REUTERS | Dinuka Liyanawatte

Project monitoring surveyor not negligent

A few weeks ago, I looked at what Coulson J had to say about experts in Bank of Ireland v Watts. I’m returning to that judgment this week to look at the project monitoring angle.

Just like experts are a recurring theme on this blog, it seems that project monitoring is too, as I have I looked at the judgment in Bank of Ireland v Faithful & Gould Ltd and I have also discussed the judgment in Lloyds Bank plc v McBains Cooper Consulting Ltd.

One point I should make. Those cases can be distinguished from this one, as they dealt with allegations of negligence concerning a project monitoring surveyor’s (PMS) progress reporting. Bank of Ireland v Watts concerns allegations of negligence over Watts’ initial appraisal report (IAR). As such, the case will undoubtedly provide clarity to surveyors and banks as to the scope of a PMS’ obligations when preparing such reports (although I suspect surveyors will be much happier with this judgment than the banks).

Bank of Ireland v Watts Group plc

There were four allegations of negligence in relation to the IAR but, before dealing with these allegations, Coulson J commented on the inadequacy of the Bank’s expert evidence, as I discussed in my last blog. As part of that discussion, he noted that Watts’ fee for producing the IAR was £1,500, and said that:

“I regard the size of the fee as good evidence of the limited nature of the service which Watts were expected to provide at the IAR stage.”

That was evidently the context in which Coulson J judged the allegations of negligence although, taken at face value, it does rather appear that he was considering the adequacy of the consideration paid for Watts’ services.

As part of his critique of the Bank’s expert evidence, he also noted that the correct test for allegations of professional negligence is not what a particular expert would do in a given situation (Mr Vosser in this case), but rather what a reasonably competent professional would do in the circumstances (here, that was a reasonably competent PMS).

Allegations of negligence

The first three allegations of negligence were concerned with planning, the construction programme and cash-flow information, and they turned on their facts. Coulson J rejected them all.

It is the fourth allegation that is of real interest, namely that Watts endorsed the developer’s estimated construction costs of £999,099. This was the Bank’s main criticism of Watts.

Construction costs

The Bank’s expert, Mr Vosser, said that Watts’ surveyor should have done his own calculations “from scratch”. He should have done a “BCIS stage 1 calculation and then a detailed stage 2 calculation of the estimated costs”. That’s what he said he’d have done if he’d been in Watts’ shoes. When Mr Vosser did this, his stage 1 figure was £1.036 million (some £37,000 more than the endorsed figure). It was only when Mr Vosser included a number of add-ons (like an allowance for the work being in a city centre, self-build costs and contingencies) that he got the figure to £1.442 million (or £1.622 million if the work was done by a third party).

Watts’ expert, Mr Whitehead, disagreed. He said that monitoring surveyors are not obliged to carry out detailed calculations. There was nothing special that required Watts to do so here, and this was in keeping with the RICS’ guidance note for project monitoring. After all, the £999,099 figure was a fixed price and was being put forward by an experienced developer. Watts was entitled to assume that the add-ons included by Mr Vosser were already allowed for in the figures.

Coulson J agreed with Mr Whitehead. He acknowledged that it was always possible to include add-ons to embellish construction costs, but that wasn’t the point. The point was, was it reasonable for Watts to assume they had been included in the original figure? Yes. If the developer was experienced, the starting point must be that it was reasonable to assume that the figure of £999,099 was reasonable, especially as a developer would have no incentive to underestimate the costs. Further, Mr Vosser’s own figure was only £37,000 more than the endorsed figure. This was:

“… the best evidence that Watts were not negligent in coming to the conclusion that they did.”

Coulson J also felt that the evidence of the individual who prepared the first draft of the IAR was credible in relation to his “sense check and his three comparables”, which led him to conclude that Watts had properly considered the borrower’s figures.

Causation

Coulson J concluded that the Bank did rely on the IAR, at least in general terms. But that was not enough. The Bank had to show that, but for the four allegations of negligence, it would not have lent the money. It could not do this.

The first three allegations failed for causation reasons. With regard to the fourth allegation, Coulson J said that he accepted that if the Bank had been advised that the actual construction costs were £1.6 million, it would not have permitted immediate drawdown of the loan. However, since he had already found that the Bank had failed to demonstrate that Watts should have identified the figure of £1.6 million, the causation case failed here too. The Bank argued in the alternative that Watts should have reverted to the Bank after the stage 1 calculation (its primary case being that Watts should have calculated the stage 2 figures), but it failed because the Bank had not provided any evidence as to what it would have done if Watts had advised it that the figure of £999,099 was too low.

Any loss recoverable in law?

Even though the Bank lost on liability and causation, Coulson J went on to consider whether any of the loss it had suffered was recoverable from Watts.

Coulson J referred to the “so-called SAAMCO cap” and BPE Solicitors v Hughes-Holland, where the Supreme Court clarified the law, including on Lord Hoffmann’s distinction in SAAMCO between the provision of “information” and “advice”. He held that this case was “plainly in the ‘information’ category”. Watts would only be liable in law for the financial consequences of the construction costs being wrong, and not for the financial consequences of the Bank entering into the transaction. The true cause of the Bank’s loss was its fundamentally flawed decision to lend to the borrower. The Bank had failed to follow its own lending policies and guidelines.

My takeaways

I think that Coulson J’s conclusions regarding the construction costs provide a useful guide to surveyors when preparing an IAR. In particular:

  • If an experienced developer has submitted an estimate that it considers to be reasonable, then it appears that the PMS can start from the assumption that the estimate is likely to be reasonable, and this is all the more the case if the works are going to be subject to a fixed price contract. Although not mentioned in the judgment, in the event that the developer’s estimate has been obtained following a competitive tender process then this must reinforce the reasonableness of the figure.
  • There is no general requirement to undertake a detailed cost estimate, and Coulson J considered that this is consistent with paragraphs 3.6 and 5.1 of the RICS’ guidance note on project monitoring. However, this is obviously subject to the instructions given to the PMS. Here, Watts was asked to undertake a “Verification of the construction cost estimate. Please comment on the cost per square foot relative to local area norms”, and was not asked to undertake any more detailed analysis.
  • Subject to the instructions given to the PMS, it appears that checks based on a cost per unit area, and comparing to the price of similar projects, should suffice.

Coulson J’s findings should put to bed an argument that has been raging for some time as to the extent of the surveyors’ obligations concerning the analysis of construction costs in an IAR, and they will be welcomed by surveyors.

In terms of SAAMCO, Coulson J has confirmed that, generally speaking, in the event that a PMS is found to be negligent, they will only be liable in law for the financial consequences of the information they provided being wrong, and not for the financial consequences of the bank entering into the transaction. For example, if a PMS negligently endorses construction costs that are £1 million too low, this will be the limit of liability even if the bank’s losses far exceed that sum. This puts to bed the debate as to the extent of a surveyors liability for such losses.

Furthermore, if a bank has obtained guarantees against cost overruns, then this will present even greater difficulties for the bank to pursue the PMS:

“It is difficult to see how any specific loss could flow from the information about the estimated construction cost, because the Bank had obtained a guarantee in respect of cost overruns, so had sought to cover themselves on this very issue. If the guarantee was worthless, that was the Bank’s responsibility, not that of Watts.”

MCMS Ltd Jonathan Cope

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