Bank of Ireland and another v Watts Group PLC
Derwent Vale York Limited (the Borrower) made an application to the Bank of Ireland (the Bank) for a loan of £1.4m for the development of a site in York. The Modus Group, a key client of the Bank, was a majority shareholder of the Borrower (which was an SPV created for to develop the project).
The Bank had produced an internal memo before approving the loan approval which recorded that the proposed loan failed to comply with 3 out of 4 of the Bank’s lending guidelines, including the fact that the Bank already had £20 million exposure to the Modus group. A surveyor’s report was also obtained before the loan was approved which flagged up a requirement for an independent valuation of the construction costs of the works before the Bank agreed to the loan. However, the Bank failed to obtain that valuation and approved drawdown of the loan in June 2007.
The Bank instructed Watts Group PLC (the QS) as a monitoring quantity surveyor in January 2008, to review the costings of the Borrower. The QS prepared an Initial Appraisal Report (IAR), to review the Borrower’s proposed development and costs estimates for a fee of £1500 plus VAT. The IAR confirmed the construction cost and the proposed programme as reasonable. However, the IAR made clear that it was subject to caveats that it was produced on the basis of draft documents supplied by the Bank and was subject to further documents and information being provided.
Unhappily, by the end of May 2009, the Modus group had entered administration and the Borrower was put into liquidation. Building work on the project ceased. The Bank eventually took possession of the site which it sold at a loss of £750,000.
The Bank sued the QS for negligence in producing the IAR.
Coulson J found that there was no evidence on the facts that the QS had actually been negligent in producing its report. As such, he found that the QS’s figures were reasonable in the circumstances. The QS was carrying out an overview process of the figures provided by an experienced developer and was not expected to carry out a detailed analysis.
CAUSATION AND RECOVERABILITY
Had there been any negligence, Coulson J went on to consider the question of causation. Whilst there had been reliance on the IAR by the Bank, such reliance had not caused the loss claimed. The judge found that it was probable that Bank would always have approved drawdown of the loan. Referring to the distinction between the provision of ‘information’ and ‘advice’ established in South Australia Asset Management Corporation v York Montague Limited (SAAMCO), Coulson J stated that the QS provided information which had formed part of the material on which the Bank relied, as opposed to specific advice on which it acted. The QS would only be liable in law for the financial consequences of the information being wrong, not for the financial consequences of the Bank entering into the transaction.
The real cause of loss was the ‘Bank’s botched consideration of the loan application and their flawed decision to lend to the Borrower’. The Judge listed a number of failures on the part of the Bank to recognise the risk they were taking on and decided that by the time the QS had become involved ‘the die was pretty much cast’. Had the Bank’s claim succeeded on liability, it would have been subject to a 75% reduction for contributory negligence in any event.
Coulson J heavily criticised the Bank’s expert as unrealistic, unreasonable and misleading to the Court and concluded that he was not an independent or reliable expert witness. The Judge warned that given experts’ increasing work in ADR, they should make themselves aware of the differing duties owed by them in acting as an advocate in mediation, for example, versus their duties to the Court as an independent expert.
One significant point for parties, practitioners and experts alike to note is that the Judge heavily criticised the expert’s close relationship with the Bank, which was his principal client and provided the ‘vast majority’ of his work and instructions.
This is not the first warning from the Courts of “Bankers Beware” in relation to funding arrangements. The Court held in Lloyds v McBains Cooper that contributory negligence on the part of Lloyds meant that its damages against a negligent project monitoring surveyor would be reduced by a third. This judgment continues in that trend and emphasises that funders must take some responsibility for their funding decisions, particularly where red flags existed at the time which could and should have been heeded.