FEDERAL COURT OF AUSTRALIA

Armidale City Council v Alec Finlayson Pty Ltd [1999] FCA 330

Negligence – duty of care – breach of duty – damages – pure economic loss – loss of profits – remediation costs – council negligent in approving development applications – contaminated land re-zoned for residential purposes – whether a statement of environmental effects by a consulting valuer and registered surveyor negated the existence of the council’s duty of care – whether the council’s duty of care was limited to making a determination under s 90 of the Environmental Planning and Assessment Act 1979 (NSW) – whether a private cause of action in negligence was negated by the statutory rights of appeal under the EPA Act – whether the harm to the respondent’s reputation was caused by public misapprehension or misleading or unfair media publicity rather than the council’s negligence – whether the trial judge quantified a loss of profits claim rather than the loss of opportunity to earn profit – whether the trial judge allowed for the chance that the NSW Environment Protection Authority may not have required stringent remedial measures – whether the award of damages for remediation costs should have been discounted on the basis of that chance.

Environmental Planning Assessment Act 1979 (NSW) – ss 90(1), 77(3), 76(2)

Environmentally Hazardous Chemicals Act 1985 (NSW) – s 35

Contaminated Land Management Act 1997 (NSW) – s 21

Sutherland Shire Council v Heyman (1985) 157 CLR 424 – cons.

Avenhouse v Hornsby Shire Council ((1998) 44 NSWLR 1 – cons.

Donoghue v Stevenson [1932] AC 562 – cons.

Pyrenees Shire Council v Day (1998) 192 CLR 330 – cons.

Romeo v Conservation Commission (NT) (1998) 192 CLR 431 – cons.

Hawkins v Clayton (1988) 164 CLR 539 – cited

Albert Shire Council v Bamford (1998) 97 LGERA 33 – cited

Mahmud v Bank of Credit and Commerce International SA [1998] AC 20 – cited

Bryan v Maloney (1995) 182 CLR 609 – cited

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 – cited

Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 – cited

March v E and M H Stramare (1991) 171 CLR 506 – cited

ARMIDALE CITY COUNCIL v ALEC FINLAYSON PTY LIMITED

NG 231 OF 1998

JUDGES:       BEAUMONT, MOORE & MERKEL JJ.

DATE:            29 MARCH 1999

PLACE:          SYDNEY

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS:

1.         Appeal dismissed, with costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

1                     The respondent, Alec Finlayson Pty Ltd (“Finlayson”) sued the appellant, Armidale City Council (“the Council”), for damages for common law negligence.  After a trial, a judge of the Court (Burchett J) ordered the entry of judgment in favour of Finlayson in a substantial sum.  The Council now appeals from this order.  In its appeal, the Council challenges his Honour’s finding that it was liable at all, and also the award of damages.  Finlayson filed, but has subsequently discontinued, a cross-appeal.  His Honour’s reasons on the issue of liability, which was dealt with as a separate question, are reported at (1994) 51 FCR 378.

FINLAYSON’S CASE ON LIABILITY AT THE TRIAL

2                     The negligence alleged by Finlayson at the trial related to the circumstances in which the Council (a) re-zoned a substantial parcel of land at Armidale between Martin Street, formerly in an industrial zone, as residential;  (b) subsequently granted development applications for subdivisions of the land for dwelling purposes;  and (c) thereafter approved plans of subdivision and building applications.  Finlayson, a building company, had purchased some of the land, carried out subdivisional works and constructed cottages.  Finlayson claimed that it suffered loss when it was revealed that areas within the subdivisions were seriously contaminated with a combination of creosote (which contains toxic organic compounds known as PAH) and copper chrome arsenate (a complex salt containing arsenic).

3                     Finlayson pleaded its case at first instance in several alternative ways, but the critical allegation of a duty of care was stated in para 25 of its statement of claim relevantly as follows:

“25.     Further, or in the alternative, the [Council] was under a duty of care to [Finlayson] to give proper consideration to the [subdivision development] applications… and in particular to give proper consideration to any health risks in relation to residential use of the land the subject of the applications and to ensure that [Finlayson] did not suffer economic loss and to refuse to approve the said applications.”

4                     Particulars of these allegations included the following:

“Particulars

(a)               The [Council] was under a duty to act reasonably in dealing with applications for sub-division.

(b)               The [Council] and  [Finlayson] were in a relationship of proximity in that in relation to the first application for subdivision at the time the said applications for subdivision into residential allotments were being considered by [the Council], [Finlayson] had entered into a contract to purchase and was a future owner of the land comprised in the twenty seven lot subdivision and was a member of a class of potential purchasers and future owners of the land comprised in the nine lot subdivision.  In relation to the subsequent subdivision and other applications [Finlayson] was the applicant [for the Council’s approval].

(c)               The [Council] knew, or ought to have known, that [the] said land was not suitable for residential purposes…”

5                     Finlayson claimed a breach of the duty of care alleged in para 28 of its statement of claim as follows:

“28.     In breach of the said duty of care, the [Council] failed to give any or any proper consideration to the said health risks [arising from the contamination of the site] and approved the subdivision of the land into nine and twenty seven residential allotments, thereby permitting the creation of the allotments comprised therein and representing to [Finlayson]  that the said allotments were suitable for residential purposes and further approved the said subsequent development and building applications.”

BACKGROUND FACTS

6                     There is no longer any contention about the background to the dispute.  Nor is there any challenge to the findings of facts made by his Honour.  The findings were as follows:

(a)               The early history of the contamination of the site

·                    In 1967, the Council was asked by Arthur H Hasell & Co Pty Ltd (“Hasell”) to approve, and did approve, the building on the land, then zoned “industrial”, of “a substantial industrial undertaking”, being a timber treatment plant in which telephone poles were to be impregnated with creosote.  Provision was made for the “laying of drainage lines ‘to the open street channel’, with three ground sumps to drain the whole of the surface area to the east of the main rail siding to the open street through a common line”.  A pressure cylinder seventy two feet long, and two creosote tanks, one of 10,000 gallons capacity, the other of 12,000, were proposed.

