Lloyds Bank Plc v McBains Cooper Consulting Ltd

In earlier and happier days 226 Church Road, Willesden (“the site”) was a bingo hall. It was then acquired by Miracles Signs & Wonders Ministry Trust for the purposes of an evangelical church, whose pastor was Mr James Chukwu. He was sufficiently charismatic to attract a large congregation and he decided to redevelop the site to create a new church with up-to-date facilities. With the help of an adviser, he created a special purpose vehicle called Miracles Signs & Wonders Ltd which entered into a building contract of 31st August 2007 with Acre Contractors for a fixed price of £2,556,937.00 after Lloyds Bank (“the bank”) had agreed to lend £2,625,000 on the terms of a Facility Letter of 30th May 2007. The bank retained McBains Cooper Consulting Ltd (“McBains”) to act as its progress monitor, who would report to it about the progress of the building contract and make recommendations about interim payments to be made by the bank pursuant to the facility. This appeal, from an order of Sir Antony Edwards-Stuart (as he had then become) in the Technology and Construction Court of 18th January 2017, raises questions about the scope of a progress monitor’s duty and the assessment of damages in the event that the progress monitor is in breach of its duty under its contract. The judge awarded the bank a sum of £127,115.95 and interest for McBains’ breach of its contractual duties. McBains now appeals.

The judge found that McBains had committed two breaches of duty:

breach of a duty to inform the bank that the cost of completing the development was greater than the amount of the facility;

breach of a duty not to recommend payment from the facility of sums due to the builders in respect of works not covered by the contract relating to the erection of a third floor to the building on the site.

It is a curious feature of the case that the judge also held that the bank was aware from the beginning that the cost of the development was greater than the facility, despite the fact that on paper the facility was for £2.625 million and the fixed price building contract was in the amount of £2.557 million. This was because quarterly interest payments were going to be made out of the facility, costs of the removal of asbestos, the cost of a performance bond, and professional fees had to be paid; these fees were payable not only to McBains but also to Clark Associates, who acted as the Contract Administrator and produced the interim certificates, against which interim payments were paid to the builders. The judge’s finding (para 97) was that the bank knew at the time the facility was agreed that there would be a shortfall of at least £200,000. Nevertheless he held (para 264) that McBains ought to have informed the bank by the end of October 2008 of a prospective shortfall of £325,000, as it had by then become. The bank would then, he held, have become aware of the true financial position in November 2008.

In these circumstances it is necessary to set out the terms of McBains’ contract and the underlying facts in a little detail.

The contract was signed on 6th February 2006 by Mr Julian Symons of McBains and Mr Andrew Mannering, a senior relationship manager at the bank, responsible for the loan at a time when the contemplated loan was £1.5 million. McBains was required to provide two initial reports verifying (inter alia) the cost of construction and levels of contingency; this it did, and no complaint is made of the content of those reports. Provision was then made for Periodic Reports in the following terms:-

Early internal documentation of the bank, when a facility of £1.5 million was being discussed, shows that Mr Mannering was “keen to do something here” while others were doubtful whether the loan could be supported. A first Facility Letter was nevertheless issued on 6 December 2005 for £1.5 million. On 20th March 2006 the bank’s valuers valued the site at £1.45 million, and the site as developed (Gross Development Value) at £3.5 million. On 20th June Mr Mannering sought authority to increase the loan to £2.25 million, with proposed building costs of £2.15 million. Mr Simon Cook of the bank agreed to this increase on condition that Mr Chukwu provided a cash backed personal guarantee of £175,000 and a second facility letter was issued on 27th June. On 1st April 2007 Mr Chukwu’s adviser, Mr Simon Purdom, asked Mr Mannering for an increase in the facility to £2.625 million against proposed building costs of £2.54 million; although the building costs were estimated to be £2.667 million, including a sum for contingencies, and although the contract contained a number of provisional sums which could well be subject to uplift, Mr Mannering nevertheless asked for authority to increase the facility. On 26th April Mr Cook authorised the increase, provided the borrower provided a cash deposit of £325,000 and that Mr Chukwu provided a further guarantee of £375,000 (in addition to his original guarantee of £175,000) together with a charge on his home at 165 Whitchurch Road, which was assumed to have a value of £800,000. On 30th May 2007 the bank issued its third and, for the purposes of this case, the relevant Facility Letter in the sum of £2.625 million. The building contract with Acre Contractors was signed on 31st August 2007 for a sum of £2,556.937. It is not clear that the additional security was given and even the cash deposit, already reduced to £125,000, seems to have been only £92,000 by September 2007 (para 98 of the judgment).

