Is the project monitor always to blame?

Background

In 2007, Lloyds Bank (the Bank) agreed to lend £2.625 million to Miracle Signs & Wonders Ministry Trust (the Borrower) to redevelop a Church in Willesden, North London. McBains Cooper Consulting Ltd (McBains) were appointed by the Bank as its project monitor.
A project monitor’s role is to:

• Check the progress and quality of the works
• Approve the applications for drawdown submitted on behalf of the Borrower
• Make recommendations to the Bank against the drawdown request

Here the project went wrong and the loan facility was exhausted before the completion of the works and the Borrower was unable to pay to complete the development. The Bank decided to realise its security and sustained a loss of around £1.4 million. The Bank commenced proceedings against McBain seeking to recover the loss.

The allegations

The Bank alleged that McBains had negligently assumed that the Borrower was part funding the development and had negligently confirmed in progress reports that there were sufficient funds left to complete the development.
The Bank said that if McBains had carried out their monitoring service appropriately, the Bank would have been informed earlier of the funding issue and would have taken steps to avoid or mitigate the loss, eg, they would have refused further drawdowns on the loan or realised the security at an earlier stage.

The TCC judgment

The court held that McBains was in breach of its duty to the Bank, in particular by failing to advise that there was not enough money in the facility to complete the works and failing to inform the Bank that some of the money was being used to carry out works that were not even within the parameters of the loan facility. The court also criticised McBains’ decision not to report on variations that it knew had been instructed until formal variation orders had been signed. The court held that McBains gave advice that was “unquestionably negligent”. Accordingly, the court held McBains had to bear the “lion’s share” of responsibility for the losses suffered by the Bank.

However, the judge also believed that the Bank had to bear some responsibility. The loan facility should never have been agreed in the first place, as the insufficiency of the facility to cover the development was known by a relevant individual at the Bank at an earlier stage, and the Bank had failed to share relevant information with McBains and to respond appropriately and in a timely manner to reports. Accordingly, it was held the Bank should bear a third of its own losses.

Relevance

Judgments dealing with the negligence of project monitors are very rare but this is a growing industry. The facts of this case also highlight how easily construction projects can go wrong when the parties overlook basic housekeeping checks.

In particular, for a consultant acting as project monitor, this judgment is a keen reminder to carefully pay attention to the terms of its retainer, to ensure it is qualified to do what it is retained for, to carry out the services it is being paid to do, to not make assumptions and the importance of contemporaneous record-keeping.

Here, McBains were retained to go to site monthly, but actually attended site significantly less times. The Court held that to accept payments and not visit the site monthly could have been “verging on the fraudulent”.

McBains had agreed to “exercise all reasonable skill, care and diligence to expected of a monitoring surveyor…” However, the relevant member of McBains was not actually a qualified quantity surveyor, which is the discipline from which project monitors are usually drawn. It is essential that the project monitor has the relevant experience required to carry out this role.

Consultants also need to be aware of the terms of their professional indemnity policy as some policies only provide cover where those involved are professionally qualified.

In addition, the case serves as a lesson to funders and employers. They need to ensure that they fully engage and co-operate with their advisers and to ensure their consultants are fully briefed. Without doing so, the employer/funder run the risk of losing the safety net of their consultants’ professional indemnity cover should things go wrong.