BAKER v TOWLE

[2008] NSWCA 73

Court of Appeal (NSW)|2008-02-01|Before: Beazley JA, Basten JA

View original source

At a glance

Source facts

Court

Court of Appeal (NSW)

Decision date

2008-02-01

Before

Beazley JA, Basten JA

Source

Original judgment source is linked above.

Judgment (59 paragraphs)

JUDGMENT OF: Beazley JA at 1; Basten JA at 31; Mathews AJA at 90

(1) Appeal allowed in part and orders 1, 2 and 5 made in the Equity Division on 19 June 2007 be set aside. (2) In lieu thereof make the following orders: (a) upon tender by the respondent of the amount of $50,000, together with a discharge of the mortgage granted by the appellant and the respondent to the National Australia Bank with respect to the property at Yippen Creek, the appellant shall transfer to the respondent all his right, title and interest in the property at Yippen Creek; (b) in the event that the respondent does not tender the amount specified and the discharge of mortgage within 90 days of the date of this judgment, the parties are to sign all documents and take all steps necessary expeditiously and in good faith to sell the property at a fair market price; DECISION: (c) the proceeds of sale, after payment of all necessary expenses, will be divided between the parties so that the appellant will receive 11% and the respondent the balance; (d) the appellant shall in any event take all necessary steps to ensure that the respondent obtains a release of the respondent's guarantee of the overdraft facility with the National Australia Bank. (3) The appellant is to pay the respondent two-thirds of her costs of the trial. (4) The respondent is to pay the appellant 25% of his costs of the appeal. (5) The respondent shall have a suitor's fund certificate in respect of the costs of the appeal.

