Introduction
The recent Court of Appeal case of Lloyds Bank Plc and McBains Cooper Consulting Limited [2018] EWCA Civ 452 reviewed in detail the scope of a lender's liability for its own losses where the lender's own negligence contributed to those losses, in circumstances where a project monitor had also been appointed to safeguard the lender's position. Further helpful judicial commentary on the nature of the provision of "advice" and the provision of "information" in a professional context also featured, following on from the 2017 TCC case of Bank of Ireland v Watts Group Plc [2017] EWHC 1667 (TCC).
The case was an appeal by McBains arising from a January 2017 TCC decision by Sir Antony Edwards-Stuart which awarded Lloyds (the Bank) £127,115.95 plus interest for McBains' breach of its contractual duties to the Bank [2017] EWHC 30 (TCC).
The Facts
The case concerned the Bank's loan of £2.625 million under a facility letter dated 30 May 2007 for the redevelopment of a bingo hall in Willesden, London, into a new church for the Miracles Signs and Wonders Ministry Trust. The borrower was an SPV set up by the church's pastor, Mr James Chukwu.
To carry out the redevelopment, the SPV entered into a building contract with Acre Contractors for £2.557 million dated 31 August 2007.
McBains were engaged by the Bank, in addition to providing two initial reports, to provide periodic monitoring reports in relation to inspections of the progress of the works. The monitoring reports were to include McBains' own valuation of the works and certification that at the time of each drawdown under the facility the undrawn balance of the facility would be sufficient to meet in full all costs to be incurred in achieving practical completion of the development.
Even before the facility letter was issued, on receipt of McBains' initial reports, it should have been apparent to the Bank that there was a funding shortfall of at least £200k, as the amount of the Bank's facility did not cover the costs of: quarterly interest payments which were to be "rolled-up" into the facility, asbestos removal costs, the costs of a performance bond; and professional fees for McBains and the building contract administrator, Clark Associates. The building contract also included a significant amount of provisional sums.
During the course of the works McBains issued 19 progress reports and it was upon the content of those reports that the litigation turned, along with the Bank's own knowledge of the position.
By early 2009 the Bank's facility was virtually exhausted and the development was far from complete. It appeared that neither Mr and Mrs Chukwu nor the church's congregation had sufficient funds to meet the balance of the costs of completing the development, which were thought to be in excess of £700,000. The Bank decided to cut its losses and realise its charge over the development property and two properties owned by Mr and Mrs Chukwu.
First instance
At first instance, the court held that McBains were in breach of McBains' duty of care to inform the Bank that the cost to complete would be greater than the facility, and in breach of McBains' duty not to recommend payment from the facility of sums in respect of works to the third floor which were not covered by the building contract.
The Court of Appeal's decision
In considering the scope of a project monitor's duty, the Court of Appeal considered the distinction between the provision of information and advice. Longmore LJ cited the "guiding principle" set out by Lord Hoffman in South Australia Asset Management Corporation v York Montague [1996] UKHL 10. (SAAMCO):
"… a person under a duty to take reasonable care to provide information on which someone else will decide on a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties."
McBains' reports had included valuations in relation to works on the third floor of the property which were never included in the scope of the works to be funded by the Bank. On McBains' recommendation, the Bank funded these works to the tune of £260,000.
With this "guiding principle" in mind, it was clear to Longmore LJ that McBains had negligently failed to draw the Bank's attention to the fact that the Bank was being asked to pay for works done outside the building contract and thus outside the terms of the facility.
At first instance, the judge had awarded the Bank the full amount of the sums covered by McBains' progress reports 14 to 17. In Longmore LJ's view, that was not correct and McBains should only be liable for the sums covered by progress reports 14 to 17 which actually related to the third floor works. By reference to the SAAMCO principle above, McBains were only responsible "only for the consequences of the information being wrong." The cause of the Bank paying out sums in relation to progress reports 14 to 17 was not the fact that McBains gave wrong information or advice to the Bank in relation to sums claimed for the third floor works, it was the fact that the Bank agreed to lend for (and continued to fund) a project which was never financially viable.
In relation to the Bank's own contributory negligence, Longmore LJ considered that the judge at first instance had downplayed the level of the Bank's responsibility for the Bank's own losses. The Bank had:
- made a loan which the Bank knew from inception was insufficient to fund the entire development
- made no arrangements with the borrower for the payment of additional costs
- never provided revised information which McBains had requested on the cost of the works in excess of the available facility
- failed to provide McBains with a copy of the facility letter or informed McBains that the facility had been increased from £2.25 million to £2.625 million
- allowed the borrower to reduce the amount of security to an inadequate amount
- regarded a substantial reduction in the value of Mr Chukwa's personal residence, over which the Bank had security, as unimportant.
Summary
The Court found that McBains' primary liability in respect of the sums paid from the facility in respect of the third floor works was £259,792 which was to be reduced by almost two-thirds by way of the Bank's contributory negligence to £89,597.
In relation to SAAMCO, Longmore LJ summed up the position by referring to Lord Sumption's judgement in Hughes-Holland vs BPE Solicitors in the Supreme Court to illustrate that the labels of advice and information are:
"neither distinct nor mutually exclusive categories. Information given by a professional man to his client is usually a specific form of advice, and most advice will involve conveying information. Neither label really corresponds to the contents of the bottle."
This neatly emphasises that in practice, the provision of "information" and the provision of "advice" is seldom likely to be clearly distinguished.
In relation to the Bank's own contributory negligence, McBains and indeed any project monitor has "a right to expect that a bank will adhere to its elementary banking principles which, on this occasion, the Bank did not do."
The judgement therefore reinforces the fundamental obligation for lenders to lend within their own guidelines. Here, the Court of Appeal found that the Bank was to blame for a "formidable catalogue of irresponsibility" on the Bank's own part.
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