The Court of Appeal has handed down its decision in a long running dispute concerning the duties owed by a project monitor. Lloyds Bank Plc v McBains Cooper Consulting Ltd, underlines the importance of a cohesive and open relationship between a funder and its project monitor in a development finance transaction.
McBains was the monitoring surveyor for Lloyds on a development of a former bingo hall, appointed to carry out due diligence and approve the developer’s requests for drawdown.
Lloyds agreed to loan the developer £2.625m. This figure was subsequently reduced to approximately £2.5m, a figure less than the building contract sum of £2.54m.
The loan was insufficient to cover the full construction costs and the project was left unfinished. Lloyds recovered what it could from the developer, and sought to claim the difference from McBains. Lloyds sued McBains for professional negligence, claiming damages of c.£1.4m, principally on the basis that McBains negligently advised that the funding was sufficient to complete the development.
Decision of the TCC
At first instance, the Technology and Construction Court (TCC) found that McBains was negligent and awarded Lloyds damages. In breach of its duty, McBains incorrectly reported that the facility was sufficient to complete the development and failed to notify Lloyds that the facility was being used to fund additional works.
However, the court was equally unimpressed with Lloyds, awarding it damages of only £415,439. Lloyds had not provided McBains with a copy of the final facility agreement and, in spite of McBains’ negligent reporting, should have understood much earlier that the facility was insufficient to fund the entire development.
Decision of the Court of Appeal
McBains appealed the TCC’s decision. The Court of Appeal decided that McBains was liable for £86,597.
Scope of duty and causation
The Court of Appeal held that McBains should have informed Lloyds it was funding additional works that were outside of the terms of the facility. McBains’ negligence resulted in the bank paying for additional works when, simply, it did not have to. However, the Court of Appeal considered that the TCC was incorrect to award Lloyds damages which exceeded the sum paid for the additional works.
The Court of Appeal also concluded that Lloyds knew there was likely to be a serious shortfall. Lloyds paid sums pursuant to McBains’ progress reports because it agreed to finance a development that was never financially viable, not because McBains had advised them incorrectly. In the court’s view, the bank would not have terminated the facility purely because of the additional works payments.
The Court of Appeal also determined that the TCC had not sufficiently considered Lloyd’s irresponsibility. Knowing that development costs would exceed the facility sum, Lloyds declined to insist on the developer paying the additional sums. McBains would have expected Lloyds to comply with elementary banking principles, which, in the court’s opinion, it failed to do. The Court of Appeal held that Lloyds were two thirds responsible in having agreed to finance a non-feasible development and overlooking McBains’ viability warnings.
This case emphasises the problems that a poorly manged relationship between a funder and its project monitor can cause. A funder needs to be cognisant of the viability of the project it is financing and cannot simply sit back and rely entirely on its monitoring surveyor to keep an eye on costs.
Equally, a monitoring surveyor should make sure it fully understands the funding arrangements and the terms of any loan, ensuring that any assumptions it has are clarified at the outset or clearly stated in all reporting.