In case you missed it: $9.4 million awarded to a neighbour impacted by contamination

On 21 August 2024, the Supreme Court of NSW handed down its decision in Seaforth Securities Pty Limited v Zoya Investments Pty Limited [2024] NSWSC 1061, finding that the plaintiff (Seaforth) was entitled to $9.4 million in damages from the defendant (Zoya), including $700,000 in exemplary damages.

By way of background, a petrol station business was conducted on Zoya’s property, and hydrocarbon contamination migrated to the Seaforth property. Zoya did nothing to prevent or address this, notwithstanding multiple requests by Seaforth, regulation by the NSW Environment Property Authority (the EPA) and a conviction in the Land and Environment Court of NSW (LEC). Zoya was found liable to Seaforth under the torts of nuisance and negligence.

This case contains several useful reminders, including:

Plaintiffs must precisely articulate the counterfactual

A plaintiff claiming damages under the torts of nuisance and negligence must clearly identify their "counterfactual". That is, what the plaintiff says would have occurred but for the negligence/nuisance of the defendant.

This can be a complex exercise. For example, Zoya was not responsible for all of the contamination within the Seaforth site, as a portion of the contamination migrated before Zoya became the owner of the “source site”. As such, it was necessary for Seaforth to identify, amongst other things:

• The date from which Zoya could be held responsible: Being a reasonable time after Zoya purchased the source site or, at the very latest, a reasonable time after Zoya was notified of the problem by Seaforth.
• The losses that would have been avoided had Zoya acted reasonably: The Court accepted that, but for Zoya’s wrongful conduct, Seaforth would not have incurred remediation costs and its site would not be impacted by substantial contamination.

Diminution in value is the preferred measure of damages

If you have incurred reasonable expenses responding to a defendant’s wrongful conduct, then you will be entitled to be reimbursed for those expenses. However, the measure of damages is more difficult when it concerns compensation for property damage.

While reinstatement costs can be available in some circumstances, the Court held that the preferred means of compensating a plaintiff for property damage is diminution in value. That is, the sum which represents the decrease in value of the property because of the contamination.

In coming to this conclusion, the Court noted that this approach avoids the uncertainties associated with determining the appropriate remediation method and estimating the associated costs. This approach is more likely to result in an accurate assessment of damages.

Exemplary damages can be awarded, even if there have been criminal proceedings

Exemplary damages are intended to punish defendants whose conduct has shown a “…conscious and contumelious disregard for the plaintiff’s rights”,¹ and are awarded with a view to deterring similar conduct in the future. Whilst relatively common in other jurisdictions, exemplary damages are rare in Australia.

In finding that Zoya’s behaviour warranted an award of exemplary damages the Court noted, amongst other things, that:

• Zoya “..continued to deliberately and flagrantly violate Seaforth’s property rights by discharging hydrocarbons onto its land.”,² including in circumstances where it knew that Seaforth was attempting to remediate its own property.
• Zoya maintained blanket denials of liability, in the face of compelling evidence to the contrary.
• There is a presumption against awarding exemplary damages where there has already been a successful criminal prosecution for the same conduct. Although Zoya had been fined $320,000 by the LEC for failing to comply with a management order issued by the EPA, this related to a very specific breach, and the Court considered that exemplary damages were still available.

Unfortunately for Seaforth, notwithstanding overwhelming findings in its favour, this is likely to be a hollow victory, as a liquidator has been appointed to Zoya.

Some tips to reduce the risk of a similar situation include the following:

• When conducting due diligence, do not limit your enquiries to the land to be acquired. Look at the surrounding properties and consider whether any of their current or historical operations present a risk to your site.
• As soon as you identify that a surrounding property is or has the potential to impact your property, swiftly develop a strategy, including for:
  • Communicating with the responsible party.
  • Involving regulators.
  • Ensuring you can comprehensively establish your losses.
• Assess the risk that the responsible party is or may become insolvent, and consider (amongst other things):
  • Engaging in early settlement discussions, with a view to recovering some compensation at an early stage and with minimal expense.
  • Investigating whether any form of security (such as a personal guarantee or statutory charge) and/or pre-judgement orders may be available.
  • Whether a debt can be registered in insolvency proceedings.

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