This case arose from a loan applied for in the boom year of 2007 when the property bubble was still fully inflated. The bank had a favoured developer client, whose exposure was some £20 million, but no-one was concerned about that. The client sought a £1.4 million loan to fund a residential development. The loan was approved in June 2007 despite a cautious valuation. In coming to its lending decision the bank considered various aspects of the deal and imposed some conditions, including its appointment of a quantity surveyor (QS) to give an overview the detailed costings and monitor the project to approve monthly drawdowns.
The bank instructed Watts as the project QS. Watts prepared an Initial Appraisal Report (IAR) on the proposed construction costs, cash flow and timescale and advised in April 2008, for a fee of £1,500, that they were reasonable. The bank had by then already lent the developer the money to buy the site. The loan was approved and was paid out in monthly drawdowns on receipt of monthly reports from Watts. In September 2008 Lehman Brothers collapsed. By the time the bank’s client failed in May 2009 its exposure was £83 million.
The bank alleged that Watts’ IAR was negligent and that Watts alone caused the bank’s loss. Coulson J began the judgment with severe general criticisms of the presentation of the bank’s case:
- “the bundles were something of a dog’s dinner”
- “the incomplete nature of the Bank’s factual evidence”
- “an absence of evidence from anyone at the Bank who actually read and/or expressly relied on the final IAR”
The judge had more severe criticisms of the bank’s expert, of whom he said:
- “not a properly independent witness”
- “unaware of the difference between acting as the Bank’s advocate in, say, a mediation, and his duties to the court”
- “his unrealistic approach to the allegations”
- “his attempt to mislead the court”
- “his application of the wrong test”
- “his unreasonable intransigence”
- “many of his criticisms […] were so unpersuasive that the Bank, quite properly, declined even to plead them as allegations of professional negligence”
The judgment was a long and careful examination of several legal issues. Watts’ IAR was not negligent. It had no duty to prepare full calculations in order to provide an overview, as was evidenced by its low fee. The bank’s own flawed lending decision (in breaching three of its four lending guidelines and having “blind trust” in its client) caused the loss. The judge gave a useful overview of SAAMCO principles and the scope of a monitoring QS’s retainer.
In a final swipe at the claimant Bank, Coulson J commented on contributory negligence despite not needing to, given his findings on liability. Following the recent decision in BPE v Hughes Holland, he determined that if a claimant has not caused his own loss entirely, the maximum deduction for contributory negligence is 75 per cent but that this was “amply justified” in the circumstances which included their “botched consideration” of the loan application and the “fundamentally flawed” decision to lend.
This case is a sorry example of a claimant pursuing an insured professional when all other potential defendants have folded. It is also an example of a claimant failing to consider its own conduct or properly analyse the strength and/or weakness of its claim before embarking on costly litigation.
The intransigence of the claimant’s expert, closing his mind and his ears to another opinion, was mirrored by the claimant’s intransigence in pursuing an apparently hopeless claim to the bitter end.
The judgment also contains a helpful analysis for professionals regarding the link between the fees charged and the resulting scope of their duty and the expectations placed on them by the party paying the fees.