By Stephen Aroney, Partner, Sindri Bergsson, Senior Associate and Gabriella Janu, Lawyer

The NSW Court of Appeal has handed down its decision in Mistrina [1], which found a design engineer had caused loss to a developer and its director/guarantor when it issued a certificate which was false and misleading because it incorrectly certified that a raft slab was in compliance with the Building Code of Australia (the BCA). This decision is important for two reasons. Firstly, it highlights the significant risks facing certifying engineers in the performance of their roles in building developments. Secondly, it serves as a reminder for parties involved in complex building disputes that a party can be held liable for causing loss when a third party has relied on an incorrect certification, as long as the conduct was a material cause of the loss.

Background

In April 2009, Jabbcorp Management Pty Ltd (Jabbcorp) commenced the construction of a 10-storey mixed use residential and commercial development in Brighton-Le-Sands under a design and construct contract with Mistrina Pty Ltd (Mistrina) (the Development).

Jabbcorp relied on a structural engineering certificate issued by Australian Consulting Engineers Pty Ltd (ACE) certifying the compliance of the design of a raft slab in accordance with the BCA (the Certification).

After almost a year of construction, the raft slab and Certification were found to be defective, prompting the immediate suspension of all works on the Development pursuant to a Stop Work Order.

Faced with a delayed completion date, costly rectification works and an ensuing uncertainty of recovery under a loan facility, Mistrina’s financier, Bankwest, took over the Development (at a loss). Bankwest did so pursuant to an “Event of Default” clause in the loan facility and a Builders Tripartite Deed, which ultimately facilitated its sale of the partially completed Development, along with another property provided by Mistrina’s director (and guarantor under the loan facility) as security under the loan.

As a result, Mistrina claimed that it had suffered $2,665,360 loss of profits on the Development, and that the director/guarantor had suffered $1.3 million of loss on the other property sold by Bankwest.

The Supreme Court Decision

It was not in contention between the parties at the hearing that ACE engaged in misleading and deceptive conduct in contravention of (the now repealed) section 52 of the Trade Practices Act 1974 (Cth) when it issued the defective Certificate because it was clear that the design of the raft slab was not in compliance with the BCA. It was also not in dispute that Mistrina would not have proceeded with the Development in accordance with a defective structural engineering design had it not been for ACE’s misleading and deceptive conduct.

Mistrina’s claim was for loss of opportunity, which Mistrina alleged it had suffered as a result of ACE’s misleading and deceptive conduct. Mistrina argued that ACE’s conduct had caused it to lose the opportunity, among other things, to make a profit from the Development.

The Supreme Court dismissed Mistrina’s claim [2]. Justice Hammerschlag determined that while it was clear that ACE had engaged in misleading and deceptive conduct in issuing the Certification, Mistrina had failed to establish causation between Bankwest’s decision to exercise its rights under the security documents, and the consequences of ACE’s defective Certification. His Honour considered Mistrina’s argument for a causal link between Bankwest’s decision and Mistrina’s loss to be conjecture as there were various other possible factors and unknowns.

The Appeal and Findings

The NSW Court of Appeal overturned the decision of the trial judge and allowed Ministra’s appeal. It determined that there was a relevant and requisite causal connection between ACE’s misleading and deceptive conduct and Mistrina’s loss, and that the defective Certification was ‘a’, if not ‘the’, material cause of Bankwest’s decision to exercise its rights under the security documents.

Notably, the Court of Appeal’s finding was made in the absence of any evidence from a representative of Bankwest in respect of its decision to take over the Development. Notwithstanding the absence of this evidence, the Court of Appeal considered that an overwhelming inference could be drawn that the cessation of works (and the resulting uncertainty as to a new completion date and recovery of the lending and risks to the venture) was material in Bankwest’s decision.

ACE’s argument that the loss suffered by Mistrina was not a reasonably foreseeable consequence of the misleading and deceptive conduct was dismissed by the Court of Appeal. The Court considered that a secured creditor calling up a loan was an event which naturally arose from construction delay, additional costs of rectification works and the identification of a significant structural defect at a building development. At the very least, the loss of opportunity was foreseeable in a general way.

As a result, the Court of Appeal awarded Mistrina $2,265,556 and its director/guarantor $1,105,000 against ACE.

Implications of the Appeal Decision

The Court of Appeal decision is a timely reminder of the potentially significant liability risk facing engineers and other building professionals when issuing certifications. This decision indicates that the liability of engineers and other building professionals extends to (in certain circumstances at least) loss of opportunity claims by developers (including related entities) who have been affected by the defective certification.

It is also a reminder that when establishing causation, a claimant does not need to establish that the act or omission of a defendant was ‘the’ material cause of loss – rather, a claimant can succeed by establishing only that the act or omission of a defendant was ‘a’ material cause of loss. This is particularly relevant in complex building disputes where there are often multiple parties and disputes as to the cause(s) of loss. It means there can be a number of material causes of loss and the Plaintiff only has to establish one of them.

The liability risks of building professionals such as engineers has been a longstanding consideration for insurers when deciding whether to provide cover, particularly to building professionals who design costly developments. This decision will be important for insurers when considering the risks of providing cover and for determining the extent of coverage under liability policies.

[1] Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWCA223.

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