·                    The plant was erected and inspected by the Council in 1968, when seepage and spillages of creosote were noted.  The Council then required the provision of a creosote arrestor “to prevent creosote from entering any water course or private lands”, and other measures.

·                    However, either not all of this work was carried out, or it proved inadequate.  In June 1969, it was reported to the Council that creosote had escaped to a nearby creek, Martin’s Creek or Martin’s Gully, after “a major spillage”.  In August 1969, the Council was informed that there was “a pool of creosoty water” in the unmade road east of Martin Street.  In September 1969, the City Health Surveyor reported to the Council, at its request, stating that “the waste disposal from the… plant is continually under review and… further attempts are being made to prevent even the smallest quantity of creosote entering the main water course”.

·                    But the situation was not in fact rectified.  In August 1970, complaints were made to the Council that creosote had flowed into the creek.  In September 1970, the City Health Surveyor, Mr Crawford (who was not called to give evidence), noticed that creosote oil had not been removed from the pond and that creosote was in the creek.  In October 1970, the Council wrote to Hasell, noting that creosote was entering the water course, and requiring that pits and ponds be cleared at least twice a week “so that creosote does not enter the water course”.

·                    In October 1970, the Council approved an application by Hasell to install two new tanks (one with capacity considerably larger than 12,000 gallons) to contain Tanalith, a copper chrome arsenic salt.

·                    In January 1971, the Council received a letter from the State Health Department complaining of pollution of Martin’s Creek by Hasell’s works.

·                    Pollution from the plant continued.  The Council wrote to Hasell in February 1971, referring to the presence of creosote oil in the pond on the other side of the road from the treatment works, requiring that the area be “cleared and maintained so that no creosote enters the small water course”.

·                    In March, and again in May, 1971, the Council raised with Hasell its continuing concerns with the presence of creosote.  The problem was seen as still unresolved.

·                    In November 1972, Hasell applied for the Council’s approval to use an area of about eight acres on the other side of Martin Street as an “air seasoning yard” for hardwood poles.  Hasell stated that no treated timber would be stored there.  The proposal was opposed in petitions to the Council with 227 signatures, referring to the seepage of industrial waste into Martin’s Gully and from there into Dumaresq Creek, a major stream.  The Council granted Hasell the development consent for a period of two years.

(b)               The re-zoning of the land for residential purposes

·                    Between 1973 and 1975, officers of the Council held several meetings with representatives of the State Planning Authority (“the Authority”) at which a proposal to re-zone the land for residential use was discussed.  The Authority regarded the proposal as controversial in view of the existing industrial use.  The Authority reminded the Council of this at a meeting held in April 1975.

·                    On the following day, on 22 April 1975, the Council wrote to the Authority, re-affirming the Council’s proposal to re-zone, stating that the Council was firmly of the opinion that residential development should be permitted.

·                    On 5 September 1975, an Interim Development Order (“IDO”) was gazetted providing for a residential zoning for the area.  The IDO provided, inter alia:

“30.     In respect of any application under this Order for consent to carrying out any development the Council shall take into consideration –

            …

(h)               Whether any environmental issues are involved in or raised by the proposed development, and if so, whether adequate safeguards have or will be made to prevent pollution and protect the environment of the locality.”

(c)                The later history of contamination of the site 1975-1980

·                    In 1975, the State Pollution Control Commission (formerly the Authority) wrote to the Council, referring to the need to ensure the satisfactory quality of the waste water run-off from the site.  The Council stated that it would keep the matter under review.

·                    However, in 1976, 3,000 gallons of copper chrome arsenate escaped.  Mr Crawford subsequently arranged for disposal of this material into the Council’s waste disposal area.  But a very large quantity found its way into the pond and even into Martin’s Creek.  There was considerable flooding of the area.

·                    In 1979, in response to a notice from the State Pollution Control Commission, Hasell constructed an earth bund around its impregnation and storage facilities.  This probably prevented further spillages escaping from the treatment works;  but the inference is that continuing spillages were absorbed in the treatment area.

·                    In 1979 or 1980, the timber treatment works were re-located to another area in Armidale.

(d)        The nature of the contamination of the site

·                    Creosote and arsenic are present in the various parts of the site which have been tested.  In some areas the contamination is very heavy.  On at least two of the allotments into which the site has now been divided, a membrane has been laid in an attempt to contain the contaminants.  Digging on one lot in particular revealed significant quantities of visible creosote.

·                    Contamination of the site is patchy, and is particularly heavy in the places where the cylinder and the sumps were located.  Other patches of contamination exist in the places where sumping of waste creosote and Tanalith may have occurred.

·                    Arsenic and PAH are present, in the main, in the upper level of gravelly ground, and this could have been removed before the land was subdivided.  Once houses were erected, the problem magnified.  Arsenic and PAH are carcinogenic as well as toxic.  Where both are involved, there may be a synergistic effect, presenting a particular hazard in areas where young children may play.  Young children generally absorb dirt at a rate estimated at 100 mg per day;  and some eat significant quantities.

·                    A remediation problem is that contamination varies greatly in intensity from spot to spot, so that without removal of the entire upper layer of the ground in the area, strong concentrations of PAH or arsenic, or both, may be by-passed.

(d)               Basia’s application to the Council for approval to subdivide

·                    In 1982, the land was purchased for $65,000 by Basia Holdings Pty Ltd (“Basia”).  (Basia was originally sued by Finlayson in these proceedings as an additional respondent.  Basia having gone into liquidation, the action against it did not proceed).

·                    In 1983, Basia applied to the Council for, and was granted, consent to continue an existing industrial use, viz. an overnight truck storage depot.