The judge found that as at the date of McBains’ second initial report of 6th April 2007 Mr Mannering knew that there was a shortfall of at least £200,000 once contingencies and payments of quarterly interest had been taken into account; if proper allowance was made for professional fees it would be £250,000 (para 94). By the time the facility was granted on 30th May 2007 he likewise knew that the shortfall would be “at least £200,000” (para 97). Moreover, in response to a request from Mr Humphrey, Mr Mannering’s assistant, about drawdown procedures, Mr Symons of McBains emailed on 24 September saying:-

The judge further held (para 150) that by the time of the First Progress Report of 28th September 2007, the shortfall between the facility and the contract price was £300,000.

The first eight progress reports contained the sentence:

The position was rectified in Progress Report 9 of 14th July 2008 and subsequent reports because the sentence now read:

Possible contract variations were first raised in Progress Report 4 of 26th February 2008. This report recommended payment of increased sums in respect of a performance bond and removal of asbestos in the amounts of £25,518.75 and £47,434.70 (together £75,953.45). The judge (paras 179-181) held that McBains should have drawn attention to the payment of these sums because the facility did not cover them and they used up most of the contingency originally allowed for in the sum of £85,000 and they were thus matters adverse to the bank’s position, within clause 3.1.2 of the Project Monitoring Contract. He also held, however (para 182), that the breach of contract caused the bank no loss because the bank had always accepted that it would have paid those costs in any event.

Progress Report 4 also included this, under the heading “Variations”:-

Under the heading “Progress/Programme”, Progress Report 5 of 18th March 2008 said:-

Progress Report 10 of 12th August 2008 was the first report following the contractor’s valuation, which included a claim for payment for work on the third floor. It referred to £10,000 which had been claimed in respect of tripod piles, necessary for the work. The Contract Administrator had included this in its interim certificate, and McBains recommended payment. The judge held (paras 222 and 250) that it was McBains’ duty to take reasonable care to ensure that the bank did not pay for work which fell outside the facility and that its failure to do so constituted a breach of McBains’ retainer and, in particular, clause 3.1.2.

Progress Report 11 of 9th September 2008 showed a further figure for the third floor of £30,596, which McBains recommended for payment. Progress Report 12 of 14th October 2008 showed a further figure of £158,000 for the third floor (paras 226-227).

Meanwhile, in early September 2008, Mr Mannering had requested authority to renew the facility up to 31 August 2009. Mr Andrew Downes emailed on 12th September 2008 that he was prepared to authorise renewal, subject to certain conditions being met, including:

commitments from McBains to confirm or advise in future progress reports

the date of estimated completion and the number of weeks the project was behind or ahead of the verified programme;

any cost overruns, together with the impact of contract variations

commitment from the borrower to pay for cost overruns, with a confirmation of the sources from which such payments were to be made.

At paragraphs 251-265, the judge considered what would have happened if McBains had drawn the bank’s attention to the fact that payments they recommended included sums for the third floor. In summary, he concluded that the bank would not have terminated the facility merely because £10,000 had been wrongly claimed for the third floor in August, but would have sought to discuss the matter with the borrower and, because Mr Mannering would have had to come clean to his supervisors and disclose that all was not well with the loan, would have concluded by the end of October 2008 that the costs to complete (excluding the third floor, which would not have been authorised) would have been between £300,000 and £400,000. The bank would then have terminated the facility, since there was no hope of the borrower finding that sum.

In his second judgment (para 44), the judge assessed the loss to the bank caused by McBains’ breach of duty to be the sums wrongly paid out in respect of the third floor and the sums paid out by the bank from Progress Report 14 (18th December 2008) onwards, together with the difference (if any) between the amount that would have been realised if the bank had realised its security in Spring 2009 and the sum which was later realised. Ironically, the site sold for more in late 2009 than it would have realised in Spring 2009 just after the financial crash and the judge gave credit for that in coming to his final figure of £622,159.93. He reduced that by one-third for the bank’s contributory negligence to a sum of £415,439.95. McBains had already paid £288,304 pursuant to an adjudication, leaving a balance in respect of which judgment was given of £127,115.95.

