Scope of duty owed by project monitors

In a decision relevant to project monitors and surveyors, and, indeed, professionals in general, the Court of Appeal has considered the scope of a professional’s duty of care against the backdrop of the well-established principle handed down by the House of Lords in South Australia Asset Management Corp v York Montague Ltd (SAAMCO). The judgement in Lloyds Bank PLC v McBains Cooper Consulting Ltd [2018] EWCA Civ 452 also considered the limitations on the damages awarded to a bank following a breach of duty by a project monitor.

Background

A construction project monitor was appointed by the bank to report on the redevelopment of a church being partially financed by a loan facility. The bank was aware from the outset that the loan amount would not cover the costs of redevelopment in full. The project monitor was responsible for making recommendations on interim payments under the loan facility, and was required to provide regular progress reports which highlighted any matters adverse to the bank. It was required to confirm at each drawdown that: (1) the sums claimed were payable under the loan; and (2) the as-yet-undrawn portion of the loan would cover completion of the redevelopment.

In later progress reports, the project monitor noted that the developer was using facility funds to cover additional costs, particularly adding a third floor which was not referred to in the facility agreement or the original building contract. The bank did not investigate the additional costs which had been flagged and continued to make the recommended payments. On authorisation of the renewal of the facility in September 2008, the bank failed to obtain the commitments which it required, for example confirmation of the estimated completion date and the borrower’s agreement to pay any cost overruns.

In February 2009 the bank realised that the project was out of control and terminated the facility, then issued proceedings claiming damages.

High Court decision

The court held at first instance that the project monitor had been in breach of the duty of care which it owed to the bank. Although the bank had known that the redevelopment costs were greater than the amount of the facility, the court held that the monitor should have informed the bank when the shortfall reached a certain figure. Accordingly, drawdown should not have been recommended for the additional floor works. The court concluded that at that point, had the bank been informed by the project monitor that the development was costing more than the facility and that the additional planned variations would create further costs, it would have terminated the loan and refused to make any further payments. The project monitor was held liable to the bank for losses sustained after November 2008 and damages were awarded. However, damages were reduced by one-third for the bank's contributory negligence.

Court of Appeal decision

In considering the scope of the project monitor’s duty, the Court of Appeal referred to SAAMCO, in which the House of Lords handed down widely-applied guidelines on the scope of a professional’s liability for loss. Under SAAMCO, the key issue when a professional has acted in breach of duty is whether that professional was giving advice or merely providing information. A professional which has given negligent advice is liable for all foreseeable loss which followed from that advice. If, however, the professional was merely providing incorrect information, its liability is limited to the consequences of that information being wrong.

In this case, the court confirmed that the recommendations for payments in relation to the additional floor were negligent and resulted in the bank paying for additional work outside the scope of the facility. Applying the SAAMCO principles, the Court of Appeal commented that the distinction between advice and information should be viewed as against the guiding principle of SAAMCO as to what loss is attributable to the negligent act when deciding the scope of duty. In doing so the court followed the recent decision in Hughes-Holland v BPE Solicitors that the categories of advice and information are “neither distinct nor mutually exclusive”. The court, therefore, concluded that because the bank knew it was going to lose the sums paid under the progress reports, aside from the works on the additional floor, the project monitor was only liable in damages up to the amount of the wrongly paid sums in relation to the additional floor works. In such circumstances it was unnecessary to conclude whether the progress reports constituted advice or information.

The Court of Appeal also applied a greater reduction than the High Court for contributory negligence. The High Court had found that the bank’s contributory negligence should reduce the award by one-third. The Court of Appeal, however, held that as the bank had always been aware of a serious shortfall, proper disclosure of the extra work would not necessarily have caused the entire facility to be cancelled. The project monitor's primary liability was therefore £259,792, being the sums paid out in respect of the third floor, which was reduced by two thirds for contributory negligence. The bank was therefore awarded damages of £86,597.

Comment

In headline terms, the Court of Appeal decision provides further information on how a court will look at a project monitor’s scope of duty. Monitors should understand that whether or not progress reports are considered to be advice, they can be liable for any action taken in line with such reports. More generally, it shows the courts are following a course of interpreting the guidance of SAAMCO when assessing a scope of duty by blurring the distinction between whether the negligent act constitutes advice or information and instead placing emphasis on an overriding “but-for” analysis.

Finally, in revisiting and adjusting the attribution of responsibility for losses as between the lender and the project manager, the Court of Appeal placed greater responsibility on the lender for the losses in this case. Lenders will note that pursuing claims against professionals places the lender’s own decision making under the court’s microscope as well as the professional’s.

Further reading

Lloyds Bank PLC v McBains Cooper Consulting Ltd [2018] EWCA Civ 452.

South Australia Asset Management Corp v York Montague Ltd [1996] UKHL 10.

Hughes-Holland v BPE Solicitors [2017] UKSC 21.