Sydney Light Rail Nuisance Claim: Cautionary Lessons for Project Owners and Contractors
In a landmark decision, two businesses have emerged victorious in their compensation claim against the NSW government’s transport agency for the disruption to their businesses caused by the construction of the Sydney light rail project.
The NSW Supreme Court ruled that the extended period of disruption constituted an unlawful “nuisance”, going beyond what was “reasonable”.
This verdict has far-reaching implications for project owners and contractors involved in construction activities affecting neighbouring businesses.
Balancing Rights: Give and Take
Not every interference with the use of land warrants an actionable claim in nuisance. The law demands a delicate balance between landowner’s rights and the interests of adjacent occupants. The law requires “give and take” between neighbours. To be unlawful, the interference needs to be unreasonable or, as another commentator has put it, OTT (“over-the-top”).
No Need to Prove Negligence
Transport for NSW argued that the business owners needed to prove that TfNSW had acted negligently, for their claim in nuisance to succeed. The court disagreed.
All that the law requires is that the interference with the business owner’s use and enjoyment of their land is both “substantial” and “unreasonable”.
In deciding whether the interference is unreasonable, regard is to be had to a variety of factors including:
the nature, duration and extent of the interference;
the social or public value in the defendant’s activity;
the nature of established uses in the locality (eg residential, industrial, rural);
the extent to which the defendant might have known or anticipated that the interference would impact on the financial interests of the claimants;
whether there were self-help remedies available to the claimants; and
whether all reasonable precautions were taken to minimise any interference.
Consequently, interference can amount to nuisance, even if the defendant has taken reasonable care to minimise the interference.
Public Benefit not a Blanket Defence
While acknowledging the public benefit of the light rail project, the court emphasised that its public benefit didn't serve as an absolute defence against the nuisance claim. The public benefit is just one factor among many in determining the reasonableness of the disruption experienced by neighbouring businesses.
TfNSW Liable because it created the State of Affairs that led to Nuisance
Ordinarily in a case such as this, one might expect the affected business to bring its claim against the contractor, rather than the project owner. But for reasons that aren’t explained in the judgement, the businesses choose the bring their claim against TfNSW. Perhaps they believed the prospects of a commercial settlement were better if the claim was directed to a politically exposed government instead of a hard-nosed contractor?
When the claim was first made against TfNSW, TfNSW filed a cross claim against the contractor to claim contribution. But TfNSW subsequently dropped this cross claim, presumably as part of the commercial settlement it reached with the contractor and the PPP company in June 2019 in respect of earlier claims made by the contractor against the PPP company and TfNSW for extensions of time and more money.
Accordingly, the affected businesses had to demonstrate that TfNSW should be held legally liable for the nuisance that occurred.
The court ruled TfNSW liable because, through its planning, procurement and contracting activities, TfNSW created the state of affairs that led to the nuisance. It found TfNSW should have foreseen the harm and done more to protect the affected businesses' interests.
Negligent Contracting Terms
The contracts for the light rail project required construction to be completed by March 2019. Completion did not occur until 12 months later.
More importantly, the contractor didn’t adhere to the staging plan, which contemplated that it would complete most construction work within a section or zone of the route, before moving to the next zone, thereby minimising the period that businesses within any particular zone suffered disturbance. Instead, it vastly overstayed in the zones adjacent to the claimants’ businesses.
The court found that the delay to completion in the zones adjacent to the two businesses was primarily caused by “utilities risk”, namely:
the discovery after contract award of unknown utilities;
known utilities differing from the contract drawings; and
the need to reach agreement after contract award with utility providers on the treatments for known and unknown utilities.
A TfNSW-initiated contract variation to move the location of the tram stop/platform near the Queen Victoria Building also caused substantial delay to the construction works near one business.
Treatments for known utilities could not be agreed with the utility owners before contract award because the then design of the treatment works was not sufficiently progressed. The construction works were tendered on the basis that the contractor would progress and complete the design after contract award.
TfNSW’s original contracting plan was for the contractor to take all time and cost risks arising out of the treatment of utilities. But TfNSW was unable to achieve this commercial outcome. Instead, it ultimately agreed it would give the contractor extensions of time, and compensation, for delays and additional costs arising from utilities risk.
The contract also included a site access regime that was supposed to encourage the contractor to adhere to the staging plan — by requiring the contractor to pay a daily fee for each day it occupied a zone beyond the agreed period. But TfNSW agreed to cap the contractor’s liability for such fees to just $4.5 million (less than 0.33% of the D&C contract price), which cap would be reached after just one months’ overstay in all zones. When this cap was reached, the occupation fee regime ceased to provide any incentive for the contractor to promptly complete its construction activities within a zone before deploying its resources to another zone.
The court was highly critical of these contracting terms. It said the relief TfNSW provided for utilities risk was so broad, and the penalties for overstaying were so negligible, that the contractual arrangement provided no disincentive for overstaying in the relevant construction area. This exposed the business owners to the risk of extensive delays to the completion of construction activities adjacent to their business.
Indeed, the court went so far as to say that by contracting on this basis, TfNSW failed to properly consider the interests of business owners along the route and failed to take reasonable care to protect these interests. This is a damning finding against TfNSW and its advisors, particularly given it was one that the court didn’t need to make to award compensation.
Implications and Lessons
Lessons for Contractors – Beware Impossible Obligations
Contractors should avoid signing contracts with unreasonable obligations regarding nuisance that are impossible to fulfil.
The terms of the D&C contract are confidential, but they would have been back-to-back with the corresponding terms of the upstream project deed between TfNSW and the PPP company. The upstream project deed required the PPP company to:
prevent nuisance and unreasonable noise, dust, vibration and disturbance;
not interfere with the passage of people and vehicles, except to the extent agreed with affected residents/businesses or required for unforeseeable reasons of public safety; and
indemnify TfNSW against any claim by a third party arising out of any wrongful act or omission by the PPP company.
