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Rowan Turrall
Rowan Turrall,
SENIOR ASSOCIATE - SOLICITOR
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Liability of a project monitor for negligent advice
01 February 2016

In the recent case of Lloyds Bank plc v McBains Cooper Consulting Limited [2015] the court was required to decide a claim brought by the Bank against its project monitor in connection with a loan made by the Bank for the redevelopment of a church. The unusual feature of the case was that it was clear to the judge that the Bank should never have made the loan and that the project monitor gave advice that was unquestionably negligent. The case highlights various pitfalls for project monitors in performing their role.

Background

The bank agreed to lend Miracles Signs & Wonders Ltd £2.625 million to assist with the development of a church. The church was based in a former bingo hall and the development was intended to add various function rooms, a bookshop, a nursery, an internet café and self-contained accommodation units. Originally the borrower also wished to develop the third floor of the property but the costs were not ultimately included in the facility.

About 21 months into the project the Bank’s facility was almost exhausted and the development far from being finished. The bank cut its losses and realised its security. There was a shortfall of some £1.4 million which it then sought to recover from McBains Cooper who had been appointed by the Bank as project monitor – essentially the eyes and ears of the Bank in relation to the project. The court then had to decide to what extent the Bank relied on the advice given by McBains Cooper and who was actually responsible for the losses sustained by the Bank.

McBains Cooper was engaged to provide monthly progress reports. Its obligations under its retainer included inspecting the site at least once a month and confirming at the time of each drawdown that the undrawn balance of the facility would be sufficient to meet in full all costs to be incurred in achieving practical completion. Among the allegations made were that the monitor did not attend site on a monthly basis, he wrongly stated in the reports that the facility was sufficient, he failed to include variations in the reports and he included works which were outside the scope of the facility (namely works to the third floor).

Areas where McBains Cooper was found to have been negligent

The failings on both sides highlighted by the judge were numerous. It was clear that the Bank should have been aware at the time the facility was granted that it was not going to be sufficient to cover the development costs. However, the judge highlighted a number of areas where McBains Cooper’s conduct was found to be in breach of the terms of its retainer and/or to have fallen below the standard to be expected and lessons can be learnt by those acting as project monitors from these points. In particular:

  • McBains Cooper was in breach of its retainer because the project monitor did not visit the site prior to the issue of each Progress Report. However, the judge found that this breach was largely immaterial because the Bank had not established any loss as a result of it. There was no allegation, save in two respects, that the information given in the progress reports about the quality, value and progress of the works was inaccurate.
  • McBains Cooper confirmed in the first 8 progress reports that the facility was adequate. Each report stated “We can confirm that, in our view, sufficient funds remain in the total facility at this time to complete the development.” The judge found that confirmation was given negligently because the facility amount stated was some £300,000 less than the Contract Price. However, he found that this failing was not causative of the Bank’s loss. From Progress Report 9 onwards the reports included the contradictory statement, “We can confirm that, in our view, sufficient funds remain in the total facility at this time to complete the development, as we understand that additional costs are to be funded by the Borrower from outside of the Facility”.  
  • McBains Cooper should have advised the Bank of significant variations to the building contract or circumstances likely to result in a significant variation for which the borrower would be liable. The judge found that the monitor took an overly contractual approach in that he took the view he should only report on additional work if that additional work had actually been the subject of a formal variation instruction. The judge found that taking a stance of not reporting additional cost on the ground that the contract had not yet been formally varied was “verging on the absurd”. Even though the monitor had sent the Bank copies of the contractor’s valuations, he was not entitled to assume that they would have read the attachments to the progress report unless something was particularly drawn to their attention.
  • It was also in breach of its retainer in not specifically drawing to the Bank’s attention that there was likely to be an extension of time attributable to “client influenced delays” as this was likely to result in prolongation costs being payable.
  • Progress report 10 included costs associated with the redevelopment of the third floor. McBains Cooper should have advised the Bank as soon as the borrower included costs for the third floor redevelopment in the drawdown applications. The monitor knew that it was not the intention of the Bank to pay for the third floor. He should have questioned its inclusion and not recommended payment should be made for it. The judge found that it is the duty of the monitor to advise the Bank if sums had been included in the monthly valuation for work that was, or might have been, outside the scope of the work covered by the facility.
  • The judge found that McBains Cooper had not been provided with a copy of the Facility Letter but concluded that they should have taken more vigorous steps to obtain a copy at the outset. If the development is only part funded by the facility then the project monitor has to know what has been agreed between the bank and the borrower in relation to the injection of funds by the borrower.

Did McBains Cooper’s negligence cause the Bank’s losses?

There were a number of respects in which the judge found that the Bank’s own actions fell below the standard of a reasonably competent lender. He therefore concluded that none of the breaches of duty by McBains Cooper caused any loss to the Bank until it failed to advise the Bank about the inclusion of the third floor works in Progress Report 10. If it had been drawn to the Bank’s attention, the judge was of the view that the Bank would have disputed its obligation to pay for those works, the third floor works would have been put on hold pending resolution of how they were to be funded. It would have become apparent that there was a very substantial deficit between the facility amount and the funds required and that the borrower was unable to find those additional funds. Had McBains Cooper properly performed its role, the judge found that the Bank would have become aware of the true financial position in November 2008, would have terminated the facility and called on the security. He therefore found that McBains Cooper was in principle liable for the losses sustained by the Bank after November 2008 because the Bank would not have permitted any further drawdowns after this point had it been aware of the true financial position. However, it should have been apparent to the Bank that there were insufficient funds available and it was therefore contributorily negligent. The Bank was therefore found to be responsible for one third of its losses after November 2008.

The Bank’s losses by the end of November 2008 would have been in the region of £700,000. Nothing done by McBains Cooper caused or contributed to that loss. The overall loss was in the region of £1,400,000. Following deduction of the £700,000 of loss existing as at November 2008, the remaining loss was to be split so that McBains Cooper was responsible for two thirds. 

Conclusion

The case serves as a salutary reminder to those acting as project monitors to ensure that they are familiar with the terms of the facility and ensure that the certifications they give accurately represent the progress and contractual scope of the project.

For more information about the issues in this article to find out more about how the Dispute Resolution team can help you please contact Rowan Turrall on 0118 952 7206 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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