Caltex has emerged as the winner in a highly publicised court battle with Charben Haulage over the sale of a contaminated site in Killara, a suburb in Sydney's north shore. The recent Federal Court decision reversed an earlier decision that had awarded $2.2m in damages to Charben.

Charben had discovered the contamination after purchasing the site from Caltex. Charben sued both Caltex and Caltex's consultant – who prepared a Contamination Assessment Report prior to the sale of the site – for breach of contract, breach of the Trade Practices Act 1974, negligent misstatement and negligence.

The judgment in Caltex Australia Petroleum Pty Limited v Charben Haulage Pty Ltd 2005 FCAFC271 (22 December 2005) had been greatly anticipated by lawyers, environmental contamination experts, and purchasers and sellers of contaminated land, as it determined who should be liable for damages flowing from the failure to properly remediate contaminated land prior to its sale.

From the purchaser's perspective, this case emphasises the need to take utmost care in the drafting and consideration of contractual clauses when dealing with contaminated sites, or what is thought at the time to be a "former" contaminated site.

The special conditions of the contract for the sale of the site were critical to the outcome of the case. The contract transferred the risk of future liability for contamination of the site to Charben following receipt of the report commissioned by Caltex.

Charben's directors had no previous property development experience and relied heavily upon advice from their lawyer and a property developer who was related to one of the directors. Charben had not anticipated that the contract could be read to its detriment; it never would have purchased the site unless the site had been verified as clean of all contaminants and free from any future liability.

Why the environmental expert was not found liable

Charben challenged the author of the report for incorrectly verifying that pollutants on the site were of a standard that was consistent with the relevant Guidelines, and that it was suitable for residential and commercial use. In particular, they were criticised for failing to dig a well and test the ground water to ascertain whether any pollutants were present. These arguments had been successful prior to the appeal.

However the evidence put forward by Charben did not convince the court that Charben had in fact relied on any specific statement in the report so as to have been induced to purchase the site to its detriment. In other words, the evidence could not support a finding that Charben was induced to believe that the site was suitable for residential land use in accordance with relevant Guidelines by any statement contained within the report. Relevant to this finding was the fact that Charben's directors had not read the report themselves, and Charben's lawyer, who had read the report, had no knowledge of the contents of the Guidelines. The court also found that the relevant Guidelines required a well to be dug only in certain limited circumstances, such as when ground water was found to exist on the site during preliminary tests. The report did not find such ground water to be present, and therefore the court found that it was in accordance with the Guidelines to refrain from testing the ground water.

A further point was that the report was prepared for Caltex and not for Charben and although the expert anticipated that it may be read by a prospective purchaser, the expert was not aware of the special terms of the contract for sale and the degree of reliance that might be had on the report.

The court commented that Charben could have ensured that it had a direct relationship with the expert such that the expert was under an express contractual obligation to Charben to carry out the works in a competent and non-negligent fashion.

Lessons for purchasers of contaminated land

The lessons to be gained from this case for purchasers of contaminated land are:

• If you have not commissioned your own environmental assessment report, or there is any doubt about the adequacy of an assessment, do not take on the risk of indemnifying a contaminator for future claims for contamination of the site.
• Where contamination is caused by contaminants that exist underground, as a matter of practice, wells need to be dug to test if ground water is present, and if so, this ground water should be tested. This requirement should be built into the contract for sale, whether or not it is specified in the relevant Guidelines. Alternatively, it should form instructions to the environmental consultant undertaking the tests.
• Read the environmental assessment report. Do not accept it as correct, particularly if the report is prepared by the vendor. Retain your own expert to carry out a separate assessment and to critique the findings of the vendor’s report. Completion of the sale contract should be made contingent upon your own expert’s satisfactory findings.
  
• Do not rely on conveyancers or solicitors to critique contamination assessments. Input is required from technical experts.
  
• You can request for the vendor's expert to have a direct relationship with you, so that the expert is clearly under a duty to perform diligently and in good faith for you.
  
• If a vendor is unwilling to amend the sale contract to cover these types of issues, there is probably cause for concern.

Warnings for environmental experts

The court found that there was no evidence that Charben had relied to its detriment on any statements made in the report. In addition, there were no findings made against the environmental expert because the expert had not owed a duty of care to Charben.

However, the court clearly indicated that it may very well have found against the environmental expert if Charben had pursued a claim of negligent misstatement differently. The court outlined the basis upon which duty, reliance and breach may have been established.

1. Duty - The consultant should have known that the report would be communicated to prospective purchasers for the purpose of inducing them to purchase the land. Also, that a purchaser would be likely to rely on the report and risk incurring economic loss if it was wrong.
2. Reliance - Charben's lawyer had been induced to advise Charben to complete the purchase based upon the report’s conclusion that the remediation works had been completed and the site was now clean.
3. Breach - If the report's conclusion had been made negligently and in breach of a duty of care owed to Charben, the consultant might have been liable.

Experts should clearly establish who they are being instructed to do the work for, and for what purpose the report is to be used. If it is to be used in relation to the sale of land, a prospective purchaser may place reliance on your report. You should therefore ensure that your report contains appropriate disclaimers.

For more information, please contact:

Anthony Whealy

T: + 00 61 (02) 9931 4867.E: awhealy@nsw.gadens.com.au

Isabella Ferguson

T: + 00 61 (02) 9931 4929. E: iferguson@nsw.gadens.com.au

RICS wishes to thank Gadens Lawyers for permission to feature this article. All rights reserved to Gadens Lawyers. This article is not a substitute for detailed advice on specific transactions and problems and should not be taken as constituting legal advice on any issue discussed.

Gadens Lawyers is a major Australian law firm, with 117 partners, 983 staff and offices in every mainland state and also Papua New Guinea. It has expertise in a number of sectors including cross-border dispute resolution, property & construction, banking & finance industries, corporate advisory & tax, insurance & insolvency, workplace relations, and planning, environment & government.