But the PPP company’s liability under the indemnity was reduced to the extent that the loss arises out of a third party claim for pure economic loss arising solely as a result of the decision by the State to proceed with the project or the existence or location of the light rail system.
This carve-out from the indemnity is critical. To the extent that the nuisance is an inevitable consequence of undertaking the project, the contractor cannot avoid the nuisance and thus should not be expected to bear liability for it.
There should have been an equivalent carve-out from the contractor’s obligation to “prevent” nuisance. An obligation to “minimise” nuisance is more appropriate.
But such carve-outs would not have absolved the contractor in this case, because the nuisance was not inevitable. Accordingly, the contractor was wise to negotiate a release from TfNSW claims under these provisions as part of the earlier 2019 settlement.
The template PPP project deeds used by the NSW and Victorian Governments contain an unqualified obligation to “prevent nuisance”, whether inevitable or not. They also fail to provide a carve-out from the indemnity for third party economic loss claims, to the extent such claims arise out of nuisance that is inevitable.
Lesson: Contractors and investors should bid back appropriate amendments to these provisions when bidding for projects with a material risk of claims by affected businesses for financial loss.
Lessons for Project Owners – Discover Unknown Utilities, and finalise Interface Agreements
At the time of contract award, TfNSW’s investigations had found more than 2000 known utilities along the route. The contractor discovered a further 1759 unknown utilities after contract award.
TfNSW chose not to take the extra time required to conduct further discovery works before contract award because of its self-imposed deadline to award the PPP contract before the 2015 state election.
This was a key factor in the court’s determination that the interference was unreasonable, and that TfNSW should be legally liable for the nuisance. The court ruled there was more that TfNSW could have reasonably done to discover the unknown utilities before construction and thereby reduce the construction delays to which businesses would be subjected upon the discovery of unknown defects during construction.
Lesson: Owners of projects with a material risk of economic loss claims by affected businesses should ensure that all reasonable efforts are made to discover unknown defects before commencing construction.
Finalise Utility Interface Agreements before Construction
At the time of contract award, no agreements had been reached with utility providers on the treatments that would be applied to affected utilities.
TfNSW had expected (or at least hoped) that the bidding contractors would assume the risk of utility providers requiring more costly, or time consuming, treatments than those assumed by the contractor at contract award.
When it turned out that the contracting market would not accept this risk, TfNSW again chose not to take the time to reach concluded agreements with utility providers and the preferred contractor before contract award because of its desire to award the contract before the state election.
This was another key factor in the court’s decision. Again, there was more that TfNSW could have reasonably done to conclude these agreements before commencing construction and thereby reduce the construction delays to which businesses would be subjected upon the discovery of unknown utilities during construction.
Lesson: Owners of projects with a material risk of economic loss claims by affected businesses should ensure that all reasonable efforts are made to conclude agreements with utility providers before construction commences.
Alternative Strategies for finalising Interface Agreements
Concluding third-party interface agreements almost always ends up on the critical path to contract award of major linear projects. This is because:
utility providers won’t agree the treatment without a sufficiently detailed design; and
the interface design is typically only completed by the contractor after it has been preferred.
As such, the negotiation of final treatments usually occurs in the intensive phase after a preferred contractor is selected and before contract award.
Project owners that aren’t able or willing to allow sufficient time for these negotiations to be completed before contract award should develop alternative strategies for concluding the interface agreements. Such strategies might include:
funding interface design development by each shortlisted contractor, and negotiations with the utility provider, before a preferred contractor is identified;
concluding the interface agreements based on a ‘common’ interface design that each shortlisted contractor is required to adopt; and/or
concluding ‘interim’ interface agreements based on an ‘assumed’ interface design, so that negotiations during the preferred bidder stage on ‘final’ interface agreements can be limited to differences between the assumed design and the preferred contractor’s design.
Lesson: Project owners should develop alternative strategies for concluding third party interface agreements prior to contract award.
Negotiate Incentives to Minimise Interference
TfNSW’s original approach of transferring utilities risk to the contractor proved to be unachievable in the then market. As such, after testing the market, it needed to negotiate an alternative risk allocation. Unfortunately, the arrangements that TfNSW negotiated provided the contractor with too much relief, and failed to ensure the contractor was incentivised to minimise overstays in the zones adjacent to the affected businesses.
A different approach that truly shared utilities risk, by requiring the contractor to bear a portion of additional costs arising from utilities risk, would have protected the interests of affected businesses and been achievable in the market.
Lesson: Owners of projects that will unreasonably disrupt adjoining businesses during construction should negotiate contractual arrangements that appropriately incentivise the contractor to minimise the disruption. Arrangements that truly share the financial pain of relevant delays should be considered.
Accountability for Politicians
Rushing the procurement of a major project to satisfy the desire or directive of a politician that wants to improve his or her prospects of re-election might be a good political strategy, but it’s rarely a good project strategy. The subsequent costs to taxpayers can be enormous. We’ll probably never know the full costs in this case, as the NSW Government likes to keep the terms of its commercial settlements confidential.
Politicians that prioritise their re-election prospects ahead of the public interest should be held to account.
Conclusion
The Sydney light rail nuisance claim highlights the risk of affected businesses successfully claiming compensation for “unreasonable” interference that they suffer. It is unreasonable and, in the current market, unrealistic for project owners to attempt to transfer this risk to their contractor, to the extent the interference is inevitable. Project owners should, instead, take all reasonable steps to avoid or reduce the risk. Contractors should avoid accepting impossible obligations and indemnities. And politicians should put the public interest ahead of their self-interest.
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