A property developer obtained a loan facility from Lloyds Bank PLC (the “Claimant”) in the sum of £2,625,000.00 (the “Facility”), which figure was subsequently reduced to approximately £2,500,000.00 (the “Revised Facility Amount”) for the redevelopment of a bingo hall (the “Development”). McBains Cooper Consulting Limited (the “Defendant”) was appointed as the project monitor surveyor by the Claimant in respect of the Development. The Defendant’s contractual obligations in terms of the Development included, but were not limited to, carrying out a due diligence on the Development site and reviewing the developer’s requests for advances under the Facility.
The Defendant was responsible for providing regular progress reports to the Claimant in respect of the Development. The Defendant further requested an additional advance for the construction of a third floor which the Claimant paid without investigating such recommendation (the “Additional Work”). The Defendant did not notify the Claimant that the costs of Additional Work would exceed the Revised Facility Amount. The Revised Facility Amount was not sufficient to complete the Development and the project was eventually left unfinished. The Claimant terminated the Facility and recovered what it could from the developer when it realised the securities it had in relation to the Facility. The Claimant then issued proceedings claiming the balance of the damages it had suffered in the amount of £1,400,000.00 from the Defendant on the basis that the Defendant had been negligent in failing to advise the Claimant of the shortfall in the Revised Facility Amount and for recommending payment for the Additional Work. The High Court of Justice of England, Queen’s Bench Division, Technology and Construction Court (the “TCC”) found that the Defendant had breached its duty of care arising from the Development in that the Defendant had incorrectly reported that the Revised Facility Amount was sufficient to complete the Development. Further, the Claimant was also found to be at fault in that it had not provided the Defendant with a copy of the final Facility agreement and, in spite of the Defendant’s negligent reporting, the Claimant should have understood that the Revised Facility Amount was insufficient to fund the entire Development. Accordingly, the TCC found the Claimant to be liable for one-third of the damages its had suffered for funding a project which the Claimant knew was never financially viable. As such, the TCC awarded the Claimant damages in the amount of £415,439.00. The Defendant, unsatisfied with the court a quo’s decision applied to the Court of Appeal of England and Wales (Civil Division) (the “Appeal Court”).
The Appeal Court allowed the appeal in part and held that the Defendant was liable for damages in the sum of £86,597.00 for the following reasons:
- The Appeal Court held that the Defendant should have informed the Claimant that it was funding the Additional Work and that such funding was not included in terms of the Revised Facility Amount. The Defendant had negligently failed to inform the Claimant that it was being asked to pay for work not covered by the Revised Facility Amount, which resulted in the Claimant paying for those Additional Work. However, the Appeal Court considered that the TCC was incorrect to award the Claimant damages which exceeded the sum paid for the Additional Work, and held that the monetary sums lost as a consequence of the Defendant’s negligent information and/or recommendation cannot be more that the total sum which had been paid out for the Addition Work, which was £259,792.00; and
- The Appeal Court also determined that the TCC had not sufficiently considered the Claimant’s irresponsibility in the matter in that the Claimant declined to insist on the developer paying the additional sums in relation to the Additional Work, knowing from the outset that the Development costs would exceed the Revised Facility Amount. The Appeal Court found that pursuant to the reports provided by the Defendant, the Claimant knew that the project was not financially viable and a bank would not have normally terminated a facility on the basis of the Additional Work. The Defendant would have expected the Claimant to comply with its elementary banking principles, which, in the Appeal Court’s opinion, it failed to do. Accordingly, the Appeal Court held that the Claimant was liable for two-third of the damages its had suffered in having agreed to finance a non-viable development.
This case emphasises the potential problems that may arise from a poorly managed relationship between a funder and its project monitor surveyor . It is essential that a funder conduct a comprehensive due diligence into a project it intends funding and be certain of the projects viability prior to committing to same. Further, a fund cannot blindly rely on its appointed project monitoring surveyor to control and review costing of the project on site. Equally, a monitoring surveyor should make sure it fully understands the funding arrangements, terms and conditions as set out in the loan facility agreement, ensuring that any assumptions it has are clarified at the outset or clearly stated in all reporting.
Written by Michal Asoulin and Daniella Brocco