·                    In July 1984, Basia submitted a development application to the Council under Part II (s 77(3)) of the Environmental Planning Assessment Act 1979 (NSW) (“the EPA Act”) in relation to the land.  Part IV of the EPA Act (ss 75-109A) deals with Environmental Planning Control.  Section 76(2) provides that where an environmental planning instrument provides that development (defined in s 4(1) so as to include the subdivision of land) specified therein may not be carried out except with consent under the EPA Act being obtained, a person shall not carry out that development unless that consent has been obtained.  (Under the IDO, the land was zoned “Residential C”, so that the only development which may be carried out without the Council’s consent (i.e. Column II use) is “Dwelling houses”.  Prohibited uses apart (i.e. Column V – none applicable here), any other development (e.g. a subdivision) may be carried out only with the Council’s consent (i.e. Column IV).)

·                    The development proposed by Basia was described as – “Subdivision into 9 Lots [as] part of an overall proposal to subdivide the property”.

·                    By s 77(3) of the EPA Act, it is provided, relevantly, that a development application shall be accompanied by such information and particulars as may be prescribed.  By the statutory Regulations, it is provided (by Note 6) that information – (a) demonstrating that consideration has been given to the environmental impact of the development;  and (b) setting out any steps to be taken to mitigate any likely adverse environmental impact – must accompany the application.  Basia’s application was accompanied by a surveyor’s “Statement of Environmental Effects” as providing “a residential area for 40 home sites together with an internal roading system and a Public Park”.  The Statement went on:

“The soil appears to be clay based and through previous industrial use has nearly a full cover of consolidated gravel.  There are no unique features associated with the land and there are no known reserves of minerals.”

Under the heading “Engineering”, the Statement said:

“The land is considered physically suitable for residential living…

Drainage will be out of the subdivision and into the natural watercourse of Martin Gully and there will be no detrimental effect to the properties.”

·                    The Council was informed at this time that the transport depot use would cease.

·                    The development application was submitted to the relevant departments of the Council, including its health surveyor, Mr Crawford.  No objection was raised.  On 9 August 1984, the Council gave its consent, subject to conditions, including a condition that the use of the depot cease within twelve months.  (Other conditions, described by his Honour as “normal” (sc. in the case of a residential subdivision), dealt with dedication of a neighbourhood park, the provision of “adequate drainage”, including “inter-allotment” drainage, and the provision of underground water and sewerage services to each lot.)

(e)               The sale of land by Basia to Finlayson

7                     On 23 October 1985, Basia sold to Finlayson for $90,000 Lot 11 in DP161700 being the residue of the former plant site remaining after excision therefrom of the first stage of the Basia’s subdivision (i.e. by which nine lots and a public reserve had been created).  The contract for sale was subject to the registration of a subdivision plan within six months;  in the event that this not be registered within that time, either party could rescind.

(f)                 Finlayson’s application for subdivision (development) approval in October 1985

·                    On 31 October 1985, a development application was made to the Council on behalf of Finlayson for approval to subdivide Lot 11, being the second stage of the subdivision of the site.

·                    In recommending its approval, the Council’s officers reported on the application as follows:

“The overall subdivision concept of this parcel of land was previously dealt with by Council in 1984 when the Owners of the Land, Basia Holdings Pty Ltd proposed a 40 lot subdivision which was tacitly approved by Council.  Basia Holdings only proceeded with Stage 1 of that proposal by subdividing 9 lots fronting Martin Street, a Public reserve to the west and creating lot 11 being the residue of the site.  The proposal is for the subdivision of proposed lot 11.

It is not considered that the subdivision will create any undue impact on the locality and will result in an acceptable useage of the site which has in the interim being [sic] occupied by non-conforming activities.”

·                    The Council gave its conditional consent to the development on 29 November 1985.  The conditions were unremarkable.  No mention was made in them of any contamination problem.

(g)               Finlayson’s original belief that the site was suitable for residential development

·                    In very general terms, the nature of the previous use, including the application of creosote to timber, was known to Mr Alec Finlayson, the controller of Finlayson, but not its details.  He had no reason to suspect that the site itself had been contaminated:  residential development had been approved, and Mr Finlayson assumed the land was suitable for residential use and human habitation because of the approvals.

(h)               Finlayson’s development of the site

·                    Upon completion of its purchase, Finlayson proceeded with its subdivisional works in 1986.  In 1987, Finlayson applied to the Council, and was granted, a further development approval to re-subdivide Lot 14.  In 1988, Finlayson constructed and sold homes on some of the lots;  other lots were sold as land, and building contracts were entered into for the construction of housing upon some lots.

·                    In 1988 Finlayson applied for, and was granted, further development approval, to re-subdivide Lot 22.  From October 1988 Finlayson commenced selling some of the blocks of land in the second stage of the twenty seven lot subdivision.

·                    In 1988-9, Finlayson purchased a further five lots from Basia out of the first stage of the subdivisions, some of which were sold.  Housing was erected upon them by Finlayson under building contracts.

(i)                 Finlayson first becomes aware of the contamination

·                    Mr Finlayson first became aware that the site was contaminated when the Mayor made a statement on television in February 1990.  In March 1990, Finlayson received a letter from the Council stating that, in order to determine the extent of the contamination, soil sampling at one of the lots would have to be undertaken.  Finlayson authorised this.

(j)                 The Council’s formal admission of contamination

·                    At the trial, the Council admitted that (a) since 1973 some of the land was potentially contaminated from creosote and arsenic at levels that required action – either of investigation, evaluation or remediation – in connection with any residential use;  and (b) at the time of the subdivision applications in 1984 and 1985, some of the land was in fact contaminated at levels (i) that required some such action in that connection;  and (ii) would have been discoverable at the time.

(k)               The Council’s knowledge at the time of the first development application

·                    The Council’s officers were well aware of the contamination at the time of the change of zoning and at the time of the first (Basia’s) development application.  They also knew that the site was covered in gravel, that the covering was deceptive and concealed the contamination, and that an ordinary purchaser would not know that the covering was deceptive.

·                    They simply failed to apply their minds to the question whether the contamination ought to be investigated so as to determine whether it required remediation.  They did nothing effective about its implications.  No serious attempt was made by the Council to remedy the situation, although effective measures were possible.

