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Some of you may be old enough to remember those heady days a decade or so ago, pre-financial crash and Brexit, when lending for property deals was much more readily available. 

The recently decided Technology and Construction Court (TCC) case of The Governors and Company of the Bank of Ireland vs Watts Group plc, originating from that period, serves as a warning to property lenders. The appointment of a project monitor to assist a lender with the assessment of the technical aspects of a project does not relieve the lender of its duties to lend within its own guidelines.

The case concerned the bank鈥檚 loan of 拢1.4m against a speculative residential development to be constructed in Clifford Street in the heart of York. The borrower was an SPV half-owned by Derwent Vale Developments and half-owned by Modus Group 鈥� one of the bank鈥檚 key clients in Manchester. 

The bank appointed Watts in January 2008 to act on its behalf in checking costings for the development to be supplied by the borrower; approving requests for drawings under the loan facility; and preparing an initial appraisal report (IAR). 

Watts duly produced the IAR, which generally supported the borrower鈥檚 estimate of construction costs for the project. Much turned on the content of the IAR and its level of influence on the bank鈥檚 lending decision.

The first drawdown of the loan was in April 2008, with subsequent drawdowns against the value of completed work, as reported on by Watts. Modus went into administration in May 2009, and the bank appointed receivers to the borrower that October.

The bank alleged that Watts鈥� IAR was negligently prepared, and said that if it had been properly prepared, the bank would not have permitted the drawdown of the loan by the borrower and so would not have suffered any loss.  

The expert evidence relied upon by the bank received significant and detailed judicial criticism. In contrast, the expert evidence relied upon by Watts was generally accepted as being reasonable and submitted in compliance with the duties of Watts鈥� expert to the court. 

Mr Justice Coulson concluded on the evidence presented that the bank鈥檚 expert was not an independent or reliable witness. Indeed, the bank鈥檚 expert had attempted to mislead the court, was unreasonably intransigent in his refusal to make any concessions whatsoever and had provided criticisms of Watts that were so unpersuasive that the bank declined to plead them as allegations of negligence.

In the court鈥檚 view, the bank鈥檚 expert appeared to be unaware of the duties of an independent expert to the court as set out in the well-known judgment in The Ikarian Reefer.  

In relation to the scope of damages that should properly be recoverable if Watts had been negligent, the judge also provided some helpful analysis regarding alternative arguments presented by the parties鈥� counsel on the correct application of the so-called 鈥淪AAMCO cap鈥� to the facts of the case.

In South Australia Asset Management Corporation vs York Montague Ltd,  Lord Hoffman distinguished between the provision of 鈥渁dvice鈥� where an adviser has a duty to protect his client against the full range of risks associated with a transaction, and the provision of 鈥渋nformation鈥� where an adviser contributes a limited part of the information that the client will rely on in deciding whether to enter into a prospective transaction, but the overall assessment of the commercial merits of the transaction is exclusively a matter for the client.  

In relation to the 鈥渁dvice鈥� category, a client in principle would be able to recover all loss flowing from a transaction that the adviser should have protected his client against. On the other hand, negligent 鈥渋nformation鈥� provided by an adviser gives rise to liability only for the financial consequences of being wrong and not for the financial consequences of the client entering into the transaction, so far as these are greater.

In the judge鈥檚 view, this case was plainly in the 鈥渋nformation鈥� category and only the information provided by Watts in relation to the borrower鈥檚 estimate of construction costs could have given rise to a claim.  

The court found that Watts had not been negligent in its preparation of the IAR and also drew attention to the modest nature of Watts鈥� fee of 拢1,500, which it regarded as 鈥済ood evidence of the limited nature of the service that Watts were expected to provide鈥�.  Rather, the bank鈥檚 pleaded loss was caused by its own deficient consideration of the loan application, leading to an unsound decision to lend.

In the judge鈥檚 estimation, the bank was willing to override its own conditions to avoid upsetting Modus. The 鈥渄ie was cast鈥� by the time it instructed Watts.

Bearing in mind the current economic climate, all parties, including banks, project monitors, and those fulfilling the role of independent experts, need to remember both the scope and duties that accompany their respective roles, and perform them, as a failure to do so does not leave someone else to carry the blame and liability.