Profit does not equate to loss!

04 February 2021

This case considered whether a developer is entitled to damages for a solicitor’s alleged negligence and misleading conduct pertaining to the purchase of a property, despite later making a profit from the subsequent development and sale of the property.

In Issue

The court was required to consider whether the defendants engaged in misleading and deceptive conduct, or breached their retainer, and whether the plaintiff suffered loss in any event.

The background

In late 2009 PPK Willoughby Pty Ltd (PPK) purchased a 4.78 hectare site in Willoughby, known as Willoughby Market Gardens (Willoughby), for $25.5 million. HWL Ebsworth Lawyers (the defendants) were engaged to act on behalf of PPK in the transaction.

Following the purchase of Willoughby, it became apparent that Willoughby was adversely affected by flood control restrictions (the flood restrictions). The flood restrictions created further work and additional expenditure for PPK, in order for it to proceed with the development. PPK developed Willoughby into town houses and eventually sold the land at a profit.

PPK alleged that the defendants were negligent, and engaged in misleading conduct, by not making PPK aware of the flood restrictions prior to the purchase of Willoughby. Specifically PPK alleged that the due diligence report prepared by the defendants was misleading, in that it suggested that the land was unaffected by flood restrictions. PPK further alleged that the defendants were negligent in failing to obtain zoning certificates from the Willoughby Council, which would have confirmed the presence of flood restrictions.

The defendants admitted that the due diligence report was incorrect and misleading, but denied that it was negligent in not obtaining the zoning certificates as it was specifically instructed not to obtain them.

While PPK accepted that it did not suffer a trading loss from the sale of the development, it alleged that it was entitled to damages for the difference between the amount paid for the property and its real value at the date of the acquisition i.e. on the basis that it would not have purchased and developed Willoughby had it known about the flood restrictions. The purported assessment of damages was based on the principles in Potts v Miller (1940) 64 CLR 282; [1940] HCA 43.

The decision at trial

Justice Harrison found that it was not appropriate to assess damages based on the Potts v Miller approach, given the transaction involved the purchase of land for the purposes of development and resale. Rather the correct approach ought be based on the decision of Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413, where it was held that where a transaction involves benefits and burdens no loss is suffered until it is reasonably ascertainable that the plaintiff is “worse off than if he had not entered into the transaction.”

When applying that approach to the set of facts before him, Justice Harrison found that the costs of removing the flood control restrictions would have been incurred by any developer. Irrespective of whether PPK would not have purchased the property had it known of the flood problems, the fact that it purchased the property and made a profit meant that it suffered no loss and was not entitled to damages.

Justice Harrison noted that the position would be different if PPK had unwillingly purchased the property and only proceeded with the development as a means of mitigating its losses.

As PPK did not suffer any loss it was unnecessary to consider the allegations of negligence as against the defendants.

Implications for you

This decision supports the position that Courts ought not award damages to aggrieved parties if they have profited from a development, even if there is evidence of negligent and/or misleading and deceptive conduct.

An appeal by PPK was unsuccessful, and was dismissed by the NSW Court of Appeal in December 2021.

PPK Willoughby Pty Ltd v Baird [2020] NSWSC 1757

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