24 April 2008 John Graham BAKER v Esma Fay TOWLE Judgment 1 BEAZLEY JA: I have had the advantage of reading in draft the judgment of Basten JA in this matter. 2 I agree with his Honour's conclusion that McLaughlin AsJ erred in the order he made adjusting the interests of the parties in the property pursuant to s 20 of the Property (Relationships) Act 1984. I also agree with the order proposed by his Honour on the appeal. 3 Basten JA has, in the course of his reasons, examined in some detail the principles that apply to an application for an adjustment of interests in property, including the principles stated in Howlett v Neilson [2005] NSWCA 149. In the course of doing so, his Honour, at [56] ff, rejects that part of the reasoning in Kardos v Sarbutt [2006] NSWCA 11 at [65]. 4 In Kardos, Brereton J expressed the view that an increase in value of assets initially contributed by one party was to be regarded as a contribution by the party who contributed those assets. There has been qualified disagreement in this Court with this view. In Bilous v Mudaliar [2006] NSWCA 38; 65 NSWLR 615, Ipp JA (with whom Giles and McColl JJA agreed) at [62] ff, stated that he disagreed with Brereton J on this point, if his Honour had intended to state a general rule. 5 In this case, the Court has not been asked to reconsider Kardos on the point on which the Court in Bilous disagreed and no argument was directed to the correctness of that aspect of the decision. Basten JA's disavowal of his agreement in Kardos is consistent with the approach taken in Bilous. As the correctness of Kardos was not argued, I am content to rely upon the principles stated in Howlett and Bilous as being the principles that govern the outcome of this case. Upon the application of those principles, I consider that Basten JA's analysis of the evidence is correct and I agree with his proposed orders. 6 That then brings me to the question of costs. The starting point in respect of costs is that costs are in the discretion of the court: Civil Procedure Act 2005, s 98. Pursuant to Pt 42, r 42.1 of the Uniform Civil Procedure Rules 2005 (UCPR), costs follow the event, unless it appears to the court that some other order ought to be made. Rule 42.1 applies in applications under s 20 of the Property (Relationships) Act: see Dunstan v Rickwood (No 2) [2007] NSWCA 266 at [40] per McColl JA (Beazley and Ipp JJA agreeing); Hayes v Marquis [2008] NSWCA 10 at [14] per Beazley JA (Einstein J agreeing); McColl JA at [145]. 7 The application of r 42.1 is qualified by r 42.30, which governs costs where the quantum of the adjustment or other order made by the court under s 20 does not exceed the jurisdictional limit of the Local Court. In that case, r 42.30(2) provides that "unless the Court otherwise orders, the plaintiff is not entitled to payment of his or her costs". Rule 42.30 is not relevant to this matter. 8 In this case, McLaughlin AsJ ordered that the defendant (the appellant) pay 75 per cent of the plaintiff's (respondent's) costs. As Basten JA explains, that approximates the extent of her success on her claim. There has been no appeal from that decision. The orders to be made on the appeal result in a slightly different adjustment of property to that ordered by McLaughlin AsJ. I agree with Basten JA that it is appropriate in the circumstances to adopt the same approach to the costs of the proceedings at first instance as did McLaughlin AsJ, and to adjust the proportion of costs accordingly. I agree with his Honour, therefore, that the appellant should pay two-thirds of the respondent's costs at trial. 9 In agreeing with this costs order, I should state that I do not consider that there is a "usual rule" that an award of costs in applications made under the Property (Relationships) Act should reflect the proportion of interests in property that were adjusted in comparison with the claim. The discretion conferred by r 42.1 is not to be fettered in that way. 10 Although there was no real question raised on the appeal as to the proper approach to costs in applications under the Property (Relationships) Act, it is appropriate that I make some comments having regard to the remarks of Basten JA at [83]. His Honour states that "the event" for the purposes of r 42.1 in an application under the Act "may be identified with greater or less precision by reference to the extent of the adjustment ordered". 11 The provision made by r 42.1 reflects a longstanding rule of court traceable back to nineteenth century England, although the rule has been amended and simplified in its expression over various rule adaptations. In most litigation, the rule operates in a straightforward way, "the event" being readily identifiable as a judgment for the plaintiff or the defendant on the claim. In that sense, "the event" to which the rule refers is the result of the proceedings, so that the party who succeeds on the claim before the court is awarded costs, unless the court, pursuant to the discretion conferred by r 42.1, makes "some other order". 12 There have been a number of cases in which the principles governing the award of costs in cases under the Property (Relationships) Act have been considered. This Court's decision in Kardos, in so far as it stated that in cases under the Act "the starting position should be that each party should bear its own costs", has been rejected: see Dunstan v Rickwood (No 2) [2007] NSWCA 266; Hayes v Maquis [2008] NSWCA 10 at [14] and [145]. As those two cases establish, it is inappropriate to so confine the discretion conferred by s 98 of the Civil Procedure Act and r 42.1. However, those cases did not deal with the question of what "the event" was for the purposes of r 42.1. Indeed, it appears that they proceeded upon the basis that "the event" was the proceedings and that the different order made in each case was made pursuant to the exercise of the court's discretion. 13 The meaning of "the event" for the purposes of a claim under the Act was considered in Vollmer v Hauber-Davidson [2005] NSWCA 237. That decision was a judgment on a Summons for Leave to Appeal from a costs order made in a matter brought under the Property (Relationships) Act. In that case, the parties had lived in a de facto relationship for a period of almost seven years. Their major asset, and that which was the focus of the proceedings, was a jointly owned residential property. 14 The plaintiff brought proceedings seeking an adjustment of interest under s 20, claiming an order that the property be transferred into his name, subject to mortgage, for the payment to the defendant of $47,000. Prior to commencing proceedings, the plaintiff had made an offer to the defendant of $57,000 for her share in the property. The defendant brought a cross-claim, claiming that the property be transferred into her name, but for the payment to the plaintiff of the sum of $200,000. 15 Each party made a Calderbank-type offer, the plaintiff offering the defendant 20 per cent of the net value of the property and the defendant making an offer to settle for the payment of the sum of $250,000. On the hearing of the application, the defendant was awarded 30 per cent of the equity in the property. Master Macready (as his Honour then was) also ordered that the property be sold. In dealing with the question of costs, the Master treated this order as having a worth of $220,000 to the defendant and ordered the defendant to pay the plaintiff's costs of the proceedings. 16 It is necessary, in order to properly understand the Court's conclusion in granting leave, to set out the following portion of the judgment: "[8] The costs of proceedings in the Supreme Court are, in general, in the discretion of the Court, and this is particularly important in cases under the Act. This Court can only interfere with an order for costs which are in the discretion of the Court in accordance with the principles stated in House v The King (1936) 55 CLR 499, 504-5.

