Bank of Ireland & Anor v Watts Group Plc, Court of Appeal - Technology and Construction Court, July 12, 2017, [2017] EWHC 1667 (TCC)

Resolution Date:July 12, 2017
Issuing Organization:Technology and Construction Court
Actores:Bank of Ireland & Anor v Watts Group Plc

Neutral Citation Number: [2017] EWHC 1667 (TCC)

Case No: HT-2016-000073




Royal Courts of Justice

Rolls Building, Fetter Lane, London, EC4A 1NL

Date: 12 July 2017



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Mr Paul Mitchell QC (instructed by Elborne Mitchell LLP) for the Claimants

Ms Jessica Stephens (instructed by Reynolds Porter Chamberlain LLP) for the Defendant

Hearing dates: 8, 9, 10, 11 and 16 May 2017

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The Hon. Mr Justice Coulson:


  2. In these proceedings, the claimants (``the Bank'') seek damages for professional negligence against the defendant quantity surveyors (``Watts'') relating to a residential development in the heart of York. The developer, who borrowed money from the Bank (``the Borrower''), went into liquidation and could not repay the loan, causing approximately £750,000 loss to the Bank. It is the Bank's case that Watts' Initial Appraisal Report (``the IAR'') was negligent and that, if it had been properly prepared, the Bank would not have permitted the drawdown of the loan to the Borrower, and so would not have suffered any loss. Watts deny negligence and raise further issues as to reliance, causation and loss. Watts also say that the Bank's negligent decision to lend to the Borrower in the first place was the real cause of the loss.

  3. I deal with the issues between the parties in this way. In Section 2, I set out the events and documents relating to the original loan. In Section 3, I set out the events and documents relating to Watts' involvement and the final IAR. In Section 4, I set out briefly some of the relevant subsequent events relating to this development. In Section 5, I address the allegations of negligence. In Section 6, I deal with the issues of reliance and causation. In Section 7, I deal with quantum. In Section 8, I deal with the case of contributory negligence. There is a short summary of my conclusions in Section 9.

  4. I should deal with two matters at the outset. First, although the bundles were something of a dog's dinner, the trial could not have been more efficiently and competently presented by counsel on both sides. The conclusion of the evidence in four days was only possible because counsel properly concentrated on what mattered and ignored the secondary issues. I am very grateful to them both.

  5. The second, more substantive point, concerns the incomplete nature of the Bank's factual evidence. The Bank did not call Mr David Rainford, who was the relationship manager responsible for this loan. He would have been a critical witness as to the circumstances in which the loan was sought and approved, and the conditions of approval There was evidence from other Bank employees, such as Mr Catterson, to the effect that only Mr Rainford could answer certain questions of detail. As he put it, some aspects of the original loan proposal were ``pretty unique to David Rainford''.. His absence therefore meant that there were significant gaps in the Bank's evidence. No reason was given as to why Mr Rainford did not give evidence, although I note that he was the subject of lending criticisms by Edwards-Stuart J in The Governor of the Bank of Ireland v Faithful and Gould Limited [2014] EWHC 2217 (TCC) at paragraphs 62, 90, 129, 131, 150, 154, 192, 207 and 249. There was also an absence of evidence from anyone at the Bank who actually read and/or expressly relied on the final IAR in April 2008. These difficulties were exacerbated by the absence of documentation which must, at one stage, have existed. These omissions mean that I have had to weigh the factual evidence in this case with particular care.


  7. The site of the development was Clifford Street, York, directly opposite the Magistrates' Courts, one of York's finest Victorian buildings. The Borrower (and proposed developer) was Derwent Vale York Limited. This company was a special purpose vehicle, half-owned by Derwent Vale Developments Limited (``DVD'') and half-owned by Modus Partnerships Limited (``MPL'').

  8. Although MPL was another new company, the documents stress the Bank's pre-existing relationship with the Modus group of companies, and their overall parent, Modus Ventures Ltd. The evidence was that the Modus group were, at the time, a large Manchester-based property development and investment group specialising in leisure/retail/shopping centre schemes and town centre urban regeneration projects. They were a long-established client of the Bank's Manchester office and were described by the Bank as ``a key Manchester relationship''. For the reasons noted below, I find on the balance of probabilities that, but for that pre-existing relationship, the Bank would not have made this loan to the Borrower.

