Theresa Mohammed and Beth McManus of law firm Trowers & Hamlins examine a recent with implications for project monitors.
Beth McManus
The growing field of project monitoring has come under scrutiny in a recent case – Lloyds Bank Plc v McBains Cooper Consulting Ltd – in the TCC, with a number of useful points arising on parties’ interpretation of their contractual obligations.
In May 2007 Lloyds Bank agreed to provide a loan facility of £2.6m to a special purpose vehicle to develop a church building. To ensure the provision of the loan was properly overseen, Lloyds contracted McBains Cooper Consulting to act as project monitor.
McBains’ obligations included monitoring the quality of works, providing monthly progress reports, approving borrower applications for drawdown and making recommendations to the bank on the amounts to be paid against drawdown requests.
Theresa Mohammed
Compliance with these obligations did not go according to plan: by 2009 the loan facility was almost fully paid out and there was still a substantial amount of work required to complete the development. Lloyds therefore took a decision 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 against McBains.
Both sides’ arguments revolved around the scope of their obligations under the contract. Lloyds argued that McBains had not attended the development site with sufficient frequency and had been reckless in preparing the progress reports. This led to part of the loan facility being used to fund works outside the scope of the loan agreement and to Lloyds being exposed to unanticipated risks.
On the other side, McBains maintained that it had understood that some of the development works were to be funded separately to the loan facility and that the balance of the loan was not therefore significant.
The court found that McBains had breached its duty of care and acted negligently. The key breach consisted of failing to advise Lloyds that one of the borrower’s drawdown applications contained an item outside the scope of works. This led to Lloyds’ loss because it meant it was not then alive to the financial issues surrounding the development.
If it had been properly informed, “It would have taken the decision to terminate the facility and call on the security”. McBains was required to “paint the full picture” and it had not.
“A key lesson to draw from this case is the need for parties undertaking project monitoring duties to fully understand the scope of their retainer and to carry out the precise duties to which they have signed up.”
However, the court also made a finding of contributory negligence on the part of Lloyds on two grounds. The first is that Lloyds should never have provided the loan facility in the first place and the second that, “the bank was not entitled to rely on McBains Cooper’s ‘understanding’ that these works [works outside the scope] were to be funded separately from the facility without making enquiries as to the source of the funds. 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.”
The finding of contributory negligence reduced McBains’ recovery by a third.
A key lesson to draw from this case is the need for parties undertaking project monitoring duties to fully understand the scope of their retainer and to carry out the precise duties to which they have signed up. Sticking closely to the underlying contract is vital. However, there is a balance to be struck because, at the same time as carrying out the explicit terms of the contract, parties need to avoid prioritising the form of the agreement over the substance.
It could be argued that project monitors should bear in mind the spirit as well as the letter of their duties and, for example, should not fail to pass on relevant information on the grounds that it is not specifically required of them under the terms of the contract.
This may mean providing progress reports that present a true financial picture of the development and that provide the financier with a clear overview of what is happening. Critical information should be clearly communicated, for example, presented in report summaries rather than in email attachments. As a further point, project monitors should ensure they have access to all the information required for them to carry out their role and to fully understand the project in its wider context.
From a financier’s perspective, one of the key lessons is the importance of not taking a formulaic approach to reviewing progress reports and making sure to understand the project reality on the ground. There is also a need to ensure that staff charged with reviewing these reports have enough experience of the relevant industry. Clearly this also applies to the decision to provide the loan facility in the first place.
More generally, all parties should bear in mind the importance of contemporaneous record-keeping, given the difficulty of retrospectively trying to establish which party is responsible for failures and miscommunications. Managing a contract well is only half the battle – project monitors must be able to prove that they did so.
Further, it is more often than not the case that the level of scrutiny required to maintain detailed, accurate records will also promptly bring to the fore any problems with the project. Speedy diagnosis usually leads to speedy resolution, in a manner that is significantly more time and cost effective than proceedings in the High Court. As is generally the case with all such disputes, prevention is both better and cheaper than cure.
Theresa Mohammed is a partner and Beth McManus is a solicitor in the dispute resolution and litigation team at law firm Trowers & Hamlins
