Midcoast Petroleum Pty Ltd v Keldros Pty Ltd

[2019] NSWSC 970

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:	Midcoast Petroleum Pty Ltd v Keldros Pty Ltd [2019] NSWSC 970
Hearing dates:	7, 11, 12 and 13 March 2019
Date of orders:	01 August 2019
Decision date:	01 August 2019
Jurisdiction:	Equity
Before:	Ward CJ in Eq
Decision:	1.   Judgment for the plaintiff against the first and second defendants in the following amounts: (i)   in respect of the Past Remediation Claim: $8,249.75; (ii)   in respect of the Future Remediation Claim: $162 (being one-quarter of the amount attributable to the deployment of an ORC sock in MW12 in 2016), together with such proportion of the costs of the environmental assessment reports obtained in 2004, 2005 and 2007 (i.e., the PB ESA Phase I Report, the PB ESA Phase II Report, and the PB ESA Post-Phase II Report) that relates to an assessment of contamination in the north-western corner of Lot 7 (to be agreed or, failing agreement, determined on the papers following the provision of submissions by the parties in relation to this issue); (iii)   in respect of the Make Good Claim: $150; (iv)   in respect of the Debt Claim: $35,000, to be set off in its entirety by the sum of that amount drawn down by the plaintiff in or about 2015 on presentation of a bank guarantee that had been provided by the first defendant to the plaintiff. 2.   Otherwise dismiss the plaintiff’s claim. 3.   Order the plaintiff to pay 80% of the first and second defendants’ costs and otherwise make no order as to costs.
Catchwords:	CONTRACTS – construction – interpretation – proper construction of a fuel supply agreement – whether applicable in respect of supply of products to particular premises   CONTRACTS – Breach of contract – Lease and fuel supply agreement – claims for past and future remediation costs, make good, regulatory claims and a claim in debt
Legislation Cited:	Conveyancing Act 1919 (NSW), s 133A Protection of the Environment (Underground Petroleum Storage Systems) Regulation 2008 (NSW), cll 19 and 21 Protection of the Environment Operations (Clean Air) Regulation 2010 (NSW), cll 69 and 72 Protection of the Environment Operations Act 1997 (NSW), s 91 Real Property Act 1900 (NSW), s 55A
Cases Cited:	Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136 Espir v Basil Street Hotel Ltd [1936] 3 All ER 91 Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] Ch 592 Gupta v Fordham Laboratories Pty Ltd [2018] NSWSC 551 Holus Bolus Pty Ltd v The Wicko Pty Ltd [2012] NSWSC 497 James v Hutton [1950] 1 KB 9; [1949] 2 All ER 243 Jones v Herxheimer [1950] 2 KB 106 Pascoe-Webbe v Nusuna Pty Ltd (1985) 3 BPR 97,231 Re Savile Settled Estates [1931] 2 Ch 210 Walton Construction Pty Ltd v Pines Living Pty Ltd [2013] ACTSC 237 Waterman v Gerling Australia Insurance Co Pty Ltd (2005) 65 NSWLR 300; [2005] NSWSC 1066
Texts Cited:	Brendan Edgeworth, Butt’s Land Law (7th ed, 2017, Thomson Reuters) Peter Young, Annotated Conveyancing and Real Property Legislation New South Wales (3rd ed, 2003, Butterworths) Second Reading Speech, NSW Parliamentary Debates, Legislative Assembly (20 March 1991) William Duncan, Commercial Leases in Australia (5th ed, 2008, LawBook Co)
Category:	Principal judgment
Parties:	Midcoast Petroleum Pty Ltd (Plaintiff) Keldros Pty Ltd (First Defendant) Andrew Robert Plant (Second Defendant)
Representation:	Counsel: MP Cleary (Plaintiff) R Marshall SC with H Durack (Defendants)   Solicitors: McCullough Robertson (Plaintiff) Nash Allen Williams & Wotton (Defendants)
File Number(s):	2016/00247579
Publication restriction:	Nil

Judgment

1. HER HONOUR: This matter involves various claims made by the plaintiff, Midcoast Petroleum Pty Ltd (Midcoast), the registered proprietor of land in Budgewoi, New South Wales, (the Budgewoi Premises), against: the first defendant (the former lessee of the site), Keldros Pty Ltd (Keldros), for alleged breaches of a lease and of a separate fuel supply agreement; and the second defendant (the sole director of Keldros), Mr Andrew Plant, in his capacity as guarantor of Keldros’ obligations under the relevant lease (though not the fuel supply agreement, to which Mr Plant was not party). At all material times (and indeed for many years before the events the subject of these proceedings), the Budgewoi Premises has been the site of a motor vehicle service station. Keldros was the operator of the service station from November 2005 until mid-2015.

2. The claims made against Keldros arise variously under its lease of the Budgewoi Premises (see [29] below) (claims (i)-(iv) below) and under the fuel supply agreement entered into between Midcoast and Keldros prior to Keldros’ entry into the lease of the Budgewoi Premises (see from [46] below) (claims (i)-(iii) and (v) below).

3. Midcoast pleads in its amended statement of claim filed 12 November 2018 that contamination arising in or around January 2011 in the vicinity of the service station was caused by the failure of three underground storage tanks on Lot 8 (amended statement of claim at [21]-[22]). Midcoast also pleads that the groundwater and soil beneath or around the Budgewoi Premises remains contaminated by hydrocarbons at levels over and above the levels subsisting prior to 2 November 2005. It attributes this to the failure of one or more underground storage tanks and/or associated lines; the diesel fuel lines or former diesel bowser on the Budgewoi Premises; and/or Keldros’ occupancy and use of the premises (amended statement of claim at [23]-[24]). (The claim referable to failure of the diesel fuel lines or bowser is no longer pressed.)

4. Midcoast’s remediation claims are for costs and expenses that it has incurred or will incur in “making good the premises, remediating the premises or bringing the premises into compliance with environmental regulations” (see amended statement of claim at [56]-[59]).

5. As against Mr Plant, Midcoast seeks damages and/or an indemnity from Mr Plant for any amounts for which Keldros is liable for breaches of the lease. Midcoast further seeks orders against both defendants for interest on any award of damages, together with orders for costs.

6. The defendants largely deny liability for the various claims.

7. In summary, Midcoast claims the following amounts from Keldros (as quantified in Midcoast’s closing submissions):

1. the sum of $8,249.75 paid by Midcoast in respect of an invoice issued to it by Wyong Shire Council (the Council) in September 2011, following the issue by the Council to Keldros of a clean-up notice dated 31 January 2011 (the clean-up notice) in relation to the Budgewoi Premises (said by Midcoast to relate to remediation works carried out by the Council at the Budgewoi Premises after a pollution incident in January 2011) (referred to as the Past Remediation Claim);

2. the sum of $639,561 for future remediation of the service station site arising from contamination that is alleged to have occurred to the Budgewoi Premises during Keldros’ occupation of the site (said by Midcoast’s experts most likely to have been caused by the failure of three underground storage tanks and/or associated fuel lines at some time between commencement of Keldros’ lease and up to and including the January 2011 pollution incident) (referred to as the Future Remediation Claim);

3. the sum of $59,895.44 by way of loss and damage said to have arisen from Keldros’ alleged failure, during its occupation of the Budgewoi Premises, to take the necessary steps to comply with environmental regulations which were introduced in 2008 and 2010 (referred to as the Regulatory Claims);

4. an amount (now quantified, depending on whether Midcoast’s expert evidence in relation to various of the make good claims is accepted, plus additional amounts for contractors’ preliminaries and the like) at either $87,188.75 or $38,019.60 for Keldros’ alleged failure to comply with its make good obligations on the determination of the relevant lease (the Make Good Claim); and

5. the sum of $35,000 (plus a claimed service charge) in respect of a debt allegedly owing by Keldros for petroleum products supplied to it by Midcoast during the term of the lease (the Debt Claim).

8. For the reasons set out below I am of the view that the fuel supply agreement in question was applicable to govern the supply of Products at the Budgewoi Premises; the Past Remediation Claim should be allowed; the Future Remediation Claim should be allowed (in part); the Regulatory Claims should be dismissed; the Make Good Claim should be allowed (to a very minor extent); and, in respect of the Debt Claim, the amount drawn down on the $35,000 bank guarantee should be treated as referable to the Debt Claim and no further amount should be recoverable by Midcoast in relation to that claim.

Background

The parties and the relevant site

9. Midcoast was incorporated in 1990. Since about 16 November 2005, Midcoast has been part of the United Group of companies (United Group), one of which companies is United Petroleum Pty Ltd (United).

10. From 1990, Midcoast has been the registered proprietor of the Budgewoi Premises, which are located at 67-69 Scenic Drive, Budgewoi. (In some of the evidence there is reference to the premises being at 71 Scenic Drive, Budgewoi – most relevantly in the original lease - but nothing turns on this discrepancy.) Relevantly, the Budgewoi Premises comprises Lot 7 in Deposited Plan 708066 (Lot 7).

11. Since 17 April 2014, Midcoast has also been the registered proprietor of the site adjacent to Lot 7 (Lot 8 in Deposited Plan 708066) (Lot 8). Before then, however, the owners of Lot 8 were unrelated to Midcoast (or, for that matter, Keldros).

12. From 5 June 1985 to 4 June 2015, there was an easement burdening Lot 8 for the benefit of Lot 7 (in essence for access to four underground fuel storage tanks situated on Lot 8 – referred to as tanks 2, 3, 4 and 5). The easement permitted entry upon Lot 8 so far as was necessary to enable: storage of petrol and diesel fuel in the four underground tanks; and the refilling, inspecting, repairing and maintaining of the underground fuel tanks and the above and below ground pipelines and valves used to transfer the fuel from those fuel tanks to the five fuel dispensers (i.e., petrol bowsers) situated on Lot 7.

13. Keldros is a company of which Mr Plant is the sole director and shareholder. As adverted to above, from 2 November 2005 until termination of its leasehold arrangements in mid-2015, Keldros was the lessee of the Budgewoi Premises (i.e., Lot 7) and the operator of the motor service station on the site. It went into occupation of the premises in about mid-2005, in the circumstances to which I refer below.

Geography of the site and location of underground fuel storage tanks

14. The geography of the site of the Budgewoi Premises (as does the location of the underground fuel storage tanks on the respective Lots) occupies no little significance in this case, as will become apparent in due course.

15. Lot 8 is to the west of Lot 7. Although the hydraulic gradient of the two Lots was somewhat inconsistently described in the evidence (i.e., whether the gradient is northerly or north-easterly - see Mr Neralic’s evidence at T 102), it is agreed that the land slopes downward in either a northerly or north-easterly direction away from Scenic Drive, Budgewoi (which is at the southern boundary of both Lots 7 and 8) and towards Republic Lane, Budgewoi (which is at the northern boundary of both Lots). (In some of the plans in evidence Republic Lane is named Tenth Avenue but again nothing turns on this discrepancy.) This is relevant in that it appears to be accepted by the respective environmental experts that the petroleum “plume” that was identified in 2014 on or adjacent to the site (see from [151] below) has migrated (or is migrating) off site in a northerly or north-easterly direction.

16. On Lot 7 (i.e., the leased premises), there is one underground fuel storage tank (tank 1) that is located wholly on the site (on the eastern side of the site) and one 27,000 litre capacity underground fuel storage tank (tank 6) that is located partly on Lot 7 (on the western or south-western side of the site) and partly on Lot 8. No issue arises in the present proceedings in relation to tank 1. It was used to store distillate (or diesel) but from at least late 2014 tank 1 was not used by Keldros to store any petroleum products. Tank 6, as noted, is in the south-west corner of the site (and to the south-west of the five petrol bowsers). The petrol bowsers are located under a canopy towards the centre of the site (outside the entrance to the service station shop). Tank 6 was used to store unleaded or premium unleaded (ULP/PULP) petrol. On Lot 7, apart from the service station shop, there was also a garage (referred to in various of the reports as a mechanic workshop). The garage was located towards the north-east of the site in the vicinity of tank 1 (and soil contamination in that area – about which there is no longer an issue – was attributed in some of the environmental reports to products stored in that tank).

