Bank fails to obtain pre-action disclosure on fraud claim

05/03/2007

A property developer applied for a loan from the Bank to fund the purchase of a property. The Bank instructed the Defendant Valuer to carry out a valuation of the property, which was duly carried out by their London Head of Valuation. The Valuer reported, inter alia, that the market value of the freehold interest in the property, subject to and with the benefit of three occupational leases said to have been entered into when the developer acquired the property as proposed, was £16m. The report gave the value of vacant possession at £10.5m. In reliance on that valuation, the Bank made a loan of £10.5m and a further loan of £1m. It later became apparent that the three occupational leases referred to in the valuations were forgeries, and that the valuations were themselves flawed. The developer defaulted on the loans and appeared to have no assets. The Bank repossessed the property but anticipated that it would receive no more than £2m for it.

The Bank sent a pre-action letter to the Valuer alleging that the advice had been negligent and made a number of requests for pre-action disclosure. The Valuer admitted that there were flaws in the valuation. The Bank later alleged that the case involved potential allegations of fraud against the Head Valuer, and noted that publicly available information indicated that there were several similar transactions being investigated by other lenders. It requested information in documents wider than the specific transaction involving the property developer, which was rejected.

The Bank applied pursuant to CPR 31.16 for pre-action disclosure for documents which fell within three categories:
(i) documents described by reference to persons with whom the Head Valuer was dealing and by reference to certain properties; (ii) lists of key word searches undertaken by the Bank in searching for documents in the first category; and
(iii) a copy of the particulars of claim and other statements of case in what was said to be a similar action involving another lender.

The application was refused.

Mr Justice Tugendhat held that the jurisdiction threshold at sub-para (c) imported into CPR 31.16(3) the provisions relating to standard disclosure, including the limitation of reasonableness, reasonableness or proportionality was a jurisdictional issue.

Although this might not be so in many applications for pre-action disclosure, as there might not be an issue as to standard disclosure at all, or as to the reasonableness of each search required, it was so in the instant case. In all the circumstances, the Bank had not established that the Valuer's duty by way of disclosure would extend to the documents or classes of documents sought.

Moreover, having regard to sub-para (d) of CPR 31.16(3), disclosure was not desirable. This was a discretionary test, and although it might eventually transpire that reliance upon similar fact evidence was possible and proportionate, that was not clear at this stage.

(Cheshire Building Society v Dunlop Haywards (DHL) Ltd [2007] EWHC 403 (QB) 2 March 2007)

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