·                    The Council’s officers, in particular its health surveyor, Mr Crawford, knew that the substances used in the treatment of the poles and other timber regularly escaped;  that the operations were not being conducted with appropriate care to avoid the escape of contaminants;  and that waste materials were disposed of on the site.

·                    Mr Crawford, the Council officer most concerned with the re-zoning and the development applications, was not called to give evidence, although available.

(l)                 The Council’s failure to take risk of contamination into account in considering development applications

·                    In considering the development applications, the Council did not take the risk of persisting chemical contamination into account.  If it had, some action would certainly have followed, given the known history of the site.

(m)             The approach of a careful town planner

·                    A careful town planner who had ascertained the facts would not have permitted the development of any land without prior investigation and remediation.

As has been noted, the foregoing facts were found by his Honour, and those findings are accepted by the Council for our purposes.

By way of further background, reference should be made to the material provisions of the EPA Act (s 90(1)) applicable upon the consideration of a development application by the Council.

SECTION 90(1)(g) OF THE EPA ACT

8                     As will be seen, in finding that the Council owed Finlayson a duty of care, his Honour referred to s 90(1) of the EPA Act.  It is there provided that, in determining a development application, the Council shall take into account such of the matters there specified as are of relevance.  They include (materially for present purposes):

 “(g)    whether the land… is unsuitable for that development by reason of its being, or being likely to be, subject to flooding, tidal inundation, subsidence, slip or bush fire or to any other risk;” (Emphasis added).

9                     On the issue of liability, the Council sought on the appeal to challenge, inter alia, his Honour’s conclusion that it owed Finlayson a relevant duty of care.

THE REASONING OF THE PRIMARY JUDGE ON THE QUESTION WHETHER THE COUNCIL OWED A DUTY OF CARE TO FINLAYSON

10                  In concluding that this duty existed, his Honour said that he bore in mind (51 FCR at 401-2) the following circumstances:

·                    The Council had detailed knowledge, through its officers, of the potential danger.

·                    The Council must have appreciated that ordinary persons in the community who might buy the land or some of it with no prior acquaintance with the site, would not have the same knowledge.

·                    In terms of relevant knowledge, the Council was in a position of dominating advantage compared with Finlayson.

·                    The Council also had its statutory duty under s 90(1)(g) of the EPA Act to take into consideration whether the land was unsuitable for that development by reason of its being, or being likely to be, subject to any risk of the kind specified or any other risk.

·                    The requirements of professional practice (see above finding) which lay upon the Council’s town planner.

·                    Mr Finlayson’s evidence, accepted by the primary Judge, of his reliance upon the Council’s approval as indicating that the land was appropriate to be built upon for residential purposes, was justified by the Council’s statutory obligation in relation to the development application.    Although Mr Finlayson could not quote the provision of the statute, the basis of his reliance really lay in the practice of the Councils and those who deal with them, itself firmly grounded in legal obligations.

·                    The Council took an active part in the creation of the situation from which Finlayson’s loss came:  The Council insisted upon the re-zoning as residential, despite initial opposition from the State Planning Authority;  and the Council positively decided to approve Basia’s development application and tacitly approved the foreshadowed further development.  This made the subdivision possible, and made the land available to purchasers, including Finlayson, for the purpose of residential construction upon it.

11                  In concluding that the existence of a relevant duty of care had been established in each development application decision, his Honour referred to the following considerations (51 FCR at 412):

·                    Finlayson, which was buying part only of the land, had no practical means, of either investigating or remedying, the contamination of the whole area.

·                    Yet Finlayson would be affected by contaminants both on the land it acquired and on adjacent parcels.

·                    Finlayson had to rely on the Council to have approved the development with due care.

·          Finlayson had no means of knowing or of having reason to suspect what was in the soil, so as to excite a particular need for that care, since the signs of the contamination had been covered over by gravel.  The Council’s officers knew that this covering was deceptive, but the ordinary purchaser would not.  The Council should have taken the position of potential purchasers into account.

·                    Nor could the Council have thought a purchaser would obtain, at great expense, chemical analyses of land in a residential subdivision.  It was a situation where, of necessity, the functions of the Council as the local government authority, in approving development of the subdivision must be seen (as Mason J put it in Sutherland Shire Council v Heyman (1985) 157 CLR 424 (at 462-3)) as supplanting private responsibility.

THE FIRST QUESTION ON THE APPEAL:  DID THE PRIMARY JUDGE ERR IN HOLDING THAT A DUTY OF CARE EXISTED?

12                  Although, as has been said, the Council did not seek to challenge the findings of fact made by the trial Judge, it did challenge his Honour’s conclusion that a relevant duty of care existed.

13                  For the Council, particular reliance is placed upon the circumstance that, in support of its development application dated 31 October 1985, Finlayson through its surveyor, made particular statements to the Council concerning the site in the form of a statement of the environmental effects required by the Regulations made under s77(3) of the EPA Act.

14                  By way of legislative background, it should be mentioned that one of the other matters specified in s 90(1) is –

“(b)     the impact of that development on the environment… and, where harm to the environment is likely to be caused, any means that may be employed to protect the environment or to mitigate that harm;”

15                  As has been noted, the Regulations made under s 77(3) relevantly require that a development application must be accompanied by information (a) demonstrating that consideration has been given to the environmental impact of the development;  and (b) setting out any steps to be taken to mitigate any likely adverse environmental impact.

16                  The statement of environmental effects of the proposed residential subdivision was dated 30 October 1985, and was made by Terence J. Stewart, Consulting Surveyor and Registered Valuer.  It described the environment from several aspects as follows:

17                  With respect to the topography, it stated that “[t]he soil appears to be clay based and through previous industrial use has nearly a full cover of consolidated gravel.  There are no unique features associated with the land and there are no known reserves of minerals”.

18                  With respect to ecology, it stated that there was no vegetation, trees or timber on the property, which was only covered with natural grasses of little value.

19                  As to the human aspect, the statement referred to “prior industrial usage… now a vacant area with no occupancy”.

20                  In justifying the proposal, it was stated, in addressing usage, that the land “has as its best use residential living in accordance with its zoning.  It is unsuitable land for agriculture both pastoral and arable”.