17. Situated wholly on Lot 8, there are the four underground fuel storage tanks (tanks 2, 3, 4 and 5) to which I have already referred. These are all of a smaller storage capacity than tank 6 (each being of 9,700 litre capacity) and are much older than tank 6 (having been installed in about 1965). Tanks 2-4 were used to store ethanol; tank 5 was used to store either diesel or ULP/PULP. Tanks 2-4 have not been used for fuel storage since early in 2011 (after the pollution incident referred to above). Tanks 2-5 are located slightly to the north-west of tank 6 in what has been referred to in the reports variously as the “tank farm” or tank pit. (As already noted, part of tank 6 is located on Lot 8.)

The Lease

18. From about 1999 until around mid-2005, Keldros had leased (and operated a service station at) other premises in the Budgewoi area (“down the road” at 97 Scenic Drive, which is now a supermarket site) (the 97 Scenic Drive Premises). This is of some relevance since the fuel supply agreement (on which Midcoast bases a number of its claims in the present proceedings) was an agreement entered into when Keldros was in occupation of the 97 Scenic Drive Premises (at that time under the holding over provisions of an expired lease) and it made specific reference to the name under which Keldros traded from those premises (albeit that Midcoast contends it also applied to Keldros’ subsequent occupation of the Budgewoi Premises) (see [169] below).

19. As adverted to above, from around January 2004, Keldros was occupying the 97 Scenic Drive Premises under a holding over tenancy. At some time during 2005, Mr Plant became aware that the service station site at the 97 Scenic Drive Premises had been sold and that the service station was to be demolished and converted into supermarket premises (see his affidavit sworn 7 December 2018 at [12]-[13]; cross-examination at T 123). He has deposed that in about June or July 2005 the petrol station business which operated at the Budgewoi Premises became available and he purchased that business (see his affidavit at [14]).

20. Annexed to Mr Plant’s 7 December 2018 affidavit are documents relating to an assignment to Keldros of the balance of the then existing lease over the Budgewoi Premises (which was to expire in November 2005). Mr Plant’s recollection is that when the matter (i.e., presumably, the assignment of the existing lease and/or his purchase of the service station business) settled, he moved out of the 97 Scenic Drive Premises and began operating at the petrol station on the Budgewoi Premises “within the next day or so” (see his affidavit at [19]; T 123-124). The defendants point to these matters as part of the surrounding circumstances at the time of the entry by Keldros into the fuel supply agreement with Midcoast (see from [74] below); in particular, that Keldros, through Mr Plant, was on a holding over tenancy at the time that the fuel supply agreement commenced and that he did not know at that time (around January 2005) that he would be moving to the Budgewoi Premises.

21. No condition report was prepared at the time that Keldros went into occupation of the Budgewoi Premises in or about mid-2005; nor was any condition report prepared at the time of commencement of Keldros’ 2005 lease (in November 2005) or at the time of the 2008 variation of lease (see below).

22. After Keldros was already in occupation (under the assigned lease which expired on 1 November 2005), Midcoast and Keldros entered into a lease of the Budgewoi Premises, commencing on 2 November 2005, for an initial term of three years.

23. In or around 2008, the parties executed a Variation of Lease, among other things varying the lease entered into in 2005 to extend its term for a further five-year term from 2 November 2008 until 2 November 2013 (the Lease). (Unless otherwise indicated, where I refer to the Lease in these reasons it is to the lease as varied in, and operating from, 2008.) The defendants note that the amended statement of claim (at [13] and [61]) makes a claim for damages for breach of the lease commencing on 2 November 2008 (defined in the pleading as “the Lease”) and, hence, they say that the relevant date for the Make Good Claim is that 2008 date. (Midcoast does not suggest otherwise.)

24. After 2 November 2013, when the Lease expired, Keldros continued in occupation of the Budgewoi Premises pursuant to the holding over provisions of the Lease until Keldros terminated the holding over tenancy and vacated the Budgewoi Premises on 31 July 2015.

25. Following termination of Keldros’ tenancy of the Budgewoi Premises, Midcoast undertook a substantial renovation of the service station premises (largely reconfiguring the shop premises – a matter of relevance to its Make Good Claim). United has occupied and traded from the Budgewoi Premises (and Lot 8) since 13 January 2016. When United took over the conduct of the premises the only tanks in use at that point were tanks 5 and 6 (Ms Garvey at T 115.46). (Reference was made to an old kerosene tank – tank 7, but it does not feature in the present case; see T 116.)

26. On 13 November 2015, Kleinfelder Australia Pty Ltd (Kleinfelder) provided an estimate of remediation costs of $1,570,000 (see the affidavit of Ms Garvey, the former National Property Manager for the United Group, affirmed 30 March 2017 at [73]).

27. On 4 November 2016, Parsons Brinckerhoff (who had been undertaking bi-annual monitoring of existing contamination since United commenced trading from the premises) reported that four Oxygen Release Compound socks (ORCs) had been deployed in monitoring wells MW6, MW9, MW12 and MW13 in order to improve biodegradation of dissolved phase hydrocarbons in the groundwater.

28. VRI works (installation of ventilation system and tank works) were also carried out (by an entity trading as FuelSpec) after Keldros vacated the premises (Ms Garvey at T 114.40); which seems to have involved some re-lining of the tanks (T 115.46). The VRI works involved a two stage process – the first stage required compliance with environmental requirements and the second, at a later date, was more extensive in terms of pump recovery (see Ms Garvey at T 118).

Relevant lease provisions

29. As noted, the initial lease governing Keldros’ occupation of the Budgewoi Premises was for a term of three years expiring on 1 November 2008. That lease was varied by an undated Variation of Lease, to which was annexed the form of the lease as varied. The Variation of Lease extended the term of the lease to eight years, so as to expire on 2 November 2013; increased the rent payable from 2 November 2008; and provided for the variation of the lease as set out in Annexure A thereto (that being the varied lease document).

30. The Lease specifies a commencing date of 2 November 2008 and a terminating date of 2 November 2013, with an option to renew for a period of five years in accordance with cl 21.

29. Clause 6, headed “[t]he use of the premises by the lessee”, contains relevantly the following. The permitted use (as set out in Item 12 to the Reference Schedule) is as a motor service station (see cl 6.1). Clause 6.2, headed “[r]estrictions on use of the premises”, then provides that:

[Keldros] will not at any time during the continuance of this lease:

(a)   use, exercise or carry on or permit or suffer to be used, exercised or carried on in or upon the premises or any part thereof any noxious, noisome or offensive act, trade business, occupation or calling; or

(b)   do or omit or permit or suffer to be done or omitted any act, matter or thing whatsoever in upon or about the premises or any part thereof which is or shall or may be or grow to the annoyance, nuisance, damage or disturbance of other lessees, tenants or occupiers of the building or persons lawfully therein or occupiers or owners of any adjacent premises;

(c)   use or permit or suffer to be used the premises for any illegal purpose or activity;

…

32. Clause 6.3 contains a provision dealing with exterior signs, in effect prohibiting Keldros from placing any such signs or devices without the written consent of the lessor and obliging Keldros, upon the expiration or sooner determination of the Lease, to remove at its expense “any such name, number, advertising sign or hoarding so erected, painted, written or attached with the prior written consent of [Midcoast]” and to make good any damage or disfigurement caused to the premises or the building or the land by reason of such removal.

33. Clause 6.5, headed “[l]essee’s compliance with regulations, ordinances and by-laws”, provides that:

[Keldros] shall at all times during the term observe and comply in all respects with the provisions and requirements of any and every enactment (which expression in this covenant includes as well as any and every Federal and State Act of Parliament already or hereafter to be passed any and every order, regulation, ordinance and by-law already or hereafter to be made under or in pursuance of any such Act) so far as they relate to or affect the use by [Keldros] of the premises, or any additions or improvements thereto made by [Keldros] or the user thereof or the employment or residence therein of any person or persons or any fixtures, machinery, plant or chattels for the time being affixed thereto or being hereon or used for the purpose thereof and shall execute all works and provide and maintain all arrangements which by or under any enactment or by any government department,, [sic] local authority or public authority or duly authorised officer or court of competent jurisdiction acting under or in pursuance of any enactment or may be directed or required to be executed provided or maintained at any time during the said term upon or in respect of the premises or any additions or improvements thereto or in respect of the user thereof or employment or residence therein of any person or persons or fixtures, machinery, plant or chattels as aforesaid whether by the lessee or tenant thereof and to indemnify [Midcoast] at all times against all costs, charges and expenses of or incidental to the execution of any works or the provision or maintenance of any agreements so directed or required as aforesaid and not at any time during the said term to do or omit or suffer to be done or omitted on or about the premises any act or thing by reason of which [Midcoast] may under any enactment incur or have imposed upon it or become liable to pay any penalty, damages, compensation, fees, costs, charges or expenses.

34. Clause 6.6 obliges Keldros at all times at its own expense to keep clean and free all drains and waste pipes in or leading from the premises. (Pausing here, I do not understand this to encompass fuel lines and no reliance was placed on this clause in the proceedings.)

35. Relevantly, cl 6.11, headed “[c]ontamination”, provides that:

(a)   [Keldros] may only

(i)   store, bring onto, use or release Contaminants on the Premises, Building or Land if it is necessary for the permitted use and all licenses [sic], consents and approvals required from Government authorities or instrumentalities by law have been obtained; and

(ii)   manufacture, produce or carry on an activity which creates or leads to the creation of Contaminations if it is necessary for the permitted use.

(b)   [Keldros] must not:

(i)   permit the Premises, Building, Land or the Environment to be contaminated, polluted or affected by Contaminants;

(ii)   do or omit to do anything that results in a governmental authority issuing notice, direction or order requiring a clean up, decontamination, remedial action or making good, under any law;

(iii)   do or omit to do anything that constitutes a violation or contravention of law, the Environment or occupational health and safety;

(iv)   do anything in or around the Premises, Building or Land that in the Lessor’s reasonable opinion may be annoying, dangerous or offensive;

(c)   [Keldros] indemnifies [Midcoast] against all expenses, damages or costs (including legal costs on an indemnity basis) incurred arising from any breach of subclause 6.11(a) caused by [Keldros] or a predecessor of [Keldros] and releases [Midcoast] from any obligation or liability arising or which may arise from any Contamination of the site at the date of this lease.

(d)    If a notice or order is issued by any authority in relation to Contamination arising during [Keldros’] occupation of the Premises, to either [Midcoast] or [Keldros], [Midcoast] may comply with this notice and [Keldros] indemnifies [Midcoast] for all costs and expenses incurred relating to such compliance.

36. “Contaminant” is defined in cl 1.1 to mean: any form or pollution of the Environment; any waste in the Environment; anything which causes or contributes to an Environmental hazard; and a substance at a concentration above the concentration at which the substance is normally found and which harms or is likely to harm, directly or indirectly, the Environment or the health and safety of a person.

37. “Contamination” is defined in cl 1.1 to mean “the existence in the Environment of any Contaminant”.

38. “Environment” is defined in cl 1.1 to mean: “a surrounding of human beings”, including but not limited to: the physical characteristics of those surroundings (including by not limited to land, water, the atmosphere, the ozone layer and underground); the biological characteristics of those surroundings including any form of life; and the aesthetic characteristics of those surroundings including but not limited to the appearance, sound, smell, taste and texture of the surroundings.