e) The effect of the Master's adjustment of the parties' interests was that the appellant's share of the property was valued at approximately $220,000, the respondent's at approximately $520,000. As is apparent from a comparison of the Master's orders and the pleadings, each party was unsuccessful in that he or she failed to obtain the adjustment that he or she sought, though each was successful in exceeding the adjustment that the other party offered. These were material considerations which were not taken into account by the Master." 19 His Honour held that the appropriate order was that each party pay his and her own costs. In reaching this conclusion, his Honour did not attempt to identify "the event". It is apparent, not only from the reasons, but also from the Court's order, that the order was made in the exercise of the Court's discretion. 20 A review of the cases does not reveal any authoritative resolution of the meaning of "the event" within r 42.1. The discussion of the Court in Vollmer on the leave application indicates that "the event" could be defined or identified in a variety of different ways. The approach of Basten JA, to which I have referred at [10], adopts a similar approach. 21 The question as to what is "the event" will answer itself when an application is refused. In that case, the event will be the order for the defendant and, upon a straightforward application of r 42.1, the defendant will have the costs of the application unless the court makes some other order. 22 However, on the approach adopted by the Court on the leave application in Vollmer, "the event" may be identified in a variety of ways in the one case. It would be odd and, indeed, unfortunate, if the identification of "the event" in one way resulted in an order for costs, on the basis of "costs follow the event" whereas a different, but equally appropriate identification of "the event" meant a different application of the rules. The oddness in there being different possible applications of the rule (in this respect I am not referring to the exercise of the discretion under the rule) depending on the identification of "the event" raises in my mind the question whether this is the correct approach. In most cases, the costs order will almost invariably depend upon the exercise of the discretion. 23 The real question is what is the appropriate order for costs. An obvious starting point is the pleadings. However, the identification of the issues in the pleadings is likely to be only one of several considerations relevant to the costs order that ought to be made. The considerations may include whether any offers of settlement have been made and if so what those offers were. The discretionary considerations may also include the manner in which the proceedings are conducted. These are but 2 examples. There may be a whole range of relevant circumstances depending upon the particular case. 24 I would therefore prefer to treat the identification of the issues that arise on the pleadings as part of the consideration of matters relevant to the Court's discretion. In my opinion, that gives proper effect to r 42.1 and is consistent with the authorities and, in particular, the statement of McLelland J in Parker v McNair to which the Court referred in Vollmer (see [8] of the judgment on the leave application). 25 The difference between the approach that I prefer and the approach of Basten JA is probably more apparent than real. It will be apparent from what I have said, that where an order for adjustment is made, the costs order made will rarely, if ever, depend simply upon which party commenced proceedings. The question of costs needs to assessed in accordance with the facts and circumstances in each case and as the analysis undertaken by the Court in Vollmer indicates, no principles or general guidelines have emerged in cases under the Property (Relationships) Act. In this case, the effect of McLaughlin AsJ's costs order was that they be apportioned in the ratio of the adjustment that he ordered. As I have said, that decision was not challenged. The only reason to interfere with his Honour's specific order was so as to reflect the different adjustment that this Court has ordered. 26 That brings me to the appropriate order for costs on the appeal. The appellant has been successful on the appeal in the sense that the appeal is to be allowed and there will be an alteration in the amount of $50,000. That adjustment is significantly less than that sought by the appellant. The question, therefore, is whether costs should follow the event or should the Court, in the exercise of its discretion, make some other order for costs. The question is whether the Court ought to make some order other than 'costs follow the event'. 27 The appellant challenged the primary judgment on four grounds. In summary those grounds were: a failure to give adequate reasons; wrongly including a property, "Yarrowitch", as an asset of the appellant (that ground was advanced as a failure to give reasons for including the property as an asset of the appellant); a failure to give sufficient weight to the appellant's initial and subsequent contributions to assets; and, making an adjustment of interests in property that was manifestly outside the range of judicial discretion. 28 The first and second grounds were not made out. In particular, it was apparent that the reference to "Yarrowitch" as an asset in the early part of his Honour's judgment, was an error. This error was not replicated in the later part of the judgment and did not feature in the property to be taken into account for the purposes of any adjustment. Further, as the respondent pointed out, the case was conducted on the basis that this property did not form part of the appellant's property. Strictly, neither the third nor the fourth grounds were made out in the terms in which they were advanced. However, as Basten JA explains at [77]-[78], his Honour apparently failed to order an adjustment in an amount which properly reflected the approach he had in fact taken in determining the application. 