There are six grounds of appeal. Jackson LJ has granted permission for grounds (1) (2) and (5) and left it to the full court to determine whether it should be granted for (3) (4) and (6).

McBains was in the business of giving information not advice; according to South Australia Asset Management Corporation v York Montague [1997] AC 191 (“SAAMCO”), as followed and applied in Hughes-Holland v BPE Solicitors [2017] 2 WLR 1020; [2017] UKSC 21, the scope of its duty was to provide the correct information and it should only be liable for the consequences of the information being wrong;

it was not within the scope of McBains’ duty to be responsible for sums advanced from Progress Report 14 onwards;

the bank’s losses would have been incurred in any event because (a) the project was always a loss making project, alternatively (b) the failure by Mr Mannering to comply with the conditions laid down by Mr Downes in his 12th September 2008 email broke the chain of causation;

the judge was wrong to find that, if Mr Mannering’s attention had been drawn to the fact that applications for payment for work on the third floor had been made and/or were being approved by McBains, or that there were insufficient funds to complete the development, he would have disclosed those matters to the credit committee of the bank;

the judge was wrong in failing to treat Mr Mannering’s knowledge as the knowledge of the bank; and

the assessment of contributory negligence at one-third did not reflect the fact that Mr Mannering knew at the outset that there was a likely shortfall of £200,000 and that the loan should never have been made and that he had deliberately concealed matters from the bank’s credit committee.

McBains’ duty is set out and defined by the terms of its retainer, as quoted above. It was therefore under a duty (inter alia):-

to inform the bank of matters adverse to the bank’s position including any variations ordered to the building contract (clause 3.1.2 and clause 3.2);

to ensure that, when applications were made for sums due to the builders to be paid out of the facility, such sums were properly claimable from the bank under the terms of the facility (clause 3.1.3); and

to check that sufficient sums remained in the facility to complete the building contract (clause 3.1.4).

The judge (179-182) found McBains to be in breach of these duties in e.g. submitting Progress Report 4 which stated that it had not been advised on any variations to date when there was a proposal to consider an additional third floor, but he also held (para 183) that since the proposal was itself reported, the bank could not complain since it had been told at an early stage that it was not cost-effective to carry out that work.

More importantly, the judge held (paras 221-2 and 243) that, when the builder made a claim for work actually done on the third floor and included it in the valuation which preceded Progress Report 10, McBains should have pointed that out and should not have recommended that any sum in respect of the third floor be paid out of the facility. The same applied to Progress Report 11. The relevant amounts were small (£10,000 and £30,596) and the judge also held (para 253) that, if it had been pointed out, the probability would have been that Mr Chukwu would have paid them out of his own resources. By the time of Progress Report 12, the sum payable (and paid) for the third floor was £158,000 which would probably have been beyond Mr Chukwu’s ability to pay.

By the time the facility ran out of money in 2009, £259,792 had been paid for third floor works and one question will be whether McBains is liable for permitting that sum to be paid.

The judge also criticised McBains for failing to check that sufficient sums remained in the facility to finance the building contract and for the originally false and, later, oblique terms in which the matter was dealt with in the Progress Reports. Since, however, Mr Mannering (and therefore the bank) knew well from the outset that the costs of the building contract exceeded the facility by at least £200,000, this breach of contract on the part of McBains caused the bank no loss and the judge held in terms (para 274) that no breach of duty caused any loss to the bank until its failure to advise the bank in Progress Report 10 that the draw down application included £10,000 for works to the third floor. He went on to hold (in para 278):-

The guiding principle was stated by Lord Hoffmann in SAAMCO [1997] AC 191, 214C:-

The consequence of this negligence was that the bank continued to pay for works to the third floor when they were not bound to do so. There is no reason why McBains should not be liable in damages to the bank in the amount of such sums wrongly paid away. The totality of such sums is not just the £198,551 mentioned in para 44 of the second judgment which is constituted by the payments made for the third floor Progress Reports 10-12 but all sums paid for the third floor including sums for the third floor contained in Progress Reports 14-17 (no such sums having been included in Progress Report 13). According to the expert evidence of Mr Payne that is £259,792.00

