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Capita Alternative Fund Services v Drivers Jonas

8 November 2012

The appellant surveyors “Drivers” appealed against a judgment of Eder J ([2011] EWHC 2336 (Comm), 139 Con. L.R. 125) in which he had awarded damages of £18.05 million against them for a negligent over-valuation of a factory outlet shopping centre in Chatham, Kent. The Court of Appeal, allowing the appeal in part, gave guidance on the proper approach to expert evidence in proceedings concerning property valuations, and also on the correct approach to measuring loss where investors had utilised a trust structure to invest in the property that was valued.
Drivers provided its valuation to the trustees “Capita” of an investment vehicle called an Enterprise Zone Property Unit Trust “EZPUT”. Individual investors would then invest in the shopping centre through that vehicle, and those who took part in the scheme were entitled to certain tax credits which in effect reduced the purchase price of the overall acquisition.
The valuation given by Drivers put the open market value of the development at £48.15 million, or £62.85 million with the benefit of enterprise zone allowances. The development was a commercial failure. Capita sued Drivers alleging that the centre had been overvalued, including a contention that Drivers should have obtained a CACI”  report as part of their retainer, which would have addressed the centre’s prospects of attracting consumer spending.
Eder J found that with the benefit of the enterprise zone allowance the true value of the development was around £44.8 million, some £18.05 less than the figure Drivers had provided. He held that a CACI report was an essential component of a competent valuation, and based his own valuation on the evidence given by Capita’s expert in the proceedings, Mr Barbour, that £19 per square foot was the correct value.
Drivers argued on appeal that:
(i) Mr Barbour’s expert evidence was based entirely on the evidence of another expert, Mr Parr, which had been rejected by the judge, and accordingly, there was no proper basis for Eder J’s conclusion as to the correct valuation which would have been given by a competent valuer, such that no loss had been established.
(ii) The judge had erred in failing to require Capita to give credit for the tax benefits received by investors as a result of the purchase of the shopping centre.
By a majority (Lloyd LJ dissenting) it was held that Eder J had been entitled to base his decision on the evidence put forward by Mr Parr. While a judge had to have a reasoned or rational basis for a decision, he was not confined to the figures contended for by the experts. Indeed, the figure arrived at by a judge in a valuation case might well lie somewhere in between two figures proposed by opposing experts. Moreover, having regard to the nature of quantum disputes, a judge would often find himself having to do the best he could. It was not to be expected that “pinpoint accuracy” might be achieved in valuation matters. In light of this inherent imprecision in the nature of any valuation exercise, there would have to be cogent reasons for interfering with the judge's conclusion, and there were none present on the facts.
However, the Court of Appeal allowed the appeal in part by holding that Eder J should have taken into account the tax advantages enjoyed by investors in arriving at the damages figure.  
Drivers had argued that the tax relief was enjoyed by the investors, who were a different person from the claimant in the action "Capita". The Court accepted the general rule that, "there is, ordinarily, neither need nor justification for looking behind [trust] structures and the consequences of doing so can be far-reaching and unwelcome". However, in the very specific context of the statutory regulations governing EZPUTs, the Court was justified in looking behind the trust because the statute expressly permitted the beneficial investors to take the benefit of the tax credits rather than limiting them to the trust itself.
With this position taken, the guiding principle reverted to: "what damage has the plaintiff really suffered?". In applying this, the Court held that to ignore the fact that the investors almost immediately became entitled to the tax relief upon investing in the EZPUT scheme would be "out of touch with reality" and that for practical terms the tax relief should be viewed as having reduced the purchase price
This was a face of looking at the market value of the whole transaction in order to assess the loss actually suffered: Ford v White & Co [1964] 1 W.L.R. 885 considered; British Transport Commission v Gourley [1956] A.C.185 followed.
Therefore, taking the correct approach of deducting the tax relief from both the £62.85 million and £44.8 million figures, the sum awarded in damages was reduced to £11.86 million. That measure was held to be fair and realistic, as it involved both sides of the investment equation and best reflected the actual losses suffered by investors.