Quantity surveyors may be liable for deficient valuations – LM Investment Management v BMT
Colin Biggers & Paisley Pty Ltd – by Julian Mellick, Teodor Lomaca, Kyle Berger
In brief – Property development financier successfully sues for breach of duties
Quantity surveyors who overvalue the extent of construction work performed can be liable for a financier’s losses on the project, even if those losses have other causes. The NSW Supreme Court case of LM Investment Management Limited (In Liquidation) (Receivers appointed) v BMT & Assoc Pty Limited [2015] NSWSC 1902is likely to be relied upon by lenders, investors and other financiers who receive valuations from quantity surveyors that are found to be deficient.
Developer borrows money, engages builder and quantity surveyor
Greystanes Projects Pty Limited (developer) wished to develop a property at Greystanes, NSW. It borrowed $23 million from LM Investments Management Limited (financier) to finance the project and engaged Toro Constructions Pty Ltd (builder) to build it. The loan agreement provided for the financier to release funds as work was completed by the builder.
The financier engaged BMT & Assoc Pty Ltd as quantity surveyors to assess each of the builder’s progress claims independently and advise if works were complete to the extent claimed.
During the project, claims were made by the builder, assessments were made by the quantity surveyor and loan funds were released by the financier. However, for various reasons, the project ran into difficulties: there were defaults under the loan agreement, the developer went into liquidation and the financier ended up out of pocket.
Financier sues quantity surveyor alleging assessments overvalued work completion level
The financier sued the quantity surveyor, claiming that it had a duty of care (in tort) to avoid economic loss from the advice it gave the financier, an implied duty (in contract) to act with reasonable care and skill; and a statutory duty to avoid misleading and deceptive conduct in trade or commerce.
The financier alleged that it was out of pocket because the quantity surveyor’s assessments had overvalued the level of completion of the work, in breach of the above duties, and consequently the financier had advanced loan funds beyond what it should have.
Quantity surveyor found to have incorrectly assessed builder’s payment claims
The Court found that the quantity surveyor was liable to the financier. The quantity surveyor’s incorrect assessment of the builder’s payment claims was held to constitute negligence, breach of contract and/or misleading and deceptive conduct under the Trade Practices Act 1974 (now replaced by the Australian Consumer Law).
Importantly, expert evidence confirmed that the quantity surveyor failed to comply with widely accepted competent professional practice in the valuation of the original budget when giving progress recommendations. The quantity surveyor’s site inspections were satisfactory, but its process of converting site information into a reasonable recommended payment was not.
Proportionate liability defence fails, as well as other attempts to reduce liability
The quantity surveyor claimed that the financier’s loss was caused by a range of other factors, including the developer’s failure to repay the loan, the builder’s failure to complete the works, the financier’s own decision to abandon the works in the face of the global financial crisis and the financier’s decision to advance loan funds despite loan defaults.
None of the quantity surveyor’s attempts to reduce its liability prevailed. Significantly, the developer’s failure to repay the loan involved an action for debt rather than a failure to take reasonable care (and accordingly the developer and quantity surveyor were not held to be concurrent wrongdoers in the same appropriable claim for the purpose of a proportionate liability defence. For more about this topic, refer to our previous article Proportionate liability in construction, engineering, building and property development).
Accordingly, the Court applied established principles to find that the financier was entitled to recover from the quantity surveyor the difference between what it lent and what it would have lent but for the incorrect valuations.
Tips for managing liability include keeping record of contributory negligence
Quantity surveyors should check that they have adequate measures to manage their liability to financiers and developers. This should include appropriate quality assurance/quality control systems and processes, terms of engagement (including limitations on liability), and qualifications in respect of their valuations. As well as ensuring that they have appropriate insurances in place, quantity surveyors should keep a careful record of contributory negligence or failures to mitigate by other parties.
