A US bank instructed a marine surveying company to provide a valuation of a client’s vessel to assess its suitability to be used as collateral for a loan. The bank was to be provided with a preferred ship mortgage by their clients.
The marine surveyors valued the vessel in mid 2007 as being worth USD 900,000. On that basis, the bank alleged that they issued two business loans to their clients worth USD 1,200,000, plus credit of an additional USD 400,000 partly secured on the vessel.
In the latter part of 2008 the bank’s clients defaulted on their loans. The bank seized the vessel and appointed a second surveyor to perform an updated survey on the vessel. This survey, in December 2008, valued the ship at only USD 210,000, some USD 690,000 less than the original survey.
The bank issued a claim against the marine surveyors in excess of USD 1 million, representing the difference between the two valuations plus other associated costs. The marine surveyors argued that their valuation was correct at the time it was given; the global economic crisis had occurred between the two valuation dates and many vessels had dropped significantly in value over that period.
During the subsequent investigation, another valuation of the vessel undertaken in mid 2007 was found, which valued it in the “USD 200,000” range. It was argued that the discrepancy in the valuations was due to the marine surveyor being informed by the chief engineer that the engines had recently been overhauled and had just to be ‘hooked up’. The 2007 survey was conducted on the basis that the engines were of no use at all and that new engines would need to be purchased. It seems that the latter view was in fact correct, with the lower valuation being more accurate.
The matter was scheduled to be heard by a jury and there was a serious risk of an adverse finding. Even if the claim had been successfully defended legal costs were unrecoverable in the jurisdiction in which the trial would have taken place. In all the circumstances, ITIC settled the matter for USD 200,000.