Kane & Co (NSW) Pty Ltd v Idolbox Pty Ltd - [2024] NSWCA 278 - NSWCA 2024 case summary — Zoe

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Kane & Co (NSW) Pty Ltd v Idolbox Pty Ltd

[2024] NSWCA 278

Court of Appeal (NSW)|2024-10-25|Before: Kirk JA, McHugh JA, Parker J

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At a glance

Source facts

Court

Court of Appeal (NSW)

Decision date

2024-10-25

Before

Kirk JA, McHugh JA, Parker J

Catchwords

[1982] HCA 24 Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited and Another (2015) 256 CLR 104
[2015] HCA 37 Suttor v Gundowda (1950) 81 CLR 418

Source

Original judgment source is linked above.

Catchwords

[1982] HCA 24 Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited and Another (2015) 256 CLR 104[2015] HCA 37 Suttor v Gundowda (1950) 81 CLR 418

Judgment (17 paragraphs)

[1]

Background

The appellant, the purchaser under the contract, is a company controlled by Mr Dimitry Kane. Over the past 20 years, through companies and in his own name, Mr Kane has acquired, sold, and leased various service station sites in New South Wales.
The first respondent, the vendor, is a company owned by Mr Stephen Davidson. He is a motor mechanic with many years' experience of operating service station and automotive repair businesses.
The second respondent is the agent which acted for the first respondent on the sale of the land. The second respondent holds a deposit paid by the appellant pursuant to the contract for sale. For convenience, as the first and second respondents submitted a joint notice of appearance and were represented by the same solicitors and counsel, I will refer to the "respondents" collectively unless it is necessary to differentiate between them.
The land the subject of the proceeding is a commercial property of approximately 651 m² located in Randwick in the eastern part of Sydney. It has for many years been used as a petrol station and automotive repair workshop. According to the Planning Certificate annexed to the contract, the land is zoned R3 (medium density residential) under the relevant Local Environmental Plan. But it was common ground that the land has existing use rights which permit the use as a service station and automotive workshop to continue.
The first respondent decided to sell the land. It was to go to public auction on 24 November 2022.

[2]

The dispute as to the interpretation of Special Condition 22(b)

Special Condition 22 provides as follows: (a) The vendors must contribute $10,000 to obtain and provide a copy of an Environmental Report for the property within eight weeks from the contract date. All other costs due and payable for the Environmental Report are to be paid by the Purchaser; (b) If the Environmental Report indicates that the property does not fall within the NSW Environment Protection Authority guidelines in relation to the contamination levels in, on or under the property and which permits the property to be used as a Service Station then either party may rescind this contract by notice in writing to other party which clause 19 of the contract will apply. (c) "Environmental Report" in this clause means a Phase 2 Contamination Report for the property prepared by JBS&G Sydney Environmental Consultants and must test a minimum of six core holes in the workshop area. (d) This clause is for the benefit of purchaser and may be withdrawn by only the purchaser by notice in writing to the vendor or at any time. (Emphasis supplied.)
The sole issue in the appeal is the interpretation of the words underlined above: "and which permits the property to be used as a Service Station".
The construction the appellant advanced at trial was that the words "and which permit[s] the property to be used as a Service Station" should be read as meaning "notwithstanding it permit[s] the property to be used as a Service Station": J[12]. The primary judge rejected that construction. His Honour said that it would be the same in substance as simply deleting the phrase entirely.
The respondents submitted at trial that SC 22 should be construed as making the right to rescind conditional on the Report's indicating that the property cannot be used as a service station. The primary judge accepted that construction. His Honour held that the clause required the appellant to demonstrate "that the Environmental Report 'indicated' that the contamination levels presented in the Report were such that the property could not be used as a service station:" J[220]; see also at J[204], J[219].
The appellant submitted in this Court that the words "and which permit the property to be used as a Service Station" are satisfied if the applicable guidelines, "in some sense, 'permit' the property to be used as a service station or mechanical workshop." (AS [56]) The effect of the appellant's construction is that: SC 22(b) operates so that each of the parties has a right to rescind the Contract if the environmental report procured under SC 22(a) indicates (without more) that the property is affected by contamination levels that exceed the EPA guidelines that are applicable to the property. In the appellant's submission, the underlined words in SC 22(b) serve to identify that the environmental report should be prepared by reference to the EPA guidelines applicable to land being used as a service station. (AS [2])
Special Condition 22(b) refers to "the NSW Environment Protection Authority guidelines in relation to the contamination levels in, on or under the property". Special Condition 22(c) defines the "Environmental Report" as "a Phase 2 Contamination Report". It was common ground that in order to interpret SC 22 it was necessary to understand the statutory and regulatory framework regulating contaminated land in NSW. As French CJ, Nettle and Gordon JJ said in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 116 [46]; [2015] HCA 37, the rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context and purpose. The context includes "any contract, document or statutory provision referred to in the text of the contract".

