Home » MISLEADING AND DECEPTIVE CONDUCT AND PRE-CONTRACTUAL NEGOTIATIONS: AN UPDATE

The recent case of Noor Al Houda Islamic College Pty Limited v Bankstown Airport Limited [2005] illustrates the extent to which section 52 of the Trade Practices Act continues to erode the certainty of commercial contracts. The case also reveals that, where one party to negotiations can be classified as vulnerable, that the law of negligence also undermines the generally accepted position that each party must protect their own interests during negotiations and make their own inquiries. The way that the law of negligence is now being used by the court to attack the sanctity of contractual bargains is evidenced in the following comment from High Court Judge, Michael McHugh. “One of the assumptions of the law of contract…is that the parties can bargain to protect their interests. A plaintiff who is vulnerable - for whatever reason - cannot do this in any meaningful way. In its quest for corrective justice, the law of negligence may be able to fill the gap which the law of contract has left.” Material Facts Noor Al Houda Islamic College (the “College”) leased a site from Bankstown Airport. During negotiations for the lease one of the Airport employees, Ms Williams, pointed out that there were some problems with the site from the point of view of setting up a school. She referred to the fact that it was a noisy site and there were no services available. No representations were made by Bankstown Airport that the site was suitable for a school. Critically, at the time the parties were negotiating the lease Bankstown Airport was aware that the site was contaminated and did not advise the College of the contamination. It is also important that there was an exclusion clause in the lease which stated that Bankstown Airport was not liable for any loss or injury to the College unless the loss or injury was caused by Bankstown Airport’s negligence or default. There were also numerous clauses that stated that the College had to make its own inquiries as to the suitability of the site for the College and the Airport made no representations as to the suitability of the site. The Argument The College argued that by failing to advise the College that the site was contaminated the Airport had: engaged in misleading and deceptive conduct in breach of section 52 of the Trade Practices Act; and breached its duty of care and was liable in negligence for the pure economic loss suffered by the College as a result of the non disclosure. What did the Court hold in respect of the section 52 argument? Essentially the question was whether failure to disclose that the site was contaminated was misleading and deceptive in the absence of any positive representations about the suitability of the site and in circumstances where the Lease specifically stated that the College had an obligation to make its own inquiries about the suitability of the site. The Court held that, because the Airport was aware that the site would be used for sensitive purposes (i.e. a school) the circumstances gave rise to a reasonable expectation that the College would have been told about the risk of contamination. Importantly the Court held that where something has not been disclosed during pre contractual negotiations the party who has not made the disclosure will have engaged in misleading and deceptive conduct if the circumstances give rise to a reasonable expectation that the disclosure would be made. The non disclosure does not have to be deliberate or intentional. It is important to note that Ms Williams disclosure of many of the disadvantages of the site was important in creating a reasonable expectation on the part of the College that any risks of contamination would be disclosed. What did the Court hold in respect of the negligence argument? In addition to the above, the Court held that, having regard to the vulnerability of the College, the Airport had a duty of care to the College. The Airport breached this duty of care by failing to warn that the site was contaminated. Accordingly, the College could recover damages from the Airport even though the College could only establish that it had suffered pure economic loss by way of a downturn in its business as a result of the contamination. Conclusions and Comments The following are important points to keep in mind in negotiating a contract: If you want to make any disclosures at all about risks associated with the Contract they should be comprehensive and complete. Partial disclosure may give rise to a reasonable expectation that all disadvantages will be disclosed. The safest approach would be to make no disclosures and tell the other party to make their own inquiries and maintain this position throughout the negotiations. Taking the above approach would not manage the risk of you being negligent by failing to make disclosures in pre-contractual negotiations. Your contract should specifically exclude liability in negligence if commercially possible. This is particularly important where the other party to the negotiations could be classified as vulnerable. In these circumstances, the other party should be aware of what they are agreeing to. At the minimum you should recommend that they take legal advice on the Contract.