39. “Land” is defined in cl 1.1 by reference to Item 4 of the Reference Schedule and means Lot 7. In the original (2005) lease, reference was made to the premises and “Premises” was defined in cl 1.1 to mean the premises described in the Reference Schedule and to include any fixture and fittings of the lessor (Midcoast) in the premises.

40. Clause 9, headed “maintenance and repair”, contains obligations on the part of Keldros both during the term of the Lease (cl 9.1) and on the expiration or sooner determination of the Lease (cl 9.2) in relation to the repair of the premises. Relevantly, those clauses provide as follows:

9.1   Repair of premises during lease: [Keldros] will during the whole of the term and otherwise so long as [Keldros] may remain in possession or occupation when, where and so often as need shall be, maintain, replace, repair and keep the whole of the premises in good and substantial repair, working order and condition (having regard to their condition at the commencement of the lease or the date when [Keldros] or [Keldros’] predecessors entered into possession of the premises whichever is the earlier) and particularly all plate glass, machinery, plant, equipment, fixtures and things thereto belonging or which at any time during the term or possession or occupation as aforesaid shall be erected therein or thereon or be part thereof, damage by fire, flood, lightning, storm, tempest, act of God, war, aircraft damage and reasonable wear and tear only excepted, PROVIDED HOWEVER THAT nothing herein contained shall impose any obligation upon the lessee to do any work of a structural nature except such as may be occasioned by the act, neglect or default of [Keldros] or by its use or occupancy of the premises including any use or occupancy of [Keldros’] predecessors.

9.2   Repair on termination of lease

[Keldros] will at the expiration or sooner determination of this lease peaceably surrender and yield up to [Midcoast] the whole of the premises and every part thereof in good and substantial repair, order and condition in all respects and clean and free from rubbish (having regard to their condition at the commencement of the lease or when [Keldros’] predecessors entered into possession of the premises whichever is earlier), damage by fire, flood, lightning, storm, tempest, act of God, war, aircraft damage and reasonable wear and tear and structural defects not caused by [Keldros] or [Keldros’] predecessors only excepted.

41. Clause 10, headed “[a]lterations”, among other things prohibits Keldros from making any structural alterations or additions in or to the premises or any part thereof (cl 10.1) and obliges Keldros, not later than the expiration or sooner determination of the Lease, to remove all partitioning, equipment and fixtures installed by Keldros on the Budgewoi Premises and to make good all damage occasioned by such removal (cl 10.4).

42. Clause 12.2, headed “[l]essee’s indemnities”, provides that:

[Keldros] will and does hereby indemnify [Midcoast] and will keep [Midcoast] indemnified from and against all actions, claims, demands, losses, damage, costs and expenses for which [Midcoast] shall or may be or become liable in respect of or arising from :

…

(c)   loss, damage or injury from any cause whatsoever to property or person caused or contributed to by the use of the premises by [Keldros] or any servants, agent, sub-tenant or other person as aforesaid;

(d)   loss, damage or injury from any cause whatsoever to property or person within or about the building occasioned by or contributed to by any act, omission, neglect, breach or- [sic] default of [Keldros] or any servant, agent, contractor or sub-contractor, sub-tenant or other person as aforesaid;

…

43. Clause 13.2, headed “[h]olding-over”, provides that, if Keldros “remains in possession of the premises after the expiration or sooner determination of the term” of the Lease with the consent of Midcoast, Keldros will do so as a monthly tenant only, such monthly tenancy to be terminable by one month’s notice in writing by either party expiring at any time.

44. Pursuant to cl 18 of the Lease (read with Item 17 of the Reference Schedule of the Lease), Mr Plant guaranteed the due payment of all moneys by Keldros and the due performance, observance and fulfilment by Keldros of all its obligations under the Lease; and indemnified Midcoast from and against all damages and all costs, losses and expenses which Midcoast may suffer or incur consequent upon or arising directly or indirectly out of any breach by Keldros of its obligations under the Lease.

45. Finally, pursuant to cl 19 of the Lease, headed “[s]ecurity bond”, Keldros was obliged to pay to Midcoast or its agent a deposit in the sum of $35,000 (see Item 18 of the Reference Schedule), which sum was to be refunded to Keldros on the termination of the Lease and vacation of the premises by Keldros, provided that Midcoast was “to deduct from the said sum or apply the same towards the satisfaction of any amount that may be payable to [Midcoast] as a result of any breach by [Keldros] of any of the terms, conditions or covenants of this lease”.

The Midcoast Petroleum Product Supply Agreement (Fuel Supply Agreement)

46. In 2005, Midcoast and Keldros (trading as Diamond Head Autos, Budgewoi) entered into an agreement for the supply by Midcoast to Keldros of fuel and other petroleum products (the Fuel Supply Agreement). (This is admitted at [19] of the defendants’ defence, though the defendants there go on to say that the Fuel Supply Agreement related only to “Diamond Head Autos, Budgewoi located at 97 Scenic Drive, Budgewoi” and not the Budgewoi Premises or Lot 8.)

47. The Fuel Supply Agreement is undated but provides for a commencement date of 1 January 2005. The document bears inconsistent word processing footers: 11 January 2005 in the body of the agreement; 21 February 2005 on the execution clause page; and a third date of 5 January 2005 on the footer to the Reference Schedule. The Fuel Supply Agreement was not executed on behalf of Midcoast by Midcoast’s former directors until on or about 16 November 2005, prior to the United Group’s acquisition of Midcoast which was just after the commencement of the Lease.

48. The Commencement Date of the Fuel Supply Agreement, as noted above, is specified as 1 January 2005 (see Item 3 of the Reference Schedule and cll 3, 5.5 and 7.1) and the Expiry Date is specified as 31 December 2005 (see Item 5 of the Reference Schedule and cll 1.1 and 20).

49. In the definitions clause of the Fuel Supply Agreement (cl 1.1), “Site” is defined as meaning:

the petrol retailing facility, the location of which is set out in Item 10 of the Reference Schedule and where there is more than one location means each and all locations

50. Item 10 of the Reference Schedule identified the site as:

Diamond Head Autos, Budgewoi

(throughout)

51. Under the Fuel Supply Agreement, Midcoast agrees to sell (and Keldros agrees to purchase) each month not less than the Minimum Quantity and not more than the Maximum Quantity of the Product (defined as those products of the type provided by Midcoast, being the products specified in Item 8 of the Reference Schedule – namely, automotive distillate oil (diesel), unleaded petroleum, premium unleaded petroleum, other petroleum products distributed by Midcoast including lubricants, and other products agreed to in writing by Midcoast) (see cl 3.2).

52. Clause 4.12, under the heading “[e]xclusivity”, provides (without limiting cl 3.2) that Keldros would acquire all products required for the business from Midcoast “during the Term and any holding over period”.

53. The Fuel Supply Agreement then sets out, among other provisions, clauses relating to: the terms of supply and delivery (cl 4), including the obligation on the part of Keldros to ensure the site is suitable for the delivery of the “Products” (and complies with all necessary laws and also with Midcoast’s written requirements concerning safety and environmental protection) (cl 4.3); terms of payment (cl 5); title and risk (cl 6); warranties (cl 7); indemnity and release (cl 8); and, relevantly in the context of certain of the claims now brought against Keldros, environmental compliance (cl 10). Any moneys which Keldros fails to pay to Midcoast on the due date for payment, and for which an invoice had been delivered by Midcoast, are subject to a service charge which is to accrue from day to day and compound monthly from the due date for payment until payment was made (cl 5.6). Keldros is not permitted to set off any amounts it was obliged to pay to Midcoast under the Fuel Supply Agreement with any amounts it believes owing to it by Midcoast (cl 5.7).

54. Keldros indemnifies Midcoast against all losses and claims arising directly or indirectly from: Keldros’ use of the Site (including adjacent footpaths, drives and kerbs) or of the equipment or facilities at the site; Keldros’ operation of “the Business” from the site; the storage or handling of any Products on the site including the leakage or spillage of any Products; the presence of any pollutant, toxin or chemical waste on the site; and any breach of the Fuel Supply Agreement, except to the extent that the loss or claim is caused by the negligent act or omission of Midcoast (cl 8.1).

55. Clause 10, headed “[e]nvironmental Compliance”, provides as follows:

10.1   Observance of the law

[Keldros] must at all times comply with provisions of all acts, ordinances, regulations and by-laws of any Authority and with all orders, notices or directions of such Authorities in respect of the operation of the Site and the Business.

10.2   Compliance with Environmental Laws

[Keldros] must at all times, in the operation of the Site (and conduct of the Business) comply with:

(a)   all environmental laws and all directions, procedures and standards regarding the protection of the Site and the surrounding area from environmental harm; and

(b)   all Midcoast’s policies, standards, protocols and directions regarding the environment and occupational health and safety as notified by Midcoast from time to time.

10.3   Underground tanks

If [Keldros] has any underground tanks at the Site in which Products are stored under its control, or any pumps through which any Products are sold from the Site or any other equipment storage facility or property used in relation to the Business, whether a part of the equipment or not, [Keldros]:

(a)   must maintain and repair such tanks, pumps, and other equipment and property and ensure that at all times such tanks, pumps and other equipment properly comply with all environmental laws and other statutory requirements; and

(b)   must at all times keep such pumps and other equipment and property clean and properly painted in such colour schemes as clearly designate that the Products being sold are Midcoast products.

10.4   Leakage or spillage

[Keldros] must:

(a)   immediately notify Midcoast of any known or suspected leakage or spillage of the Products, pollutants, toxin, or chemical waste at the Site or in the surrounding area; and

(b)   accurately record details of any damage caused including without limitation the amount of Product spilled and take such steps as are directed by Midcoast and by any Authority which are necessary or desirable in the circumstances.

10.5   Testing of underground tanks

(a)   [Keldros] must test all underground storage tanks containing Products for water contamination in accordance with all standards, policies, protocols and directions notified by Midcoast to [Keldros] from time to time, and must keep detailed records of all such testing being conducted by it or on its behalf.

(b)   If any underground storage tank contains significant water or water contamination, [Keldros] must:

(i)   immediately notify Midcoast in writing of such event; and

(ii)   take all steps to halt any further risk of water content or water contamination in the underground tanks.

10.6   Risk

[Keldros] acknowledges that, as from the date of this Agreement, [Keldros] assumes all risk of loss or injury to any person or property resulting in any way from the use of the Site including, without limitation, the leakage or spillage of Products.

10.7   Notices and orders

[Keldros] must comply with any notice, order or requisition proposal, recommendation or report from any authority having environmental or occupational health and safety jurisdiction over the Site or [Keldros] and must immediately notify Midcoast in writing if [Keldros] is served with any notice or complaint concerning environmental or occupational health and safety non-compliance.

56. On expiry or early termination of the Fuel Supply Agreement, Keldros is obliged, among other things, promptly to pay to Midcoast all amounts due under the Fuel Supply Agreement (cl 14.2(a)).

57. Clause 20, headed “[h]olding Over”, provides that:

If Midcoast continues to supply the Products to [Keldros] and [Keldros] continued to receive and take delivery of the Products after the Expiry Date [defined under Item 5 of the Reference Schedule as 31 December 2005]:

(a)   the parties will continue to be bound on the same terms and conditions as contained in this Agreement;

(b)   the Agreement may be determined by one month’s written notice by either party to the other which may expire on any day of a month; and

(c)   nothing contained in this clause will be construed as requiring Midcoast to continue to supply the Products to [Keldros] after the Expiry Date.

58. I interpose here to note that Midcoast emphasises that neither of the parties determined the Fuel Supply Agreement by one month’s written notice (as provided for under the agreement).

