For those of you unfamiliar with the role of the project monitoring surveyor (PMS), they are commonly appointed by banks or other funding institutions to advise on the risks of acquiring an interest in a development, and then monitoring the development, approving draw-downs from the funding institutions and the like. As a result of many developers becoming insolvent from 2008 onwards, claims against these surveyors have been quite commonplace in the past few years as banks seek to recover their losses.
I have undertaken project monitoring myself and acted as expert witness in a number of cases where banks have pursued PMSs. However, other than Practical Law’s excellent practice note, the only other detailed guidance is a RICS Guidance Note, and even that is quite broad-brush (it is currently being updated). Furthermore, to the best of my knowledge, the role of PMS had not previously been dealt with in a High Court judgment. I have therefore been eagerly anticipating the TCC’s judgment in Bank of Ireland v Faithful & Gould & CBRE ever since the case appeared in the TCC court list back in April.
Bank of Ireland v Faithful & Gould & CBRE
F&G was the PMS for a residential development in Manchester, the Sarah Tower Development, and CBRE undertook a number of valuations of the site and completed development. The project went horribly wrong. Both the developer, Issa Ltd (of whom Edwards-Stuart J described the principal as being a “rogue”), and contractor went into administration, and the Bank sued F&G for £8 million of losses, some of which the Bank said arose because:
“…F&G had advised [the Bank] in December 2006 that Issa Ltd had provided materials for the development which were stored off-site within the UK to the value of about £4.5 million when no such materials existed, or at least not to anything like that value.”
Lawyers reading this will have to trust me when I say that this is the stuff of nightmares and will send shivers down the spines of quantity surveyors and PMSs.
In January 2014, F&G settled the Bank’s claim for £3.35 million plus its reasonable costs. However, F&G continued to pursue CBRE under the Civil Liability (Contribution) Act 1978 in respect of CBRE’s liability to the Bank. F&G said that CBRE’s valuations of the gross development value (GDV) and market value of the site were negligent, meaning that the Bank’s security was far less than it had been led to believe. F&G was unsuccessful because it was unable to prove that a negligent valuation had caused the Bank’s loss, despite a breach of duty within the scope of CBRE’s liability.
However, I don’t want to talk about the contribution issues, rather I want to focus on Edwards-Stuart J’s comments on the Bank’s allegations that F&G:
- Failed to draw the Bank’s attention to the lack of any formal contract between the developer and contractor.
- Should have advised the Bank that the developer did not have sufficient expertise.
- Failed competently to quantify the developer’s expenditure, particularly in regard to the off-site materials.
Edwards-Stuart J’s comments obviously turned on the facts and the wording of F&G’s appointment is not set-out. Furthermore, these allegations only relate to a small number of the duties a PMS may be obliged to undertake, but Edward Stuart J’s comments are nevertheless relevant.
Lack of formal contract
Edwards-Stuart J dismissed this allegation as being unmeritorious, saying that the Bank was well aware of the implications of the lack of formal contract. Interestingly, he also thought that it was relevant that:
“…the Bank was being advised by solicitors and does not appear to have received any advice from them that the contractual arrangements were unsatisfactory.”
It would be interesting to know whether F&G had an express duty to comment on the contractual arrangements, as many PMS appointments contain. If so, then it is arguable that F&G should have reported on this matter regardless of the involvement of solicitors. That said, there may well be no loss flowing from any breach of such an express duty.
Developer’s lack of experience
Edwards-Stuart J similarly dismissed the Bank’s allegations concerning F&G’s lack of advice concerning the developer’s inexperience. The Bank had undertaken its own rigorous audit of the developer, and had clearly formed its own views about the developer’s capabilities and resources.
This is the really interesting part and Edwards-Stuart J went into some detail about F&G’s failures concerning the off-site materials.
F&G and the Bank’s solicitors had agreed the form of vesting certificates required if monies were to be drawn-down for off-site materials, however the developer failed to comply with these requirements. Edwards-Stuart J said that:
“From the point of view of protecting the Bank’s interest as against the supplier of the materials [the vesting certificate] was almost worthless.”
In particular, it was written by the contractor rather than the supplier of the materials, there was a complete lack of itemisation (for example, “M&E Order: at Manchester warehouse and Issa Ltd Quay development – £1,456,000”) and many of the materials, which were stored in four separate locations, were not in boxes clearly marked for the Sarah Quay Development. Not only this but the developer was claiming for materials such as windows and glazing when the substructure was not even complete.
F&G wrote to the Bank on 19 December 2006 saying that the vesting certificate was based on the form F&G had proposed (this doesn’t appear to be the case) and that the claimed materials were stored in the four locations (despite being unable to confirm this). F&G did warn about the lack of identification of the materials and suggested that the Bank should take a “commercial view on the vesting certificate and the inclusion of these materials in the total expenditure to date”.
F&G’s expert was of the view that F&G had complied with its obligations in regard to the vesting certificate, but Edwards-Stuart J stated that the expert’s reasoning was “devoid of any reasoning whatever”. Edwards-Stuart J was firmly of the view that F&G had fallen below the standard of a reasonably competent PMS in F&G’s position, and concluded by saying that he found it:
“…surprising that a project monitor in F&G’s position should have recommended – for that is what I find they did – their client to advance such a large sum of money against such unsatisfactory verification and without offering any explanation as to why Issa Ltd had chosen to tie up such a large amount of much needed cash in the advance purchase of materials.”
What does all this mean?
This is a salutary lesson for PMSs and QSs on the importance of getting vesting certificates right, and not feeling pressurised into certifying materials where ownership has not clearly passed between the parties. While it would have mattered not a jot if the project had been completed satisfactorily, PMSs and QSs have to exercise caution at all times, but particularly if they are aware of the contractor and/or developer being in financial difficulties.
So, the guidance on PMSs in this case is somewhat “Ooh Ahh…Just A Little Bit“, but it is nevertheless helpful.