.
31 I do not agree with these submissions. When properly analysed, the decisions in HTW Valuers on the one hand and Kenny & Good and Wardley on the other hand sit comfortably together based on the principles discussed, particularly in Wardley but also in Kenny & Good. What was emphasised in those two cases was the need to enquire what the interest was that was infringed by the negligent act. In relation to a mortgage, as Gaudron J makes clear at [16] in Kenny & Good, the interest that a mortgagee seeks to protect by obtaining a valuation is that it should be able to recoup by the sale of the property the amount owing under the mortgage, and it is the interest in recoupment that is infringed by breach of the duty. That is why the relevant enquiry is the time when recoupment is rendered impossible. That may be as early as default but it may be at a much later time because the default is merely a hiccup along the way.
32 It is not correct to concentrate on the default by the borrower because it is not that default that the valuer is protecting against in providing his or her valuation.
33 On the other hand, where a purchaser pays too much money for a property as the result of a negligent valuation, the loss occurs at the entry into the purchase. That is because the interest to be protected is the purchaser's interest in paying the market value for the property.
34 A purchaser is in the position of the plaintiff in Forster v Outred [1982] 1 WLR 86 where the fact that damage was first suffered was said by the High Court in Wardley to be explicable by reference to the immediate effect of the execution of the mortgage on the value of the plaintiff's equity of redemption (see at 175 CLR 514 at 529). A purchaser is also in the same position as the plaintiff in Winnote Pty Ltd v Page (2006) 68 NSWLR 531, as per the discussion by Mason P at [40] to [66], adopting the description of the English Court of Appeal in Bell v Peter Browne & Co [1990] 22B 495 of "cases where the client had through the negligence of his professional advisor ended up with a package of rights less valuable than he was entitled to expect".
35 The Plaintiff next submitted that even if loss did not occur on the making of the loan it occurred at the date of default. This was because the default showed an indication that the agreement for loan was not to be honoured and, by implication, it could be inferred that the personal covenants available to the mortgagee would be worthless. In this regard the Plaintiff pointed to part of the passage in the judgment of Wood CJ in NSW Aboriginal Land Council where he said that in a case where a loan was not repayable until a later date it could not be said that from the outset the security was less valuable than expected (see at [104]). The Plaintiff pointed to the fact in the present case that the loan was a bridging one for a period of one month only and was, without the exercise of the option to extend for one month, repayable on 18 June 2004. In this regard the Plaintiff also pointed to the remarks of both Gaudron and Gummow JJ in Kenny & Good that suggest that default may be a relevant time for the ascertainment of loss (see Gaudron J at [16] and Gummow J at [84]).
36 It is important to bear in mind two things when considering these submissions. The first is that the general principle remains that loss is established in a case such as the present (the loan of funds in reliance on a valuation) when recoupment becomes impossible and that involves the balancing of benefits and burdens which include matters such as rights under personal covenants, rights under guarantees and the ability to realise the sale of the land for an amount that will, when taken with the other matters, bring about the position that the lender recovers its full entitlement. Secondly, as Johnstone DCJ makes clear in Key Nominees, the issue is one of fact that involves an enquiry into when recoupment is impossible and that is when it becomes reasonably ascertainable by objective evidence that sale will result in a loss.
37 In the present case the Agreed Facts on which the separate question is decided do not point to any objective evidence to say that it was reasonably ascertainable at the date of default that recoupment was impossible. There was then available no evidence about the value of the land at that date. There was no evidence of the inability of the borrower to repay the money, only that it had failed to do so.
38 The only matter the Plaintiff can point to is that reliance on the Deed of Guarantee by the lender was likely to prove futile. This is because, by some error of drafting and execution, the Guarantee is said to be between the borrower and two lenders being Apollo Fruit Supply Pty Ltd and Joan Marshall. It appears that Joan Marshall was at one stage intended as one of the lenders because her name appears in a number of places on the Loan Contract crossed out with the name of Marie Ross (the Plaintiff) written in with initials alongside it. Probably by oversight, this did not happen in relation to the Deed of Guarantee. Unrectified, it would appear that the Plaintiff could not enforce the Guarantee against the borrower.
39 Nevertheless, the evidence goes no higher than that to support the submission that by the date of default the loss was objectively ascertainable.
40 The Plaintiff further submitted that the retrospective valuation by Mr Wright that valued the property as at April 2004 at $1,250,000 was objective evidence to show that, at least by the date of default, it was reasonably ascertainable that recoupment would be impossible.
41 In my opinion, the retrospective valuation does not make it objectively ascertainable that loss was suffered at the earlier time at which the valuation purports to speak. A valuation is an expression of opinion, albeit informed opinion, but standing alone is insufficient to amount to objective evidence that makes it reasonably ascertainable that a loss will result. Certainly, a further valuation, when combined with other evidence such as a continuing default by the borrower, or some other objective matter, may be sufficient. Indeed, that is how I understand Wood CJ's conclusion in NSW Aboriginal Land Council, that by the date the further valuation was obtained in that case it was reasonably ascertainable that a loss would be suffered (see at [106]-[109]). That case provides no support for the proposition that a retrospective valuation provides objective evidence of ascertainable loss at the date it purportedly values the land.
42 In my opinion, the mere act of default on 18 June 2004, even coupled with the later opinion of Mr Wright that at the date of the advance (May 2004) the land was worth less than the advance, did not make it objectively ascertainable that loss would result by the date of default. There was no evidence to suggest, for example, that the personal covenants were by that date worthless or worth so little that a loss would inevitably flow to the lender. There was not, as at that date, any further valuation evidence pointing to a loss on resale at that time. The first time such evidence was available was in December 2004 when Mr Cremer valued the property at $1.65 million.
43 I have not been asked to make a finding as to the date on which it could be said the Plaintiff suffered actual loss. The question to be determined is whether the cause of action accrued subsequent to 26 July 2004 or, put another way, whether it could be said that actual loss had been sustained on or before 26 July 2004. The evidence available does not permit me to say that the cause of action accrued on or before 26 July 2004 and, accordingly, I answer the question asked in the affirmative, that is to say, each cause of action set out in the Statement of Claim against the First and Second Defendants accrued subsequent to 26 July 2004.