[4]

The Contaminated Land Management Act

The general object of the Contaminated Land Management Act 1997 (NSW) (CLMA) is "to establish a process for investigating and (where appropriate) remediating land": s 3(1). The distinction between the investigation stage and the remediation stage is significant. Depending on the results of the investigation, it may not be necessary to go beyond the first stage. And, as will be seen, it is only at the second stage that the regime contemplates prohibitions on the use of land, and only by order of the EPA.
As to the first stage, s 10 confers a power on the EPA to order a person (including an owner of land) to investigate whether land is contaminated. The words "contamination" and "contaminate" are defined broadly in s 5. Of practical significance at the investigation stage is the self-reporting obligation in s 60. By s 60(2), an owner of land that has been contaminated must notify the EPA in certain circumstances. Failure to do so is an offence carrying substantial penalties and, for a continuing offence, a further penalty for each day the offence continues. By subs (3)(b), one of the circumstances requiring notification is where: a guideline specifies a level of the contaminant in soils with respect to a current or approved use of the land and the level of the contaminant on or in any part of the soil on that land is equal to or above that specified in the guideline and a person has been, or foreseeably will be, exposed to the contaminant or any by-product of the contaminant; …
A "guideline" is one made or approved by the EPA under s 105. As will be seen, the applicable guidelines specify varying levels of contaminant depending on the category of land use. Section 60 does not in terms require an owner of land to investigate suspected contamination. However, by subs (4), a person is required to notify the EPA as soon as practicable after the person becomes aware of the contamination; by subs (5), a person is taken to be aware of contamination if the person ought reasonably to have been aware of it; and by subs (9)(b) and (c), in determining when a person should reasonably have become aware of contamination, the circumstances of the contamination and whether the person could reasonably have sought advice that would have made the person aware of the contamination are to be taken into account.
I will return to the guidelines themselves shortly. But it is important to note that what is triggered where the level of a contaminant exceeds that specified in the guidelines (and it is foreseeable that a person will be exposed to the contaminant) is the s 60 reporting obligation. The CLMA does not impose any automatic prohibition on the use of land merely because the levels in the guidelines are exceeded. The possibility of constraints on the use of land arises only at the next stage, i.e., the remediation and management of contaminated land.
As to that second stage, by s 11(1) of the CLMA, the EPA may declare land to be "significantly contaminated land". Before doing so, the EPA must take into account various matters: s 12(1). These include any relevant guidelines, and, by s 12(1)(d) and (e), matters relating to the current and approved uses of the land.
The EPA may make a "management order" in relation to significantly contaminated land, directing an "appropriate person" to carry out specified actions in relation to the management of the land or to submit a plan of management: s 14(1). An owner may be an "appropriate person": s 13(2)(b). By s 16, the actions that a management order may require an appropriate person to carry out include undertaking various investigations: pars (a)-(c); carrying out remediation of the land: par (d); and vacating the land, or ceasing to carry on any activity on it: par (h). Similarly, by s 28(2)(d) and (e), the EPA may direct an owner of land that has been the subject of a management order not to carry out specified activities on the land or to use the land for specified purposes. The EPA may also approve a voluntary management proposal put forward by, e.g., an owner: s 17.

