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According to specialist construction lawyer, Deborah Ritchie, the judgement in Lambson Fine Chemicals Ltd v Merlion serves as a reminder of the importance of carrying out thorough due diligence, particularly if planning to redevelop property for residential purposes when it previously had industrial use.
A partner at Nelsons, Deborah says it also confirms what does and does not constitute an actionable misrepresentation. She explains: “In this case, Merlion had acquired a 40-acre industrial property from Lambson for £12.25m with the intention of redevelopment, possibly for residential purposes.
“Shortly before the property was sold, ground investigation specialists carried out borehole tests which found that the soil was contaminated with “Blue Billy”, a waste product from gasworks which contains high concentrations of cyanide. The sale went ahead, however Lambson agreed to a retention sum being held back pending removal of the Blue Billy from the soil. The bulk of the retention sum was eventually paid, but £150,506 remained outstanding. Lambson brought a claim for the balance of the purchase price. Merlion counterclaimed the sum of £425,597 for excavating and removing the polluted soil.
“Merlion’s argument was that it entered into the sale agreement with Lambson in reliance upon a written representation made shortly before the sale by one of Lambson’s directors. The director had undertaken and confirmed that he knew of no contamination other than that specifically identified in the environmental survey report, and that the parties had agreed that borehole tests indicated a level of contamination for the property as a whole and should not therefore be interpreted as meaning that there was only contamination at the site of the boreholes. Merlion maintained that this representation was made fraudulently and that following the purchase, it discovered that over 14,000 tonnes of soil had been contaminated by Blue Billy.”
Deborah says the main issue at trial was whether the statements contained in the director’s letter constituted an actionable misrepresentation. She comments: “The Judge held that the letter could not be interpreted in isolation and that the factual background needed to be taken into account, which was that the property was extremely valuable, Merlion was very keen to purchase it, the parties were sophisticated commercial organisations, and that the director and Lambson had given full disclosure and had never sought to keep back or obstruct Merlion from whatever information it had reasonably required before the sale. It had also been known by everyone that there was heavy and widespread contamination across the site and that extensive remedial works would be required.
“The Judge found that the director’s pre-sale letter was straightforward and honest, and that Lambson had no knowledge of any further contamination beyond facts set out in the environmental survey report. Accordingly, the Judge found that the letter contained no actionable misrepresentation, or evidence of fraud or deceit. It was therefore agreed that Lambson was entitled to the outstanding retention monies, with interest. In terms of Merlion’s counterclaim, that was partially allowed, however overall there was a balance to be paid by Merlion to Lambson.”