59. Midcoast’s evidence (see the affidavit of Ms Garvey) is that: Ms Garvey is not aware of any other agreement between Midcoast and Keldros for the supply of petroleum products to Keldros; Midcoast supplied petroleum products to Keldros up to the date on which the Lease was determined and Keldros vacated the Budgewoi Premises; between March 2007 and July 2015, Midcoast supplied petroleum products to Keldros (said to be pursuant to the terms of the Fuel Supply Agreement); the last delivery was made to Keldros on 21 July 2015, the date of the last invoice; and from at least late 2014 to 31 July 2015, all petroleum products supplied by Midcoast to Keldros were delivered to the tanks situated either on Lot 8 or partly on both Lot 8 and the Budgewoi Premises.

60. Hence, Midcoast contends, by reference to the continued supply and receipt of Products, that the parties continued to be bound by the Fuel Supply Agreement after 31 December 2005 (under cl 20) until Keldros vacated the Budgewoi Premises on 31 July 2015.

Environmental assessments of the Budgewoi Premises

61. On 7 December 2004, a Phase 1 Environmental Site Assessment of the Budgewoi Premises was conducted by Parsons Brinckerhoff Australia Pty Ltd and Parsons Brinckerhoff International (Australia) Pty Ltd, trading as Parsons Brinckerhoff (Parsons Brinckerhoff). The investigation was commissioned by Mobil Oil Australia Pty Ltd (Mobil) in July 2004 as part of a due diligence process in connection with a proposed sale (which did not ultimately proceed) of the Budgewoi Premises by Midcoast to Mobil (see the Executive Summary contained in the report produced in respect of that investigation) (PB ESA Phase I Report).

62. The PB ESA Phase I Report noted, as part of the history of the site, that the site had been leased to Caltex Oil Australia Pty Ltd from 1965 to 1976 and thereafter had been owned and operated by other entities (seemingly all for garage or service station uses). The report identified potential sources of impacts at the site (including underground storage tanks, fuel bowsers and associated fuel transfer lines) and potential routes of possible contaminant migration; stated that no evidence of previous environmental assessments (on site groundwater monitoring wells or cut concrete for soil borings) was noted; and stated that no evidence of leakages or spillages from fuel storage facilities had been observed but some minor staining was noted within the vicinity of the bowsers.

63. On 9 May 2005, Parsons Brinckerhoff prepared a Phase 2 Environmental Site Assessment (PB ESA Phase II Report) in respect of the Budgewoi Premises (again for the purpose of Mobil’s due diligence process in connection with the proposed sale to Mobil which did not eventuate). The stated objectives of this assessment (which was commissioned in August 2004) included “to define the nature, extent and sources of any liquid, dissolved and vapour phase petroleum hydrocarbon impacts on site”. Potential sources of contamination were again identified and, again, Parsons Brinckerhoff observed that a site inspection showed no evidence of leakages or spillages from fuel storage facilities but some minor staining within the vicinity of the bowsers.

64. The scope of works undertaken for this assessment included: drilling of 11 soil bores to a nominal depth and collection of representative soil samples at regular intervals; conversion of six soil bores into groundwater monitoring wells; and surveying of groundwater monitoring wells for location and elevation.

65. The results of the Phase 2 Environmental Site Assessment made reference, among other things, to a hydrocarbon odour and elevated PID (Photo-ionisation Detector) level for soil at Soil Bore 5 (SB5) and a hydrocarbon odour for groundwater in Monitoring Well 4 (MW4). (No issue is now raised in the present proceedings as to any soil contamination.) The report noted that PSH (Phase Separated Hydrocarbons) were not encountered in any of the monitoring wells on site. SB5 was shown in the report as located to the east of the fuel canopy towards the north of the Budgewoi Premises site; and MW4 was at the northern boundary of the site (the northern side of the fuel canopy and shop).

66. Pausing here, there was unfortunately some confusion as to the precise location of various soil bores and monitoring wells at different times (not helped by some inconsistency in the labelling of those in different reports). In particular, see the location of the monitoring wells in the plan drawn 19 April 2017 by Kleinfelder of the pre-November 2005 locations – which puts MW4 on the northern boundary (where MW8 is on the post-July 2015 sampling locations); MW8 on the pre-November 2005 plan being on the south-eastern boundary; and MW4 on the post-July 2015 plan being about where MW2 is on the pre-November 2005 plan). Relevantly, for present purposes, I note that there were no monitoring wells in the north-western area of the site until 2011 (T 98).

67. On 1 May 2007, Parsons Brinckerhoff prepared a Post-Phase II Environmental Site Assessment Report (PB ESA Post-Phase II Report), which had been commissioned by Mobil in February 2006 (the investigations for which were carried out during March 2006). The scope of works undertaken included: drilling and installation of two groundwater monitoring wells (MW3 and MW5), the surveying of all new and existing groundwater monitoring wells for location and elevation; the development of new groundwater wells; and purging and subsequent sampling of all new and existing groundwater monitoring wells (eight in total).

68. The key results of the groundwater investigation at the site at that time included that no PSH were encountered in the wells on the site; that hydrocarbon odours were noted in MW3, MW4 and MW5 during groundwater sampling and that a sheen was noted on water from MW3 and MW4. (MW3 appears to have been a monitoring well towards the far north-east of the site; MW5 a monitoring well at the far east of the site; and MW2, referred to in the extract below, was at the south-western corner of the site – seemingly in the vicinity of the boundary between Lots 7 and 8.)

69. The PB ESA Post-Phase II Report stated that:

Generally, impacted groundwater samples have been collected from wells in the north eastern portion of the site, with some impact also detected in MW02 located along the southern (up gradient) site boundary. No groundwater impacts have been detected in the monitoring wells located in the south eastern, or south western corners of the site which is up hydraulic gradient of the USTs and oil storage areas. Consequently the extent of impacts on site can be assessed as being well delineated, however as impacts were detected in wells along the down gradient site boundary, off site migration of contaminants may be occurring and the impacts have not been delineated in this direction.

70. The report concluded that there were elevated TPH concentrations in the groundwater located in the north-eastern portion of the Budgewoi Premises (at MW3, MW4 and MW5), with the highest levels in MW3. The report stated:

The magnitude of soil and groundwater impacts beneath the site does not appear to have increased since the previous investigation (PB 2005). The current investigation indicates that groundwater impacts exists and have the greatest magnitude in the north eastern corner of the site, indicating the source of contamination is most likely in this area of the site, being possibly the diesel UST or oil storage facilities location within the mechanic workshop. As groundwater is inferred to be flowing to the north it is also possible that impacted groundwater may be migrating across the northern site boundary towards Lake Munmorah 500m to the north. The extent of the impacts across this boundary is unknown.

71. In early 2011, the Council conducted an investigation following detection of a strong odour of petroleum at or near the Budgewoi Premises. The Council investigation was an enquiry as to high concentrations of hydrocarbons emanating from the local storm water system into the environment. This investigation included CCTV exploration footage of the stormwater infrastructure at a connection point near to the Budgewoi Premises. The Council concluded that the hydrocarbons entering the storm water system emanated from the Budgewoi Premises. (I note that the respective letters from the Council’s Senior Environmental Protection Officer to Midcoast and then to Keldros in relation to this investigation – see below – were admitted not for the truth of the assertions contained therein but limited to the fact of what was communicated at that time. This is relevant insofar as Midcoast relies on these communications, and in particular the issue of a clean-up notice at around this time and subsequent tax invoice for clean-up costs, as establishing or giving rise to an inference in support of its Past Remediation Claim.)

72. On 21 January 2011, the Council wrote to Midcoast advising it of a pollution incident and enclosing a draft clean-up notice pursuant to s 91 of the Protection of the Environment Operations Act 1997 (NSW). Midcoast’s response to this was that the Budgewoi Premises site was not under the management or control of Midcoast but was leased to Keldros and that, under the terms of the Lease, Keldros was responsible for maintenance of the tanks, daily inventory monitoring, and compliance with NSW environmental legislation. Midcoast requested that the Council issue the notice to Keldros. By letter dated 31 January 2011, the Council did so.

73. The clean-up notice issued to Keldros directed it to take the clean-up action specified therein (including to carry out certain investigative works by 20 February 2011 and to provide to the Council by 7 March 2011 a report in relation thereto).

74. The Council subsequently issued an invoice dated 8 September 2011 to Midcoast containing the following description of the amount claimed in the invoice: “Cost of Clean up – Fuel Contamination of Stormwater January 2011, Budgewoi Shops, Scenic Dr Budgewoi – United Petrol Station (67-69 Scenic Dr)”. The invoiced amount was $6,598.11(inclusive of GST). Midcoast forwarded the invoice to Keldros by letter dated 15 September 2011, referring to “the issue of the failed tank at the above premises and the subsequent contamination resulting from the failure”, which it was said was the responsibility of Keldros, as the lessee. Keldros apparently refused to pay the invoice. The Council then commenced proceedings in the Local Court claiming the sum of $8,249.75 (inclusive of interest and other costs) (the Local Court proceedings). This amount ($8,249.75) was paid by United on 9 August 2013.

75. Meanwhile, in January 2011, and, thus, before the Council notices referred to above were issued, Keldros had itself commissioned a tank and line test from Tanknology Australia (Tanknology). A report dated 3 February 2011 by Tanknology (the Tanknology Report) identified that there was a failure in tanks 2, 3 and 4 (each storing E10 petrol). Following the Tanknology Report, tanks 2, 3 and 4 were decommissioned (and thereafter were no longer used for storage of petrol). Tank 5, which was noted as storing diesel, passed the inspection as did tank 6, which it was noted stored unleaded petrol.

76. In the evidence there are copies of various groundwater monitoring reports commissioned by Keldros in the period from January 2011 and 17 November 2014 from Environmental Investigation Services (EIS) (collectively, the EIS Reports). In the first of those reports (dated 7 February 2011) (the 2011 EIS Report) it is noted that EIS undertook the screening “generally in accordance with an EIS proposal … of 13 January 2011 and written acceptance from Keldros Pty Ltd of 14 January 2011”. Accordingly, that report was commissioned before the Council had issued its 31 January 2011 letter to Keldros (and, for that matter, before it had issued the draft notice to Midcoast). The groundwater testing for that report was conducted on 18 January 2011.

77. In the first of those reports, EIS reported: the presence of concentrations of ethylbenzene above the site assessment criteria (SAC) in two monitoring wells (MW6 and MW8); the presence of TPH concentrations (C10-C36) above the SAC in MW2, MW3, MW5, MW6, MW7 and MW8; and the presence of quantifiable concentrations of TPH (C8-C9) in MW6 and MW8. (Relevantly, on the post July 2015 drawing, MW6 is located to the east of tank 1; MW7 on the north-east boundary adjacent to the workshop; MW8 on the northern boundary adjacent to the shop and in the vicinity of the workshop.)

78. The 2011 EIS Report recommended notification of hydrocarbon contamination at the site and that the following steps be taken: to rectify any failures/leaks in the system; and to monitor all wells with an interface probe to identify any possible PSH and to analyse the wells regularly to assess whether the contamination concentrations detected are decreasing or increasing. (Midcoast complains that Keldros did not act on these recommendations. The EIS reports do, however, provide some evidence to the contrary of that complaint.)

79. EIS next prepared a report dated April 2012 (the 2012 EIS Report) (commissioned by Keldros on 13 March 2012) said to be in order to meet the groundwater monitoring requirements of the Protection of the Environment (Underground Petroleum Storage Systems) Regulation 2008 (NSW) (UPSS Regulation 2008) (see further below). The scope of work there carried out involved one sampling event from each of seven monitoring wells. Field work was conducted on 15 March 2012.

