The NSW Court of Appeal has held that an acquiring authority which made an offer of compromise 10 months prior to hearing which was ultimately more favourable to a dispossessed land owner than the Land and Environment Court’s determination of compensation, was not entitled to its indemnity costs under Rule 42.15(2) of the UCPR. The Court found that the dispossessed land owner was entitled to its costs up to and including the date the offer of compromise was made but, after that date, each party was required to bear its own costs of the litigation.

CLASS 3 COMPENSATION PROCEEDINGS – THE GENERAL COSTS POSITION

In Class 3 compensation proceedings, the costs position following the conclusion of proceedings differs from the general costs rule that “costs follow the event”.[1] The general costs rule which applies in Class 3 compensation proceedings was summarised in the 2011 NSW Court of Appeal case of Dillon v Gosford City Council[2] (Dillon). In Dillon, the Court held that a dispossessed land owner claiming compensation in respect of a compulsory acquisition would usually be entitled to recover the owner’s costs of the proceedings if the owner had acted reasonably in pursuing the proceedings and had not conducted them in a way which gives rise to unnecessary delay or expense.[3] That is, even if the Court’s determination of the compensation payable to the land owner is less than that which the land owner claimed, there is no general presumption that costs should “follow the event” meaning that the land owner would be at risk of having to pay the acquiring authority’s litigation costs.[4]

However, in Dillon, the facts of the case did not require the Court of Appeal to consider the costs position in Class 3 compensation proceedings where an offer of compromise has been made. Offers of compromise made under the Uniform Civil Procedure Rules 2005 (UCPR) (and the more informal Calderbank letters) can provide a costs penalty against a party who has unreasonably failed to accept another party’s offer to settle the proceedings and has taken the matter to hearing and been unsuccessful in their claim.

In the recent decision of Tempe Recreation (D500215 and D1000502) Reserve Trust v Sydney Water Corporation[5] (Tempe) the NSW Court of Appeal considered this issue.

In Tempe, the Court of Appeal considered, amongst other issues, an application by Sydney Water Corporation (Acquiring Authority) for leave to appeal against costs orders made by the NSW Land and Environment Court (LEC) in circumstances where the Acquiring Authority had made an offer of compromise on which it relied to seek its costs from the dispossessed land owner.[6]

THE LEC’S DECISION ON OFFERS OF COMPROMISE

On 2 December 2011, the Acquiring Authority compulsorily acquired easements over Tempe Reserve from the Tempe Recreation Reserve Trust (Applicant) in accordance with the Land Acquisition (Just Terms Compensation) Act 1991 (NSW). The easements were acquired for the purpose of a water supply pipeline from the Kurnell desalination plant. The Applicant commenced proceedings in Class 3 of the LEC’s jurisdiction, objecting to the amount of compensation offered. The Applicant initially claimed $1,790,000 compensation but, by the time the matter was heard, this had increased to $5,000,000.

The LEC ordered that:

  1. the compensation payable to the Applicant was $106,000; and
  2. the Acquiring Authority was to pay the Applicant’s costs of the proceedings.

Following this decision, the Acquiring Authority sought to have the costs order vacated. It instead sought orders under Rule 42.15(2) of the UCPR on the basis that on 13 February 2013 (ie. 10 months prior to the hearing) it had made an offer of compromise in accordance with the UCPR in the amount of $268,000. This offer had not been accepted by the Applicant and the Applicant had obtained an order or judgment which was “less favourable” than the terms of the offer.[7]

In such circumstances, Rule 42.15(2) of the UCPR provides:

Unless the court orders otherwise:

(a) the plaintiff is entitled to an order against the defendant for the plaintiff’s costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and

(b) the defendant is entitled to an order against the plaintiff for the defendant’s costs in respect of the claim, assessed on an indemnity basis:

(i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and

(ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made. (emphasis added)

Specifically, the Acquiring Authority sought orders that:

  1. it pay the Applicant’s costs on the ordinary basis up to 13 February 2013; and
  2. the Applicant pay its costs of the proceedings on an indemnity basis on and from 14 February 2013.

The LEC dismissed the Acquiring Authority’s motion finding that Rule 42.15(2) was not engaged and, alternatively, the Court should exercise its discretion under Rule 42.15 to make an “otherwise order”.

THE COURT OF APPEAL DISAGREES

Not being satisfied with the LEC’s determination of compensation, the Applicant appealed to the Court of Appeal regarding the proper construction of the easement terms. The Acquiring Authority sought leave to cross-appeal from the LEC’s orders that it pay the Applicant’s costs.

The Court of Appeal rejected all grounds of the Applicant’s appeal against the LEC’s determination of the compensation payable.

In relation to the Acquiring Authority’s application for leave to appeal, the Court of Appeal allowed the cross-appeal and set aside the LEC’s costs orders.

The Court of Appeal noted that under the UCPR, not all of the Rules apply to the exercise of the LEC’s jurisdiction in Class 3 compensation proceedings. Relevantly, the rule that “costs follow the event” (Rule 42.1) does not apply. However, the rules regarding offers of compromise, specifically Rule 42.15, do apply.

