Environment Update – June 2006 - Noor Al Houda Islamic College Pty Limited v Bankstown Airport Limited

You cannot keep environmental reports to yourself. Gone is the concept of buyer beware.

In the case of Noor Al Houda Islamic College Pty Limited v Bankstown Airport Limited [2005] the legal concepts of negligence and misleading and deceptive conduct were used to call for the disclosure of environmental reports. The case has the potential to impact the certainty of commercial contracts. This case challenges the generally accepted notion that each party must protect its own interests during negotiations and make its own inquiries in commercial dealings. Now, where one party to negotiations can be classified as ‘vulnerable’, the law of negligence can be used.

Noor Al Houda Islamic College (the College) leased a site from Federal Airports Corporation (FAC). During negotiations for the lease an Airport employee pointed out that there were some problems with the site from the point of view of setting up a school. It was a noisy site and there were no services available. No representations were made by Bankstown Airport that the site was suitable for a school. Critically, at the time the parties were negotiating the lease, Bankstown Airport (but not the individual negotiating the deed) was aware that the site was contaminated and did not advise the College of the contamination. As usual, there was an exclusion clause in the lease which stated that Bankstown Airport was not liable for any loss or injury to the College unless the loss or injury was caused by Bankstown Airport’s negligence or default. There were also numerous clauses that stated the College had to make its own inquiries as to the suitability of the site for the College and the Airport made no representations as to the suitability of the site.

The College argued that by failing to advise it that the site was contaminated the Airport had:

• Engaged in misleading and deceptive conduct in breach of section 52(1) of the Trade Practices Act.

• Breached section 74(2) (implied warranty in relation to the supply of services) of the Trade Practices Act.

• Breached its duty of care and was liable in negligence for the pure economic loss suffered by the College as a result of the non-disclosure.

The question was whether failure to disclose that the site was contaminated was misleading and deceptive in the absence of any positive representations about the suitability of the site. This was despite the specific terms in the lease which stated that the College had an obligation to make its own inquiries about the suitability of the site.

The Court held that, because the Airport was aware the site would be used for sensitive purposes (a school), the circumstances gave rise to a reasonable expectation that the College would have been told about the risk of contamination.

Importantly, the Court held that where there has been a failure to disclose during pre-contractual negotiations, the party who has failed to disclose information will have engaged in misleading and deceptive conduct if the circumstances give rise to a reasonable expectation that the disclosure would be made. The nondisclosure does not have to be deliberate or intentional.

The Court also held that the Airport owed the College a duty of care. This duty of care was increased in this case because of the vulnerability of the College. The Airport breached this duty of care by failing to warn that the site was contaminated. Therefore, the College could recover damages from the Airport even though the College could only establish that it had suffered pure economic loss by way of a downturn in its business as a result of the contamination.

• Where there is a reasonable expectation of disclosure of information, section 52(1) of the Trade Practices Act can prevent a party escaping liability by silence. Disclosure of contamination issues will probably be regarded as falling within this situation.

• The law of negligence will impose a duty of care on landlords where they knew or ought to have known that their acts of omissions may cause a loss or impairment of legal rights of a tenant, where that tenant is in no position to protect his or her own interests.

• The landlord was not able to protect itself through the existence of protective exclusion clauses in the lease. The Court went to significant lengths to find that those protective clauses were insufficient.

• This case continues a trend of full and frank disclosure by parties in commercial transactions.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.