29 Given the limited success on the appeal I am of the opinion that costs ought not follow the event and some other order for costs is warranted. I would not, however, deprive the appellant of all of his costs. The adjustment made by the Court, although within a small compass, is still a significant amount of money and the Court has made an order to accommodate the possibility that the respondent will not be able to pay the moneys she has been ordered to pay to the appellant. That too is a significant difference in the orders made compared to those made at first instance. Further, the respondent maintained arguments on the appeal relating to funds that the appellant had disposed of during the course of the relationship. She was unsuccessful in those arguments. 30 For these reasons, I am of the opinion that the appropriate order as to costs is that proposed by Basten JA. 31 BASTEN JA: Between 1982 and October 2004 the parties to these proceedings were in a de facto relationship, for the purposes of the Property (Relationships) Act 1984 (NSW) ("the Act"). Each had children, of varying ages, from a previous relationship. 32 By proceedings commenced in April 2005, Ms Towle sought orders under s 20(1) of the Act seeking, in effect, to adjust interests with respect to the property of the parties, by way of transfer of certain assets from the appellant, Mr Baker, to herself. On 18 April 2007 McLaughlin AsJ ordered that Mr Baker transfer to Ms Towle all his interests in a property known as "Yippen Creek", together with the contents of the house (other than plant and equipment) and his interest in a Holden Statesman motor vehicle. 33 Mr Baker has appealed against those orders, not seeking to have them set aside, but seeking an additional order that Ms Towle pay to him an amount of $250,000. In substance, the appellant's complaint is that the trial judge failed to accord sufficient weight to the significantly greater proportion of assets brought into the relationship by him and, if the final distribution were intended to be one of equality, it was not but was weighted substantially in favour of Ms Towle. Issues on appeal 34 The orders sought in the notice of appeal were quite specific. The variations to the orders made by the trial judge required that the transfer of the appellant's interests in Yippen Creek to the respondent should be made conditional upon the respondent paying him $250,000 and refinancing the current mortgage. In the event that she was unable to comply with those conditions, an order was sought providing for the sale of the property and distribution of the proceeds. The appellant did not seek a retrial. 35 The first ground of appeal alleged that the trial judge failed to give proper reasons for his conclusion. The second asserted that his Honour failed to give reasons for including a property known as "Yarrowitch" as an asset of the defendant, in determining the pool of assets of the parties. The third and fourth grounds alleged, in the broadest terms, that his Honour failed to give "sufficient weight" to the initial and subsequent contributions of the appellant and that the result was manifestly outside an appropriate range. 36 In the course of the hearing, counsel for the appellant articulated a case based on the failure of the trial judge to make findings in relation to the identity and value of the assets brought into the relationship by the appellant and the value of his contributions during the relationship. Indeed, the errors alleged included the failure to make findings as to the assets available at the date of hearing. It was argued that, in the light of these omissions, there should be a retrial. 37 The amount in issue between the parties is not insignificant but, if there were a retrial, the legal costs will become a significant proportion of the total amount realistically in dispute. Even if error be established, a retrial should be avoided if possible. If there are credibility findings which have not been made and which are necessary for the proper disposal of the proceedings, a retrial may be necessary. That is not this case, on the approach adopted below. 38 The complaint about a failure to give reasons had two limbs. The specific complaint involved the suggestion that the trial judge had included the property at Yarrowitch in the assets of the appellant. Although at [44] his Honour included the property at Yarrowitch in a list of assets owned by the parties at the termination of the relationship, it was not included in the list of Mr Baker's assets at [50] and at [57] his Honour correctly noted that the property was owned by Baker Pastoral Co Pty Ltd and that Mr Baker lived there as a tenant. At [58] there is reference to the claims made by Ms Towle, which included a sum equivalent to 50% of the value of the property acquired during the relationship "including the Yarrowitch property", but there is no suggestion that his Honour included that property (which he did not value) in his assessment of the appropriate orders. He certainly did not purport to transfer any interest from Mr Baker to Ms Towle in relation to that property. Accordingly, the better view is that the reference to the Yarrowitch property at [44] was an error. 