November 1, 2020

A recent decision of the NSW Court of Appeal (NSWCA) considered whether a third party’s misleading or deceptive conduct caused a developer’s loss of opportunity to profit from the sale of a development.

In Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWCA 223, a developer engaged a builder to construct a 10 storey mixed-use property development, funded by a loan facility from Bankwest. By virtue of a security agreement between the developer, builder and Bankwest, the developer’s loan was secured against the development and another property owned by a third party personal guarantor.

The terms of the loan facility entitled Bankwest to demand immediate repayment following a default event. One such event included a change in circumstances which, in Bankwest’s reasonable opinion, materially adversely affected the developer’s ability to meet its repayment obligations.

Under the terms of the building contract, the builder was required to obtain a certificate that the structural design complied with the Building Code of Australia and relevant Australian Standards. A structural engineering company (ACE) certified, during the design phase, that the structural design was compliant, and construction of the development proceeded. It was later discovered that the structural design was not compliant with the Building Code and relevant Standards, and that ACE had erroneously certified the design as compliant.

At the time the error was discovered, a structural defect in the partially completed development posed a risk to the structural integrity of a neighbouring property. The builder issued a Stop Work Order and works were suspended. Bankwest then engaged a quantity surveyor to conduct an audit of the site, and undertook investigations to determine whether the structural defect constituted a default event under the terms of the loan.

Shortly thereafter, Bankwest issued a demand for repayment of the developer’s loan. The developer could not meet the timeframe for repayment, and Bankwest exercised its rights under the security, selling both the partially complete development and the property mortgaged to Bankwest by the personal guarantor.

The developer commenced proceedings against ACE in the NSW Supreme Court alleging that ACE had contravened the prohibition against misleading or deceptive conduct in trade or commerce under section 52 of the Trade Practices Act 1974 (Cth). The developer claimed, amongst other things, an entitlement to damages of $2,665,360 for the loss of opportunity to profit from the eventual sale of the development.

It was not disputed between the parties that ACE had engaged in misleading or deceptive conduct in erroneously certifying the non-compliant design, and that the builder had relied upon ACE’s certificate in commencing construction. The key issue before the court was whether the misleading or deceptive conduct caused the loss of opportunity for which the developer sought to recover damages.

At first instance, Hammerschlag J found that causation had not been established and that the developer had no entitlement to damages for loss of opportunity, noting that:

  •   there was no loss of opportunity to the developer in Bankwest simply issuing a demand for repayment of the loan;
  •   the developer had failed to adduce sufficient evidence that the structural defect and consequential delay to the development were factors, let alone material factors, in Bankwest’s decision to call on the security; and
  •   it was a matter of conjecture that the structural defect was a material cause of Bankwest’s decision to call on the security, and the developer’s loss.

The developer appealed to the NSWCA, submitting that the evidence it had adduced at first instance, primarily with respect to Bankwest’s investigations following the suspension of the works, provided a sufficient basis for the court to infer that ACE’s certification of the design was a factor, or a material factor, in Bankwest’s decision to call on the security.

The NSWCA found in favour of the developer, agreeing that the causal link between ACE’s contravening conduct and Bankwest’s decision to call on the security had been established.

In coming to this conclusion, the NSWCA observed that:

  •   on the whole of the evidence, there was an overwhelming inference that the structural defect was a material cause of Bankwest’s decision to call on the security; and
  •   the loss of the developer’s opportunity to make a profit from the development was, at the very least, foreseeable in a general way.

This decision demonstrates that, in the absence of direct evidence, the court will consider the inferences which can reasonably be drawn from the facts, in determining whether causation has been established.

The full decision can be found here.

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