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Case Study: Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWCA 223 – Liability of third party professionals in property development projects

No longer is the liability for a third party professional confined to losses flowing directly from their contractual relationship or dealings with a head contractor. So long as the developer can prove that the misrepresentation was causative of the loss (and the loss is a generally foreseeable result of the conduct), damages will be recoverable.

By way of example, in the case of Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWCA 223 (Mistrina), it can be seen that a design engineer (who contracts with a builder and not with a developer) may still be liable to a developer for misleading conduct if they certify designs that are non-compliant with relevant standards, including for losses caused to parties with whom they do not have a contractual relationship with.

The developer in this case had not contracted with the design engineer and it was the developer's builder who was induced to rely on the misleading or deceptive conduct complained of (ie, an incorrect certificate being issued by the design engineer).

Background

Mistrina, a property developer, entered into a design and construct contract with a builder for a 10-storey development on its property at Brighton-Le-Sands in Sydney. Mistrina borrowed $7.2 million from BankWest to fund the development.

Mistrina, BankWest and the builder entered into a Builders Tripartite Deed (Deed) under which BankWest could assume Mistrina’s contractual rights and obligations following an “Event of Default”.

The builder engaged a third party structural design engineer who provided a misleading structural certificate. The certificate incorrectly stated that the structural design of the development complied with the Building Code of Australia, which in turn, posed a risk to the integrity of the neighbouring property.

Discovery of the defective slabs caused the work on the project to be suspended and it was found that the design engineer had incorrectly certified the design of the slab.

As a result of the halt to the construction mid project, Mistrina incurred significant economic loss. BankWest demanded repayment of its loan. Mistrina was unable to repay the loan and BankWest enforced its rights under the Deed by appointing receivers, taking over and selling the partially complete development.

Mistrina lost their opportunity to complete the development and lost the land, the opportunity to derive profits and the value of other security.

Mistrina sued the builder’s engineer for misleading conduct (despite it not having any contract or direct dealing with the engineer).

Trial judge

Justice Hammerschlag found, at first instance, that the provision of the certificate by the engineer amounted to misleading and deceptive conduct. However to succeed in its claim, it was necessary for Mistrina to establish a causal connection between the defective foundation design and the damage claimed (i.e. loss of opportunity) resulting from BankWest stepping in.

The primary judge found that Mistrina had failed to establish causation (with direct evidence) and, in particular, that BankWest acted on its security because of the structural defect and erroneous certification.

Mistrina appealed the decision asserting that the primary judge erred as to the causal link between the misleading and deceptive conduct and loss that it had suffered.

Appeal

On appeal, the key issues before the NSW Court of Appeal were:

  • (a) whether the engineer’s misleading and deceptive conduct was a material cause of the developers’ loss of opportunity to profit from the development; and
    (b) whether the loss of opportunity caused by the engineer’s conduct was foreseeable.
  • The design engineer filed a notice of contention arguing that the loss was too remote.

    Mistrina succeeded on appeal where the NSW Court of Appeal unanimously overturned the first instance decision. The court found that, notwithstanding the absence of direct evidence to establish the basis for BankWest stepping in, Mistrina suffered loss caused by the misleading and deceptive conduct of the third-party engineer on the basis that there was an "overwhelming inference" that the defective design and delay to the development gave rise to an “Event of Default” under the Deed and therefore, was a material cause of the BankWest’s decision to call on the security.

    The court determined 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. The court also found that the losses suffered were "a reasonably foreseeable consequence of the misleading and deceptive conduct."

    Conclusion

    The appeal decision is authority for the proposition that third-party professionals found liable for misleading and deceptive conduct which causes economic loss to a developer, even indirectly (ie, to other contractors – such as a builder), may still be liable to a developer for damages.

    If you are a developer, builder or third party professional involved with a development, it is critical that you are well aware of your rights, including the potential for liability to extend to a third party professional outside the direct chain of contracting for a claim relating to misleading or deceptive conduct under the existing provisions of the Australian Consumer Law.

    This is important because it is not always possible to obtain evidence from third parties in these instances.

    If you have any queries, please contact our Property & Development Team for further information or to have a free 15 minute consultation with one of our lawyers to see how we can assist you.

    Contacts

    Kristy Muhlhan

    Principal

    Kristy Muhlhan

    Principal
    LL.B (Hons) GRAD DIP. L.P., GAICD.
    Since 2014, she has been an owner and Principal of the firm and has mastered a broad range of essential commercial and business skills which go hand in hand with the work she does for...

    Meghan Warren

    Principal

    Meghan Warren

    Principal
    LL.B GAICD B.Bus (FinPlan)
    Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

    George Hanger

    Associate

    George Hanger

    Associate
    LL.B BA
    George was admitted to legal practice in May 2015 after completing a Bachelor of Arts at the University of Melbourne and a Bachelor of Laws at Monash University.

    Stewart Davis

    Associate

    Stewart Davis

    Associate
    LL.B (Hons) B.Com
    As well as property law, Stewart has had exposure to VCAT administration matters and commercial law, particularly servicing developer clients.

    Emma Dickens

    Paralegal

    Emma Dickens

    Paralegal
    Emma previously completed a Bachelor of Legal and Dispute studies at RMIT University in 2015.

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