21                  In dealing with urban design, it was stated that this area of Armidale “is best suited to residential living and encompassed with other open areas adjoining will provide a comfortable living area…”

22                  As to engineering aspects, it was stated that the land –

 “…is considered physically suitable for residential living.  Its low grade allows economics in house construction, and it also allows for low velocity drainage with no serious impact of soil erosion.

Drainage will be out of the subdivision and into the natural watercourse of Martin Gully and there will be no detrimental effect to other properties”.

23                  On behalf of the Council reliance is also placed upon Mr Stewart’s statement of environmental effects dated 27 November 1987, accompanying that development application.  It stated:

“The effect of the subdivision will in no way have any impact upon the overall residential subdivision of the area…  It is considered that there will be no detrimental effects to the environment by the proposed subdivision and will have no effect upon the normal requirements of residential living within the area as it develops.”

24                  Although the Council did not, on the appeal, seek to pursue the defence of contributory negligence pleaded at first instance, it is now submitted for the Council that these statements of environmental effects “represented to Council that the land was suitable for residential living and, generally, that investigation of the land and as to the effect of the proposed subdivision had been made”.  It was then submitted that this negated the existence of any duty of care.

25                  We have difficulty accepting the submission.  In our opinion, it was clearly open to his Honour, on the unchallenged findings of fact he made, to conclude that the Council owed Finlayson a relevant duty of care.  Moreover, we detect no error of legal principle in the approach taken by his Honour.

26                  It is true that courts of high authority have, from time to time, adopted various ways of approach in analysing whether, in the particular circumstances of the case at hand, a duty of care existed.  In Avenhouse v Hornsby Shire Council ((1998) 44 NSWLR 1) Priestley JA (at 5-9) recently reviewed the approaches that have been taken.  Priestley JA (at 9) observed of the circumstances of Avenhouse, viz. the failure of a Council to process a subdivisional application with due diligence, that even if one were to take into account each of the various approaches that have been taken, none of them ruled out the conclusion in that case that the relationship is so close that a duty arose.  The same can be said, we think, of a duty of the kind pleaded in para 25 of the statement of claim.  Further, again as Priestley JA (at 9) did in Avenhouse, if one were to disregard all formulations except that of Lord Atkin in Donoghue v Stevenson [1932] AC 562 (at 581) and simply to ask oneself the question whether, in the present case, the relationship between Finlayson and the Council is so close that a duty of care upon the Council arose, the answer, in our judgment, will be in the affirmative.  Moreover, the reasoning in Pyrenees Shire Council v Day (1998) 192 CLR 330 and Romeo v Conservation Commission (NT) (1998) 192 CLR 431, the most recent authoritative statements in this area for our purposes, not only do not detract from our conclusion, but support it.

27                  As was contended for on behalf of Finlayson, the following considerations point to the existence of a relationship between Finlayson and the Council that was so close, that a duty upon the Council of care arose on these undisputed facts:

·                    To the Council’s knowledge, pockets of contamination were randomly located on the land and were hidden under a deceptive gravel surface.

·                    So far as the Council knew, the applicants for residential subdivision development approval (first Basia, later Finlayson) were unaware of the contamination risk.

·                    The Council could not have thought that purchasers of the land would have thought that there was a contamination problem, or would have had the means, or even the idea, of obtaining expensive technical analyses of the land.

·                    Here there were both physical proximity and, from Finlayson’s perspective, latent defects, yet the Council knew that the gravel surface was deceptive (see Hawkins v Clayton (1988) 164 CLR 539 per Deane J (at 577)).

·                    The Council had before it an application for residential subdivision which could not proceed without its consent.

·                    It must have been apparent to the Council that, if it approved the subdivisions, the overwhelming probability was that the subdividers, unaware of the contamination problem, would sell the resulting blocks to purchasers, who would also be unaware of the problem, and that the blocks would ultimately be used for residential purposes.

·                    The Council knew that the use of the land for residential purposes had the potential to cause serious harm to the occupiers of the land.

·                    The Council had a statutory obligation to consider whether the land was suitable for residential subdivision, regard being had to risks such as contamination.

·                    Without incurring expense or delay, the Council had only to look to the information in its own records and to the specific knowledge of its officers in order to appreciate that it could not conclude that the land was suitable for residential subdivision.

·                    The Council’s approval of the development applications proceeded, in fact, without the need to resort to any “policy” considerations.

·                    It must have been obvious to the Council that the subsequent discovery of the contamination had the potential to cause economic loss to the purchasers of the land.

·                    It must also have been obvious to the Council that the subsequent discovery of the contamination in land sold to local residents by a firm such as Finlayson (known to the Council as a local builder/developer) in consequence of the approval given to its subdivision application, had the potential to damage severely Finlayson’s reputation as a competent and responsible builder/developer and the community’s willingness to deal with him.

28                  Although much relied on in the argument for the Council, in our view the surveyor’s statements of environmental impact have no relevance to the present question.  Those statements did not, and did not purport to, address the question whether the land was already contaminated.  Finlayson had no reason then to believe, and did not believe, that the land was already polluted.  On the other hand, the Council was well aware of a serious problem (see Albert Shire Council v Bamford (1998) 97 LGERA 33).  The Council’s argument seeks to reverse these roles by attempting to fly in the face of the unchallenged facts.

29                  On behalf of the Council it is further submitted that, as a matter of statutory construction, the extent of the Council’s duty, in these circumstances, was limited to making a determination of applications according to s 90, including having regard to the requisite statement of environmental effects.  This, the argument runs, the Council did, and it was obliged to do no more.  Moreover, it is said on behalf of the Council that, again as a matter of interpretation of the EPA Act, no private cause of action could accrue in the present circumstances in negligence against the consent authority arising out of its determination of such an application.  Rather, the rights and remedies consequential upon a determination are exhaustively provided for in Division I Part IV, s 75-105 of the EPA Act, conferring rights of appeal against a Council’s refusal to grant development consent, and similar remedies.

