Lloyds Bank Plc v McBains Cooper Consulting Limited examines the extent to which a professional advisor may be liable for a claimant's loss and how damages can be reduced by contributory negligence

A recent Court of Appeal decision has addressed once more the limits on what damages may be sought from a defendant to a professional liability claim. The judgment also illustrates the extent to which contributory negligence can affect the level of damages awarded.

The background

McBains Cooper Consulting Ltd was a construction project monitor, appointed by Lloyds Bank plc in respect of a loan of £2.65 million advanced against a new property development. From the outset the loan would always have been in difficulty because it failed to allow for contingencies, professional fees or adequate interest payments. It was therefore (and always would have been) insufficient to cover the total cost of the development.

The loan was to be drawn down in tranches. McBains’ duties to Lloyds included monitoring the project, confirming prior to each drawdown that each tranche was payable and that the undrawn balance would cover the remaining costs.

The project scope expanded to include the third floor of the building. McBains did not advise Lloyds that loan monies were being used to fund that aspect of the works, despite that being outside the scope of the loan agreement. McBains also failed to request a copy of the loan facility letter or to advise that there were insufficient funds to complete the development.

However, there were also failings on the part of Lloyds. In addition to the fact that the loan could never have covered all the costs of the development, key commitments (such as confirmation of the completion date and a commitment from the borrower to pay any cost overrun) were not obtained. The bank also failed to investigate references to the third floor and additional works associated with it.

By the time the loan was almost all drawn down, the project remained incomplete. Lloyds terminated the facility, and issued a negligence claim against McBains for its losses of £1.4 million.

The first instance judgment

At first instance, it was held that McBains had breached its duty of care by failing to highlight the variations to the scope of works, thereby allowing funds to be used against the third floor and outside the scope of the loan. McBains had also failed to flag that insufficient funds remained to complete the works.

Damages were reduced by one-third to reflect the bank's failings in approving a loan which, from the outset, fell short by at least £200,000. McBains were held liable for all losses following the progress report in which the works to the third floor were apparent, being all loan tranches following that report. This was on the basis that, had the bank been properly advised, it would have prevented further drawdowns and realised its security following that report.

On appeal

The Court of Appeal held that McBains was liable only for the £259,792 lost as a consequence of its negligent recommendation that the bank pay out sums towards the development of the third floor, which fell outside the scope of the facility and which the bank had no obligation to pay. Contrary to the first instance decision, McBains were not liable for all the losses following the progress report mentioning the third floor, but only those costs that related to the third floor. This follows SAAMCo principal and more recently, BPE v Hughes-Holland, confirming that a negligent adviser is not liable for losses that would have been sustained in any event. Here, those losses were the shortfall suffered by the bank at the very outset of the loan.

The Court of Appeal also significantly increased the contributory negligence reduction, holding Lloyds two-thirds responsible and reducing damages to £86,597. This was on the basis of the ‘formidable catalogue of irresponsibility’ on the part of the bank. Interestingly, the assessment of contributory negligence was applied to Lloyds' behaviour across the whole loan, and not just its conduct in respect of the losses actually awarded to it (i.e. following the report highlighting the third floor).

What have we learned?

The case is a useful reminder of SAAMCo principles and the limits on what damages may be recoverable from professional advisers. It also serves as a clear warning to claimants, particularly lenders, of the perils of contributory negligence and the extent to which damages may be reduced.