[7]

Schedule A: the general processes for assessment of site contamination

Schedule A of the Measure, which was the focus of argument on the appeal, is in the form of a flow chart which summarises the general processes for assessment of site contamination in three columns headed as follows: 1. "Tier 1 Preliminary site investigation" (Tier 1 PSI): this corresponds to section 1.1 of the EPA Guidelines, which says the "objective of the preliminary site investigation and associated report is to assess whether contamination has the potential to exist on the site and whether further investigation is needed." Section 2.1 of Schedule B2 of the Measure states that PSIs usually include a desktop study to collect basic site information including historical land uses and activities. 2. "Tier 1 Detailed site investigation" (Tier 1 DSI): this corresponds to section 1.3 of the EPA Guidelines, which says the "objective of a detailed site investigation report is to provide more complete and definitive information on issues raised in the preliminary site investigation." Section 2.2 of Schedule B2 of the Measure states that a Tier 1 DSI is required when the results of the Tier 1 PSI indicate that contamination is present, or is likely to be present, and the information available is insufficient to enable site management strategies to be devised. It was common ground that the "Phase 2 Contamination Report" referred to in Special Condition 22(c) meant the report of a Tier 1 DSI. 3. "Tier 2 or 3 Site specific risk assessment" (Tier 2 or 3 SSRA): this corresponds to section 1.4 of the EPA Guidelines, which says the "objective of a site-specific risk assessment is to further assess potential for harm to human health and/or the environment from a specific site."
Schedule A shows the individual steps in each of those three processes, together with the relationships between them. The headings to the Tier 1 PSI and Tier 1 DSI columns use the word "investigation", whereas the heading to the Tier 2 or 3 SSRA column uses the word "assessment".
Schedule A includes a shaded box at the bottom, which "indicates activities which are outside the scope of this Measure", i.e., beyond the activities in a Tier 1 PSI, a Tier 1 DSI, or a Tier 2 or 3 SSRA. The activities in the shaded box include "Develop a site remediation plan", "Undertake remediation and validation" and "Develop and implement site management plan with monitoring, reporting and response requirements". These activities broadly correspond to sections 1.5 ("Remedial action plan"), 1.6 ("Site remediation and validation"), 1.7 ("Environmental management plan") and 1.8 ("Ongoing monitoring") in the EPA Guidelines.
Schedule A to the Measure indicates that one of the steps in a Tier 1 Preliminary site investigation is to answer the questions, "Are investigation levels or screening levels for intended land use exceeded? Are petroleum hydrocarbon management limits exceeded? Schedule B1". These are clearly references to the HILs, HSLs, and Management levels in Sch B1. If the answer to the question whether the levels are exceeded is "No", Schedule A states, "No further action".
The EPA Guidelines include a checklist at Table 2.1 for a Preliminary site investigation. At no point does the checklist contemplate that the consultant performing a Tier 1 Preliminary site investigation will express an opinion about whether any use of the land should be permitted or prohibited.
Similarly, Schedule A to the Measure indicates that one of the steps in a Tier 1 Detailed site investigation (i.e. "Phase 2") is to answer the questions, "Are investigation levels or screening levels for intended land use still exceeded? Are petroleum hydrocarbon management limits exceeded? Schedule B1". Again, if the answer is "No", Schedule A states, "No further action".
The EPA Guidelines also include a checklist at Table 2.3 for a Detailed site investigation. Against the heading "Conclusions and recommendations", one of the items on the checklist is "A clear-cut statement that the consultant considers the site to be suitable for the proposed use (where applicable)". The consultant would be in a position to express such an opinion where the applicable levels were not exceeded. But it is notable that the checklist does not contemplate any statement that the consultant performing a Tier 1 DSI considers the site to be unsuitable for the proposed use. Instead, there is an item on the checklist for "Recommendations for further work, if appropriate" (e.g., because the levels in a guideline are exceeded).
Any such further work is not within the scope of a Tier 1 DSI (i.e. Phase 2) report. Under Schedule A, if the answer to the question whether the HILs, HSLs or Management limit levels are exceeded is No, there is "No further action" to be taken. If the answer is Yes, the furthest a Tier 1 DSI goes is to answer the question whether there is "sufficient information to devise risk-based remediation strategies". Whether the answer to that question is Yes or No, the Tier 1 DSI ends at that point, and Schedule A indicates that the assessment process moves into the third column, for a Tier 2 or 3 Site-specific risk assessment. The only difference between a No and a Yes answer at the end of the Tier 1 DSI (i.e. Phase 2) process is that Schedule A indicates different points of entry into the Tier 2 or 3 processes: either carrying out additional investigation and laboratory analysis (if the answer was No), or asking whether remediation is required to manage site risks (if the answer was Yes).
It would only be after that stage - inside the shaded box, and therefore outside the Measure - that a site management plan might be developed. At that point a particular use of the land might not be permitted. It would not be the EPA Guidelines themselves that prohibited the use, but rather an exercise by the EPA of its powers under the CLMA.
It is thus unsurprising that the checklist for a Tier 1 DSI in the EPA Guidelines at Table 2.3 does not contemplate any affirmative statement that the consultant considers the site to be unsuitable for the proposed use. The consultant is not in a position to express that view.