30                  We cannot accept any aspect of the Council’s argument.  It is true that the application for development approval was made under the statute and that certain statutory rights and obligations arose accordingly under the EPA Act, including the statutory rights of appeal mentioned.  However, it does not follow from the fact that the Council was purporting to exercise its statutory function, that no cause of action in negligence could arise as a matter of statutory interpretation.  Certainly, there is no explicit provision in the EPA Act to that effect.  If such an interpretation were to be open, it would have to be grounded in an implication derived from the context, scope or purpose of the legislation.  In our opinion, there is nothing in the context, scope or purpose of the EPA Act which could justify the making of the implication contended for on behalf of the Council.  There is, in our view, nothing at all inconsistent with the existence of a statutory right of appeal against a refusal of a development application on the one hand, and, on the other, the existence of a private cause of action in negligence against the Council arising out of circumstances, one of which is the making of an application under the EPA Act for development approval.  Whether such a cause of action exists under the general law is, of course, another matter.  Our present point is that, as a matter of statutory construction, we can see nothing in the Act which precludes the possibility of such a cause of action arising at common law in appropriate circumstances.

THE SECOND QUESTION IN THE APPEAL:  DID THE PRIMARY JUDGE ERR IN HOLDING THAT THE COUNCIL BREACHED ITS DUTY OF CARE?

31                  His Honour (51 FCR at 412) found the Council guilty of a breach of its duty, saying:

“Both Mr Crawford and Mr Hegarty [the Council’s Town Planner] were careless in relation to the approvals of the various development applications, having regard to the knowledge which they had.  They did nothing at all, whether by way of the imposition of any condition, by the giving of any warning, or by any other means, to avert the harm which they could reasonably foresee might be a consequence of the approval of each development application.  Damage resulted which should be regarded as materially caused by the breaches of duty.  See Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 420, per Gaudron J.”

32                  We can deal with this aspect of the appeal briefly.  In our opinion, the conclusion of a breach of the relevant duty was also clearly open.  Given the serious public health hazard, the Council’s duty could only have been competently discharged by an outright refusal of the application, or at least a refusal except upon acceptance and performance by the applicant for approval of appropriate remediation conditions.

Damages

33                  Following the finding by Burchett J that Finlayson had established a case in negligence against the Council in respect of each of the development applications, his Honour conducted a further hearing in relation to the damages claimed by Finlayson, which fell into the category of pure economic loss.

34                  On 31 December 1997 his Honour handed down his second reasons for judgment in respect of the damages claimed by Finlayson and directed that the parties bring in Minutes of Orders in accordance with those reasons.  On 6 March 1998 orders were made assessing damages, other than interest under s 51A of the Federal Court of Australia Act 1976 (Cth), at $1,119,576.  A lump sum of $360,000 was awarded in lieu of any interest under s 51A.  Judgment was accordingly entered for Finlayson against the Council for $1,479,576.

35                  The amount awarded as damages, other than interest, included an amount of $500,000 which his Honour allowed in respect of Finlayson’s “loss of the opportunity to earn profit by the residential side of its business”.  We refer hereafter to that claim as the claim for lost profits.  Also included in the damages awarded was the sum of $400,000 which his Honour allowed as the cost of remediation works, which the Environment Protection Authority was expected to require Finlayson to carry out, to deal with the high levels of contamination in the seven unoccupied lots at West Martin Street.  We refer to that claim as the claim for remediation costs.

The lost profits claim

36                  As at February 1990, when the serious contamination of the land at West Martin Street became known publicly, Finlayson was Armidale’s leading commercial and residential builder.  However, the public announcement caused “a furore”.  The announcement and extensive subsequent publicity led to a strong reaction by the public against Finlayson as a builder of a residential development upon land contaminated with the carcinogenic agents, creosote (containing toxic polycyclic aromatic hydrocarbons) and copper chrome arsenate (containing arsenic).  As a consequence, Finlayson’s residential building business came to an abrupt end.  His Honour accepted evidence that Finlayson’s name as a residential builder was “mud” after the contamination became known and that effectively led to the termination of the residential building side of Finlayson’s business.  However, as a result of Mr Finlayson’s high reputation for efficiency and for superior workmanship, Finlayson nevertheless managed to remain Armidale’s leading commercial builder.

37                  His Honour, in reliance on Gates v The City Mutual Life Assurance Society Limited (1986) 160 CLR 1 at 13, approached the lost profits claim on the basis of conjecturing -

“…what, had the Council not been negligent, would have happened, and what profits the applicant would have earned from the business opportunity represented by its position in the residential building market at Armidale.”

38                  Before Burchett J the parties presented their evidence and submissions on the lost profits claim on the basis that his Honour’s approach was correct.  In its written submissions on the appeal, the Council accepted that his Honour had correctly stated the issue for him to determine in order to value what the respondent had lost by reason of the Councils’ negligence.

39                  The claim for lost profits was a claim for “stigma compensation” (see Mahmud v Bank of Credit and Commerce International SA [1998] AC 20 at 52-53 per Lord Steyn) based on Finlayson’s loss of reputation.  Whilst there may be much to be said for the view that Finlayson's claim for loss of earning capacity was, in truth, a claim for loss of the goodwill of its residential building business, that was not the basis upon which the matter was contested either before Burchett J or on appeal.  Ultimately, the appropriate measure of Finlayson’s loss was left as a question of fact for his Honour to determine on the evidence and submissions presented to him.  It was not disputed before us that, in that regard, the contest before his Honour related to how the lost profits were to be assessed.

