Local business owners successful in legal action against NSW government for impacts of construction project

A 2023 decision of the New South Wales Supreme Court has found in favor of two local businesses that had their livelihoods affected by delayed and mismanaged construction of the Sydney Light Rail, constituting a private nuisance in law.

Navigating the circumstances of the case, the extent of the damage done to the businesses, and the conduct of the NSW government, the decision may provide insight to local businesses in similar situations both in Australia and New Zealand. This is particularly the case for individuals and businesses affected by large infrastructure or other works where there are specific impacts, such as damage to property, noise pollution and other impacts. Noise pollution can cause psychological effects, reduce a property’s value, and also reduce productivity/profitability at local businesses

Background

The Sydney Light Rail (SLR) project was a major infrastructural undertaking for the NSW Government, an envisaged total overhaul of the main public transport system of the city’s CBD, with construction planned to take place from 2015 and conclude in 2019. Despite the significance of the project, this vision was not realized; construction on the project would not be completed until 2020.

The risk of delay was well-known to the NSW government prior to entering the project deed. One of the most primary hazards of the project was the ‘utilities risk’, the possibility of encountering underground utilities that would need to be treated and relocated before work on the project itself could continue. This risk had been identified from the first SLR planning meeting, and while efforts had been taken to identify utilities prior to construction, they were not exhaustive. Construction had been scheduled to be carried out in stages, across consecutive ‘zones’ in the city, to minimise the effects on the surrounding businesses, but construction contractors would end up overstaying some of these zones for significant lengths of time – in some cases, by several years.

The claim

The plaintiffs brought claims in public and private nuisance, in respect of three different stores within the Sydney CBD. Hunt Leather, an Australian-owned luxury leather goods retailer, brought claims for two stores, one of them its flagship store, and hospitality company Ancio brought a claim for its restaurant.

The public nuisance claims failed, but two of the three claims in private nuisance (the flagship Hunt Leather store and the restaurant) were successful. Private nuisance is a tort, a civil law claim brought by private parties rather than the Crown, that arises when one party interferes with another party’s use or enjoyment of their private land to an unreasonable degree. This interference usually takes the form of ‘emanations’ from an adjoining piece of land onto another.

During the decision, the Court defined the test for an actionable nuisance: the interference with the land needed to be substantial, objectively unreasonable, and foreseeable by the defendant.

The businesses

The Hunt Leather Strand Arcade store (‘the Strand store’) saw perhaps the most significant degree of interference across all three stores. From the outset of construction, hoardings (barriers) were erected on the footpath outside the store, limiting visibility and giving the appearance of constant construction to passers-by. Noise, dust, and dirt were incessant. The store regularly needed to close its display doors onto the street due to debris, which made its way into the store regardless – dirt settled on shelves and products daily and required constant cleaning, posing danger not only to sales, but also to staff health. The noise of machinery was at times so loud that employees needed to shout to be heard by customers and by each other. The atmosphere of the store, intended to provide a luxury shopping experience, was rendered non-existent. The duration of this interference was found to have lasted over a year, through the full period of construction activities outside the Strand store.

The restaurant was located on a different street to the Strand store, but still within the heart of the Sydney CBD. Like the Strand store, the restaurant was directly proximate to a construction site, subjecting it to similar levels of noise and a general reduction in ambience. Hoardings were also erected on the footpath directly adjacent to the restaurant, reducing the visibility of the business. However, the most key interferences with the restaurant were changes to the vehicular traffic flow of the street. Prior to construction, Anzac Parade held three lanes of traffic, with on-street parking available – during construction, this was significantly altered, with the street being reduced from three lanes to one lane for traffic and one bus lane. All parking spots outside the restaurant were removed. This resulted in a significant decline in traffic outside the restaurant during the construction period, in turn affecting the business of the restaurant.

The second Hunt Leather store, located in the Queen Victoria Building (‘the QVB store’), did not meet the threshold of substantial interference. Unlike the Strand store and the restaurant, the QVB store did not open directly onto a street where construction was happening and wasn’t affected by dirt or dust like its sister store. The primary source of the interference was claimed to be reduced visibility and foot and vehicle traffic, but they were found to be insufficient – the road was closed but the footpath was not, and the hoardings erected on that section of the street only partially reduced the visibility of the location. The QVB store closed in 2018 due to lack of profits, but the Court found that was not entirely due to the construction; Hunt Leather had been experiencing financial difficulties with its specialty single-brand stores prior to the SLR project, and the QVB location was one such store.