[8]

Conclusion on statutory and regulatory regime

The following features of the statutory and regulatory regime are significant for the interpretation of SC 22(b).
First, the EPA "guidelines in relation to the contamination levels in, on or under" land vary significantly by reference to the current or approved use of the land. Generally speaking, the EPA Guidelines tolerate higher levels of contaminants in relation to commercial/industrial uses than in relation to residential ones. For that reason, it is necessary to identify the category of use before it is possible to determine whether particular land falls within the EPA Guidelines.
Secondly, the EPA Guidelines do not themselves permit (in the sense of expressly authorise) or prohibit the use of land. Rather, the Guidelines provide for general processes for the assessment of site contamination. However, an important feature of both Tier 1 Preliminary site investigation and Tier 1 Detailed site investigation (i.e. Phase 2) is that if the contamination levels for a category of land use are not exceeded, Schedule A explicitly states that "No further action" is required. There is no further investigation to be done and no need to self-report to the EPA under s 60. A purchaser of land can carry out that land use without further concern of regulatory intervention under the CLMA regime. In that situation, the consultant could express the opinion referred to in the checklist at Table 2.3 of the EPA Guidelines for a Tier 1 DSI (i.e. Phase 2) report: "A clear-cut statement that the consultant considers the site to be suitable for the proposed use (where applicable)".
Thus, although the EPA Guidelines themselves neither prohibit nor permit any use of land, a commercial person might sensibly say that where the contamination levels for a land use are not exceeded, the guidelines "permit" that use.
The converse is not true. The mere fact that contaminants exceed the levels for a particular category of use does not engage any automatic prohibition on that use. Instead, if it is foreseeable that a person will be exposed to the contaminant, the exceedance must be reported to the EPA under s 60. The guidelines contemplate further investigations, analysis, and potentially the formulation of plans of management which might ultimately culminate in the EPA making a management order under s 14 of the CLMA or approving a voluntary management proposal under s 17. These might include a requirement to remediate the land, with or without a prohibition on use pending remediation. It follows that where the contaminants exceed the levels identified by the EPA Guidelines, a purchaser of the land will find itself enmeshed in an investigative and regulatory process the scope, duration, and cost of which will be uncertain.
Thirdly, the issues just discussed are far beyond the scope of a Tier 1 DSI / Phase 2 investigation report. The EPA Guidelines do not contemplate that a consultant preparing such a report would enter into those issues, and the consultant would not be in a position to do so.