40                  His Honour found that damage to Finlayson’s reputation was foreseeable and that the requisite relationship of proximity existed between the Council and Finlayson with respect to the negligent class of act and the particular kind of damages which the plaintiff has actually sustained (see Hawkins v Clayton (1988) 164 CLR 539 at 576 per Deane J and at 595 per Gaudron J, and Bryan v Maloney (1995) 182 CLR 609 at 624 per Mason CJ, Deane and Gaudron JJ).  His Honour said:

“In my opinion, it was foreseeable, when the Council issued the relevant development approvals, that they would be acted upon, as the applicant did act upon them.  It was also foreseeable that if a developer, such as the applicant, developed the land and erected residential housing on it in its polluted state, that developer’s reputation in Armidale might well suffer.  It is not, of course, necessary that the Council should have been able to foresee the precise train of events, so long as the type of damage was foreseeable, as I hold it was.  Does the doctrine of proximity limit the recoverability of damages of this kind, which are plainly not remote in the ordinary sense (cf. Coroneo v Kurri Kurri and South Maitland Amusement Company Limited (1934) 51 CLR 328 at 343-344)?  For the reasons already given in my earlier judgment, and particularly because of the Council’s statutory obligation to deal with this very problem of unsuitability of the land resulting from a particular risk (the risk of pollution), because of the applicant’s reliance on the Council which was in a dominant position to determine whether there was a risk and what should be done about it, and because of the Council’s active role in the creation of the situation, I find that a relationship of proximity between the applicant and the Council imposed on the Council a duty of care which required it to have the applicant’s economic interests in mind when it considered granting development approvals.”

41                  The steps taken by his Honour in assessing lost profits in the sum of $500,000 may be summarised as follows:

1.                  The claim for lost profits, being damages for deprivation of a commercial opportunity, was to be ascertained by reference to the Court’s assessment of the prospects of success of that opportunity had it been pursued (see Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355 per Mason CJ, Dawson, Toohey and Gaudron JJ).  In the present case the Court was to make an estimate of profits that would have been earned which takes account of the possibilities, either way, in respect of those profits being earned, and, after doing so, assess the degree of probability that the relevant events enabling the hypothetical profits to be earned, would have occurred, or might occur, and adjust its award of damages to reflect the degree of probability (see Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 at 642-643 per Deane, Gaudron and McHugh JJ).

2.                  The question was what compensation should be allowed in respect of the profits which Finlayson would have earned from its residential building business had the Council’s negligence not destroyed its opportunity to earn in that way.

3.                  Finlayson’s claim was for lost profits calculated as having a present value as at 30 June 1995 in the sum of $977,721.  The claim, which was stated to be a calculation “of the diminution in earning capacity”, was on the basis of a number of assumptions one of which was that the loss was continuing and would continue until the year 2000 when Mr Finlayson would be 65 years of age and might retire.  That, and other assumptions, and the manner in which the claim was calculated were contested before, and then carefully considered by, his Honour in his reasons for judgment.

4.                  After emphasising that any estimate of the lost opportunity to make profits from the residential building side of Finlayson’s business is not exact and that the Court is to look “at the hypothetical future that the applicant would have had”, Burchett J concluded:

“In principle, it is better to make the one assessment of the whole of the lost profits, taking account as best the Court may of the various contingencies and uncertainties.  The Court should also bear in mind that the applicant would have had to expend time and effort to realize the value of its business opportunities.  By the same token, it would have had the possibility of improving its market share and its level of profit.  Taking all these matters into account, I have come to the conclusion that the applicant’s loss of the opportunity to earn profit by the residential building side of its business would be fairly represented by an award of the sum of $500,000.00.”

42                  Primarily, the judgment for lost profits was attacked on the grounds that the lost profits were not caused by the negligent conduct of the Council and, in any event, were too remote.  Rather, so it was said, the damage was caused by public misapprehension and media publicity.  Senior Counsel for the Council submitted that a common sense approach to causation (see March v E and M H Stramare (1991) 171 CLR 506) should lead to the conclusion that the lost profits were not caused by the Council’s negligence.

43                  The problem with that submission is that it ignores the findings, which were not challenged, made by his Honour.  His Honour was satisfied that it was foreseeable that a developer such as the applicant, developing the land the subject of the relevant development approvals and erecting residential housing on that land in its polluted and contaminated state, was likely to suffer harm to its reputation and that, when that precise event occurred, the loss of profits flowing from that damage were “plainly” not remote.  That conclusion was reinforced by the conclusions to which we have referred earlier in these reasons for judgment concerning the relationship of proximity between Finlayson and the Council which imposed on it a duty of care which required it to have Finlayson’s “economic interest in mind when it considered granting development approvals”.

44                  In Pyrenees Shire Council v Day, above, at 339 Brennan J observed that to sheet home liability to the alleged wrongdoer for pure economic loss the chain of causation is established by showing that some act or omission on the part of the alleged wrongdoer induced the plaintiff to act or to refrain from acting in the way that caused the particular economic loss the plaintiff claimed to have suffered.  Burchett J found that Finlayson had proceeded to sub-divide and build a residential development on contaminated land in reliance upon what the Council had negligently done.  In that context, the inevitable publicity in relation to the land being contaminated and the economic harm Finlayson suffered from it could not be said to be a novus actus interveniens or not to have been caused by the Council’s negligent conduct.  As was pointed out by senior counsel for Finlayson, the harm to Finlayson’s reputation as a developer did not come about by reason of any public misapprehension or misleading or unfair media publicity.  It came about because Finlayson came to be known to be the developer that constructed residential housing on polluted and seriously contaminated land.  Senior Counsel’s analogy of publicity of a restaurant selling food to the public containing salmonella poisoning was not inapt.

45                  In substance, his Honour concluded that the Council’s negligence was the effective cause of Finlayson’s loss of reputation and residential business.  His Honour’s approach to causation was essentially a question of fact to be answered by reference to common sense and experience: see March v E and M H Stramere.  His Honour’s conclusion has not been shown to have been reached by reason of any error of law, fact or principle.  The conclusion Burchett J reached was not only open to his Honour on the evidence before him but, in our view, was plainly correct.  There is no substance in the challenge to his Honour’s findings on the basis of remoteness or causation.

46                  The second ground upon which his Honour’s assessment of the claim for lost profits was attacked was that his Honour had quantified a loss of profits claim rather than the loss of opportunity to earn profit which was the case he was required to determine.  It was said that his Honour had failed to apply the test he had set for himself in valuing loss of opportunity.