Commentary

One of the deciding aspects of this case was the NSW government’s acute awareness of the likelihood of the risk of interference, and the severity of the impact should it have occurred. The defendant had carried out extensive investigations into the presence of utilities along the planned route of the SLR, and because of those investigations, knew that the risk of utilities interfering with the project was substantially higher than they had anticipated; its own experts told them that unknown utilities would make a ‘huge difference’ in the timeline of the project. If the construction was delayed, it knew that the impact on businesses was likely to be significant – during construction of the Light Rail along the Gold Coast, 15% of businesses had closed their doors. Ausgrid, the primary company responsible for the utilities along the SLR route, had warned them that they had underestimated the time and the resources they would need to properly treat the utilities, and the construction companies they negotiated with consistently refused to undertake a meaningful share of the utilities risk. This again underscored the likelihood and seriousness of the risk to the government.

With all this in mind, the NSW government contracted with the construction company on surprisingly lenient terms. It offered extensions on zone occupation time periods if the contractor came across unforeseen delays in the project, a definition that included unknown utilities, and financial relief to the contractors in cases of those delays. This effectively relieved the contractors from bearing any responsibility of the risk, and almost incentivized them to overstay in the construction zones.

Relief was so broad, the likelihood of unknown utilities being discovered was so high, and the penalties of overstaying so limited that the Court found prolonged occupation was ‘not only foreseeable but predictable.’ This considerable foreknowledge is what cemented the NSW government’s liability for the nuisance.

At the time of entry into the contract, the government had made no agreements with any utilities managers on treatments, even further increasing the likelihood that undiscovered utilities would cause major delays. In its efforts to comply with its own internal timeline, the government knowingly took a serious risk by contracting on the terms it did – unfortunately for all involved, that risk came to fruition, and the business owners bore the consequences.

It was not the project planning alone that led to the finding of private nuisance. The decision relied heavily on the degree to which the mismanaged construction interfered with the businesses; the Court emphasized the ‘give and take’ nature of the relationships between neighbours and stressed that some interference from public construction works was an unavoidable part of inner-city life, not enough to be a legally actionable nuisance alone. The interference of the SLR construction, however, was so far beyond reasonable that it outweighed what business owners should be expected to tolerate as CBD occupants. Weight was given to the fact that the defendant was a public body with statutory authority to carry out the work, which was a project of considerable public significance, but neither of those factors outweighed that ‘give and take’ principle governing their relationship with the business owners. They did not have the right to operate indefinitely, nor so far beyond what they promised.

However, the Court also acknowledged that if construction activities on their own were enough to constitute actionable private nuisance, public development would grind to a halt. It was a combination of factors that led to the finding of a substantial interference; not only the severity of the interference, but the multitude of ways in which it happened, and the length of time it went on for.

Compensation

The businesses sought damages, financial compensation for the economic loss they’d suffered as a result of the nuisance. The Court’s remedy aimed to restore them to the material position they’d currently be in if not for the interference; it did so by calculating a rate of compensation based on the average amounts each business had been earning prior to the construction, applying it to the length of time the nuisance had occurred for in respect of each store.

Significantly, the Court also recognized that if not for the nuisance, the restaurant would have renewed its lease for another 5 years, and compensated it for that hypothetical time period on top of the actual time the restaurant was operational. This compensation was for loss of a chance as opposed to actual economic loss – there were too many variables, such as the emergence of the COVID-19 virus, for the Court to be confident they would have continued profiting at their pre-construction rates had they renewed their lease, and so their compensation for the loss of that chance was heavily discounted.

Summary

This decision doesn’t open local government up to brand new realms of liability, but it does clarify the rules it must play by when planning and carrying out construction projects. It makes clear the level of consideration that it needs to afford local businesses, and that its attempts to minimise impacts on them must actually be successful in order to protect themselves from liability. The issue was not the mere existence of the utility risks, nor the choice to undertake a project where risk was unavoidable, but the failure to manage that risk correctly and assign the responsibility for it to the proper parties, instead of knowingly letting it be borne by the local businesses.

This case also serves as a valuable example of the bar that local business would need to meet to take legal action against public authorities for the impact of construction on their livelihoods. Government projects are a part of life, and the existence of some interference with private property as a result is an inevitability that doesn’t automatically result in legally actionable nuisance. Nuisance is a sliding scale – not every inconvenience gives rise to a claim, but in every potential nuisance there is an assessment of sufficiency to be made.

Written by Lillian McArthur and Stuart Dalzell.