Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd  NSWCA 223
November 4, 2020
The New South Wales Court of Appeal has found for a developer who sued an engineer for loss of opportunity to make a profit. Notwithstanding that there was no direct contractual relationship between the developers and the engineer, the Court of Appeal found that a defective certificate issued by the engineer had played a material role in a bank’s decision to call in a loan and appoint receivers to the project, causing the developers to lose the opportunity to make a profit. The Court of Appeal rejected the engineer’s arguments in respect of causation and remoteness. The decision highlights the risks faced by professionals and in particular building professionals.
The proceeding arose out of a property development in Sydney. The appellants, developers, appealed from the dismissal by the primary judge of their claim for damages for misleading or deceptive conduct by the respondent, a structural engineering company (the Engineer).
The development was funded by a facility entered into with Bankwest. The loan was repayable 18 months from initial drawdown, and was to be repaid out of the eventual proceeds of the development. As security, the developers had given a mortgages and a personal guarantee.
The Engineer was retained by the builder, who had contracted with the developer. During the design stage, the engineer erroneously certified the structural design of a raft slab (the Certificate). The builder relied on the Certificate in commencing construction incorporating the raft slab and would not have commenced construction without it.
When construction was well advanced, a neighbouring owner, a practising structural engineer, complained and this led to the discovery that the raft slab was non-compliant and posed a risk to the neighbouring property. The engineer suspended works. Eventually, Bankwest exercised rights under the security interest and appointed receivers to the development, but without specifying a particular event of default. The developers suffered substantial loss.
It was not disputed the Engineer had, by issuing the certificate, in trade or commerce, engaged in misleading or deceptive conduct in contravention of s52 of the
Trade Practices Act 1974 (Cth) (as was then applicable to the relevant events).
The remediation works ultimately undertaken were performed at a cost of less than $350,000, however the developers put a loss of opportunity case that the Certificate had caused them to lose the opportunity to make a profit from the development of over $2.6 million.
The first instance decision
The primary issue at trial was one of causation: whether the defects arising from the Certificate played a material role in Bankwest’s decision to exercise its rights.
The primary judge held causation was not established. His Honour considered any role the certificate played in Bankwest’s decision was ‘conjecture’. It was not known what factors Bankwest had taken into account, or whether it had even acted lawfully in acting as it did.
The primary judge went on to consider, indicatively, that if causation was satisfied,
His Honour would have applied a 15% discount to the developers’ loss of profit to account for various other risks.
The developers appealed the finding on causation. The Engineer filed a cross appeal on loss of opportunity obiter remarks made by the primary judge and the indicative discount of 15%.
The primary issue on appeal continued to be whether the defects arising from the certificate played a material role in Bankwest’s decision to exercise its rights. The Engineer also raised remoteness, arguing that the developers’ loss had to have been foreseeable in a general way.
The Court of Appeal unanimously found although there was no error of law in the primary judge’s decision, the primary judged had erred in not determining the structural design defect was a material cause of Bankwest exercising its rights. The Court considered there was ‘an overwhelming inference’ to be drawn that the structural design defect (and the ensuing uncertainty) was ‘a’, and perhaps the only, material cause of the decision by Bankwest to exercise its rights.
In response to the Engineer’s arguments on remoteness, the Court found the loss suffered was a reasonably foreseeable consequence, even in a general way (if not more so), of the misleading and deceptive conduct. The Court observed that a secured creditor calling up its loan is the very sort of event that could naturally arise from delays, additional costs and the discovery of significant structural defects.
The Court noted in obiter that it did not consider this result would have the effect that professional service providers would thereby become unwitting underwriters of commercial risk, as had been suggested by the Engineer.
The Court otherwise found the primary judge was open to make the conclusion in respect of a 15% discount applied to the developers claim for loss of profit.
Professionals, including construction professionals, can be exposed to claims of this nature notwithstanding a lack of direct contractual relationship. The Engineer ultimately found itself exposed to a claim for loss of profit which far exceeded the cost of remediation works.
Finance arrangements for developments and projects are typical. Professionals who provide services to developments and projects carry a risk of exposure to far reaching consequences. Professionals may wish to factor that risk into their commercial arrangements. Insurers should also be aware of this increased risk when underwriting policies for professionals.
Further information / assistance regarding the issues raised in this article is available from the author, Jonathan Markowitz – Lawyer or your usual contact at Moray & Agnew.
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