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Construction Consultants' Increased Exposure from Third Parties: Misleading and Deceptive Conduct

  • Legal Development 17 November 2020 17 November 2020
  • Asia Pacific

  • Insurance & Reinsurance

In the case of Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWCA 223, the Court of Appeal held that direct evidence is not required to hold a third party liable for misleading and deceptive conduct where inferences can be drawn.

Key takeaways

  • The Court relied on inferences as opposed to evidence in determining that a structural engineer had caused the Plaintiff's substantial losses, including for loss of profit.
  • This decision, in conjunction with the Design and Building Practitioners Act[1], increases accountability and exposure on the part of designers and their insurers for economic loss.

Background

Mistrina Pty Ltd (Mistrina) entered into a contract with Jabbcorp Construction Management Pty Limited (Jabbcorp) to build a mixed use development in Brighton-Le-Sands. The development was funded by Bankwest. The security given by Mistrina included a mortgage over the Brighton-Le-Sands property and a separate mortgage over another property. Mistrina intended to repay the loans with the proceeds of the development.

The general terms of the loan with Bankwest included an "Event of Default" clause, which allowed Bankwest to demand immediate payment if there was a change in circumstances that adversely affected the borrower's ability to fulfil their obligations.

Jabbcorp engaged a structural engineer, Australian Consulting Engineers Pty Ltd (ACE) who provided Jabbcorp with a structural engineering compliance certificate certifying that the design of the raft slabs complied with the Building Code of Australia (BCA). This turned out to be wrong as during construction it was discovered that the raft slabs in fact did not comply with the BCA. The defect in the structural design was not discovered until the project was well advanced (9 out of the 10 levels had been constructed).

A "Stop Work Order" was issued and the work was suspended. Bankwest demanded immediate repayment of the loan which was not met. When Mistrina defaulted on the loan, Bankwest exercised its rights under the security documents and sold the partially completed building development and the mortgaged property.

At First Instance

Since Mistrina did not have a contract with ACE, it relied upon a claim of misleading and deceptive conduct under the Trade Practices Act (as it then was). Mistrina argued that ACE's conduct caused the loss of a commercial opportunity, being the chance to complete the development on time and make a profit. The primary judge found that in providing the certificate, ACE had engaged in misleading or deceptive conduct. Further, the building would not have been constructed in accordance with the defective structural engineering design had it not been for ACE's conduct.  

However, the primary judge[2] also held that causation was not established as Mistrina had failed to adduce sufficient evidence for a factual finding that the structural defect and delay were material factors in Bankwest's decisions. Instead, the primary judge considered it was a matter of mere conjecture that the structural defects causally contributed to Bankwest enforcing its security as there was no direct evidence from Bankwest about the specific reasons for their actions.

Appeal

Mistrina appealed the primary judge's decision on the basis that the primary judge erred in finding that ACE's misleading and deceptive conduct was not causative of Mistrina's loss and damage. Another key issue for consideration was whether the loss of opportunity caused by ACE’s conduct was foreseeable.

Decision

The Court of Appeal found the primary judge erred in failing to determine that the structural design defect issue was a material cause of Bankwest taking over the development, and therefore causative of Mistrina's losses.

It held that, on the whole of the evidence, there was an overwhelming inference to be drawn that the cessation of the building works due to the structural design defect (and the resulting uncertainty as to when the construction would be completed) was "a" material cause of Bankwest's decision to step in and exercise its rights. The Court also did not accept the idea that such a conclusion was mere conjecture as it was the most obvious (and probable) inference to be drawn from all the facts.

This was based on three factors. Firstly, the evidence showed that the financier was concerned about the suspension of the works and its effect on time and cost. Secondly, no other material change was identified at or around the time the financier issued its demand and, thirdly, the discovery of the structural defect and likely delay were likely matters which fell within the Event of Default clause under the security documents.

As to foreseeability, the Court of Appeal held that a reasonably foreseeable consequence of the discovery of structural defects was for the financier to exercise its rights to call on the loan.

As a result, the proper inference to be drawn was that the defect in the design of the raft slab was a material cause of the decision by Bankwest to exercise its rights under the security documents and this was enough to establish causation.

Implications

Construction consultants, including engineers, have traditionally had less cause to consider exposure to parties with whom they have no contractual relationship when negotiating contracts.

In this matter, the engineer was liable for damages for loss of profits which were far greater than the actual costs required to rectify the works. The decision, coupled with the recent introduction of the Design and Building Practitioners Act 2020 (NSW) is of concern to construction professionals and their insurers as it increases construction professionals' exposure to economic loss claims.  It is also noteworthy that the Court of Appeal was satisfied with the inferences available and did not require direct evidence from the financier in determining the financier's motivation calling on its loan.

The financial arrangements for this project appeared to have been reasonably conventional and likely to be circumstances which will be repeated in claims in the future. It is reasonable to assume that developers may now have an avenue available to them in the future that was potentially not available prior to this decision.

It is difficult to identify any preventative measure for engineers in the position of ACE in seeking to restrict the representation contained within certification. However, there may be other avenues available to construction consultants when negotiating their commercial arrangements. For insurers seeking to minimise exposure, we recommend that they adopt rigorous practices when underwriting risks for construction projects in order to ascertain potential exposure through the insured's financial arrangements. Insurers could also consider whether appropriate policy exclusions might preclude a policy response for these categories of claims.

 


1. 2020 (NSW)

2. Mistrina Pty Limited v Australian Consulting Engineers Pty Ltd [2020] NSWSC 130.

End

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