80. The 2012 EIS Report noted, among other things, the presence of TPH concentration (C10-C36) above the SAC in two monitoring wells (MW6 and MW7) and the presence of quantifiable concentrations of TPH (C8-C9) (there being no relevant SAC for there) in MW4 and MW7. The 2012 EIS Report concluded with the same recommendations as the previous report.

81. A further report dated 12 April 2013 was in evidence (the EIS 2013 Report). The subject header for that report was (in capitals) “Six Monthly Groundwater Testing – March 2013”. In the background section of that report, EIS noted that it had in September 2012 conducted groundwater testing for seven wells (MW2, MW3, MW4, MW5, MW6, MW7, MW8). The EIS 2013 Report noted that TPH was detected in the samples MW6 and MW7 at concentrations above the SAC in September 2012 but no PSH was detected in any of the seven groundwater monitoring wells. (Midcoast accepts that this provides evidence of six-monthly testing having been carried out between the April 2012 report and the April 2013 report, although there is no separate report in evidence of that testing.)

82. The 2013 EIS Report noted that neither PSH nor sheen was detected in the groundwater monitoring wells during the current investigation and that some TPH was found in samples from MW6 and MW7.

83. The last EIS report in evidence, dated 17 November 2014 (the 2014 EIS Report), referred to earlier groundwater testing conducted for seven wells in November 2013 (i.e., around eight months after the March 2013 testing), noting that hydrocarbons were detected in the samples from MW6 and MW7 but, again, that PSH were not detected in any of the groundwater monitoring wells during the November 2013 groundwater testing event.

84. The 2014 EIS Report concluded that PSH were not detected in the groundwater monitoring wells “during the November 2014 monitoring round” and that there were “elevated concentrations” of hydrocarbons detected in MW6 and MW7. It was recommended that Keldros check infrastructure for potential losses (and rectify where necessary) and implement a regular monitoring program to sample and analyse the wells to assess whether contamination concentrations detected are decreasing or increasing. (Midcoast’s complaint, again, is that Keldros did not act on this recommendation.) The letter noted that the next round of groundwater testing, as recommended in the UPSS Regulation, was due in May 2015.

85. Meanwhile, Midcoast also commissioned its own site assessments, to which Ms Garvey has deposed.

86. On 2 August 2011, Midcoast commissioned Alliance Environmental Engineering and Consulting Pty Ltd (Alliance) (now known as Kleinfelder) to prepare an environmental site assessment for the Budgewoi Premises (the Alliance Report). The Alliance Report noted that the investigation had been commissioned following the issue of a letter from the Council indicating its intention to issue a clean-up notice as a result of hydrocarbon contamination entering the local stormwater system and that it was “to develop a greater understanding of the nature and extent of the plume”.

87. The Alliance Report noted that the field activities included installation and development of six groundwater monitoring wells (referring to the existence of 14 groundwater monitoring wells in all) and advancement of 16 soil bores. This report concluded there was contamination of hydrocarbons in the groundwater. In particular, it was said that two samples reported concentrations of BTEX and TPH that exceeded the solubility threshold and might be indicative of PSH and that both of those samples were collected from wells located hydraulically down-gradient of the underground “tank pit”, along the northern boundary of the site. (It is clear, from [9.2] of the Alliance Report, that the two wells in question were the “newly installed monitoring wells MW12 and MW13”, said to be located along the northern boundary of the site approximately 20 metres away from the “tank farm”.) The Alliance Report went on to state that:

The chemical composition and spatial distribution of the soil and groundwater contamination indicates that the source of the release is likely to be associated with the ULP/PULP USTs [i.e., the underground storage tanks]. The dissolved phase hydrocarbon plume appears to be migrating in a northerly direction with the highest concentrations being reported in samples collected along the northern boundary. The plume is not delineated to the north. …

88. In summary, the Alliance Report concluded that groundwater contamination had been caused by a release of ULP/PULP from the underground storage tanks and that a dissolved phase hydrocarbon plume was migrating in a northerly direction with the flow of groundwater and was not delineated (i.e., the extent of it was not known) along the northern boundary.

89. On 12 February 2014, Parsons Brinckerhoff prepared a report, having been commissioned by United to undertake a “groundwater monitoring event” comprising monitoring of 14 groundwater monitoring wells (2014 PB Report). In that report, Parsons Brinckerhoff summarised various earlier investigations and noted that:

… Groundwater levels are sporadic around the site and do not give a clear indication of groundwater flow directions. Based off previous reports, groundwater flow has traditionally been to the north.

Well MW12 located along the northern boundary noted 0.04m of product. Historically, this well has reported the highest concentrations at the site.

Wells MW10 located adjacent the north-east of the UST farm and MW13 located along the northern boundary, north of the UST farm, reported the highest hydrocarbon concentrations. Impacts in these wells comprise predominantly light-end hydrocarbons suggesting a petrol source.

Well MW09 located in the eastern portion of the site adjacent west of UST 1 comprised predominantly mid-range range [sic] (TPH C10-C14) hydrocarbons suggesting a diesel source.

Wells MW02 and MW03 located in the south-eastern corner of the site comprise predominantly high-end hydrocarbons suggesting an oil source. Impacts in this direction have been delineated as MW01 did not detect any hydrocarbons. Further, well MW07 located in the north-western corner of the site also comprised predominantly mid to high-end hydrocarbons. Impacts in this historic down gradient direction from the fuel infrastructure have not been delineated.

90. Relevantly, the 2014 PB Report identified Light Non-Aqueous Phase Liquid (LNAPL) in MW12 (over 40mm) from samples taken in January 2014. Pausing here, I note the description given by Mr Neralic of LNAP is that it is “like just petrol sitting on top of water”, though not necessarily fresh (T 103.27). The report concluded (at [8]) that:

Hydrocarbon impacts have been detected in the groundwater beneath the site. Predominantly light-end hydrocarbon concentrations were reported in the groundwater beneath the western portion of the site and predominantly mid-range hydrocarbon concentrations were reported in the groundwater in the eastern portion of the site.

High light-end dissolved phase and PSH reported in the groundwater beneath the western portion of the site may be attributed to leaks from the petrol USTs and/or fuel lines. The previous tank and line testing report (Tanknology, 2011) noted failures in UST’s 2-4 (Ethanol) which is likely the source of the PSH in well MW12. Light-end hydrocarbon impacts may be migrating off-site to the north.

Mid-range hydrocarbon concentrations reported in the groundwater in the eastern portion of the site is likely attributed to the diesel UST and/or fuel lines or the former diesel bowser located at the entrance of the garage. The highest hydrocarbon impacts are located within well MW09 with wells along the northern, eastern and southern boundaries reporting lower concentrations. Therefore, mid-range hydrocarbon impacts appear to be limited to the area beneath the vicinity of the eastern portion of the site.

Delineation of impacts north of wells MW12 and MW13 is recommended along with remediation in the form of removal of hydrocarbon impacted groundwater (i.e., multiphase vacuum extraction). Additionally, six-monthly groundwater monitoring in accordance with clause 21(1)(a) of the UPSS Regulation should continue.

91. Following the vacation by Keldros of the Budgewoi Premises (in July 2015), Kleinfelder was engaged to conduct a further environmental site assessment (2015 Kleinfelder Report). For the purposes of this report, investigations were carried out on site in early August 2015. The 2015 Kleinfelder Report dated 13 November 2015) concluded there was contamination at the Budgewoi Premises, including dissolved phase hydrocarbon concentrations in the groundwater wells MW9 (MW9 being to the east of the canopy between the canopy and tank 1), MW12 and MW13, and that the likely source of the contamination was the “main tank farm” (located on Lot 8). It also concluded that there appeared to have been “a significant increase in groundwater contamination at the site between 1 January 2005 and 31 July 2015. LNAPL was not observed during groundwater gauging and sampling (though it was noted that LNAPL had historically been observed in MW12 and that the current concentrations of TRH F1 and F2 at that location remained indicative of LNAPL).

92. Pausing here, the map prepared by Kleinfelder showing pre-November 2005 sampling locations shows Soil Bore 3 (SB3) towards the far north-west corner of Lot 8, with MW4 behind the shop on the northern boundary. The post-July 2015 sampling locations show MW4 on the southern boundary of the site and do not show SB3. On the later map, MW12 is roughly in the vicinity of SB3 on the earlier map – though there was some contention as between the environmental experts as to the precise location of SB3. MW13 is to the far north-western corner of Lot 7.

Claims

93. As indicated earlier, there are three aspects to Midcoast’s claim that Keldros breached the Lease: failure to make good (in breach of cll 6.3, 9.2 and 10.4 of the Lease); permitting contamination (in breach of cll 6.11(a), 6.11(b)(i), 6.11(b)(i) of the Lease); and failing to remediate (cll 6.5, 6.11 and 9.1 of the Lease) and failure to comply with environmental obligations (the UPSS Regulation and Protection of the Environment Operations (Clean Air) Regulation 2010 (NSW) (Clean Air Regulation)) (in breach of cll 6.2, 6.5 and 6.11 of the Lease); and two aspects to Midcoast’s claim that Keldros breached the Fuel Supply Agreement (other than the Debt Claim): first, permitting contamination (in breach of cll 10.1, 10.2 and 10.3, of the Fuel Supply Agreement) and, second, failure to comply with the UPSS Regulation and the Clean Air Regulation (in breach of cll 4.3, 10.1, 10.2 and 10.3 of the Fuel Supply Agreement).

94. There is, thus, considerable overlap between the respective claims under the Lease and the Fuel Supply Agreement. However, where there is a distinction (and where weight was placed on the latter) was to the extent that the Fuel Supply Agreement imposes an express obligation on Keldros in relation to the maintenance/repair of the fuel tanks and lines (cl 10.3) whereas Midcoast accepts that there is not an express obligation under the Lease for maintenance/repair of the fuel infrastructure (though contending that there is an implied obligation arising out of the fact that Keldros is obliged under the Lease not to permit contamination on the leased premises and has the ability, under the easement, to access Lot 8 for maintenance or repair of the tanks and fuel lines on that property) (see T 234.21ff). A further distinction to be borne in mind is that Mr Plant has no personal liability in respect of any claims under the Fuel Supply Agreement (which becomes relevant if a breach of the Lease but not of the Fuel Supply Agreement is established or if the latter does not apply to Keldros in relation to the Budgewoi Premises, as Keldros contends).

Evidence

95. Midcoast relied on evidence from: Ms Garvey, as noted above, the former National Property Manager of the United Group; Mr Nick Doumanis (the State Manager for New South Wales of the United Group, responsible for overseeing and managing approximately 65 properties owned by or leased to Midcoast including the Budgewoi Premises); Mr Geoffery Manolitsa, the General Manager – Property for United; Mr Alan Swenser, in house Counsel for United; Mr Joe Zakhar, the Business Development Manager employed at Enviropacific Pty Ltd (Enviropacific); Mr Jamie Lobb, a project engineer employed at Enviropacific; Mr Tom O’Callaghan, a manager employed at Enviropacific; the expert evidence of Mr Simon Gould formerly from Napier & Blakeley Pty Ltd (Napier & Blakeley) as to the make good issue; Mr Jeremy Newstead (of Kleinfelder) as to the contamination issues; and Mr Ivan Neralic (of Greencap) as to the cost of remediation.

96. The defendants relied on the evidence of Mr Plant and to evidence of an environmental expert, Ms Rowena Salmon of Ramboll Environ Australia Pty Ltd (Ramboll Environ), as to the contamination issues.

97. As to the lay witnesses (only some of whom were cross-examined), I make no adverse credit findings. Each of the lay witnesses for Midcoast who was cross-examined seemed to me to be genuine in his or her answers in cross-examination and appeared to be endeavouring, to the best of his or her recollection, to answer the questions posed. Each made appropriate concessions.

