A Costly Appointment: Surveyor Liable To Funder For Reporting Failures

In the recent case of Eiger v Ridge, the Court decided upon a monitoring surveyor's liability to its lender client for its advice to the lender on the costs to complete a project and for the losses sustained by the lender.

The relevant players

This case related to a development in Liverpool which, before Eiger Funding (PCC) Ltd (Eiger) became involved, had already been partially developed. Eiger provided a £12.9m loan to the Developer, Signature Living Residential Limited (Signature), at least in part due to a report it had received from Ridge and Partners LLP (Ridge). The loan was brokered by a company called North Wall Capital LLP (NWC), which seemingly handled most of the communications with Ridge.

The relevant facts

Ridge's report confirmed payments had already been made under the contract of £4,845,042, with around £3,060,000, £2,935,458 or £2,768,958 of costs needed to complete the project.

Ridge was engaged to act as the Quantity Surveyor for Signature, and as the Monitoring Surveyor for Eiger.

Signature and, its contractor (from the same group of companies as Signature), performed poorly with delivering the project, exceeding the costs envisaged in Ridge's report and, ultimately, entering administration part way through the development.

The dispute

Eiger claimed that Ridge breached its duty of care to Eiger, behaving negligently in providing its report, in four ways:

1. Conflict of interest - due to Ridge acting as both Eiger's Monitoring Surveyor and Signature's Quantity Surveyor;
2. Pricing – Ridge failed to advise Eiger that the price for the works, which formed the basis of the £12.9m loan, was inadequate
3. Cost To completion – despite requests, Ridge failed to provide its own independent cost estimate for the works, advising in an unclear way that was difficult to understand, and
4. Relationship – Ridge failed to advise Eiger on the relationship between Signature and its contractor, and that this may mean there was less pressure on the contractor to adhere to the contract, programme and Contract Sum.

The Court's judgment

The Court found the following on the various issues:

• Pricing and cost to completion - Ridge had breached its duty of care to Eiger because it had not scrutinised Signature's figures enough. The lack of scrutiny included not advising that the costs were very low and not in line with standard pricing guidelines. The Ridge should have advised that there was a significant risk that higher costs would be incurred.
• Relationship - Eiger did not expressly instruct Ridge to advise on this and Eiger, as experienced business people, should have been alive to this risk. However, Ridge had noted that the total target project cost of £7,614,000, which had reduced from a lump sum price of £10.2m,"is robust and agreed between the parties to the contract [i.e. both Signature companies]". Given how the Signature companies had converted the JCT contract from a fixed price lump sum to a target costs contract, Ridge should have advised Eiger about how the pricing of the project had changed and the implications. Eiger could not have been expected to understand this. Also, the 'agreement' to reduce the project costs was likely to be of little value given the Signature companies' relationship, which Ridge should have flagged to Eiger/NWC.
• Conflict of interest - the RICS Guidance for Independent Monitoring Surveyors (IMS) advises that IMSs should only act for the lender and, if it acts for the lender and another party, it should receive informed consent in writing from all parties it is acting for. Ridge did not receive these consents. Whilst a conflict of interest is usually unlikely to cause a loss, here, it compounded the incompetent and inexplicable advice given by Ridge. As such, Eiger had demonstrated that the conflict of interest was a potential causative breach.

In respect of causation, as a result of NWC and Eiger's communications with Ridge to clarify the costs and the fact the report was required to make the loan, it was held that Eiger relied upon the report when making the loan to Signature.

Ridge was liable for the loss suffered as a result of Ridge not advising that the project costs were likely to be higher than stipulated by Signature; and if Ridge had properly advised Eiger, Eiger would not have provided the loan to Signature.

The Judge held that Ridge was liable to Eiger for a loss of around £2.5m

Practical takeaways: what are the lessons from this case?:

For lenders

• When instructing a monitoring surveyor, check whether they are acting for the Developer in a different capacity as this risks affecting the advice they provide to you.
• Carry out effective due diligence on the monitoring surveyor you are thinking of instructing and their relationship to the other parties involved. Here, Ridge had worked on another project with Signature.
• Assess the risks of providing funding to a project in which the developer and contractor are part of the same group of companies.
• When asking your monitoring surveyor to estimate a project's costs, for the purposes of providing a loan, check what resources they have used to reach their conclusion and then consider the veracity of these.
• If in doubt, seek professional advice.

For quantity/monitoring surveyors

• If you are asked to act for more than one party to a development, consider conflicts and, if you do act for more than one party, properly inform each party of the risks and obtain written informed consent from all parties you will act for.
• Be fully aware of the RICS Guidance for IMS.
• Critically review any costs you are provided by the developer, their quantity surveyor or contractor, including comparing those costs against independent price guides.
• Set realistic expectations with your client. Here, NWC were described as 'aggressive and demanding clients' by the Judge . Whilst this does not excuse Ridge, such pressure, and likely lack of managing their expectations, may have meant Ridge did not carry out as thorough a report as they should have.
• Again, if in doubt, seek professional advice.