[9]

Interpretation of Special Condition 22

Special Condition 22(b) is not well drafted. The syntax is awkward ("… and which permits"); it is debatable what the words "which permits" refer to; the leading candidates for the subject of the verb "permits" ("guidelines" and "levels") are plural, not singular; and there are words missing from the last part of the sentence ("by notice in writing to [the] other party [to] which clause 19 of the contract will apply").
Special Condition 22(b) states the condition on which a contractual right to rescind in accordance with standard clause 19 arises. Clause 19 provides for the return of any deposit paid if a party exercises a right to rescind given by the contract.
The most natural (and in my opinion the correct) way to read SC 22(b) is that the right to rescind arises if the Phase 2 Environmental Report (i.e. the report of a Tier 1 DSI) "indicates that the property does not fall within the NSW Environment Protection Authority guidelines".
Those guidelines are then identified by a composite description: they are guidelines "in relation to the contamination levels in, on or under the property and which permit[] the property to be used as a Service Station".
The first part of the description refers to contamination levels. But, as has been seen, the applicable contamination levels identified by the EPA Guidelines vary depending on the category of land use. The question is which category is relevant.
The respondents submitted that the relevant category of use was self-evidently commercial/industrial, based on the commercial context of the existing use of the land as a service station and automotive workshop. The front page of the contract also refers to a "service station" and a "workshop". However, as the appellant submitted, the Planning Certificate, which was annexed to the contract, referred to the zoning as "Zone R3 (Medium Density Residential) in Randwick LEP 2012". If the relevant land use was residential, the levels for contaminants identified by the EPA Guidelines would be much lower than those if the use was as a service station. In the absence of a clear indication in SC 22 itself, there would be scope for the parties to dispute the relevant category of use and thus the applicable levels of contaminants.
The second part of the composite description ("and which permit[] the property to be used as a Service Station") thus performs the important function of supplying what is missing: it specifies the relevant land use for the purpose of determining the applicable levels.
It is not uncommon to speak of a "permissible use" of land as meaning a use for which no planning approval is required, or which is permitted under a planning approval. That usage is synonymous with the language of "approved use" in s 60(3)(b) of the CLMA, as defined in s 4(1). The words "and which permit[]" appear to have been used in the sense of identifying the permissible use, which in turn leads to the identification of the applicable contamination levels.
In any event, the EPA Guidelines can sensibly be said to "permit" the use of land in the way explained above. Provided that the Report indicates that "the property does ... fall within the NSW Environment Protection Authority guidelines in relation to the contamination levels" for the use of the land as a Service Station (i.e., that any contaminants are below the specified levels), no further action is required under the statutory and regulatory regime for that use. In that practical sense, the guidelines "permit[] the property to be used as a Service Station".
The fact that the word "permits" is grammatically singular is not an insuperable obstacle to this construction. Given the infelicity in the drafting of SC 22(b), the additional "s" may simply have been a typographical error. Or the guidelines might have been understood collectively, and thus as singular. In any event, given the lack of a preferable alternative (see below), as a matter of construction there is no difficulty in identifying the "guidelines" as the subject of "permit[]".
One possible construction raised in argument which would preserve the singular verb form is that the subject of "permits" is the fact that the property does not fall within the guidelines. On that reading, the not falling within the guidelines would be the sense in which use of the property as a service station was "permitted". But that would involve reading the words "does not fall within the … guidelines" as meaning does not exceed the specified levels, which I consider contrary to the natural meaning of "within".
The primary judge rejected the construction advanced by the appellant at trial, that the words "and which permit[s]" should be read as meaning "notwithstanding it permit[s]". One of his Honour's reasons was that by effectively deleting the words "and which permits …" the construction gave those words no work to do: see at J[201] and J[204]. A related criticism was that on the appellant's construction advanced at trial there would be no specification of which levels were to be used for the assessment: J[213]. Neither criticism is available in relation to the construction advanced by the appellant in this Court.
The respondents submitted that the text following the word "guidelines" is not a composite description of the guidelines. Instead, the words "and which permits the property to be used as a Service Station" should be read as stating an additional necessary second condition (that the property could not be used as a service station) which must be satisfied before the right to rescind is engaged. I do not accept that submission.
If the supposed second necessary condition engaging the right to rescind was whether the Environmental Report indicated that "the property does not fall within the NSW Environment Protection Authority guidelines ... which permit[] the property to be used as a Service Station", in the sense that the contamination levels were such that under the guidelines the land could not be used as a service station, the condition could never be satisfied. The guidelines themselves do not prohibit any uses of land. A series of steps involving the EPA's exercise of statutory powers under the CLMA would have to occur before use as a service station was prohibited.
