Causation and Building Disputes - The pitfalls of commencing proceedings against third party contractors

01 April 2020

The New South Wales Supreme Court has dismissed proceedings brought by property developers (the plaintiffs) against a structural engineer (the defendant) who provided, and certified, a defective design. The court found that the plaintiffs had failed to establish causation, in circumstances where they did not directly engage the defendant.

In Issue

Whether the plaintiffs had established a sufficient causal connection between the defective design and the alleged loss and damage.

The background

The plaintiffs purchased land for the construction of a commercial and residential development. To facilitate this, the plaintiffs borrowed $7,205,000 from Bankwest (the bank). The terms of the loan enabled the bank to demand immediate payment where there was a change in circumstances that could materially affect the borrower’s ability to observe their loan obligations.

The plaintiffs engaged a builder to design and construct the development. The builder engaged the defendant to design the building’s foundation slab, as well as to certify that the slab complied with the Building Code of Australia and relevant Australian Standards. The defendant provided a certificate certifying that the slab was compliant. It was not.

It was not disputed that, in providing the certificate, the defendant had engaged in misleading or deceptive conduct pursuant to the Trade Practices Act 1974 (Cth). By the time the slab’s non-compliance emerged, construction was significantly underway. Work was suspended, redesign was needed, and the project was significantly delayed. Roughly one month later, the bank called in the loan. Receivers were appointed, who eventually sold the land.

The plaintiffs claimed that the defendant’s defective foundation design caused the development to fail and led the bank to call in its loan and exercise its right to sell the development. The plaintiff argued that the defective design therefore caused them the loss of a commercial opportunity, which was the chance to complete the development on time and at a profit.

The decision at trial

The court dismissed the proceedings. Central to this decision was the question of causation. There was no contract between the plaintiffs and the defendant. As such, the plaintiffs needed to establish that the conduct of the defendant caused the bank to call in the loan.

The court required the plaintiffs to adduce evidence sufficient for a reasonable finding of fact that the structural defect and delay were a material factor in the bank’s decision to requisition the plaintiffs’ project. The only evidence that plaintiffs sought to rely on was expert evidence as to what a reasonable banker would have thought and done with a view to establishing what the bank thought and did. The court considered this evidence inadmissible.

The plaintiffs left the factors taken into account by the bank as matters of conjecture. The court stated that it bordered on inconceivable that there would not have been bank records in existence indicating the bank’s motivations.The plaintiffs did not subpoena any records relevant to causation from the bank, nor did they tender the mortgage outlining the terms upon which the bank may appoint receivers.

Implications for you

This decision highlights the difficulty in bringing claims for defective building work in circumstances where a plaintiff has not directly dealt with the relevant contractor. This decision reaffirms that, where a plaintiff seeks to pursue a claim in those circumstances, the issue of causation may prove to be an insurmountable obstacle to success.

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

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