The recent judgment of Mr Justice Edwards-Stuart in Lloyds Bank PLC v McBains Cooper Consulting Ltd in the Technology and Construction Court (TCC) makes uncomfortable reading for funders and their project monitors alike.
In 2007, Lloyds Bank (the Bank) agreed to lend £2.625m to a special purpose vehicle (SPV) set up by a trust for the purposes of the development of a building in Willesden, North London, which was used as a church. By this time, the Bank had already appointed McBains Cooper Consulting Ltd (McBains Cooper) as its project monitor in relation to the works. As project monitor, McBains Cooper was to provide services as a surveyor which can be summarised as follows (as set out in the judgment):
- To check the progress and quality of the works
- To approve the applications for drawdown submitted on behalf of the borrower; and
- To make recommendations to the Bank against the drawdown request.
As Mr Justice Edwards-Stuart so succinctly put it, "...it all went wrong": in short, the loan facility was exhausted well before the completion of the works (which the borrower could then not afford to complete) and the Bank suffered significant losses. In 2013, the Bank commenced both an adjudication and court proceedings in the TCC against McBain Cooper seeking to recover those losses.
Over two years later, the Bank has now received a limited judgment against McBains Cooper which included a finding of contributory negligence against the Bank. The parties have been left to sort out between themselves (hopefully) the exact amounts due pursuant to the court's findings but ballpark figures suggest that overall, the Bank may possibly recoup around £467k as against a total claim of around £1.7m; costs (an issue to which we will return) remain to be addressed. Having already received around £288k on adjudication, this would translate into another net payment to the Bank of around £160k.
A sorry tale frankly. The court found that McBains Cooper had been in breach of its retainer at various times during the project and gave advice that was "unquestionably negligent" but that the key causative breach occurred in August 2008, when McBains Cooper failed to alert the Bank that the drawdown application under consideration at that time included works outside of the parameters of the loan facility.
Had McBains Cooper properly performed its duties at that time, the Bank would have been alerted to the reality of the overall financial position and would have taken steps to avoid or mitigate loss eg by refusing any further drawdowns and calling on the security at an earlier stage.
The Bank's recovery was reduced by one third for contributory negligence in part for failing to ascertain the true factual position ie that there were insufficient funds in the facility to complete the development and that the borrower would be unable to fund the shortfall itself. A relatively straightforward analysis (and one which arguably should have routinely been carried out) would have revealed this.
The court also highlighted the Bank's failure to address concerns raised internally which should have resulted in instructions to McBains Cooper in September 2008 specifically to report on cost overruns and how they were to be funded (by the borrower).
These were in summary, the key findings of the TCC in this case but there were many more observations in the judgment that are worth highlighting. We review below the main points, with our view on how this judgment may relate to risks potentially faced by your business - the points are no doubt obvious but worth repeating as decisions can be (very) costly.
Risk areas for project monitors and managers
1. Pay attention to the terms of your retainer and do what you've agreed to do
- McBains Cooper had explicitly agreed to inspect site at least once a month but in the end, attended around once every two months. During the trial, the project monitor conceded that if he did not go to site each month before preparing his progress reports "he would be taking a risk that his ..reports would not be accurate".
- McBains Cooper agreed to "exercise all reasonable, skill, care and diligence to be expected of a monitoring surveyor...." and (among other duties) to carry out its own monthly valuations to be provided to the Bank. The Judge considered it surprising that McBains Cooper had agreed such a term, given that the appointed project monitor was not actually a qualified quantity surveyor.
- If you are a project monitor appointed by a funder with obligations that relate to the funding provided, you need a copy of the loan facility letter (full stop). As the project monitor here had failed to get this information or make sufficient efforts to do so, McBains Cooper was in breach of duty.
- If your retainer is to advise bearing in mind the parameters of the loan facility, be clear about those parameters. McBains Cooper here failed to alert the Bank to the fact that at least one drawdown application related to works not actually covered by the loan facility.
- Although the allegation was in no way successful in this case, Mr Justice Edwards-Stuart noted that in principle, if monthly payments were being made by the Bank to include monthly site visits, to make significantly fewer visits than this, without any abatement of the monthly charge to the Bank could have been "verging on the fraudulent".
2. Check your key people have appropriate experience and, where necessary, guidance
Project monitors and managers provide a professional service and will be judged by that standard.
The Judge in this case concluded that the project monitor's approach "involved too much focus on form over substance" in that he failed to alert the Bank to events that were would increase costs simply because those events had not yet been formally documented by the Contract Administrator. The Judge's comments on this were scathing: "...Not to report the additional cost on the ground that the contract had not been formally varied is, to my view, verging on the absurd....".
3. Check your professional indemnity policy
Make sure you are not breaching the terms of your professional indemnity policy eg the wording of some policies will state that cover will only apply where those involved are professionally qualified.
This is particularly the case as in such cases, it is possible that a monitor would also face a claim from the borrower for its losses - such a case is hard to prove but claims like this do tend to arise following a period of recession.
Risk areas for funders
1. Are the right checks in place when signing off on loan facilities?
The Judge in this case was clearly unimpressed with the whole funding arrangement from the Bank's perspective, commenting on the "inescapable conclusion that this development loan would never have covered the development costs...".
2. Ensure managers have the appropriate knowledge and experience
The TCC noted that one of the key individuals at the Bank seemingly had limited experience of building projects - query whether this is appropriate in relation to specialised loan facilities.
3. When instructing external advisors, ensure they are properly briefed
Quite simply, the judge considered that the Bank fell below the standard of a reasonably competent lender in failing to provide McBains Cooper with a copy of the facility letter and/or full information relating to the terms of the facility.
4. As lender, you must critically evaluate the reports of your project monitor ie unquestioning reliance will not suffice
At least one of the reports submitted by McBains Cooper contained conflicting information which should have alerted the Bank to the fact that potentially, all was not right - appropriate queries to the project monitor at this stage would have uncovered the developing issues.
Was it all worth it?
We're guessing of course but it seems unlikely that either party will be over the moon with the final outcome in this case. While costs were not addressed in this judgment, will the Bank end up with a net credit after costs are paid? And from a PR perspective clearly, the decision does not make happy reading for either party.
So, were the proceedings worthwhile after all? Towards the beginning of his judgment, Mr Justice Edwards-Stuart stated ".....It seemed to me that it was reasonably clear from the outset that neither party's position was sustainable, but it was not until closing submissions that each side accepted that it had fallen below the standard that was reasonably to be expected of it."
We may well see an increasing number of claims involving funders reaching the courts, following the recession - the Judge himself commented that the context of this loan should be taken into account in that it was approved "in the heady days before the looming financial crash had become apparent..".
Adjudication was used in this case and no doubt other forms of alternative dispute resolution were considered and possibly adopted; there will always be some cases of course that are not capable of resolution before trial. This judgment however does highlight the depth of analysis and forethought that is needed before commencing proceedings - not every case produces a winner.