PPK Willoughby Pty Ltd v Baird

1. [1]

   HIS HONOUR: In late 2009, PPK Willoughby Pty Ltd purchased a 4.78 hectare site in Willoughby known as Willoughby Market Gardens for $25.5M. The defendants, who are collectively the partners in the law firm HWL Ebsworth, acted for PPK as its solicitors on the transaction. In due course, PPK constructed a large number of town houses upon the land which they successfully marketed and sold. However, PPK alleges that as the result of HWLE’s negligence and misleading and deceptive conduct, it was unaware until after it had it completed the original purchase of the property that it was adversely affected by flood control restrictions which necessitated unforeseen work and the associated expenditure of large sums of money before it could be developed as originally intended.

2. [2]

   PPK frames its case in two ways in accordance with the events that occurred. First, PPK alleges that HWLE was retained to carry out a due diligence analysis of the property but that the due diligence report prepared by it was misleading in a material respect, namely that paragraph 4.1(h) indicated that the land was unaffected by flood control problems, which was contrary to the true position. Secondly, PPK maintains that HWLE was negligent in that it failed prior to exchange of contracts to obtain up to date s 149(2) certificates from the Willoughby Council, as the responsible authority, which would have revealed that the land was adversely affected by flood control requirements. PPK says that in either case it would not have entered into the contract if it had not been misled, or alternatively if it had been properly advised, about the flood control problems and that it suffered loss as a result.

3. [3]

   HWLE has admitted that the due diligence report prepared by it was wrong and that it was for that reason misleading and deceptive. HWLE denies that it was negligent as alleged and maintains that it was specifically instructed not to obtain s 149(2) certificates for any of the parcels of land that made up the property. However, in whichever way PPK propounds its case, HWLE contends that PPK’s claim for losses is misconceived and that far from incurring any loss or damage as the result of its conduct or alleged negligence, PPK in fact suffered no loss at all, or alternatively suffered no loss that was caused by anything it did or failed to do. In particular, HWLE contends that the sum realised on the sale of the town houses exceeded the total costs of acquisition and development of the land so that PPK’s net position was in fact better in having purchased the land and completing its development than if it had not done so. In contrast, PPK says that its loss should be calculated as the difference between what it paid for the land and its actual value together with the recovery of costs attributable to the delays occasioned by disruption to the project in performing work necessary to satisfy the council’s flood control requirements and related matters.

Preliminary matters

1. [4]

   These proceedings were commenced as long ago as 2012. The fact that the hearing of the principal proceedings did not conclude until October 2020 is possibly regrettable but is unrelated to this Court’s willingness or ability to hear the proceedings much earlier. It is sufficient for present purposes to observe that the issues for determination that are raised by PPK’s pleading developed and changed over time: the case ultimately heard by me was different to the claim that was originally pleaded.

2. [5]

   It is no longer in issue between the parties that PPK did not suffer or sustain what have been described as trading losses. In other words, it is accepted that by the time that PPK had ultimately sold the last of the town houses constructed by it on the property, it was in no worse financial position than it was when it entered into the original contract to purchase it. Although PPK at one time foreshadowed an allegation that it had sustained a trading loss, in the sense that the realised value of the development was exceeded by the costs of acquisition of the property and construction costs, as well as the associated costs of finance and the like, that claim was ultimately not pursued. Whether or not that approach was in response to HWLE’s insistence that PPK had not proved and could not prove a net loss from the development, the abandonment of the trading loss claim either spawned or promoted to significance a claim for losses caused by HWLE’s conduct or negligence assessed on a Potts v Miller basis. Indeed, this became the sole basis upon which PPK maintained that its damages should be calculated.