98. Mr Plant similarly, in my opinion, did his best to answer the questions put to him. He is retired. His Counsel informed me that he was in ill-health and to my observation he appeared tired at points during the cross-examination. He gave his evidence in a matter of fact manner and was brief and to the point. He seemed to me to be genuinely confused as to some of the questions and at times seemed to accept propositions that were put to him in a manner which suggested he was simply doing so rather than engage in argument on the point. I accept his explanation as to what he meant when, in his affidavit, he had deposed that certain make good items as outlined in the Make Good Schedule dated 11 August 2015 (the Schedule) (as discussed in more detail below) were “admitted” (see the cross-examination from T 127ff). It is consistent with the evidence he gave orally as to his understanding of reasonable wear and tear, for example. Ultimately, it became clear that what he understood by saying that an item was “admitted” was that he was admitting that work of the kind identified in that particular item of the Schedule was required to bring the premises back to the condition in which they were at the commencement of the Lease (not that he was accepting that the cost attributed to those items was reasonable; nor that he accepted that Keldros, or he, should be liable for those claimed amounts, or that the condition of certain items was not the result of reasonable wear and tear) (see for example at T 130.20; and at T 142 in relation to corrosion being reasonable wear and tear).

99. In cross-examination, Mr Plant’s explanation as to particular items (such as the security cameras – in respect of which he said he had asked Midcoast if they wanted them left at the premises; and the storeroom – which he said he had never used) was both plausible and had the ring of truth. Quite understandably, Mr Plant wanted to be shown the particular photos of items that he was being asked to accept were the subject of the make good obligations. I did not consider him to be obstructive in any way in that regard and I considered him to be an honest witness. (I summarise below the evidence he gave in cross-examination as to particular items of the Schedule.)

100. As to the expert witnesses, I note as follows.

101. Midcoast’s environmental expert, Mr Newstead (of Kleinfelder) prepared an expert opinion dated 9 May 2017 (Exhibit B). In that report he reviewed earlier reports and made a comparison of the groundwork results pre 2 November 2005 to the state of the site as at 31 July 2015 (see [12.6]). His opinion was that contamination was likely caused by tank failure, emanating from the location of three underground tanks on Lot 8, during Keldros’ period of occupancy at the Budgewoi Premises.

102. Relevantly, in his expert report, Mr Newstead states (at [12.7] and [12.9])

12.7    In general I cannot provide a likely date of release for the contamination identified within soil as soil samples obtained prior to 2 November 2005, during the lease period and post 31 July 2015 have targeted different areas of the site are not directly comparable.

…

12.9   The area of greatest groundwater contamination detected is located directly down-hydraulic gradient of the western tank farm [on Lot 8] with monitoring wells MW12 (Lot 7) and MW13 (Lot 8) reporting concentrations of the COPC [Contaminants of Potential Concern] above guidelines. MW12 has historically detected LNAPL. No baseline groundwater conditions directly down-gradient of the tank farm are available prior to 2 November 2005; however soil samples obtained from SB03 [soil bore 3] (pre 2 November 2005) [this following an inspection in around September 2004] which is in a similar location to MW12, did not detect concentrations of COPC above the laboratory limit of reporting (with the exception of lead). Monitoring wells MW12 and MW13 were installed in 2011 and contamination was present above guidelines at that time. LNAPL was detected in monitoring well MW12 in 2014.

103. For the lay reader, Mr Newstead summarises the above (which he described as the “key finding”) as follows:

In my opinion, based on the soil sample obtained pre 2 November 2005 (SB03) that did not detect COPC above the laboratory limit of detection (with the exception of lead) and the presence of COPC in groundwater in 2011 in MW12, and given the tank and line testing indicating failures within 2011, it is most likely that the release of contamination occurred between 2 November 2005 and 7 Feb 2011 (well installation).

104. Mr Newstead goes on to state at [14.3] of his report:

14.3    A review of the contamination distribution (variable depths and lateral extent) at the site would indicate that there may be multiple sources of contamination, all of which are likely attributable to leaks from the underground petroleum storage system (i.e. underground tanks and fuel lines). The area of highest contamination (groundwater at MW12 and MW13) would appear to be sourced from the underground storage tanks and/or fuel distribution lines in the central to western portion of the site as these monitoring wells are located down hydraulic gradient of this infrastructure and failures were noted during 2011 tank and line testing …

105. (The defendants emphasise that any tanks under Lot 7 – being the premises leased by Keldros – are not blamed in this report as the source of the relevant contamination.)

106. Mr Newstead advises that remediation of the site could be undertaken in multiple ways, including: removal (excavation of contaminated material); groundwater removal and treatment; and in-situ remediation. He considers that the degree of remediation is dependent upon a number of factors including the extent of the contamination (“not currently fully quantified”) and the “desired end point” and relevant land use for each portion of the property which is contaminated. His estimate of the cost of remediation of site to the conditions outlined in the PB ESA Phase II Report, as contained in his expert report, is $1,580,000 (see [21.9]).

107. The defendants’ expert, Ms Salmon, provided an expert report dated 31 October 2017. Again, she had reviewed earlier environmental site assessments. As to the state of the site at 31 July 2015, Ms Salmon states at [74]:

All of the new wells were placed in areas previously not investigated with the exception of MW12 located near SB3 (drilled on 21 September 2004). The logged stratigraphy was similar in both locations, and contamination was detected in shallow soil from both locations, although impact at SB3 was heavy end while MW12 was lighter end ... . MW12 also demonstrated elevated PID readings below the groundwater table which were not observed in SB3. This could indicate that impact to groundwater has migrated into the area between 2004 and 2011. It is noted, however, that location SB3 was not surveyed and well locations were shown inaccurately on the Document 3.3 and 3.5 figures, therefore the SB3 location shown may also be inaccurate which may also account for the different conditions observed. Data for SB3 is also somewhat unreliable due to the incorrect sample depth interval recorded …

108. At [77] Ms Salmon states:

Given the apparently dominant groundwater flow direction to the northeast, the impact identified at MW12 may be sourced from the T2-T5 tank farm or the area of the two storey building. The UST vents are located in proximity to MW12, therefore the vent lines may have acted as a preferential pathway for migration. Impacts present at MW13, in the northwest corner of the site (and MW14 offsite), could potentially be derived from offsite, to the southwest, however, given the similar contaminant profile to MW12 it is most likely they are from the same source. The source of impact, or pathway to the identified locations, may also be influenced by the services of infrastructure located in the northwest portion of the site …, including a service pit, septic tank (immediately south of MW13) and a further structure located on the site boundary between MW13 and MW14 (observed during my site inspection).

109. Ms Salmon also states at [96]:

In summary, with respect to the northwest groundwater impact, it appears likely that the impact was caused by failure of T2-T4 [on Lot 8], however, the date of this failure cannot be confirmed other than prior to 3 February 2011 (tank testing) and most likely prior to January 2011 (Clean-up notice).

110. Ms Salmon says at [122] of her report that “[n]o impacts identified at the site have been confirmed as being released during the period 2 November 2005 and 31 July 2015. The northwest impact is confirmed as occurring prior to 2011 and there are lines of evidence that suggest this may have been after 2 November 2005, although these are not conclusive”.

111. Mr Neralic provided an expert report dated 5 July 2018.

112. Mr Neralic assessed various remediation strategies and selected “active groundwater recovery” as the appropriate strategy for the site, partly for the reason that the hydrocarbon plume was likely to have extended off site to the north (see [8.1.4] – [8.1.5]). As an overview, he considered that the ongoing remediation process would take a period of nine months and would cost $639,561 (exclusive of GST). The remediation area proposed was largely Lot 8 but with a triangular corner in the north-western portion of Lot 7.

Concurrent evidence by environmental engineering experts

113. The environmental engineers (Mr Newstead and Mr Salmon) were asked about eight topics when giving evidence concurrently (see MFI 1; T 175ff). I summarise briefly their evidence given concurrently, as follows.

Topic One: What is the baseline data set for the site as at 2 November 2005 and 2 November 2008?

114. Mr Newstead said that for the baseline data for the site as at 2 November 2005 he considered the PB ESA Phase II Report. Mr Newstead stated that for 2008, there was not a baseline assessment “close to that point”, so he considered the PB ESA Phase II Report and the PB ESA Post-Phase II Report.

115. Ms Salmon said that she considered both the PB ESA Phase I Report and the PB ESA Post-Phase II Report for the baseline data set for the site as at 2 November 2005. According to Ms Salmon she considered both reports because “although the report was dated May 2007 the field work was in March 2006, so in respect to that November 2005 period it’s not that long in terms of changes in the subsurface that you might expect from contamination. A four month period is still quite close”. Ms Salmon also stated that there was a data quality issue in relation to the first data set and that the additional groundwater data from March 2005-2006 was useful to confirm the baseline in 2005.

116. In relation to the baseline data set for the site as at 2 November 2008, Ms Salmon said that there was no further data collected in 2008 and she did not consider this year specifically in her report , though she would “consider it to be the same baseline data set”.

117. Mr Newstead stated that he was “comfortable” with the above approach taken by Ms Salmon.

Topic Two: What is the reliability of the baseline data in the north-west corner provided by SB3?

118. Mr Newstead opined that the data collected from SB3 was reliable. He noted that: Parson Brinckerhoff in part of its phase 2 investigation collected soil samples and screened the soil with a PID; they submitted samples for analysis which reported some low level petroleum hydrocarbon contamination; and the PID did not detect any significant petroleum hydrocarbon contamination (see the PB ESA Phase II Report).

119. Ms Salmon was less convinced about the reliability of the data from SB3, stating that (at T 182.6):

Well, the question relates to the northwest corner, so I’m considering the reliability of that as a baseline data set to be reflective of the northwest corner. Obviously, it’s one location. There’s quite a large area further to the west that’s not covered, and it's a soil investigation and most of the issues that we’re dealing with are groundwater. So, from that point of view, it’s not ideal as a baseline. It doesn’t provide a baseline for groundwater data. I agree that you can use the screening results from that location to detect if there is potential for groundwater contamination to be present, and the results don’t suggest that. It does go below the groundwater table and there was no high PID or hydrocarbon odours below the groundwater table, suggesting that groundwater in that location doesn’t appear to be contaminated at that time.

The issue that I have with that location, primarily, is the accuracy of the location, because it wasn’t surveyed and a lot of the locations on this particular plan from this field exercise have, over time, been established as inaccurate. In particular, MWO6, which is also numbered in red as SBO6, has later been established to actually be located much closer to the southern boundary, you know, sort of around 10 metres or more away from the location that's marked. That just puts a question mark over the accuracy of these locations. In the field, when they’re not surveyed in, or back then they wouldn’t have had the, sort of, GPS locationing tools that people use nowadays … .

(iv)   Make Good Claim

263. Midcoast’s claim for make good is based on cl 9.2 of the Lease. The quantum of Midcoast’s Make Good Claim is set out most recently in a report dated 20 February 2019 by Mr Gould. In this report, Mr Gould has updated his original report. The claim was originally for $122,593.61 (inclusive of GST). It was revised by Mr Gould to $99,714.35 (following service of Mr Plant’s November 2017 affidavit). It was further revised in closing submissions (as explained below).

264. Before turning to the respective parties’ submissions as to this aspect of the claim, it is relevant to note the following evidence from Mr Plant in cross-examination (from T 120ff) as to the copy of the Make Good Schedule dated 11 August 2015 (i.e., the Schedule) referred to by Mr Plant in his 1 November 2017 affidavit in the proceedings.

