Developer recovers economic losses for structural defects caused by engineer's misleading or deceptive conduct

What you need to know

• The New South Wales Court of Appeal recently upheld a developer's claim for economic losses caused by an engineer's incorrect certification of a raft slab. This decision will be of interest to building practitioners, who should be aware that their liability may well extend beyond those with whom they have directly contracted, particularly in light of the recent commencement of the Design and Building Practitioners Act 2020 (NSW).
• There was no dispute that the engineer's conduct was misleading or deceptive, rather the appeal concerned issues of causation and remoteness of loss. The Court held that there was an "overwhelming inference" that the structural defect was "a" material cause of the bank's decision to enforce the security that resulted in the developer's economic losses and may have been the only material factor in that decision.
• The Court also held that the economic losses suffered by the developer were a reasonably foreseeable consequence of the misleading or deceptive conduct, although it did not consider it necessary to form a concluded view on whether the rules of remoteness were engaged in the context of misleading or deceptive conduct claims.

The New South Wales Court of Appeal recently upheld a claim for economic losses, including the lost opportunity to make a profit, brought by a developer against an engineer who incorrectly certified a raft slab resulting in a serious structural defect.

The developer in this case had not contracted with the engineer and it was the developer's builder who was induced to rely on the misleading or deceptive conduct complained of, i.e. the incorrect certificate. There was little dispute that the engineer had engaged in misleading or deceptive conduct, rather the appeal concerned issues of causation and remoteness of loss.

This decision will be of interest to building practitioners, particularly in light of the recent commencement of the Design and Building Practitioners Act 2020 (NSW), who should be aware that their liability may well extend beyond those with whom they have directly contracted.

Background

Mistrina entered into a design and construct contract with a builder for a 10-storey development on its property at Brighton-Le-Sands. Mistrina borrowed $7.2 million from Bankwest to fund the development. The loan was secured against the Brighton-Le-Sands development and another property. Mistrina entered into a separate deed with Bankwest and the builder that entitled the bank to "step-in" and assume Mistrina's obligations under the design and construct contract if an "Event of Default" occurred. This included where, in Bankwest's reasonable opinion, there had been a change in circumstances that materially adversely affected Mistrina's ability to repay the loan.

The design of the Brighton-Le-Sands development included a raft slab rather than traditional piled foundations. When construction was well advanced (up to level eight of the building), it was discovered that the raft slab design did not comply with the Building Code of Australia and the relevant Australian Standards, and posed a risk to the integrity of the neighbouring property. Work was suspended and it was found that the builder's engineer had incorrectly certified the design of the slab. It was not disputed that, in issuing the certificate, the engineer had engaged in misleading or deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) (which applied in this case).

In the month following this discovery, Bankwest demanded immediate repayment of the outstanding loan balance. When this demand was not met, the bank exercised its step-in rights and eventually sold the incomplete Brighton-Le-Sands development and the other property over which the loan was secured. 

Mistrina sued the engineer for misleading or deceptive conduct claiming economic losses, including the loss of opportunity to profit from the Brighton-Le-Sands development as well as the loss of the other property that Bankwest had sold. Mistrina did not pursue a claim against the builder. Justice Hammerschlag held that Mistrina had failed to establish causation and, in particular, had failed to adduce sufficient evidence that the structural defect and delay were a, or a material, factor in Bankwest's decision to enforce the security.

What was the appeal about?

Mistrina appealed the decision on the basis that the judge should have found that the engineer's misleading or deceptive conduct caused the losses claimed. The engineer asked the Court to affirm the decision on the basis that the loss was not a foreseeable consequence of the misleading or deceptive conduct. The engineer also filed a cross-appeal asserting errors in relation to the trial judge's conclusions about the loss of opportunity case had Mistrina succeeded.

Structural design defect a material cause of loss

In finding for Mistrina, Ward JA (with whom Macfarlan and Leeming JJA agreed) held that there was an "overwhelming inference" that the cessation of building work due to the structural design defect was "a" material cause of Bankwest's decision to exercise its step-in rights and enforce the security. This inference was drawn even though Mistrina had not adduced evidence from an officer of Bankwest about the decision-making processes of the bank. Her Honour rejected the primary judge's finding that such an inference was "no more than conjecture", considering it was "the most obvious (and probable) inference to be drawn" and even suggesting that it may have been permissible to infer that it was the only material factor that led to the decision.

Foreseeability of loss

Ward JA observed that the question of the engagement of remoteness rules had not been authoritatively determined in the context of misleading or deceptive conduct claims under section 52 of the Trade Practices Act 1974 (Cth) (or section 18 of the Australian Consumer Law). Her Honour declined to express a concluded view on the topic, but found that the losses suffered here were "a reasonably foreseeable consequence of the misleading and deceptive conduct." Her Honour considered it was foreseeable that Mistrina would suffer damage, including the loss of opportunity, in circumstances where a secured creditor calling up its loan is the sort of event that could naturally arise from delays, increased costs and the discovery of significant structural defects.

Discount to loss of opportunity

Ward JA found no reason to depart from the trial judge's view that a 15% discount should have been applied to the claim for loss of opportunity, if it succeeded, to account for the risks that could have impacted the plaintiff's profit. Her Honour acknowledged the findings of the primary judge that Mistrina would (but for the structural defects) have been close to completion of the development at the time the loan to Bankwest was repayable such that it would have been in default of its repayment obligations for a short period of time. The engineer argued that a more significant discount was appropriate to account for the risk that Bankwest may have at that time exercised its "step-in" rights and enforced the security. However, her Honour considered that it would not have made commercial sense for the bank to take such action at a very late stage in the development, which told against a more substantial discount.

Design and Building Practitioners Act 2020 (NSW)

This decision coincides with the commencement of the Design and Building Practitioners Act 2020 (NSW). The Act partially came into force on 11 June 2020, with the balance of the Act to take effect on 1 July 2021.

The Act imposes a statutory duty of care owed to landowners. It requires builders, architects, engineers, project managers and other building practitioners carrying out construction work to exercise reasonable care to avoid economic loss caused by defects. The duty has been imposed retrospectively and extends to loss that became apparent within the 10 years immediately prior to 11 June 2020.

Building industry participants should be aware that statutory liability may arise to third parties outside the direct chain of contracting for both misleading or deceptive conduct under the existing provisions of the Australian Consumer Law, and under the new provisions of the Design and Building Practitioners Act 2020 (NSW). Building industry participants will need to consider ways of mitigating this risk (for example, through insurance products) outside the traditional limitations of liability in their contracting arrangements.

Authors: Adam Firth, Partner; Mariel Hoare, Lawyer; and Harriet Forster, Lawyer.