A new case sheds light on the scope of a project monitoring surveyor’s liability for losses incurred on development projects.

A project monitoring surveyor (PMS) is often appointed by banks to report on the progress of a construction project on which the bank has loaned money.

In recent years, given the number of developers becoming insolvent, there has been an increase in claims against PMSs, as banks and other funders attempt to recover their losses in the event of a PMS’s negligence.

The question is, can all losses be recovered from the PMS? The answer is ‘no’. A recent case[1] examined the scope of duty of a PMS on a building project, and the extent to which loss is recoverable.

Background

Lloyds Bank entered into a £2.6m funding facility with a special purpose vehicle (SPV) to redevelop a church. The bank appointed McBains Cooper (MBC) to check the quality and progress of the works.

The project fell substantially behind schedule, despite nearly all of the facility having been drawn down by the SPV. Lloyds sold various properties secured against the facility, and thereafter commenced proceedings against MBC for negligence. The claim was for the total sum advanced under the facility, less the amount recovered in the property sales.

The first trial in 2015 dealt with causation and reliance, and the court held that MBC had acted negligently as it should have reported the likely future costs of the project, which would have shown a shortfall. If this had occurred, the bank would have terminated the facility and demanded repayment.

Notwithstanding this, the judge found that the bank knew that the facility was insufficient to cover the costs of the development, and that certain requirements had not been complied with. Therefore, it decided the bank had contributed to its own loss and the damages awarded were reduced by a third.

A second trial in late 2016 dealt with recoverable loss and the scope of duty of a PMS.

Decision

The 2016 trial quantified the loss recoverable by the bank. This related to the value of the development at the time it should have been put on the market had MBC not acted negligently, as well as determining the scope of duty and consequential losses arising out of that negligence.

It was concluded:

  1. A PMS cannot be liable for any loss which would have arisen in any event, even if the PMS had given correct advice/not been negligent;
  2. If the borrower is performing and continuing to perform its obligations, it is unreasonable for the bank to terminate a facility purely because it becomes less profitable (e.g. due to the recession and changes in property prices);
  3. A PMS is under a duty to protect a bank against losses incurred as a result of the bank advancing money:
    • under the facility to which the borrower is not entitled; and
    • in circumstances in which it would not have advanced such money if it had been properly advised by the PMS.

In this case, the court held that MBC was liable for all payments made by the bank in reliance on some of MBC’s progress reports, together with sums paid for works not carried out. The court was satisfied that such sums would not have been advanced by the bank had MBC carried out its duties.

However, as mitigation of loss had to be taken into account, the total damages awarded to the bank were reduced to deduct the proceeds from property sales and, secondly, to deduct a third of the claim for contributory negligence, as established in the first trial.

Implications

This case is particularly lengthy, as it involves two separate trials. However, it provides important guidance on the scope and practical application of the duties of a PMS, in particular that even if the PMS is negligent, it is not liable for any losses that would have been incurred even if it had performed its contractual duties.

[1] Lloyds Bank Plc v McBains Cooper (2016)

For further information, please contact:

Gemma Wilson, Associate, Construction

T: 0161 836 7884

E: Gemma.Wilson@gateleyplc.com


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.