265. When asked about the meaning of the word “[a]dmitted” in the Schedule, Mr Plant initially agreed that that term signified an admission by Mr Plant that Keldros needed to make good that item (as well as an admission in relation to the cost to make good the item, as per the estimates in the Schedule) (see T 127.38). At T 132, Mr Plant re-stated his position as being that Keldros was admitting responsibility to make good specific items but not necessarily the costs stated in the Schedule (cf items 1.1 and 1.5). (Mr Plant referred to a revised list of costing for the cost of remediation, however, this was not explored further.)

266. During the course of the cross-examination, I formed the view that Mr Plant may not have understood the questions he was being asked (and therefore the concessions he was seemingly making on behalf of Keldros). That led Counsel for Midcoast quite fairly to clarify whether, by accepting Keldros was liable, Mr Plant was accepting implicitly that the damage went beyond reasonable wear and tear (so as to be caught by the make good obligations in the Lease).

267. Mr Plant was asked about specific items in the Schedule and responded as follows:

• As to item 1.1 (‘boarded over one window’), Mr Plant admitted that Keldros was liable to make good this item (and the remediation cost attributed of $500);

• As to item 1.5 (‘security camera installed to rear elevation’), Mr Plant admitted that Keldros was liable to make good this item (and the remediation cost attributed of $700); in relation to the comment in the Schedule for this item that “I’ve never received any direction from Midcoast to remove this item”, Mr Plant explained that was a query on his behalf whether Midcoast, would like to “keep the security camera there or not”.

• As to item 2.1 (‘external decorated surfaces wear and corrosion’), Mr Plant said that “Admitted” in relation to this item had a “different meaning” to “Admitted” in the context of Items 1.1 and 1.5. Mr Plant did not concede that Keldros was responsible for the repairs. Mr Plant stated that he admitted that the corrosion was there but was not admitting that it was Keldros’ responsibility to remedy it. See from T 131.45:

Q.    Yes, and you admit that Keldros has to make good that item, that’s what you say?

A.    I’d debate that. I would have debated that. If it was already there, Keldros shouldn’t have to fix it. I’m just saying that I’ve admitted to it being there. I’m not, not admitting to Keldros repairing it.

• As to item 2.3 (‘rusty guttering’), Mr Plant initially admitted that Keldros was responsible to make good this item, but later opined that it was “common sense” that this damage constituted reasonable wear and tear.

• As to item 2.4 (‘holes (penetrations) below guttering’), Mr Plant admitted that Keldros was responsible to make good this item but that it was not caused by reasonable wear and tear and was “manmade”.

• As to item 2.5 (‘graffiti present and low level staining to bare faced brickwork’), Mr Plant did not remember there being any graffiti at this location.

• As to item 2.12 (‘light fittings corroded and finish wearing’), Mr Plant admitted that Keldros was responsible to make good this item and that it was caused by reasonable wear and tear.

• As to item 3.1 (‘security fittings, fixtures and cameras’), Mr Plant admitted that Keldros was responsible to make good this item but also added that Keldros had never received any directions from Midcoast whether Midcoast wanted to leave these items there or not.

• As to item 3.5 (‘security barrier to door and counter in shop’), Mr Plant admitted that Keldros was responsible “[t]o take those security screens down” and responsible to make good this item.

• As to item 3.10 (‘plant anchor points to workshop slab’), Mr Plant conceded Keldros was responsible to make good the item.

• As to item 4.1 (‘internal painted surfaces worn, damaged, marked and aged’) Mr Plant admitted that Keldros was responsible for making good this item but not the cost. In particular, Mr Plant agreed that the patchwork (pictured in two photographs in Appendix B of the Schedule – in particular, see the bottom two images for Items 4.1 at 1798 of the Court Book) was not reasonable wear and tear and that Keldros should repair this patchwork.

• As to item 4.4 (‘shop floor tiles chipped and damaged’), Mr Plant admitted that Keldros was responsible to make good this item and that this damage was not caused by reasonable wear and tear.

• As to item 4.6 (‘broken tap’), in cross-examination, Mr Plant stated that he could not remember where the broken tap was or ever seeing a broken tap.

• As to item 4.15 (‘section of plasterboard missing in store area’), Mr Plant admitted that Keldros was responsible to make good this item.

Midcoast’s submissions

268. Midcoast notes that Keldros led no expert make good evidence on this claim; and says that Mr Plant gave vague evidence about each item in the Schedule (which was prepared after Keldros vacated the Budgewoi Premises).

269. It is submitted that, in cross-examination, Mr Plant was confused about what he meant by the word “[a]dmitted” which he had written in his affidavit alongside various items but that after cross-examination, there were a number of items that Mr Plant now admitted Keldros was obliged to repair under cl 9.2 and which were not covered by the reasonable wear and tear exception in this clause. It is submitted that these admissions establish that Keldros has breached its obligations under cl 9.2. Midcoast argues that, given the absence of any evidence from the defendants as to the likely cost of making good the Budgewoi Premises, the evidence of Mr Gould as to the likely cost should be accepted.

270. At the conclusion of the hearing, Midcoast produced a revised Make Good Schedule, setting out two alternative positions to the claim made by Midcoast, based on Mr Gould's latest report (dated 20 February 2019). The first alternative (predicated on Mr Gould’s evidence being accepted) is that the total claim with the admissions made by Mr Plant is $87,188.75 (inclusive of GST); the second alternative (if Mr Gould’s evidence is not accepted), would bring the total of the claim, confined to those items admitted by Mr Plant, to $38,019.60 (inclusive of GST). However, in either case Midcoast now seeks additional costs referable to matters such as the contractors’ preliminaries margins and fees totalling $70,150.50 or $28,762.30 on the respective alternative calculations.

Defendants’ submissions

271. The defendants’ response to this claim is said to be as contained in the affidavit of Mr Plant. In that affidavit, Mr Plant’s response to a number of items was simply the word “[a]dmitted”. It is submitted by the defendants that Mr Plant’s explanations should be accepted in relation to all items (noting that he was not cross-examined on most of them; the cross-examination focussing on the items that he had “admitted” in his affidavit).

272. The items “admitted” by Mr Plant in his affidavit are said to be confined to the following (as quantified by Midcoast):

1.1   boarded over one window   $500

1.5   security camera   $700

2.1   external decorated surfaces wear and corrosion   $4,400

2.3   rusty guttering   $400

2.4   holes (penetrations) below guttering    $100

2.12   light fittings corroded and finish wearing    $2,560

3.1   security fittings, fixtures and cameras   $680

3.5   security barrier to door and counter in shop    $520

3.10   plant anchor points to workshop slab    $150

4.1   internal painted surfaces worn, damaged, marked and

aged   $21,320

4.4   shop floor tiles chipped and damaged   $100

4.15   section of plasterboard missing in store area   $100

273. The defendants say that in cross-examination Mr Plant clarified that only items 1.1, 2.4, 3.5, 3.10, 4.4 and 4.15 were unequivocally admitted as being the responsibility of Keldros (albeit that the allocated repair costs were not agreed to). In particular, it is noted that item 2.12 (corrosion to forecourt canopy lights for $2,560) was attributed to reasonable wear and tear; and that for item 4.1 in respect of the internal painting it was only some minor patchwork that was not attributed to reasonable wear and tear and Mr Plant did not admit item 2.1 in respect of the external decorated surfaces.

274. The defendants submit that Mr Gould was unable to give evidence first-hand as to the damages, since he did not inspect the site in preparation of the Schedule. It is noted that he had no condition report as at 2 November 2008, or any other date from which to draw a comparison with the exit condition in late July 2015; the only source he had available was the 2005 Asbestos Audit Report (with site inspection occurring on 17 November 2004). It is submitted that this gave scant detail of most items in the Schedule.

275. The defendants, thus, submit that only items 1.1, 2.4, 3.5, 3.10, 4.4 and 4.15 (totalling $1,470) could be considered as a valid claim for damages and as not falling within the fair wear and tear exception; but even then they submit that such a claim fails in relation to most of the items, having regard to the evidence of Mr Doumanis under cross-examination that the service station improvements had been radically altered in the second half of 2015.

276. The defendants point out that a decision had been made by Midcoast to trade the service station itself (or by its parent, United), in preparation for which a major refurbishment took place, including: the male and female toilets were gutted and completely renovated to a high standard; the shop was gutted, including to the point of demolition of its walls and then completely reconfiguring the shop within, the counter facing in the opposite direction to previous; the entrance in a different location and brand new equipment installed; the office and kitchen were also majorly renovated, the later with new fittings installed; externally, the Budgewoi Premises were remodelled with the installation of brand new pumps and a complete renewal of the facade in “proud United livery”; and structural alterations were also made to the rear elevation of the building, which is now totally covered in metal sheeting. (The defendants note that it is not known what happened to the storeroom that Mr Plant says he never used but nothing turns on this.)

277. It is submitted that no damages are recoverable for a breach of any covenant in respect of any make good obligations as it has been shown that the premises, regardless of their state of repair, have shortly after determination of the Lease had such structural alterations made to them as to render any repairs that might have been done by Keldros valueless (by reference to s 133A of the Conveyancing Act 1919 (NSW) (Conveyancing Act)). Section 133A provides:

(1)   Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid; and in particular no damage shall be recovered for a breach of any such covenant or agreement to leave or put premises in repair at the termination of a lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the lease have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement.

(2)   A right of re-entry or forfeiture for a breach   of any such covenant or agreement as aforesaid shall not be enforceable, by action or otherwise, unless the lessor proves that the fact that such a notice as is required by section 129 had been served on the lessee was known either:

(a)   to the lessee, or

(b)   to an under-lessee holding under an under-lease which reserved a nominal reversion only to the lessee, or

(c)    to the person who last paid the rent due under the lease either on the person's own behalf or as for the lessee or under lessee,

and that a time reasonably sufficient to enable the repairs to be executed had elapsed since the time when the fact of the service of the notice came to the knowledge of any such person.

Where a notice has been sent by post in a registered letter addressed to a person at the person’s last known place of abode in or out of New South Wales, and that letter is not returned through the post office undelivered, then, for the purposes of this subsection, that person shall be deemed, unless the contrary is proved, to have had knowledge of the fact that the notice had been served as from the time at which the letter would have been delivered in the ordinary course of post.

This subsection shall be construed as one with section 129.

(3)   This section applies whether the lease was created before or after the commencement of the Conveyancing (Amendment) Act 1930.

278. The six items the defendants concede are “potentially” items that the defendants should make good are (other than the workshop slab penetrations) said to be subject to the provisions of s 133A of the Conveyancing Act 1919.

279. It is noted that if the lessor has repairs actually carried out that is strong evidence that the cost of the works is the proper amount of damages (Jones v Herxheimer [1950] 2 KB 106) but that, otherwise, the lessor should prove the actual diminution in value of the premises to achieve more than nominal damages (Espir v Basil Street HotelLtd [1936] 3 All ER 91; James v Hutton [1950] 1 KB 9; [1949] 2 All ER 243).

