Lloyds Bank Plc v McBains Cooper

A project monitor retained by a lender must exercise reasonable care and skill in checking drawdown applications, monitoring progress and variations, and assessing whether the available facility will meet the likely completion costs. The monitor must warn the lender where sums fall outside the facility or where the project’s financial position makes further advances inappropriate. Losses caused by advances that would have been avoided if the lender had been properly informed fall within the scope of the duty. Mitigation through later realisation of security affects the amount of recoverable damages, rather than the scope of the duty. Contributory negligence may reduce the award.

The Bank claimed damages from its project monitor for negligent advice during the financing and development of a church building. In the first judgment, the court found that McBains Cooper had negligently failed to report expenditure outside the facility and the developing shortfall in funds, and that the Bank was one third responsible for the resulting loss.

This second judgment determined valuation evidence, the amount of loss, the effect of later security realisations and the balance remaining after a payment made following adjudication.

1. Liability and scope of duty. The court reaffirmed its earlier findings. A project monitor’s duties included checking that drawdown costs were justified and within the facility, checking that the relevant work had been performed, reporting adverse progress or variations, and reviewing expenditure against the cash-flow position and likely cost to complete.
2. McBains Cooper was required to protect the Bank from advances which the borrower was not entitled to draw or which the Bank would have refused had it been properly informed. The relevant information included the proposed or actual expenditure on third-floor works and whether sufficient funds remained to complete the development.
3. Causation. Had the Bank received proper monthly reports, it would have stopped further advances after November 2008. McBains Cooper was therefore in principle liable for the relevant advances from Progress Report 14 onwards and for the third-floor payments included in Progress Reports 10 to 12, totalling £815,770.93.
4. Scope of recoverable loss. Those advances fell within the scope of the duty and the SAAMCO cap: see South Australia Asset Management Corporation v York Montague [1997] AC 191. The court rejected the submission that only payments for the third-floor works fell within the cap. The loss arose when the advances were wrongly made. Any benefit from realising security was a separate question concerning mitigation and the amount of damages.
5. The property’s value in April 2009 was assessed at approximately £800,000. The difference between the actual net realisation and the hypothetical net realisation was set off, producing £622,159.93 before contributory negligence. After the one-third reduction, liability was £415,439.95. Deducting the £288,304 already paid left £127,115.95, with interest at 1.75 per cent per annum from 1 January 2009. The parties were directed to calculate the precise interest.

This was the second judgment in the same first-instance proceedings. The earlier judgment had found McBains Cooper liable for negligent project-monitoring advice and found the Bank one third contributorily negligent. The present judgment quantified the recoverable loss and balance due.