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A partially successful appeal by consultant McBains Cooper against Lloyds Bank – the latest twist in a legal dispute dating back a decade – highlights the perils of poorly managed project monitor relationships. Theresa Mohammed and Beth McManus explain.
Beth McManus (left), Theresa Mohammed
The role of the project monitor has been previously highlighted by the case involving Lloyds Bank v McBains Cooper Consulting. Now there is another twist in the saga. Following application to the Court of Appeal, project monitor McBains has partially succeeded in relation to a dispute concerning the respective duties of project monitors and funders.
To briefly set out the facts: in May 2007 Lloyds Bank agreed to provide a loan facility of £2.6m to a special purpose vehicle to develop a church building. Lloyds appointed McBains Cooper Consulting as project monitor to ensure provision of the loan was properly overseen.
By 2009, with substantial work still required to complete the development, it transpired that the loan facility was almost fully paid out. In response, Lloyds decided to enforce its security and ended up with a loss of £1.4m, following which it brought a claim in the Technology and Construction Court (TCC) against McBains.
The judge at first instance found that McBains had committed two breaches of duty:
- Breach of a duty to inform the bank that the cost of completing the development was greater than the amount of the facility;
- Breach of a duty not to recommend payment from the facility of sums due to the builders in respect of works outside the scope of the contract.
Damages were awarded to Lloyds on the basis that, if the bank had been properly informed, “it would have taken the decision to terminate the facility and call on the security”. However, damages were reduced by one-third because the court also made a finding of contributory negligence on the part of Lloyds.
This finding was made on the grounds that:
- Lloyds should never have provided the loan facility in the first place, since it was aware from the beginning that the cost of the development was greater than the facility; and
- It was not the job of a project monitor to arrange the funding of the development: that was a matter between the lender and the borrower”.
In essence, the TCC criticised Lloyds for failing to follow basic banking procedures, but these failures subsequently came under much closer scrutiny in the Court of Appeal.
McBains had six grounds of appeal, including:
- McBains was in the business of giving information not advice; it should only be liable for the consequences of the information it gave being wrong (ground 1);
- It was not within the scope of McBains’ duty to be responsible for sums advanced from Progress Report 14 onwards (ground 2);
- The bank’s losses would have been incurred in any event because the project was always a loss-making project (ground 3a).
Two-thirds responsible
Lord Justice Longmore dismissed McBains’ argument that it was in the business of giving information not advice, on the basis that the two are “neither distinct nor mutually exclusive categories”.
Further, he agreed with the TCC that McBains had negligently failed to draw the bank’s attention to the fact that it was being asked to pay for work done outside the building contract and thus outside the terms of the facility.
Despite this negligence, it appears the bank’s part in its own losses had been strangely downplayed in the TCC. The bank had made a loan that should never have been made, since it knew from inception that the cost of the project exceeded the amount of the loan.
It then failed to provide key information to McBains, not even providing a copy of the facility letter. The bank also made no arrangement with the borrower for the payment of the extra costs.
Given this “formidable catalogue of irresponsibility”, Lord Justice Longmore found that the bank was two-thirds responsible for its own losses, thus reversing the apportionment of responsibility.
Overall, this is a cautionary tale about a poorly managed relationship between a bank and its project monitor. Improved communication between the parties would have gone a long way towards reducing the losses incurred.
Theresa Mohammed is a partner and Beth McManus is an associate at Trowers & Hamlins