47                  In our view, the challenge does not do justice to his Honour’s reasons.  Although in certain passages Burchett J made reference to his endeavour to assess the whole of the lost profits, his Honour made it quite clear that in doing so he was taking into account “as best the Court may of the various contingencies and uncertainties”.  A fair reading of his Honour’s reasons makes it quite clear that his Honour was doing precisely what the parties had agreed the Court was to determine namely:

“…what, had the Council not been negligent, would have happened and what profits the applicant would have earned…”

48                  In answering that question his Honour discounted Finlayson’s claim for lost profits from $977,721 to $500,000 by reason of the contingences and uncertainties to which he referred.  It is plain that in doing so his Honour was valuing the deprivation of the commercial opportunity lost to Finlayson by reason of the Council’s negligence and was not quantifying a loss of profits as such.

Remediation

49                  The claim for remediation costs related to the seven lots at West Martin Street that were owned and occupied by Finlayson.  Finlayson claimed that the Environmental Protection Authority would be likely to exercise its power under s 35 of the Environmentally Hazardous Chemicals Act 1985 (NSW) to require that remedial action be taken in respect of the contamination of the land caused by chemicals or chemical waste and that it would be liable for the costs of remediation of part of the land it had acquired as a consequence of the Council’s negligent development approvals.

50                  It was accepted by the parties that as a result of the contamination the land “will never be used again for residential purposes”.  The Council made a formal admission that the land was not presently suitable for residential or non residential use and would not be suitable until remediated and/or appropriately tested and approved for residential use.  Burchett J also made findings in his first reasons for judgment to the effect that the contamination presented significant health hazards and, in particular, health hazards for children.  At the hearing all parties accepted that the land will not, despite its zoning, be used for residential purposes.  His Honour considered that its most likely use would be open space or park land or some sporting use.  Finlayson claimed that cost of remediation for that use was estimated to be in excess of $600,000 rather than a significantly larger amount which would have been necessary if the land was to have a residential use.  His Honour concluded that remediation measures were “very probable” for open space, park land or a sporting use.  His Honour said:

“On the evidence, I think it is very probable that the Environment Protection Authority will require all of these measures to be taken, but that some way will be found to have the work carried out in conjunction with remedial measures in relation to the land now owned by the Commonwealth.  It is necessary, however, to allow for the possibilities that, on the one hand, less stringent measures will be required, or on the other hand, higher costs than presently anticipated will be involved (it being accepted that the results of site testing so far have not conclusively defined the full extent of the environmental threat posed by it).  Bearing all these matters in mind, I think the proper sum to allow in respect of this head of damage is $400,000.00.”

51                  The main challenge to his Honour’s approach to remediation was that he did not take into account the chance that the Authority would not exercise its power at all under the Act and therefore discount the award of damages on the basis of that chance.

52                  His Honour’s starting point was his finding that it was “very probable” that the Authority would exercise its powers.  We were not taken to any evidence that suggested that there was any real possibility or likelihood that no remediation would be required.  His Honour then had regard to the contingencies and uncertainties which he considered to be realistic and after doing so concluded that it was appropriate to discount the claim for remediation to $400,000.  In our view, his Honour considered the chances that he regarded, on the evidence, as realistic and appropriate to be taken into account.  It has not been shown that his Honour erred in doing so or in the conclusion he reached.

53                  A new ground was sought to be argued by the Council before the Full Court.  It was said that his Honour failed to consider the effect of the Contaminated Land Management Act 1997 (NSW) which was assented to on 17 December 1997, fourteen days before the damages judgment.  Although the Act was not proclaimed until 1 September 1998, it was said that it was relevant as under s 21 the Authority could only order remediation if the site has –

“…been found to be contaminated in such a way as to present a significant risk of harm.”

54                  The Council contended that s 21 rendered significantly more likely  the prospect that no remediation would be required.  There is a difficulty with this submission.  Although the Act was assented to prior to his Honour’s reasons for judgment, no submission was made to his Honour that he should take it into account.  Accordingly, no evidence was presented, or submissions made, by the parties as to whether the contamination was such as to “present a significant risk of harm”.  Thus, the Council cannot properly contend that his Honour erred in not having regard to the Act or in failing to make a finding as to whether, in the context of s 21, the risk of harm is significant.

55                  In any event, we are of the view that his Honour’s findings, particularly in relation to children, are such that he did in fact approach the issue of remediation on the basis that the contamination presented a significant risk of harm.  Indeed, Council’s contention is difficult to reconcile with its formal admission to his Honour that the land is “not presently suitable for residential use”.  Thus, even if the point had been raised at trial we have little doubt that his Honour would have determined it adversely to the Council.  It was open to the Council to raise the Act before his Honour but, without explanation, it did not do so.  Further, permitting the issue to be raised would probably require the re-opening of the case.  Also, we are of the view that no injustice is likely to arise by reason of the refusal to grant the leave sought, given our view that his Honour’s conclusions are to the effect that the contamination does present a significant risk of harm.  In these circumstances, leave to raise the issue for the first time on appeal should be refused.

56                  We would add that other issues in relation to damages were sought to be raised by the Council which appeared to differ from the way in which the matter was pleaded and argued by it at trial.  One example was an endeavour to submit that Finlayson had contracted to purchase Lot 11 at West Martin Street without a condition which would have permitted rescission by Finlayson had the Council not acted negligently.  A number of issues were said to arise from this submission but it was accepted that it raised issues of fact and law which were not explored at trial and would have to be the subject of an application for leave to raise the ground as a ground of appeal and also to add to it as a ground in the notice of appeal.  It was put to Senior Counsel for the Council that it was only appropriate for that matter to be considered by the Full Court if a formal application for amendment was made.  No such application was formulated or made.

57                  The appeal in relation to interest was not pursued.  Accordingly, for the above reasons we are of the view that the grounds of appeal pursued by the Council in relation to the damages awarded by his Honour must fail.

ORDERS ON THE APPEAL

58                  The appeal is dismissed, with costs.

Associate:

Dated:              29 March 1999