Potts v Miller

1. [6]

   Because PPK accepted that it could not establish that it had suffered an overall trading loss as the result of purchasing the property and undertaking the development, which approach to the calculation of loss it specifically abandoned, it was forced to contend that its claim for damages should be assessed by reference to the principles in Potts v Miller (1940) 64 CLR 282; [1940] HCA 43. That is to say, the measure of PPK’s loss, applying this approach, would be the difference between the amount paid for the property and its real value at the date of acquisition. Necessarily inherent in this approach is an acceptance of the proposition that PPK would not have proceeded with the transaction if it had been aware of the true position. As will be apparent, if this method of the calculation of loss applies in the present case, the fact that PPK did not incur an overall trading loss would not be an impediment to the recovery of any damages that could be established on this approach.

Does Potts v Miller apply?

1. [7]

   However, in my view, Potts v Miller does not provide the correct approach to the determination of the question of whether or not PPK suffered any loss in this case.

2. [8]

   Clearly enough, PPK claims that it has suffered pure economic loss. In order to determine whether a plaintiff has suffered economic loss, it is necessary to have regard to the precise interest alleged to have been infringed by a defendant’s wrongdoing. In Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413; [1999] HCA 25, Gaudron J said this at 424:

3. [9]

   PPK purchased and developed the property. In the language of Kenny & Good, that transaction involved both burdens and benefits. The burdens included the purchase price of the land, construction costs and other expenditures, including the cost of finance. The benefits included the proceeds from the sale of the developed properties. The due diligence report and the advice received from HWLE were provided for the purpose of deciding whether to embark upon the development project with a view to earning a profit, or were otherwise directly related to PPK’s decision to do so. In accordance with an hypothetical consideration of this approach, HWLE’s conduct infringed PPK’s interest consisting in its right and entitlement to know legal matters that were arguably relevant to the likely profitability of the project. Any loss sustained by PPK and claimed as damages allegedly recoverable from HWLE must be calculated as the overall loss from deciding to proceed and develop the property. The fact that PPK may choose to characterise its losses differently for internal or group accounting purposes does not alter that position.

4. [10]

   The correctness of the Kenny & Good approach was confirmed in what the High Court said in Henville v Walker (2001) 206 CLR 459; [2001] HCA 52. That was a case concerning a development project undertaken in reliance upon negligent advice. Hayne J described the loss sustained by Mr Henville as the amount by which the expenditures exceeded the receipts from the completed development, or what may be described as the overall loss from the transaction. His Honour said this at [159]-[162]:

5. [11]

   HWLE also drew attention to Manwelland Pty Ltd v Dames & Moore Pty Ltd [2001] QCA 436. In that case the plaintiff purchased development land for $810,000. It had always been the plaintiff’s intention to develop the site and sell the developed properties for a profit. The plaintiff purchased the land in reliance upon advice about the cost of remediating contamination which was known to affect the site. Some time after it purchased the land, the plaintiff discovered that the advice it had received had not been given with reasonable care: the true cost of remediation was much higher. By the time of the trial against the negligent adviser, the plaintiff had completed the project, although with modifications to accommodate the true cost of remediation, and had sold most of the developed properties. Rather than the overall profit that the plaintiff had hoped to achieve, the plaintiff sustained a loss of some $10,000 odd. After considering the applicable authorities, including Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; [1992] HCA 55, Kenny & Good and Henville v Walker, the Court held that the correct method of measuring the plaintiff’s loss was to compare the costs that were incurred from acquiring the land in reliance upon the negligent advice with the receipts or gains from the acquisition. The acquisition of the land was both the cause of the costs and of the gains. Applying those principles, the Court found that the plaintiff was entitled to compensation for its loss of $10,000 but no more.

6. [12]

   PPK is asserting a loss from a transaction that it contends it would not have entered into but for HWLE’s breach of duty or misleading conduct. However, if the land were ever to be exploited by anyone at any time, that hypothetical purchaser would in the circumstances have been faced with the very obstacles with which PPK was confronted. The costs of development were always going to be the same whether or not PPK knew of the problems beforehand. The costs of removing the flood control restrictions would have been incurred by any developer. On this analysis, PPK would not have “lost” anything.