APPLICATION OF RULE 42.15

In the LEC, the primary judge agreed that the Acquiring Authority’s offer of compromise had complied with the UCPR requirements, but determined that Rule 42.15 was not engaged because the Applicant had obtained a “more valuable” outcome from the Court’s determination than just the monetary compensation payable. That is, the Applicant had also obtained certainty of the meaning of the easement terms moving forward. At [10], the primary judge stated:

It is true that the amount of the determination was less than the amount of the offer. However, fundamentally the case concerned the interpretation of an easement unilaterally drafted and imposed by SW over almost the entire length of Tempe Reserve. The main question was whether or not the easement permitted SW to place a large water pipeline above the surface of Tempe Reserve. If so, then the public enjoyment of Tempe Reserve would be greatly diminished and the compensation payable to Tempe could well have been millions of dollars (as Tempe contended). SW contended for nil compensation on the interpretation that I adopted. If Tempe had accepted the offer it would have received $268,000 but without resolution of the interpretation question. In contrast, under my decision Tempe is entitled to $106,000 plus the antecedent findings that SW's rights under the easement do not permit works above the surface of Tempe Reserve. That result is, in my view, much more valuable than the mere dollar amount offered by SW. (emphasis added)

The Court of Appeal disagreed with this approach to the operation of the Rules. It found that the issue in the litigation was whether compensation of $5,000,000 was payable as claimed by the Applicant, or $6,000, as contended by the Acquiring Authority. Although this issue would largely turn on the question of construction of the easements, the fact that the Applicant also gained the advantage of certainty as to the meaning of the easements this did not displace the operation of the Rules. Leeming JA stated [98]:

Those advantages are collateral consequences of the Trust's failure on the ultimate issue: the compensation it was entitled to. Further, it is to be borne in mind that the provisions of the rules as to offers of compromise are specifically made applicable to compensation proceedings in Class 3 of the court's jurisdiction, and are intended to encourage the compromise of contests which, notoriously, can be long and expensive. His Honour's construction does not promote that purpose. Indeed, it undermines that purpose. (emphasis added)

For this reason, Rule 42.15 was engaged.

COURT’S DISCRETION TO ORDER “OTHERWISE” THAN IN ACCORDANCE WITH THE REQUIREMENTS OF RULE 42.15

Alternatively, the LEC had determined to exercise the discretion to make a costs order “otherwise” than in accordance with Rule 42.15. The LEC gave four reasons for this:

  1. The costs principle in Class 3 compulsory acquisition compensation proceedings confirmed in Dillon and Brock v Roads and Maritime Services[8], which guides the Court’s discretion when deciding whether to award costs to an applicant, also guides the exercise of the Court’s costs discretion to make an “otherwise order” under Rule 42.15(2).
  2. It was reasonable and in the public interest that the interpretation of the easement be resolved by the proceedings continuing to a conclusion and judgment being delivered on the issue. The interpretation issue could not be resolved by the offer of compromise.
  3. The Acquiring Authority’s case had changed between the date of the offer of compromise and the determination of the proceedings and it would be unfair to make an order for indemnity costs against an offeree when the offeror’s case at hearing is different from that known to the offeree at the time of the offer.
  4. This was the first case to consider the operation of section 106A of the Crown Lands Act 1989 (NSW).

In relation to the first reason of the LEC, the Court of Appeal held that the test from Dillon, where there had been no offer of compromise, was not the test as to whether the Court should order “otherwise” under Rule 42.15(2). The Court of Appeal did not address the other reasons for the LEC’s costs decision as there had been a “vitiating error” in the exercise of the costs discretion by the primary judge.

However, the Court of Appeal still held that the Court should exercise its discretion to order “otherwise” than as provided for by Rule 42.15(2). In so holding, the Court proceeded on the basis that the Applicant had conducted the litigation reasonably (an unchallenged factual finding by the primary judge). Leeming JA held [at 103]:

There is a difficulty in applying offers of compromise to compensation proceedings in Class 3 of the jurisdiction of the Land and Environment Court. The ordinary rule that costs follow the event, which underlies the making and acceptance of offers of compromise in most proceedings, does not apply. Instead, an applicant will have been dispossessed of an interest in land, and ordinarily, if he, she or it acts reasonably, is entitled to a favourable costs order. Because the starting point is different, it is necessary to consider whether a different approach ought to be taken to effectuate the purpose of an offer of compromise. For it would distort the ordinary operation of offers of compromise to permit the acquiring authority to make a low offer of compromise and cause the applicant to have to run the risk of a large adverse costs order, especially where as here there was essentially a binary issue as to construction. (emphasis added)

On this basis, Leeming JA held [104:

...the appropriate way to give force to the evident purpose of an offer of compromise, in a jurisdiction where the dispossessed plaintiff who litigates reasonably is ordinarily entitled to costs, is in the present case for the Trust to obtain its costs of the proceedings up to and including 13 February 2013, but that there be no order thereafter, with the intention that the parties bear their own costs.

IMPLICATIONS

In any litigation, making a genuine and early offer of compromise is good practice. In Class 3 compensation proceedings, a different approach to the consequences of making an offer of compromise applies.

In the Tempe decision, the Court has clarified that an acquiring authority will not be entitled to its indemnity costs if it makes an offer which is not accepted and judgment no more favourable to a land owner is obtained, provided the land owner has litigated reasonably.

However, a reasonable and genuine offer, made in accordance with the UCPR, which is more favourable to a land owner than the Court’s ultimate determination of compensation should save an acquiring authority from having to pay the land owner’s litigation costs on and from the date of the offer. Such costs can be substantial, particularly in complex litigation. The difficulty which acquiring authorities face when determining the quantum of an offer of compromise is that commercial considerations alone (ie. the costs of pursing litigation to completion vs increasing the compensation offered to seek to settle proceedings) cannot guide the quantum of an offer of compromise. From a probity perspective, acquiring authorities must have expert evidence available to support the quantum of any offer of compromise which is made. Where such expert evidence does not exist, progressing the matter to hearing may be the only option available.