  9. The application for funding was made by MPL and DVD in writing in May 2007. There was a certain amount of urgency because the documents sought funding by 1 June 2007. The building on the site was a single storey document store with a basement. The proposed development of the site was designed to retain the shell of the existing building, and to build 4 further storeys on top to create a total of 11 apartments. The proposed square footage of the completed development, set out at paragraph 5.1 of the application document, was 8,858 square foot, very close to the figure of 8,939 subsequently calculated by the Bank's surveying expert, Mr Vosser. A lower figure of 7,733 square foot, noted in an appendix to the application form, clearly did not include the communal areas.

  10. The application to the Bank made plain that the original scheme, for which planning had already been granted, might well be reconfigured to increase the anticipated profits. The document stated at paragraph 5.9:

    ``A final note on the design and layout of the proposed scheme relates to the three apartments on the ground floor which extend up into the second floor. Obviously, Derwent Vale inherited this layout but it is felt by all that a much better configuration of these units could be achieved which, at the same time, would maximise the anticipated profit on the scheme. It is therefore proposed to apply for a variation to the Planning Consent to re-configure the layouts for these three units...''

  11. The Bank's original Credit Paper Memorandum, in which David Rainford sought approval for a loan in respect of this development, was dated 1 June 2007. That memorandum noted, amongst other things:

    (a) That the loan was for £1.3 million to assist with site purchase and development costs for 11 apartments at the site;

    (b) That both the Loan To Cost ratio (``LTC'') and the Loan to end Value ratio (``LteV'') were outside the Bank's lending guidelines;

    (c) That there would be full repayment of the loan, assuming that the first 7 cheapest units were sold;

    (d) That there was associated exposure of around £20 million in relation to the Bank's existing lending to three other companies in the Modus group;

    (e) That MPL (who owned 50% of the shares in the Borrower) were recently incorporated and that this was the first joint venture agreement that they were undertaking in this way;

    (f) That the costs of the development were £1.8 million odd and that the value to be realised from the development (``GDV'') was £2 million odd, making a profit for the Borrower of £200,000;

    (g) That the Borrower's liquidity was a `key credit risk', but that the fact that Modus was behind them was a positive factor;

    (h) That Mr Rainford recommended the proposed loan.

  12. The proposal was amended by Mr Rainford on 8 June 2007. The amended Credit Paper Memorandum was for an increased loan of £1.4 million. The increased amount of the loan meant that, not only were the LTC and the LteV outside the Bank's lending guidelines but, according to Mr Rainford's memorandum, so too was the ratio between the LTC site value and the development costs. Thus, on the face of the revised memorandum, Mr Rainford was expressly noting that the proposed loan failed to comply with three of the four lending guidelines set by the Bank.

  13. The amended memorandum explained that the amount of the loan had been increased because MPL considered that their internal rate of return (``IRR'') on cash invested was too low. So they wanted the amount of the loan to be increased. The memorandum said that ``it is acknowledged by client that by virtue of low profit margin on this scheme this does stretch out LteV at 69.4% albeit capital guarantee reduces this to 63%''.

  14. This last was a reference to a £200,000 capital guarantee to be obtained from MPL ``as substitute previous requirement for completion guarantee''. As Ms Stephens pointed out during her cross-examination of Mr Catterson, the man in the Bank's area credit department to whom both of these memoranda were addressed, it was rather odd to attempt to ameliorate the otherwise adverse LTV by reference to a £200,000 guarantee, which was neither part of the loan nor part of the value of the development. Mr Catterson eventually agreed with that, and accepted that the guarantee was simply ``a mitigant to the credit risk'' to the Bank. I return to this issue when considering the allegations of defective lending practices against the Bank, which are relevant to causation and contributory negligence.

  15. The revised application for the £1.4 million loan was approved by Mr Catterson on the very same day it was written (8 June 2007). The relevant parts of his decision memo stated as follows:

    ``The reduced site debt and provision of a £200k capital guarantee now addressed the initial site risk around the archaeological survey and its potential impact on marketability and value of our security.

    The new facility is approved subject to the conditions detailed in both your paper and...

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