The respondents submitted that the second condition necessary to engage the right to rescind is whether the Environmental Report contained an opinion that the land could not be used as a Service Station. The primary judge held that in order to engage the right to rescind, it was necessary that the Environmental Report express the opinion, or otherwise indicate, that "the contamination levels presented in the Report were such that the property could not be used as a service station": J[219], J[220]. There are several reasons why that construction is not to be accepted.
First, as a matter of language, it would require substantial surgery to the provision to make the words "and which permits …" a second condition necessary to engage the right to rescind. The respondents submitted that the word "which" refers to the Environmental Report. That would make the Environmental Report the effective subject of the verb "permits"; but it would be necessary to insert some negative word before the word "permits" to achieve the meaning the respondents require: "the Environmental Report … does not permits". That is because, if there were two separate conditions necessary to engage the right to rescind, the word "not" would be internal to the first condition: "the property does not fall within the … guidelines". As the appellant submitted, the respondents' construction requires the word "permits" to be read as "prevents".
Perhaps recognising this difficulty, and trying to take advantage of the one available "not", the respondents provided an alternative "parsing" of SC 22(b) at the hearing as follows: If the Environmental Report indicates that the property does not: fall within the NSW Environment Protection Authority guidelines in relation to the contamination levels in, on or under the property; and which permits [sic] the property to be used as a Service Station; then either party may rescind this contract by notice in writing to other [sic] party which clause 19 [sic] of the contract will apply.
Not only does that parsing involve inserting a colon and two semicolons, deleting the word "which", and tolerating the ungrammatical form "does not … permits"; it also makes no sense. The supposed second condition becomes: "If the Environmental Report indicates that the property does not: … permits [sic] the property to be used as a Service Station". The "property" cannot permit itself to do anything.
Secondly, as a matter of substance, the regulatory scheme does not contemplate that a consultant preparing a Phase 2 Contamination Report (i.e. the report of a Tier 1 DSI) would express an opinion that the outcome of any further investigative and regulatory processes would be some restriction on use of the land as a service station. Nor does the regulatory scheme implicitly call for such an opinion. I disagree with the primary judge's statement at J[204] that "such a report may, in accordance with the Measure, express an opinion as to whether remediation or other action is or may be required for the site to be used for a specified purpose." (Emphasis supplied) Schedule A to the Measure indicates that consideration of those matters comes later, after the Tier 1 DSI stage.
That that is so is consistent with JBS&G's Tier 1 DSI Environmental Report, which did not express any view about the suitability or unsuitability of the land for use as a service station.
Thirdly, there is no textual basis on which to identify the standard for the consultant to apply in forming such an opinion about what might happen in the future. Would it be on the balance of probabilities? Or would a real risk be sufficient? Would the consultant form the opinion by reference to the consultant's understanding of the CLMA and the EPA Guidelines? Or would the consultant take into account current regulatory practice and anticipated action? The respondents submitted that "there would have to be an opinion expressed … that in the experts view the authorities would prohibit the use of the property as a service station." (AT 28.13) But for the reasons just given, expressing such an opinion is not contemplated, nor implicitly called for, by the Measure when a consultant is conducting a Tier 1 DSI.
On the respondents' construction, it is not difficult to imagine the scope for the parties to dispute whether the Report met whatever threshold was necessary to trigger the right to rescind. It would be a surprising outcome if the existence of an express right to rescind a contract for the sale of land turned on the expression of an opinion which the Measure did not contemplate the third party consultant giving and which would involve so much uncertainty.
Finally, in support of the proposition that something more than exceeding the applicable contaminant levels was necessary to engage the right to rescind, the respondents submitted that implicit in the parties' choice of a Tier 1 DSI, rather than a Tier 1 PSI, "is a recognition that there would be some exceedance of the schedule B1 contamination levels." (AT 31.27) I do not agree. Schedule A contemplates that both the Tier 1 PSI process and the Tier 1 DSI process might result in a determination that there was no such exceedance. But the Tier 1 DSI, which involved "Detailed investigation and laboratory analysis", would give a higher degree of assurance.
In the result, on the proper interpretation of SC 22(b): 1. The "guidelines" which meet the composite description in SC 22(b) are those in relation to the contamination levels for use of the land as a service station. It is common ground that those are the EPA Guidelines in relation to the contamination levels for commercial/industrial use. 2. Special Condition 22(b) confers a right of rescission where the "Environmental Report" indicates that the property does not fall within those guidelines - that is, that the contamination levels exceed those specified by the EPA Guidelines for commercial/industrial use of land.

