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Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd
Factual and Procedural Background
The Respondent, a mortgage lender, advanced £2.45 million in March 1990 on the security of commercial property that the Appellant, a firm of valuers, had negligently over-valued at £3.5 million. The true value, later agreed, was £2.1 million. After the borrower defaulted almost immediately, the Respondent sought damages for professional negligence.
In June 1996 the House of Lords held that damages were limited to the amount of the over-valuation—£1.4 million—and adjourned the question of interest. The present opinion resolves: (1) the date from which statutory interest on the £1.4 million should run; (2) whether interest can be back-dated on certain costs orders; and (3) whether interest is payable on sums that must be repaid following the successful appeal.
Legal Issues Presented
- When did the Respondent’s cause of action arise for the purposes of awarding interest under section 35A of the Supreme Court Act 1981?
- Does the court have power to award interest on costs incurred in the Court of Appeal from a date earlier than the House of Lords’ judgment?
- Does the House of Lords have inherent jurisdiction to order interest on damages and costs that must be repaid because earlier orders were reversed?
Arguments of the Parties
Respondent's Arguments
- The cause of action arose at the loan’s completion (March 1990) because the lender immediately parted with money for inadequate security.
- By December 1990 the lender had suffered its full recoverable loss of £1.4 million; statutory interest should therefore run from 12 December 1990 at 0.4 percent over LIBOR.
- Interest already included in the £1.4 million precludes additional statutory interest before December 1990 to avoid double recovery.
Appellant's Arguments
- No actionable loss occurred until the property was sold in February 1993; only then was the security proven deficient.
- The Appellant sought interest on Court of Appeal costs from the date of the Court of Appeal’s judgment, relying on Order 42 rule 3 and the approach in Kuwait Airways.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Forster v. Outred & Co. [1982] 1 WLR 86 | Damage occurs when the claimant suffers any detriment capable of monetary valuation. | Supported the view that a lender may suffer loss at the moment of entering an unfavourable transaction. |
| D.W. Moore & Co. Ltd. v. Ferrier [1988] 1 WLR 267 | Loss arises on completion of a transaction lacking the promised protection. | Illustrated that contractual and tortious causes of action can accrue immediately upon transaction completion. |
| UBAF Ltd. v. European American Banking Corp. [1984] QB 713 | Need to compare the plaintiff’s position under the loan with the position had no loan been made. | Adopted to determine when measurable loss first appears. |
| First National Commercial Bank Plc v. Humberts [1995] 2 All ER 673 | Distinction between overall transactional loss and loss attributable to over-valuation. | Reinforced the limited scope of a valuer’s duty. |
| Wardley Australia Ltd. v. Western Australia (1992) 109 ALR 247 | Contingent loss not actionable until “reasonably ascertainable.” | Discussed but not followed; House preferred earlier accrual of loss. |
| Hunt v. R.M. Douglas (Roofing) Ltd. [1990] AC 398 | Interest on costs runs from the date of the costs order (incipitur rule). | Applied to deny back-dating of interest on Court of Appeal costs. |
| Kuwait Airways Corp. v. Iraqi Airways Co. (No. 2) [1994] 1 WLR 985 | Used Order 42 rule 3 to back-date costs for interest purposes. | Expressly disapproved as wrongly decided. |
| Covell Matthews & Partners v. French Wools Ltd. [1978] 1 WLR 1477 | Examples of when back-dating orders is permissible. | Cited to show that money judgments should not be back-dated solely to create interest. |
| Belgian Grain & Produce Co. Ltd. v. Cox & Co. (France) Ltd. [1919] WN 317 | Limits on the court’s power to manipulate dates for interest. | Supported refusal to back-date costs orders. |
| Wadsworth v. Lydall [1981] 1 WLR 598 | Avoiding double recovery where damages already include interest-type loss. | Used to confine statutory interest to periods not covered by the damages figure. |
Court's Reasoning and Analysis
1. Accrual of the Cause of Action. The court, led by Judge Nicholls and Judge Hoffmann, reaffirmed that a valuer’s duty extends only to losses caused by insufficient security, not to all consequences of entering the loan. A cause of action in tort therefore arises once the lender is demonstrably worse off as a lender than if the valuation had been correct. Because the borrower defaulted almost immediately and the loan always exceeded the true value, relevant loss existed from the outset and had reached the £1.4 million cap by 12 December 1990.
2. Statutory Interest on Damages. Under section 35A of the Supreme Court Act 1981, interest may be awarded only from the date when the cause of action arose. Given the loss position by December 1990, interest was justified on £1.4 million from 12 December 1990 at 0.4 percent above LIBOR. Earlier interest would duplicate the borrowing costs already included within the damages.
3. Interest on Costs Orders. Relying on Hunt v. Douglas, the House confirmed that interest on costs runs from the date the relevant costs order is made. The Appellant’s attempt to invoke Order 42 rule 3 to back-date interest was rejected; Kuwait Airways was expressly overruled as an impermissible use of procedural rules to achieve what statute does not allow.
4. Interest on Repayable Damages and Costs. When appellate reversal requires repayment of sums previously ordered, the House has inherent jurisdiction to order interest on those repayments to achieve full restitution. This power is distinct from the statutory powers concerning interest on damages or costs.
Holding and Implications
HELD: The Respondent is entitled to simple interest on £1.4 million from 12 December 1990 at 0.4 percent over LIBOR. The court lacks power to award interest on Court of Appeal costs from an earlier date, and Kuwait Airways (No. 2) is overruled. The House possesses inherent jurisdiction to order interest on sums repayable following its judgment.
Implications: The decision clarifies when causes of action for negligent over-valuation accrue, affecting both limitation periods and interest awards. It also settles that procedural rules cannot be used to back-date costs for interest, ensuring consistency between statutory authority and judicial practice.
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