39 Otherwise, in relation to the complaint as to failure to give reasons, it became apparent that the appellant's real concern was the failure of the trial judge to make findings of fact. There may be error in failing to make a finding in relation to particular matters, whether deliberately or through inadvertence, but there is no error in failing to give reasons for findings not made. The suggestion is self-contradictory. This logical error is not restricted to the present proceedings, but there may come a stage at which a particular costs order will be necessary to discourage time being wasted on misconceived submissions. 40 The complaints of substance in this case were threefold. The first was that, despite the fact that the relationship lasted some 22 years, it remained necessary for the judge to assess the value of the property or financial resources of each party at the commencement of the relationship. At least in terms of ascribing values, this was a task his Honour did not carry out. The second complaint was that he failed adequately to identify and evaluate the respective contributions of the parties to the relationship over the period of its subsistence. The third task (and source of complaint) was to consider whether the property interests as they existed at the end of the relationship constituted a just and equitable reflection of the contributions of the parties. According to the appellant, the trial judge did not properly evaluate the contributions, or identify the pool of assets at the cessation of the relationship, as a result of which his Honour failed to adjust interests in the property appropriately. 41 Before considering the issues presented on the evidence, it is convenient to identify the legal principles informing that exercise. Legal principles 42 These proceedings were brought under s 20(1) of the Act, which has three operative effects. The first is to grant a right to a party to a domestic relationship to seek an order adjusting property interests of the parties to the relationship; the second is to empower the Court to make such an order "as to it seems just and equitable" and the third is to identify the factors to which the Court must have regard in determining the application. Whether those factors are the only factors to which the Court can properly have regard was not in dispute in the present case: see Evans v Marmont (1997) 42 NSWLR 70 at 79-80 (Gleeson CJ and McLelland CJ in Eq); cf Manns v Kennedy [2007] NSWCA 217; 37 Fam L R 487 at [112]-[125] (Campbell JA, Santow JA and Bryson AJA agreeing). 43 It has been said in a number of cases that the application of s 20 involves three steps, which were identified in Howlett v Neilson [2005] NSWCA 149 (Hodgson JA, Ipp and McColl JJA agreeing) in the following terms at [25]: "(1) identification and valuation of the property of the parties; (2) identification and valuation of the respective contributions of the parties, of the types referred to in s.20; (3) determination of what if any order is just and equitable having regard to these contributions." 44 What questions arise will, of course, depend to some extent on the circumstances of the individual case. For example, in some cases there will be an antecedent question as to whether the applicant is a party to a "domestic relationship" as defined in s 5 of the Act: see, eg, Delany v Burgess [2007] NSWCA 360. Otherwise, each of the three steps referred to above may require some further elucidation. Identification and valuation of property of parties 45 In many cases a step will need to be taken along the lines suggested, because justice and equity will usually require an assessment to be made of the existing interests of the parties in the property owned by each or both, in order to determine whether there is an adjustment which should properly be made. However, there may be cases in which that step is unnecessary. Certainly it is clear that the chapeau to s 20(1) does not require that step: the application may be limited to the adjustment of interests in particular property or particular interests in particular property of either or both parties. (There can be only two parties: see ss 4(1) and 5(1) of the Act.) In cases where there has been a long relationship, commencing when the parties were young and had limited assets of their own, it may be possible to order a 50/50 split of the property without undertaking any precise identification of all the property available and without requiring that it be valued. 46 The first step is also silent as to the date at which the property must be identified and valued. The cases appear to involve applications made after the cessation of the relationship, although it is not clear that the Act is so limited. There may be a question as to whether adjustment is possible in relation to property acquired by one party after he or she has ceased to be a party to the relationship. Further, there may well be an issue as to whether, in making an appropriate adjustment, it is proper to have regard to the value of the property at the date of the hearing, or at the date of cessation of the relationship. This issue has been noted in a number of cases, but appears not to have been finally determined. In the present proceedings no point was taken as to when property or resources should have been valued. However, only interests which are held by a party at the date of judgment can be adjusted. Identification and valuation of respective contributions 47 The comment in Howlett, at [29], that this does not require "a narrow or purely mathematical process" may cast doubt on the helpfulness of the use of the term "valuation" in this respect. Importantly, there are risks in seeing this as a single step: the section refers to contributions of different kinds. Thus, paragraph (a) identifies two forms of contribution namely, those to:

Paragraph (a) permits the contributions to be made "directly or indirectly by or on behalf of" the parties to the relationship. The scope of this phrase is not entirely clear. For example, it may be important to consider whether the provision of free accommodation by one party who owns a dwelling, thus allowing the other party to obtain rental income from the latter's dwelling is an indirect contribution to the acquisition of rental income. The answer to this question may depend in part upon the terms of paragraph (b) which are quite distinct from those of paragraph (a). 48 Paragraph (b) identifies as a relevant consideration contributions made by the parties "to the welfare of" the other party or their children. It expressly includes contributions made "in the capacity of homemaker or parent". It is clear that the contribution of one party in looking after the home and children will fall within paragraph (b). It does not follow, however, that such a contribution must be valued, for example by reference to the income which the homemaker and parent may have foregone by adopting that role. Further, although in one sense that role may be seen as indirectly contributing to the ability of the other party to engage in fulltime remunerative work, to include that as a contribution to the financial resources of the parties, in addition to taking it into account under paragraph (b), may involve double counting. 49 These matters of differentiation are important in part because they demonstrate that placing a monetary value on contributions to the welfare of individuals is not required by the Act and may involve an invidious exercise. Many welfare services can be purchased and thus valued; it does not follow that valuation of such services, when provided within a de facto or other domestic relationship is either required or appropriate for the purposes of s 20. An evaluation of what is just and equitable 50 The proper approach to the evaluative judgment required by s 20 was explained in Manns v Kennedy [2007] NSWCA 217 at [61]-[67] (Campbell JA, Santow JA and Bryson AJA agreeing) and need not be revisited. As the Court accepted in Howlett, the diligent application of both parties to their differentiated roles within a domestic relationship may well lead to the conclusion that interests in property should be divided equally: at [29]. That result may be achieved without valuing respective contributions in monetary terms, although the outcome will be allocation of interests in property which no doubt could be valued if necessary. Treatment of 'initial contributions' 51 The cases do not suggest that any of this exegesis in relation to the "three steps" is necessarily controversial: it merely seeks to ground in the language of the section the shorthand in which those steps are expressed. It also provides a basis upon which to address a topic which has proved controversial, namely the proper treatment of initial contributions to a relationship. These have been dealt with differently in different cases. At least in part, the differential treatment can be explained by reference to the particular circumstances of each case. To the extent that comments in the course of the reasoning are at odds, these do not suggest any dispute in relation to the correct construction of the Act. It is convenient to illustrate the point by considering how some hypothetical examples might fit within the statutory language. 52 First, it is sometimes assumed that any property owned by a party to a domestic relationship which had been acquired, but not divested, before the relationship commenced, should be treated as a "contribution" within s 20(1)(a). However, this assumption may not hold good in all cases. For example, one party may, prior to the relationship, have owned jewellery, works of art or other valuable objects which are at all stages held in safe-keeping and not used, either by way of personal adornment or in any domestic residence. The fact of prior ownership may well mean that there was no contribution to their acquisition for the purposes of the section. Assuming the other party made no contribution to their conservation or improvement, directly or indirectly, it would seem that the first limb of paragraph (a) would not be engaged. Although the objects might be seen to be either the property or part of the financial resources of one party, it is difficult to see that their prior ownership constitutes a relevant "contribution". The same reasoning might apply to assets acquired by one party during the course of the relationship through a bequest from a parent. The recipient would not necessarily be said to have made any contribution to the acquisition, conservation or improvement of the property or to his or her own financial resources simply by being the recipient of the bequest. 53 Of course, most property does not fall within that category and the most common item provided by way of initial contribution will be a house, business or car, which is actively used, maintained or changed into other property during the course of the relationship. Nevertheless, the importance of questioning the initial assumption as to whether there is a "contribution" is reflected in the fact that the value of property may decrease as well as increase. If one party enters the relationship with a share portfolio which loses value during the course of the relationship, it is doubtful whether the mere existence of the share portfolio will necessarily constitute a relevant "contribution". 54 Further, it is necessary to recall that what is being adjusted by an order of a court is not that which constitutes a contribution, but that which constitutes property of one of the parties. Thus, where all the valuable assets are held in the name of one party, but the Court is satisfied that the other has made a significant contribution to the welfare of that party, the Court may think it just and equitable to require that some interests in property be transferred to the welfare provider. Such an order may be made despite the fact that the relevant property was all property owned by the other party prior to the commencement of the relationship. Whether the value of the property has increased during the period of the relationship may be a factor which is taken into account in determining the appropriate order, but it does not necessarily matter that the increase in value cannot be said to be a "contribution" made by the owner of the property (or indeed the other party) during the relationship. 