Smith v Eric S Bush [1990] UKHL 1 is a landmark House of Lords decision concerning pure economic loss caused by negligent misstatements in professional valuations. It is a key application of the Hedley Byrne principles and illustrates the limits of professional disclaimers.

Case Facts

The claimant purchased a house, relying on a property survey and valuation prepared by the defendant surveyors. Although the claimant paid for the survey, it had been commissioned by the mortgage lender (the building society) to ensure the property’s value was sufficient for the loan. The survey was carried out negligently, failing to identify defects that meant the house was worth significantly less than the purchase price.

The Legal Issue

The central question was whether a surveyor owed a duty of care to a homebuyer when their contract was only with the mortgage lender. The surveyors had also included a disclaimer stating they assumed no responsibility for the report’s accuracy.

The Decision

The House of Lords held that the surveyors did owe a duty of care to the purchaser. Despite the lack of a direct contract, the court found an “especially close relationship” because the surveyor was aware that the buyer would likely rely on the valuation. Crucially, the disclaimer was ineffective because it failed the “reasonableness” test required by the Unfair Contract Terms Act 1977 (UCTA).

Key Reasoning and Principles

  • Reasonable reliance: it is “commonly understood” that homebuyers rely on mortgage valuations to save on the cost of a full structural survey, especially since the buyer ultimately pays the lender for the valuation.
  • Modest means and importance: for many, a house is the most important purchase of their life. The claimant was of “modest means” and was entitled to rely on the professional valuer’s skill.
  • The UCTA reasonableness test: the House of Lords identified several factors for whether a disclaimer is reasonable:
    • the bargaining power of the parties;
    • how difficult the task being undertaken was;
    • the practical consequences of the loss, including the parties’ ability to bear it through insurance.
  • Distinction from Caparo: unlike Caparo v Dickman, where an audit could be relied upon by an indeterminate number of investors, the surveyor here knew specifically who would rely on the report for one particular transaction.

Legacy and Limitations

The decision is primarily applicable to private residential homebuyers. This was highlighted in Scullion v Bank of Scotland, where the court refused to extend the duty to a purchaser of a buy-to-let property, treating that as a commercial investment rather than the purchase of a family home.