Don’t be misled into a false sense of security

Failure to disclose contamination: Does it amount to misleading or deceptive conduct?

There have been numerous cases where a landowner has failed to disclose information regarding contamination to an incoming purchaser or lessee, which has in turn resulted in a claim of misleading or deceptive conduct. 

In determining whether the landowner has in fact been misleading or deceptive, the Courts have weighed various factors, including the relative bargaining power of the parties, whether “half-truths” have been told and whether there was a reasonable expectation of disclosure. 

What makes this case unique is the fact that the vendor had an express obligation to assist the purchaser, and notwithstanding that obligation, the vendor was still entitled to remain silent as to the presence of contamination within the land. To find out why, read on.

Background

On 23 March 2024, the appellant, 191 Bells Pty Ltd (191 Bells or the purchaser), and the first respondent, WJ & HL Crittle Pty Ltd (WJ & HL or the vendor) executed a put and call option deed (Option Deed) in respect of land located in Meroo Meadow (Land).

Prior to execution of the Option Deed, the parties were subject to a three-week exclusivity period, as provided for by an exclusivity agreement (Exclusivity Agreement). The Exclusivity Agreement:

• Provided that WJ & HJL could not engage with any other party in relation to the sale of the Land.
• Contained a clause (cl 3) which placed obligations on WJ & HL, including to:
  • Allow 191 Bells access to such information held by WJ & HL as is necessary to complete the due diligence.
  • Assist 191 Bells as far as possible in the due diligence process.
  • Ensure the information provided to 191 Bells for the purpose of completing its audits and enquiries are accurate and not misleading.
  • Provide physical access to the Land for the purpose of carrying out on-site due diligence and investigation of the Land.

During the Exclusivity Period, JK Environments Pty Ltd conducted a screening of the Land and on 16 March 2022 provided a draft report to 191 Bells.

The draft report contained a statement indicating that localised impacts from contamination could be present, primarily around the existing/former buildings and structures, timber power poles or from localised filling or fly-tipping. The draft report stated that a detailed site investigation would be required to assess the associated contamination risks.

After entry into the Option Deed, JKE communicated to 191 Bells, by a final report, that the Land contained two localised waste burial pits, which were later confirmed by ENRS in subsequent reports to contain contaminants such as asbestos, tyres and deceased animals.

191 Bells commenced proceedings in the Supreme Court of NSW and then in the NSW Court of Appeal alleging that WJ & HL and/or its director had engaged in misleading and deceptive conduct under s 18, sch 2 of the Competition and Consumer Act 2010 (Cth) by:

• Failing to disclose the contamination present within the Land where there was a reasonable expectation of disclosure.
• Making disclosures as to the condition of the Land in the draft contract, which amounted to a positive misrepresentation that there were no other matters affecting the Land, namely contamination.

On 16 September 2024, the NSW Court of Appeal delivered its judgment and held that a failure to disclose contamination did not amount to misleading or deceptive conduct, because:

• The Exclusivity Agreement between the parties, which required the vendor to assist the purchaser “as far as possible” in the due diligence process, did not create a positive obligation to disclose all matters relevant to the due diligence process. Rather, it only required the vendor to provide accurate answers to the questions asked of it by the purchaser.
• There was nothing in the circumstances of the transaction that gave rise to a reasonable expectation that the contamination would be disclosed in the absence of a specific request by the purchaser. Put another way, there was nothing which required the vendor to volunteer information.

In addition, it was clear that the purchaser was on notice that the Land may be contaminated because of the screening report which it received from JKE. In these circumstances, it is difficult to see how the purchaser could claim that it was misled by the vendor’s silence in any event. 

Key takeaways

This case highlights that:

• Any written agreement that governs a due diligence must be drafted in plain and specific language, so that each party understands their rights and obligations. Unfortunately for 191 Bells, the NSW Court of Appeal held that the words in cl 3 of the Exclusivity Agreement did not actually impose an obligation of voluntary disclosure of anything that might have been relevant to the due diligence process.
• A selling party’s knowledge that the purchasing party is undertaking due diligence does not mean that the seller is required to voluntarily provide information to the purchaser. In fact, the NSW Court of Appeal held that just because WJ & HL and Mr Crittle knew that due diligence was being undertaken for contamination, this did not “elevate an obligation of assistance to a positive obligation of disclosure”.
• Consultants engaged in due diligence should (as was the case here) make it clear when their investigations are incomplete or preliminary in nature.
• Making decisions based upon preliminary investigations is risky because later and more detailed investigations may disclose the unexpected.

Please contact Sarah Mansfield, Special Counsel in our Environment and Planning Team if you would like any further information about this case and how it might be relevant to your particular situation.