55 On the other hand, there may be cases where the contribution of each party during the course of the relationship is equal and it is just and equitable that each should take out of the relationship the property he or she brought in, or, where the property has been changed, equivalent proportions of the existing property at the end of the relationship as the proportions in which assets were held at the beginning. 56 In many cases the pre-relationship property and financial resources of the respective parties will be used for the material benefit of the parties during the relationship. Dwellings and motor vehicles tend to be prime examples of this situation. Two questions have arisen in such cases, the first being how one should take into account the value of the property owned by one party before the commencement of the relationship and the second being how one should take into account any change in value of the property during the course of the relationship. The problem is illustrated, in an artificially simplified case, where one party owns a home which becomes the domestic residence during the course of the relationship and is still owned by the same party when the relationship ceases, the parties having no other material assets. Assuming that the parties have contributed equally during the course of the relationship, if the first party's ownership of the sole asset prior to the commencement of the relationship is to remain intact, the other party will leave with nothing. That has been accepted as an inappropriate result under the Family Law Act 1975 (Cth) and the cases referred to in Howlett at [30]-[33] and in Kardos v Sarbutt [2006] NSWCA 11 at [65] have identified an "erosion principle" so that the contribution of one party over the course of the relationship would gradually be reflected as an increasing entitlement in the initial asset of the other party. 57 In Howlett the Court held that whilst it was proper to have regard to the ownership of an asset at the beginning of the relationship, the "erosion principle" had no clear application under the Act. That view was confirmed in Bilous v Mudaliar [2006] NSWCA 38; 65 NSWLR 615 by Ipp JA (with whom Giles and McColl JJA agreed), his Honour adding that it might create an effective onus on one party to demonstrate that his or her property should not remain in the sole name of the other, when the Act imposes no such burden: at [56]. 58 The second question is one of greater practical importance because it is concerned with increases in the value of property over time which, in recent times and in many places, have significantly exceeded the general rate of inflation. In Kardos, the Court held that the correct approach was one which recognised that "capital gains are the product of the initial introduction of the property, rather than of ongoing contributions" at [61]. This approach was said to be in contrast to that adopted in Howlett which may "in at least some cases, result in the serious undervaluation of initial contributions". The latter approach, the judgment continued, "treats any increment in capital value of an asset held at the outset of the relationship as if it were part of the fruits of the relationship, when it is not: it is the result of the asset having been held by one of the parties at the commencement of the relationship, and not the result of joint efforts …." 59 In Bilous Ipp JA stated at [63]: "Determinations as to what orders should be made under s 20 are to be made solely on the grounds of the justice and equity of the case. The justice and equity of the case may derive from the fact that the party who owns the family home or other property was able to retain that property, while the market value increased, because 'of joint efforts of wage earning, homemaking and parenting, and mutual support'. In some instances the non-financial contributions of one party may result in property of the kind in question not having to be sold. In other instances, the non-financial contributions of one partner may allow the other to advance his or her career and earn a high income that enables the property in question to be maintained and retained. Thus, an increment in capital value may well result, indirectly, from 'joint efforts of wage earning, homemaking and parenting and mutual support'." 60 The primacy of s 20 of the Act in identifying the proper approach to applications made under it is undoubtedly correct. To the extent that Kardos purported to state principles which are not consistent with or fetter the broad discretion conferred by that section, it should not be followed. However, a number of recent cases have tended to talk in terms of assets owned by one party before the relationship began as "initial contributions" or as contributions "to the relationship". The inference is that assets owned by the parties to a domestic relationship are in someway pooled even though they are not jointly owned. This approach is not reflected in the language of s 20. Rather, s 20 assumes that the parties have "interests with respect to" property, a concept which will include both individual and jointly held property. It is those interests, as at the date of the application, which are sought to be "adjusted". The use of the term "contributions" in this context is inapt because it reflects the language of paragraphs (a) and (b), defining the "contributions" to which the Court must have reference in considering an appropriate adjustment. 