Do your diligence: recent case timely reminder for contamination warranties and disclosure obligations

The recent NSW Court of Appeal case, 191 Bells Pty Ltd v WJ & HL Crittle Pty Ltd [2024] NSWCA 221, is a reminder that buyers should actively seek specific information from sellers during the due diligence process. Sellers do not have a positive obligation to ‘guess and disclose’ what may be relevant for a buyer to complete its due diligence.

An obligation on the seller to assist “as far as possible” in the due diligence process does not impose a positive obligation on the seller to voluntarily disclose everything that may be relevant to the due diligence process, including any contamination of the land being sold.  In this case, non-disclosure of known contamination did not amount to misleading and deceptive conduct under s18 Australian Consumer Law (ACL).

Background

191 Bells Pty Ltd (Buyer) and WJ & HL Crittle Pty Ltd (Seller) entered into a put and call option deed for a property located in Meroo Meadow, NSW (Property) (Option Deed).

Prior to entering into the Option Deed, the parties were subject to a 3-week due diligence period under an exclusivity agreement (Exclusivity Agreement) during which draft environmental reports were obtained and annexed to a draft contract of sale in the Option Deed.¹

Clause 3 of the Exclusivity Agreement contained provisions for the Seller to support the Buyer’s due diligence efforts. These provisions required the Seller to:

• Allow the Buyer access to such information held by the Seller necessary for completing due diligence in relation to the proposed purchase.
• Assist the Buyer “as far as possible” in the due diligence process.
• Ensure that information provided to the Buyer for the purpose of auditing and enquiries was accurate and not misleading.
• Allow the Buyer access to the Property to carry out on-site due diligence and land investigations.²

After the Option Deed was signed, the final environmental reports identified significant contamination of the Property including waste burial pits containing asbestos, tyres and deceased animals.³ These items were buried in the pits by a director of the Seller, though the primary judge accepted that the director had no knowledge of the extent of contamination caused by (or the presence of asbestos in) those items.

The Buyer claimed that the Seller’s failure to disclose the land contamination identified in the finalised reports, some of which the Seller was aware of, amounted to misleading and deceptive conduct under section 18 of the ACL⁴ and sought to have the Option Deed declared void.

The Buyer contended that:

• The obligation imposed on the Seller to assist “as far as possible” meant it should have voluntarily disclosed the contamination; and
• The disclosures in respect of the condition of the Property contained in a draft sale contract annexed to the Option Deed amounted to a positive misrepresentation and gave rise to a ‘reasonable expectation’ that there were no other matters affecting the Property which needed to be disclosed.

The claim was dismissed at first instance, with the primary judge concluding that the Seller had not engaged in misleading or deceptive behaviour, nor did the provisions impose any obligation on the Seller to disclose such contamination.⁵

The Court of Appeal upheld the primary judgment and reiterated that no clause in the Exclusivity Agreement mandated the Seller to inform the Buyer of the Contamination.⁶ The Court of Appeal found that the disclosures in the draft sale contract did not create a reasonable expectation of disclosure, and did not amount to a ‘half truth’ concerning the presence of contamination on the Property. That is, there was no conduct which was misleading or deceptive under section 18 of the ACL.

Other notable takeaways

1. A seller’s obligation to disclose contamination hinges on the transaction documents’ explicit language. In the absence of any clear contractual obligation, the Courts are less willing to intervene to imply terms into contracts. Agreements should be drafted with clauses that explicitly define the scope and requirements for disclosure.
2. Offering assistance with due diligence “as far as possible” does not create a positive obligation for the Seller to voluntarily disclose information. Buyers need to actively seek the information required to complete their due diligence.
3. The transaction documents should include appropriate warranties and clear language on what constitutes true and fair disclosure.
4. Buyers are ultimately responsible for the thorough vetting of the property. This emphasises the need for rigorous, timely due diligence and specialised environmental assessments. Experts should be engaged early on to ensure all potential issues are identified and provided for in transaction documents, prior to execution.
5. The mere absence of disclosure does not inherently constitute misleading or deceptive conduct under the ACL. Intentional concealment or purposeful misrepresentation must be established for such a claim. Parties should ensure that all actions and communications during property transactions remain transparent and defensible.

We are committed to delivering outcomes that matter to you. If you have any further questions or require assistance with issues on contamination warranties, due diligence, or disclosure obligations, do not hesitate to reach out to Margot King.

¹191 Bells Pty Ltd v WJ & HL Crittle Pty Ltd [2024] NSWCA 221 [34]-[35].

²191 Bells Pty Ltd v WJ & HL Crittle Pty Ltd [2024] NSWCA 221 [31].

³191 Bells Pty Ltd v WJ & HL Crittle Pty Ltd [2024] NSWCA 221 [44].

⁴191 Bells Pty Ltd v WJ & HL Crittle Pty Ltd [2024] NSWCA 221 [2].

⁵191 Bells Pty Ltd v WJ & HL Crittle Pty Ltd [2024] NSWCA 221 [48]-[80].

⁶191 Bells Pty Ltd v WJ & HL Crittle Pty Ltd [2024] NSWCA 221 [18].