Serving two masters – the difficulties for QSs acting as monitoring surveyors

“No man can serve two masters“. But Quantity Surveyors (QS) often wear two hats, working closely with the developer as well as offering reporting and monitoring services pre and during a build to funders to allow an assessment of the viability of a build and how their investment is progressing. This is reliant on having detailed knowledge of the build.

A recent case looks at where this can all go wrong.

The Case

Eiger Funding v. Ridge and Partners revolves around allegations of professional negligence by Ridge in their role as QS and Independent Monitoring Surveyor (IMS) for a development project. Eiger Funding, a Guernsey Company, provided a £12.9 million loan to Signature Living Residential Limited for the completion of a development in Liverpool. Ridge had previously prepared cost appraisals for the project and was later engaged by North Wall Capital LLP (NWC), Eiger’s investment manager, to provide IMS services for the loan and, key to this case, a report to assess the projected construction costs in order for Eiger to assess the build’s fundability.

While notes from the pitch meeting for their IMS services between Ridge and NWC included assurances from Ridge that there would be “No conflict of interest because Ridge is much bigger than Sig (not an important client) and reputation with lenders much more important”, the court found otherwise.

In part due to Ridge’s scope including “Advise on the adequacy of the contract sum in relation to the Project. Report on any risks which could result in a cost overrun”. This would be provided in the form of ‘Report 16’ issued by Ridge in November 2018 and upon which Eiger relied in order to issue funds for the development. As it would transpire, Ridge’s Report 16 underestimated the construction costs and costs for completion, overestimated the timescales for PC, and failed to highlight the risks adequately.

NWC for their part appeared to have doggedly pursued Ridge once it became clear Ridge had fallen short of their professional standards. The judge observed of the NCW witnesses that they “came across as very financially sophisticated people. They were aggressive and demanding clients. Their focus was relentlessly on the bottom line. They did not seek, in their evidence, to present themselves as other than ruthlessly dedicated financiers. For example, Mr Chrobog, when asked about his personal contribution to the funding of the case, said dismissively that the (no doubt substantial) amounts involved were “not a material amount of money to me“. Lucky for some!

Almost immediately after the receipt of fund, Signature “failed to make adequate progress after November 2018” against the original Ridge assessed completion date of 31 May 2019. NCW dismissed Ridge in early 2019 and when the date for PC was assessed by Ridge’s replacement (Anstey Horn) it assessed a more conservative PC of “March 2020 or later”. Further, NWC became aware that “substantially more money would be required to complete the redevelopment works than the Ridge Report had advised”.

In April 2020, Cortland Trustees Limited (the security trustee for Eiger under the Loan Agreement), placed Signature Living Residential Limited into administration for failing to comply with a demand for payment.

Eiger then alleged that Ridge breached its professional duties in several ways:-

1. Construction Costs: Ridge failed to properly appraise the costs and risks associated with the development. Specifically, Ridge did not adequately advise that the contract sum was insufficient and fell into the bottom quartile of construction costs, which posed a significant risk of non-completion by the contractor.
2. Costs to completion: Ridge failed to provide its own independent estimated costs to completion, despite being directed to do so, and issued unclear and confusing advice that obscured these deficiencies. When this figure was provided in Report 16, and relied upon by Eiger, it later became apparent that the figure was largely based on unexplained data provided to Ridge by Signature.
3. Conflict of Interest: Ridge acted in conflict with RICS guidance by serving as both QS for the developer and IMS for the lender, without obtained Eiger’s “Informed Consent”, as defined in the RICS Guidance or at all. Further, Ridge failed to advise Eiger on their relationship with Signature or that both developer and contractor were part of the same group of companies and had converted the building contract from a fixed priced contract into a “target cost” where any overspend would be passed onto the lender.

The loan agreement required Ridge, as IMS, to confirm that the timescales and costs were realistic. However, when the project stalled and Signature Living went into administration, Eiger suffered a substantial financial loss of £10,799,856. Eiger argued, successfully, that it would not have entered into the loan agreement had Ridge fulfilled its professional obligations and provided accurate and clear advice. They were successful under all heads of claim: the court agreed that Ridge had failed to avoid a conflict of interest, provide an independent assessment of costs or advise Eiger adequately on key issues.

Ridge was ultimately found liable for the difference between the figure which Ridge advised would be the costs to complete and the true market cost to complete, that being £2.5m. This was despite Ridge’s barrister arguing that it was “quite impossible to see how a tenable case for any damages within the scope of the duty can be established“. Although the question of loss in a case such as this was acknowledged to be a difficult one, the judge said that calculating the losses was “not a scientific exercise“, and despite “having to weigh in the balance a number of imponderables” was prepared to arrive at a substantial damages sum.

Conclusion

The case highlights the importance of the independence of the IMS role. It should not be treated as a tick-box exercise by a QS “marking their own homework”. It attracts a meaningful duty of care to provide professional services which should be truly independent and informed.

In this case, therefore, Ridge’s attempts to ‘serve two masters’ was unsuccessful, ultimately leaving it with a £2.5m damages bill (plus no doubt very substantial legal costs). While Ridge may have hoped that the difficulties of causation and calculating ‘hypotheticals’ may have allowed it to get away with a nominal damages figure, the court here showed it was prepared to enforce the professional obligations it found to have been breached with a substantial award in Eiger’s favour.