The judge, however, went further and awarded the entirety of the sums paid out in respect of Progress Report 14-17. That appears to be on the basis that if it had been revealed to the bank that money was being claimed for and being paid out in respect of the third floor, Mr Mannering would have had no option but to make clear to his superiors that there was not enough money in the facility to pay the development costs (whether in the first place or in August 2008), something which he should have done long before. The chain of events on which the judge relied (paras 252-277) was:-

once it was pointed out to Mr Mannering that £10,000 of valuation 10 was for the third floor, Mr Mannering would have made it clear that the borrower had to pay;

Mr Chukwu would probably have paid the modest amount attributed to the third floor in Progress Reports 10 and 11;

but there would have been negotiations with Mr Chukwu about the funding of work to the third floor;

that would have fed into the discussions about extending the facility beyond June 2008 to August 2009;

the Progress Reports were now making clear that any shortfall in the facility was expected to be paid by the borrower;

that would be thrown into doubt by the fact that Mr Chukwu was now being asked to pay for the third floor;

all parties’ minds would then be concentrated on what the shortfall was likely to be;

that calculation would have revealed a likely shortfall of at least £325,000 even without the third floor works;

Mr Mannering “would have had no choice but to disclose the true facts” to his superiors “once it was made plain that there was a very significant shortfall, even as far as the existing development was concerned” (para 266); and

the bank would have become aware of the true position in November 2008, terminated the facility and called on the security (para 277).

It was on this basis that the judge held that the entirety of the sums paid pursuant to Progress Reports 14-17 was recoverable from McBains. But, with respect, that is illogical because the bank was going to lose those sums, apart from the sums paid for the third floor, in any event. The bank, in the person of Mr Mannering, knew from the inception of the loan that there was to be a serious shortfall between the sums payable under the building contract and the amount of the facility. To say that the bank would have become aware of the shortfall and terminated the facility in November 2008 only makes sense if for some reason, Mr Mannering’s knowledge is not to be treated as that of the bank – a proposition which the bank has always disavowed. The cause of the bank paying out amounts pursuant to Progress Reports 14-17 was not the fact that McBains gave wrong information or advice to the bank in relation to sums claimed for the third floor; it was the fact that the bank agreed to lend (and continued to fund) a project which was never financially viable. The judge finds in terms (para 251) that the bank would not have terminated the facility merely because it became aware that an application for drawdown included sums for the third floor works; that also shows that the continued payments after Progress Reports 14-17 were nothing to do with McBains’ negligence but due to the bank’s continuance of its funding despite knowing that the project was uneconomic.

In spite of the arguments of Lord Marks QC for the bank to the contrary, I cannot therefore follow the judge when he holds McBains liable for all the sums paid out in respect of Progress Reports 14-17; the sums lost as a consequence of McBains’ negligent information or recommendation cannot be more than the total sum paid out for the third floor which, as I have said, is £259,792.00.

Mr Sean Brannigan QC for McBains submitted that the court should not reach this conclusion since there was no respondent’s notice saying that, if the judge was wrong to have awarded £815,770.93, he should have awarded a lesser sum associated with the sums paid out in respect of the third floor. But a respondent’s notice is not necessary before an argument can be made on the facts that the judge was at least partly right. The judge always intended to award the third floor sums; it is just the excess above that which is irrecoverable.

Mr Brannigan also submitted that the entirety of the sum awarded by the judge should be set aside because the loan was always a loss making operation and the reason I have given for eliminating from the judgment sum the sums paid unassociated with the third floor applied just as much to the claim in respect of the amounts paid out for the third floor. As he put it, “once the counter-factual is exploded, it must be exploded for all purposes”. I do not agree. There can be no doubt that McBains’ negligence was the cause of money being paid by the bank out of the facility when it should not have been. The illogicality of the counter-factual is nothing to the point in the context of the third floor sums.

I would therefore hold that grounds (2) and (3)(a) of the appeal succeed to the extent of eliminating from the sums awarded by the judge those parts of sums paid pursuant to Progress Reports 14-17 which do not relate to the third floor. If permission is needed for McBains to rely on ground 3(a), (which is very much the same as ground 2) it is granted.

