In a recent “exceptional” case concerning a professional negligence claim against a project monitor, the apportionment of costs to a lender was increased from one third to two thirds based on the lender’s contributory negligence. This raises the question: to what extent will project monitors be liable to a lender?
When funding a development, lenders will often appoint a project monitor to act as an added ‘safety net’ (together with adequate insurance cover). A project monitor will help to progress the development and will approve any applications made by the borrower for drawdown under the loan facility. Lenders will also rely on professional advisers, including the project monitor, to inform them of any potential risks throughout the duration of the development.
The case highlights what can happen if the relationship between the lender providing development finance and the project monitor breaks down. At first the court downplayed the lender’s responsibility but the court took into account standard bank practice and it was necessary to look at the relationship as a whole. The lender had to take the majority of the responsibility – firstly for commencing a nonviable project and secondly for ignoring warnings from the project monitor about the development.
Lenders cannot guard completely against the risk of negligent advice, but there are some practical steps lenders can take to minimise these risks:
- Appointments – clear and robust terms
Firstly, lenders should ensure that its professional advisers, including the project monitor, are fully informed and appointed on clear and robust terms. Lenders should be satisfied that letters of appointment contain clear and comprehensive details of the scope of services to be provided.
The courts have placed importance on the parties’ ability to communicate and share information effectively. In particular the need to provide the project monitor with a copy of the facility letter and full details of the terms of the loan.
The lender should be proactive and liaise with the project monitor regarding any outstanding or delayed information which is fundamental to the development. Guidance issued by the Royal Institute of Chartered Surveyors recommends that ‘the project monitor possesses a fundamental knowledge of the intricacies of the development, design and construction process’.
- Knowledge & experience
Lenders should also consider the experience of its advisers. Project monitors come from a range of professional backgrounds and can be, amongst others, project managers, building surveyors or quantity surveyors. It is important that the lender ensures key individuals working on loan facilities have experience and expertise in the relevant field.
For instance, where a project monitor is required to evaluate applications from the borrower to drawdown, it may be best for the lender to appoint a quantity surveyor to carry out this particular role.
- Compliance with internal checks and processes
Robust internal processes should be in place, allowing the lender to ensure that loans are only granted in relation to developments with a strong prospect of success, and for security holding enough value to ensure full recovery of the funds on enforcement.
Some of these points may seem obvious but they have all come before the courts. Following a few simple steps may, at the very least, assist a lender in mitigating its own losses. A claim in professional negligence against a project monitor is no substitute to having adequate security in place where possible to ensure full recovery of the funds on enforcement.
This blog post was written by trainee solicitor, Stephen Marsh. For further information, please contact:
Elliot Gibson, PSL assistant, Banking & Finance
T: 0161 836 7707