[16]

Orders

The orders I propose are as follows. 1. Appeal allowed. 2. Judgment of the Court below be set aside. 3. Declare that the contract for sale of the property at 88-120 Clovelly Road, Randwick NSW 2031 dated 24 November 2022 between the first respondent as vendor and the appellant as purchaser was lawfully rescinded by the appellant's notice of recission dated 20 February 2023. 4. Order that the second respondent forthwith pay to the appellant the amount of $437,500.00 it held as stakeholder under the contract, together with any interest on that money. 5. The respondents pay the appellant's costs of the appeal. 6. There be no order as to the costs of the proceedings at first instance.
BASTEN AJA: I agree with the orders proposed by McHugh JA.
This case concerns the proper construction of a special condition in a contract of sale of a commercial property, operating as a service station and motor mechanic shop. The special condition 22 (SC 22), headed "Contamination report", required the preparation of an "Environmental Report" to be obtained within eight weeks from the date the contract was signed. The report was duly prepared and, based on the use of the property as a commercial site, revealed testing which showed contamination levels exceeding the thresholds contained in the Environment Protection Authority (EPA) guidelines in relation to a number of specified compounds. The focus of the dispute was whether those findings engaged a right of the purchaser to rescind the contract.
The clause containing the relevant right of rescission read as follows: 22 Contamination report … (b) If the Environmental Report indicates that the property does not fall within the NSW Environment Protection Authority guidelines in relation to the contamination levels in, on or under the property and which permits the property to be used as a Service Station then either party may rescind this contract by notice in writing to [the] other party [to] which clause 19 of the contract will apply.
The language was undoubtedly not well chosen. What permitted the property to be used as a service station and motor mechanic shop was the availability, despite the zoning of the area under the Woollahra Local Environmental Plan, of existing use rights under Pt 4, Div 4.11 of the Environmental Planning and Assessment Act 1979 (NSW). As explained by McHugh JA, the EPA guidelines dealing with levels of contamination did not themselves permit or prevent any use of the land. Nor could the contamination experts have "indicated" otherwise in the Environmental Report.
Although the submissions identified the key phrase in dispute as "and which permits", the real issue was the subject of the verb "permits". The appellant contended that the phrase referred to the guidelines; the respondent contended that it referred to the Environmental Report. In circumstances where neither could have that effect, and therefore the relative pronoun "which" could not refer to either, a third possibility should be considered and, in my view, preferred.
The third possibility is that the subject matter of the verb is the phrase "falling within". It is the "falling within" the thresholds fixed by the guidelines which permits continued use as a service station; it is the "not falling within" those thresholds which engages the right to rescind. That is consistent with the purpose of the clause. Thus, a threshold for a particular hydrocarbon will create two classes, one below the threshold and one above. Depending on the purpose, falling within a "level" can invoke either class. The purpose of the threshold reveals the correct understanding. (The visual image created by talk of "exceeding a level" may be misleading; the threshold is best visualised as a point on a horizontal line.)
There remains the awkwardness arising from the fact that falling within (that is below) the threshold does not of itself permit the use of the property as a service station. However, it does permit the existing use to continue without the obligation to notify the EPA of the contamination, accompanied by the risk that the EPA will take steps to impose regulatory controls, including possibly a management order and requiring expensive remediation and even the risk of closing the business. (The obligation of disclosure carries a threat of substantial financial penalties for failing to notify the Authority that the land "has been contaminated", within the terms of s 60(3) of the Contaminated Land Management Act 1997 (NSW).) So understood the clause had a real commercial purpose; I did not understand the respondent to deny that.
On this approach, which at least maintains the syntax adopted by the parties, the right to rescind was, as McHugh JA explains, engaged and the notice of rescission, given pursuant to cl 19 of the standard terms of contract, was effective.