7. [13]

   Therefore, even if I accept that PPK would not have purchased the property if it had been told of the adverse affectation, the fact that it did purchase the property and made a profit means that it suffered no loss. It is in that sense actually better off than if it had not proceeded. The position would be different if it had unwillingly purchased the property and had been forced to proceed with the development to mitigate its loss but, contrary to what in fact occurred, did not even recoup its outlay. That was the position in Manwelland.

8. [14]

   Accordingly, if I were to accept Mr Webb’s evidence that he was wrongly advised, which HWLE concedes, and that PPK would not have gone ahead with the purchase if it had been aware of the flood control problems, PPK has clearly been foist with a transaction it did not want. However, it did not cause PPK to incur any loss because the project made a profit.

9. [15]

   Alternatively, if I were to find that Mr Webb, and hence PPK, would have gone ahead even if correctly advised, or despite any advice that it might have received, any loss that resulted, which HWLE denies in any event, would not have been caused by the breach, but by PPK’s own decision to proceed.

10. [16]

    By (understandably) limiting its claim for damages assessed in accordance with one view of what flows from Potts v Miller, PPK contends that my inquiry should be limited or restricted to the situation as it prevailed immediately upon entry into the transaction, contrary to the approach explained by the High Court in Kenny & Good. The High Court has made it clear that the so-called Potts v Miller principles, which have always been applied flexibly, do not apply where the transaction is one involving the purchase of land for the purposes of development and resale. Gleeson CJ said as much in Henville v Walker at [22] and [26] as follows:

11. [17]

    This question was squarely raised in the Queensland Court of Appeal in Manwelland. The Court specifically rejected the claim based upon the difference between the amount paid and the actual value because the plaintiff there, as here, had always intended to develop and resell the land. As already noted, the Queensland Court of Appeal held that the correct measure of the plaintiff’s loss was the $10,000 suffered from the whole transaction, not just the initial purchase. It is instructive to record the manner in which the Court in Manwelland reasoned to that conclusion at [14]-[17] as follows:

12. [18]

    I am unable to discern any relevant difference between that case and the present. In those circumstances, it does not matter whether PPK instructed HWLE not to obtain s 149(2) certificates, or whether I accept or reject Mr Webb’s evidence about what he would have done if correctly advised, or whether PPK can or cannot establish that the actual value of the land was or was not different to the price it paid, or indeed several other contested factual matters. None of these matters ultimately achieves any significance because Potts v Miller does not in my opinion provide a fertile route to a conclusion that PPK sustained any loss for which the defendants are possibly liable.

Conclusion

1. [19]

   PPK submitted in writing as follows:

2. [20]

   In my opinion, having regard to the way in which this case was eventually pleaded and conducted, PPK cannot establish and has not established that it has suffered any loss at all and certainly not a loss that was caused by any alleged breach of duty or misleading and deceptive conduct by HWLE: a reduced profit by reason of unexpected and unwanted costs of development does not equate to a loss for which the defendants are liable. In forming and expressing that view, I appreciate that the parties’ detailed oral and written submissions have concentrated upon all manner of issues to which the evidence directed attention in the course of the hearing. I acknowledge that these issues were strongly contested and, but for the conclusion I have reached upon the correct method of assessing PPK’s entitlement to damages, are issues that I would have been required to decide. I have determined that it is unnecessary to do so. However regrettable that circumstance may be or may become, I consider that PPK’s case falls at the first hurdle: it entered into a transaction to purchase and develop land that was potentially adversely affected by the Willoughby Council’s flood development control plans, but in the events that occurred, PPK developed the land and sold it for a profit. The fact that it did so in circumstances, on its case, that it would have avoided if it had been properly advised is, according to the authorities, beside the point. That is because, looking at the transaction as a whole, PPK did not sustain a loss in doing what it did.

3. [21]

   It follows that there should be judgment for the defendants with costs.