UK: Court Of Appeal Further Confirms Project Monitors' Narrow Scope Of Duty

Court of Appeal reverses project monitor's share of losses on finding that funder failed to adhere to elementary banking principles.

In Lloyds Bank Plc v McBains Cooper Consulting Ltd (2018), the Court of Appeal considered the scope of a project monitor's duty and, additionally, the duties of the lending bank when entering into a facility. The Court of Appeal's approach is of wider interest as the decision confirms that focussing on the strict distinction between advice and information (as set out in SAAMCo, and considered by the Supreme Court in BPE v Hughes Holland (2017) is not always helpful, particularly when the causative impact of the alleged breach is apparent. This case further also highlights (following Bank of Ireland v Watts Group Plc (2017)) that the scope of a project monitor's duty may well not cover every loss that a lender may incur, and advances the law in this regard in relation to the effect of interim reports. It reiterates that lending institutions must adhere to "elementary banking principles" or risk a finding of contributory negligence.

The facts

McBains involved the redevelopment of a former bingo hall in Willesden into a new church (the development). Under a facility letter dated 30 May 2007, Lloyds Bank Plc (Lloyds) agreed to lend GBP 2.625 million (the facility) to a Special Purpose Vehicle (SPV) created for the development. This loan did not include any allowance for contingencies, and understated the cost of professional fees. Lloyds was aware, from the outset, that the cost of the development would exceed the facility.

Lloyds retained McBains Cooper Consulting Ltd (McBains) to, amongst other things, act as its project monitor, to report on the progress of the development and to make recommendations in relation to interim payments to be made under the facility. Lloyds did not provide a copy of the facility letter to McBains.

Construction works started in late 2007. During late 2008 and early 2009, Lloyds made interim payments under the facility, including in relation to certain additional works (the construction of a third floor), which fell outside the facility. McBains did not make it clear in its progress reports that the valuations included sums relating to third floor works (totalling £259,792) that fell outside the facility. By early 2009, the development remained unfinished with the loan almost extinguished. Lloyds consequently terminated the facility and the property was sold; Lloyds sustained losses of GBP £1.4 million, which it claimed from McBains.

First instance

At first instance it was held that McBains was liable for two thirds of the losses for breach of its duty (i) to inform Lloyds that the cost of completing the development was greater than the amount of the facility; and (ii) in failing to draw to Lloyds' attention the fact that it was being asked to pay for additional work outside the facility.

The Court held that had McBains informed Lloyds by late 2008 that there was not only a shortfall, but that additional works would increase the cost further, Lloyds – having been made aware sooner - would have terminated the facility and sold the site some months earlier than it did. On this basis, McBains was found liable for two thirds of all losses sustained as a consequence of the lending that took place from late 2008, when Lloyds would have hypothetically terminated the development.

Lloyds were held contributory negligent for one third of its losses from late 2008 due to its knowledge that the facility was insufficient to cover the development from the outset.

The Court of Appeal

The Court of Appeal, by a unanimous decision, reversed the extent to which McBains and Lloyds had contributed to the recoverable loss, i.e. finding Lloyds two thirds responsible for its recoverable losses.

In reaching this conclusion, the Court of Appeal agreed with the first instance decision that McBains had negligently failed to draw Lloyds' attention to the fact that that it was being asked to pay for the third floor works. The consequence of McBains' negligence was that Lloyds paid for works that it was not obliged to. McBains was, therefore, liable in respect of such sums, totalling £259,792.

However, the Court of Appeal concluded that McBains was not responsible for the full sums advanced from late 2008 onwards as (save for the costs associated with the third floor) such losses would have been incurred by Lloyds irrespective of McBains' breach of duty. The 'but for' causation test and the counter-factual position accepted by the Court at first instance required careful interpretation. Had McBains excluded the costs relating to the third floor, Lloyds would have suffered considerable losses in any event because Lloyds had agreed (and continued) to fund the development, despite knowing from the outset that it was uneconomic. McBains' liability was therefore limited to only those losses caused by the breach of its duty i.e. negligently recommending Lloyds' pay for additional work outside of the facility.

The application of SAAMCo post BPE Solicitors

In determining McBains' scope of duty, the strict distinction between the labels of advice and information did not assist. Following the decision in BPE Solicitors, the Court of Appeal maintained that the labels of information and advice are "neither distinct nor mutually exclusive categories".

Contributory negligence

In considering the issue of apportionment, the Court of Appeal noted that, at first instance, the Court "considerably downplay[ed]" Lloyds' responsibility; there was a "formidable catalogue of irresponsibility" by Lloyds whereby it had failed to adhere to elementary banking principles.

Lloyds had:

(i) agreed to a loan for the Development when it knew from the outset that the cost of the development exceeded the amount of the loan;

(ii) made no arrangement with the borrower for the payment of extra costs; and

(iii) failed to provide McBains with a copy of the facility.

Save for the amounts paid by Lloyds for the third floor works, Lloyds continued to fund the development knowing it was uneconomic, and such sums were going to be lost had McBains fully discharged its duty. Consequently the Court of Appeal took the rarely used step of interfering with the judge's conclusions on apportionment, finding Lloyds contributory negligent and two thirds responsible for its recoverable losses (reducing McBains' liability to £86,597), some way less than had been awarded to Lloyds at an earlier Adjudication and at first instance.

This decision illustrates that a strict delineation between advice and information may not always be helpful in determining a professional's scope of duty, particularly if it is evident what losses flow from the alleged breach(es). This decision follows BPE Solicitors and Bank of Ireland v Watts in highlighting that losses should be limited to those falling within the scope and attributable to the breach(es) of duty and that lenders therefore may face substantial difficulties in recovering all their purported losses.

Court Of Appeal Further Confirms Project Monitors' Narrow Scope Of Duty

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