Parties

Applicant/Plaintiff:

Kane & Co (NSW) Pty Ltd

Respondent/Defendant:

Idolbox Pty Ltd

Legislation Cited (2)

Contaminated Land Management Act 1997(NSW)

Environmental Planning and Assessment Act 1979(NSW)

Cases Cited (8)

HEADNOTE [This headnote is not to be read as part of the judgment] On 24 November 2022, the appellant entered into a contract with the first respondent for the purchase of land in Randwick which was used as a service station and automotive workshop. The second respondent acted as agent on the sale and held the deposit paid by the appellant. Special Condition 22 (SC 22) of the contract gave a right to rescind if an "Environmental Report" which was to be obtained "indicates that the property does not fall within the NSW Environment Protection Authority guidelines in relation to the contamination levels in, on or under the property and which permits the property to be used as a Service Station" (sic). The relevant guidelines were the "Consultants reporting on contaminated land: Contaminated Land Guidelines" gazetted on 3 April 2020 (EPA Guidelines), which incorporated the National Environment Protection (Assessment of Site Contamination) Measure 1999 (Measure). The Environmental Report was issued on 17 February 2023. It indicated that certain contaminants exceeded the levels specified by the EPA Guidelines for use of the land as a service station. The report did not indicate that the contamination levels were such that the land could not be used as a service station. On 20 February 2023, the appellant purported to rescind the contract in reliance on SC 22. The first respondent disputed that the right of rescission had been engaged. The appellant brought proceedings in the Supreme Court seeking a declaration that it was entitled to rescind the contract and an order for the repayment of the deposit. The primary judge held that to engage the right of rescission it was necessary that the Environmental Report indicate that the contamination levels were such that the property could not be used as a service station. As the report did not do so, the primary judge found that the right to rescind had not been engaged. The appellant appealed on the question of construction. The Court (McHugh JA, Kirk JA and Basten AJA agreeing) allowed the appeal, holding: Per McHugh JA, Kirk JA agreeing: 1 The EPA Guidelines provide for general processes for the assessment of contamination. They specify levels of contaminants by reference to categories of use of land. The EPA Guidelines do not themselves permit or prohibit the use of land. However, if the contamination levels for a category of land use are not exceeded, under the EPA Guidelines no further action is required. In that practical sense, the EPA Guidelines permit the use [49]-[51], [62]. 2 The correct construction of SC 22 is that the right to rescind is engaged if the Environmental Report indicates that the contamination levels at the property exceed those specified by the EPA Guidelines. The words, "and which permit[] the property to be used as a Service Station", identify the relevant land use (being a commercial/industrial use) for the purpose of determining the applicable levels: [56]-[62], [77]. 3 This construction was not advanced at trial. But there was no practical injustice in permitting the appellant to raise the construction for the first time on appeal: [82]-[85]. Cappello v Hammond & Simonds NSW Pty Ltd [2021] NSWCA 57 at [37]; Suttor v Gundowda (1950) 81 CLR 418 at 438; [1950] HCA 35, referred to. Per Basten AJA: 4 It is the "falling within" the thresholds fixed by the guidelines which permits continued use as a service station; it is the "not falling within" those thresholds which engages the right to rescind. Falling within (that is below) the threshold does not of itself permit the use of the property as a service station. However, it does permit the existing use to continue without the obligation to notify the EPA of the contamination, accompanied by the risk that the EPA will take steps to impose regulatory controls: [103], [104].

[2015] HCA 37

(1982) 149 CLR 337

(2015) 256 CLR 104

(1950) 81 CLR 418

[1982] HCA 24

[2024] NSWSC 410

[1950] HCA 35