Although there is now much learning on the distinction between information and advice in the SAAMCO line of cases and it is sometimes necessary to ascertain whether information provided by a defendant is the sole input into a claimant making a decision or part only of a number of considerations which a claimant will take into account in making a decision, I do not think that learning assists in this case. The fundamental principle stated by Lord Hoffmann and cited in paragraph 25 above is all that is necessary for the resolution of this appeal. To that extent I can agree with the judge when he said (second judgment, para 45) that he did not find that the line of authorities after SAAMCO provided any real guidance. In Hughes-Holland v BPE Solicitors Lord Sumption said (para 39) that the labels of advice and information are:-

These are grounds seeking to appeal factual conclusions of the judge and I would not grant permission for them to be pursued. In the light of the conclusions so far reached they have, in any event, little relevance.

Permission has been granted to argue that the judge was wrong not to treat Mr Mannerings’ knowledge as knowledge of the bank. As I have already indicated, it was never any part of the bank’s case to say that Mr Mannering’s knowledge was not the knowledge of the bank and it is sufficient to record that that is the position.

The judge in assessing the relative blameworthiness of the parties decided that McBains was two thirds responsible and the bank one third. Lord Marks QC reminded the court of the many authorities which say that apportionment is essentially a matter for the judge and this court must not interfere unless the judge has made a serious error of principle or left out of account some essential matter. I would, however, exceptionally give permission to appeal on this ground for the reasons which follow.

The judge held that the bank was not entitled to rely on McBains’ “understanding” that work on the third floor was to be funded separately from the facility without making its own inquiries as to the source of the funds. He repeated his findings that Mr Mannering knew that the facility was insufficient to cover the costs of the development even without the third floor. He also criticised Mr Mannering for not complying with the requirements laid down by Mr Downes in his email of 12^th September 2008 to check that the borrower knew that it had to pay for any costs overruns and that it had funds available to meet them. It was only this last matter which the judge appears to take into account as a primary consideration when he concluded that McBains must bear the lion’s share of the responsibility.

With great respect to the judge this very considerably downplays the bank’s responsibility. If one treats Mr Mannering’s knowledge as that of the bank, the position is:-

that the bank made a loan for a project when it knew from inception that the cost of the project exceeded the amount of the loan of £2.625 million (para 105); it should never have been made (para 115);

it made no arrangement with the borrower for the payment of the extra costs; normally a bank would expect a borrower to put in its own funds first; if it is not to do that, a watertight procedure should have been but was not devised;

in spite of McBain’s specifically asking on 24^th September 2007 for revised information prior to release of funds as:-

the bank never even provided McBains with a copy of the Facility Letter nor did it inform McBains that the facility had been increased from an original proposal of £2.25 million to £2.625 million (para 115(ii));

it allowed the borrower to reduce the amount of security to an inadequate amount (paras 98-99); and

a substantial reduction in the value of 165 Whitchurch Road was regarded as unimportant (paras 100-101).

This is a formidable catalogue of irresponsibility which the judge appears to have regarded as comparatively insignificant. No doubt a project monitor’s task may, to some extent, be to protect the bank from failings of its own as well as to ensure the smoothness of the building project; nevertheless any project monitor has a right to expect that a bank will adhere to elementary banking principles which, on this occasion, the bank did not do.

Lord Marks submitted that initial negligence on the part of the bank was irrelevant to the question of contributory negligence because the court was only concerned to apportion the losses caused by the negligence of the project manager and those losses were only caused after Progress Report 10 of August 2008. I can only say that I disagree; the court ought, if it is to be fair to both sides, to look at the whole picture from the start of the relationship. If one does this, it seems to me that the lion’s share of the responsibility must be that of the bank for having started an unviable project and ignoring McBains’ warnings about how viable it was.

The judge with respect appears to have failed to take into account adequately or at all the matters set out in paragraph 38 and I would reverse the apportionment and hold the bank two thirds and McBains one third responsible.

I would therefore hold that McBains’s primary liability was for the sums paid out in respect of the third floor in the sum of £259,792. That is to be reduced so that McBains is liable for £86,597. If my Lord and my Lady agree that will be less than McBains paid as a result of an adjudication; I assume that there will have to be some adjustment of the judge’s order which I would ask counsel to formulate.

I agree.

I also agree.