280. The defendants also made reference to William Duncan’s commentary in Commercial Leases in Australia (5th ed, 2008, LawBook Co) (at [7.160]):

… [D]amages for breach of the covenant to keep or put premises in repair during the currency of the lease, or to leave the premises in repair at the termination of the lease, shall not exceed the amount by which the value of the reversion in the premises is diminished owing to the breach of such a covenant. Further, no damages shall be recovered for a breach of any covenant if it can be shown that the premises, regardless of the state of repair, would, shortly after determination of the lease, be pulled down, or have structural alterations made to them as to render the repairs valueless. [footnotes omitted]

281. Further, in Annotated Conveyancing and Real Property Legislation New South Wales (3rd ed, 2003, Butterworths) the author explains the effect of s 133A (at [32740.1]) as:

The effect of this section is to provide an upper limit to the amount of damages which may be received by a landlord for breach of a covenant to keep or put premises in repair during the currency of the lease or to leave or put premises in repair at its termination. The section does not provide an altered method for assessing the damages: Hanson v Newman [1934] Ch 298, nor does it apply to other covenants, such as a covenant to restore a building to its original condition at the determination of the lease: James v Hutton and J Cook & Sons Ltd [1950] 1 KB 9; [1949] 2 All ER 243. The purpose of the section is to prevent landlords recovering damages or forcing payments from tenants where strictly speaking, a tenant may be under an obligation to repair an uneconomic building that will be pulled down in any event, though it does not only operate in such an extreme class of case. If the landlord actually does have repairs carried out, that is strong evidence that the cost of the works is the proper amount of damages: Jones v Herxheimer [1950] 2 KB 106; [1950] 1 All ER 463; Smiley v Townshend [1950] 2 KB 311; Haviland v Long [1952] 2 QB 80; [1952] 1 All ER 463. Otherwise it would seem that the landlord should give evidence of the actual diminution in value of the premises if he is to succeed in more than nominal damages: Espir v Basil Street Hotel [1936] 3 All ER 91; James v Hutton and J Cook & Sons Ltd [1950] 1 KB 9; [1949] 2 All ER 243. As an illustration of how the section operates, in Salisbury v Gilmore [1942] 2 KB 38, there was a lease for 14 years expiring in 1939. In 1936 the tenant requested a renewal of the lease, but was informed that the landlord intended to pull the premises down at the expiration of the lease. In 1939 the tenant vacated the premises and left them out of repair, but the landlord then changed its mind. The court held that the tenant was entitled to rely on this section to limit the landlord’s damages.

282. It is submitted that none of the claimed make good items has actually been repaired.

283. In cross-examination, Mr Plant did not admit 2.1, 2.3 and 2.12. It is submitted that repair of all of these items except for the workshop slab item was rendered otiose by the structural alterations made to the service station improvements. The only amount ultimately conceded was the amount of $150 for item 3.10.

Determination of the Make Good Claim

284. Broadly speaking, I accept the submissions made by the defendants in relation to this claim. It is not possible to determine precisely the condition of the Budgewoi Premises at the relevant time by reference to which the make good obligation is to be tested; Mr Gould’s evidence was unsatisfactory in that regard; a large number of the items clearly became otiose once there was a substantial reconfiguration of the Budgewoi Premises; and a significant number of other items would in my opinion clearly also have fallen within the reasonable fair wear and tear exception (although I note that this was not pleaded by way of defence). For example, with item 2.12, which related to corroded light fittings that might have been in the premises for some time from 2005 through to 2015, there is an obvious likelihood that corrosion would fall within the proviso for reasonable wear and tear. Insofar as this was not pleaded, Keldros argues that it emerged on the evidence but in any event that those items would not be recoverable by reference to s 133A of the Conveyancing Act.

285. The basis on which Midcoast sought to maintain its claim to the items that might be said now to have become otiose because of the renovations was that it was the obligation at the date of the termination of the Lease that was relevant. However that does not take into account s 133A of the Conveyancing Act. A whole series of items relating to the shop premises cannot possibly now be recoverable (such as the items relating to the shop counter which has now been relocated and the items relating to the new toilets which have been installed). Although it was said that some of the areas of the shop premises (such as the rear elevation) had not been altered, I was left with insufficient evidence to be able to conclude that the claimed make good items (even those where rectification works were admitted by Keldros to be required as at the date it vacated the Lease) are now recoverable.

286. I would therefore allow no more than the conceded amount of $150 in relation to item 3.10 for the Make Good Claim and in those circumstances the additional amounts claimed on the recalculated schedule handed up on 13 March 2019 do not arise.

(v)   Debt Claim for Petrol and Diesel Purchased in July 2015

287. This claim is brought under cl 5.1 of the Fuel Supply Agreement, pursuant to which Keldros is obliged to pay for petroleum products purchased by Keldros.

288. Midcoast notes that there is no dispute by the defendants that a debt for petroleum products was owing by Keldros; and points to admissions made to that effect on determination of the Lease by Mr Plant and in cross-examination.

289. On 21 July 2015, Midcoast invoiced Keldros for $38,876.76 for 3,003 litres of diesel and 27,952 litres of unleaded petrol. On or about 31 July 2015, Keldros paid to Midcoast $3,876.76 in payment of the invoice. The complaint is that in breach of cl 5.1 of the Fuel Supply Agreement, Keldros has failed to pay Midcoast the amount of $35,000. It is submitted that Keldros owes Midcoast $35,000 for petroleum products plus interest.

290. In relation to the Debt Claim, the defendants say that, in or around August 2015, the amount was paid to United, as Midcoast’s agent, “as a call up pursuant to a Bank Guarantee provided to it by the first defendant for a Fuel Bond” (see [54] of the defence). Midcoast admits that it received the sum of $35,000 in or around August 2015 following a call up of the bank guarantee (see [4(b)] of its reply) but says that the sum was applied against the loss and damage suffered as a result of Keldros’ breach of the Lease, or alternatively, breach of the Fuel Supply Agreement “generally”; and denies that the sum was paid or applied to satisfy the outstanding invoice (see [4(c)-(d)]). (Midcoast says in its closing submissions that this money is currently held in a separate bank account and it concedes that any ultimate award of damages for breach of lease should be reduced by the amount of $35,000.)

291. The defendants say that there is no doubt that Keldros short paid its last fuel invoice by $35,000; however, Keldros directed Midcoast to apply the bond to the payment of fuel. The defendants point to the evidence of Ms Garvey to the effect that the bank guarantee was “cashed” (T 113.50) and the funds held in “some sort of bond trust of some description” (T 114.5). The first defendant’s position is that it has, thus, paid for the fuel and that the service charge does not accrue as the fuel has been paid (or, if not paid, Midcoast and/or United have had the use of the money that should have been refunded to the first defendant). Pausing here, as I understand it Midcoast accepts that it cannot press the claim for a service charge (or interest) on money that it has retained in its account but not applied to any rental arrears or other default (T 266). In that regard, Midcoast contends that the bank guarantee or security bond was to be applied against the Make Good Claim and the clean-up notice (T 266).

Determination of the Debt Claim

292. True it is that the security bond was not provided pursuant to the terms of the Lease and strictly was not able to be called upon by Midcoast to meet the outstanding fuel amounts. However, there was a clear direction by Keldros to permit Midcoast to apply the amount for that purpose and it was not open in my opinion to Midcoast to draw down that amount and then simply retain it in a bank account as some form of security for a claim it might later make for breach of the Lease. (See, for example, my observations in Gupta v Fordham LaboratoriesPty Ltd [2018] NSWSC 551.) Certainly, Midcoast did not point to any contractual entitlement for it to do so.

293. I was not taken to any authorities as to the circumstances in which a claim may be made on a bank guarantee provided as security for performance of a party’s obligations, perhaps because the point is an obvious one. It suffices here simply to refer to Clough EngineeringLtd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136 (Clough Engineering), adopted in Walton Construction Pty Ltd v Pines Living Pty Ltd [2013] ACTSC 237.

294. In Clough Engineering at [85], the Full Court of the Federal Court (French J, then sitting in the Federal Court, Jacobson and Graham JJ) said, in the context of an appeal from a decision in relation to a claim for interlocutory injunctive relief to restrain calls on certain guarantees furnished under an international construction contract:

The question of construction as to whether the underlying contract contains a qualification on the right to call upon the security must be determined in light of the contract and the form of the performance guarantee as contained in the contract. This accords with the basic principle of construction that the terms of an instrument must be read as a whole: Re Media, Entertainment and Arts Alliance; Ex parte The Hoyts Corporation Pty Ltd (1993) 178 CLR 379 at 386-387. It also accords with the approach taken to the construction of the underlying contract in the leading authorities to which we have referred: see eg Wood Hall Ltd 141 CLR at 445, 451, 457-458; Fletcher Construction [1998] 3 VR at 821-822.

295. In the context of disputes as to whether a call upon a performance bond or guarantee will be enjoined, their Honours noted that there were three principal exceptions to the rule that a court will not enjoin the issuer from performing its unconditional obligation to make payment: to restrain the party in whose favour the performance guarantee was given from acting fraudulently; to restrain that party from acting unconscionably; and, where that party has made a promise not to call upon the bond, to enjoin that party on normal principles relating to the enforcement by injunction of negative stipulations in contracts (see from [75]ff).

296. Once called upon, however, there can be no serious suggestion (nor did I understand it to be suggested by Midcoast) that the party calling on the guarantee (Midcoast) can retain the funds for its own purposes (whether to hold as security or otherwise) but at the same time maintain a claim for the breach in respect of which the funds were claimed. In the present case, as I understand it, there was no complaint by Keldros as to the cashing in by Midcoast of the bank guarantee – in fact, Keldros gave directions to that effect, but it did so on the basis that the moneys be applied to the accepted amount owing for rent. Midcoast chose not to apply the funds in that way and appears to have retained them as security for any anticipated (and not then quantified) make good claim or to satisfy any liability in respect of the clean-up notice and tax invoice (though it is not apparent that this was its position at the time).

297. Midcoast has retained that sum for a considerable period of time and has not, in effect, yet accounted for it. In the circumstances, no service charge should be allowed in respect of the claimed amount for fuel and the $35,000 should be treated as referable to the Debt Claim. (The alternative would be that the Debt Claim would be allowed, minus the service charge, and the amount of $35,000 otherwise to be refunded to Keldros would be set-off against the amounts for which it is liable in these proceedings – including the Debt Claim; which would, thus, have the same effect.)

(vi)   Claim against Mr Plant

298. Midcoast claims Mr Plant is liable, as guarantor, for the loss and damage caused by Keldros for its breach of the Lease. The amounts of Mr Plant’s liability are for the Past Remediation Claim; Future Remediation Claim; the Regulatory Claims; and the Make Good Claim. It is conceded that any damage awarded against the first defendant under the Lease is also able to be awarded against the second defendant as guarantor under the Lease.

299. I accept the submission by Midcoast that Mr Plant, as guarantor under the Lease, is also liable in relation to any breaches of the Lease that have been successfully established. This was not disputed by Mr Plant.

Conclusion

300. Midcoast has succeeded but only to a very minor extent compared to the amount it claimed from Keldros (this being most evident in terms of the remediation claims). In those circumstances I consider that the appropriate order is for Midcoast to pay 80% of Keldros’ costs and for there to be no order as to Midcoast’s costs of the proceedings. However, I will hear submissions on that aspect of the matter if either party so desires.

Orders

301. For the above reasons I make the following orders:

1. Judgment for the plaintiff against the first and second defendants in the following amounts:

1. in respect of the Past Remediation Claim: $8,249.75;

2. in respect of the Future Remediation Claim: $162 (being one-quarter of the amount attributable to the deployment of an ORC sock in MW12 in 2016), together with such proportion of the costs of the environmental assessment reports obtained in 2004, 2005 and 2007 (i.e., the PB ESA Phase I Report, the PB ESA Phase II Report, and the PB ESA Post-Phase II Report) that relates to an assessment of contamination in the north-western corner of Lot 7 (to be agreed or, failing agreement, determined on the papers following the provision of submissions by the parties in relation to this issue);

3. in respect of the Make Good Claim: $150;

4. in respect of the Debt Claim: $35,000, to be set off in its entirety by the sum of that amount drawn down by the plaintiff in or about 2015 on presentation of a bank guarantee that had been provided by the first defendant to the plaintiff.

2. Otherwise dismiss the plaintiff’s claim.

3. Order the plaintiff to pay 80% of the first and second defendants’ costs and otherwise make no order as to costs.

**********

Decision last updated: 01 August 2019