61 As Ipp JA noted in Bilous contributions by one party, whether financial or not, may result in pre-relationship property in the name of the other being conserved or improved, not necessarily by protecting the property from dispossession. It is also true that non-financial contributions of one party may result in the other being able to increase substantially his or her financial resources. However, a non-financial contribution must be recognised in a possible adjustment in property interests even though it has no such beneficial economic effect for the other party. In such a case the Court is required to translate, in a manner which is "just and equitable", the contribution of one party to the welfare of the other party or of the family, into an interest with respect to the property of the parties. 62 I remain of the view that in Kardos (in which I participated), being a case in which each party brought significant assets to the relationship, in which the relationship lasted for a little under three years and involved no children and each party had a remunerative occupation, it was appropriate that the assets be distributed proportionately to the value of the assets owned by each at the commencement of the relationship. However, I accept that, as this Court stated in Bilous, there are comments in the judgment in Kardos which are not consistent with earlier authority of this Court and which do not conform to the statutory scheme of the Act. I agree that they should not be followed. Relevant financial circumstances 63 In describing the financial circumstances of Mr Baker at the commencement of the relationship, the trial judge largely adopted the written submissions prepared for Mr Baker at trial. It is therefore difficult for Mr Baker to complain about inadequacies of the trial judgment in this respect. In 1982, the appellant owned three properties in Wauchope, the first being a butcher's shop at 25 High Street, where he carried on his business. The second was a house at Port Lane which was the appellant's former matrimonial home. It was sold and the proceeds used to purchase a further dwelling, which became that of the appellant's former wife and did not enter into the calculations. The third property was a duplex at 14 Warlters Street, Wauchope, which appears to have been transferred to his son Bradley Baker, in November 1999, at which time it was valued at $125,000. 64 The fate of the butcher's shop is more complex. In 1987 the appellant acquired a property known as "Rosevale" with a loan or gift of approximately $10,000 from his parents and a mortgage in an amount of $90,000. That mortgage was paid off in 1989 with part of the proceeds from the sale of the butcher's shop. The remainder of the proceeds, after paying the business overdraft, was apparently kept by the appellant as cash. Rosevale was sold in 1993 for $186,000 of which the major part went on the purchase of a flat in Queensland at Elanora for $123,000. The property was acquired by the appellant with his son Bradley Baker and was subsequently sold in 1999 (at a loss) with the net proceeds of $90,000 going to Bradley Baker as a gift. Of the balance of Rosevale, $40,000 went to the purchase of a property by the appellant and his son Scott Baker at Fairmont Gardens, Wauchope. Scott Baker later paid the appellant $57,500 for his half interest in the property. That transfer took place in November 1999 and the immediate fate of the funds is not apparent. Some years later the appellant made loans to Baker Pastoral Co Pty Ltd in amounts totalling $45,000. This figure remained an asset of the appellant at separation. 65 The ultimate fate of the proceeds of the various properties became a matter of some significance in that the respondent sought to bring into account amounts which the appellant had disposed of to his sons during the course of the relationship. 66 The financial resources of Ms Towle in 1982 were more limited. She owned a car and had an interest in the property of her former husband, which eventually resulted in a payment to her in 1986 of $40,000. Part of that money was expended on the purchase of Yippen Creek and part invested in a term deposit with the ANZ Bank which she retained throughout the relationship. The sum of $3,000 was spent on a new lounge suite for Yippen Creek. 67 In 1982 the appellant was 35 years of age and had run the butcher's shop business for some 10 years, although he did not obtain the freehold to the shop until 1982. The appellant also had an interest in a transport business known as Baker & Thompson Transport, established while he had the butcher's shop, and involving the respondent's son Tony Thompson. That business was sold in June 2004, from which the appellant received his half share, being $105,669 net. There remained, at the time of the trial, a further amount from the sale held in a solicitor's trust account, of which his half interest totalled $11,444. Of the cash receipts, the appellant said that he paid Tony Thompson an amount of $12,500 for his one-half interest in the shed on Yippen Creek. Because the shed and equipment on Yippen Creek has otherwise been taken into account, as an asset of the appellant, the appellant's cash receipts from the business (including the half-interest in the sum in the solicitor's trust account) may be treated in round terms as $105,000. Of this total, the appellant said that an amount was paid to his son Bradley Baker in 2004 in repayment of loans. His Honour did not accept the evidence as to the loans and they may be put to one side. The use made by the appellant of the proceeds of the business is irrelevant for present purposes: it should be seen as financial resources acquired during the relationship. 68 The appellant was also entitled to an amount by way of superannuation. In his affidavit, he said that his superannuation entitlements were worth $70,000, but in his oral evidence he accepted that he had a total of $170,000 in superannuation: Tcpt, 29/11/06, p 27. In his submissions to this Court, the appellant said he did not accept that figure, but did not explain why the lower figure of $70,000 should be accepted as the full amount of his superannuation. The figure given in cross-examination should be accepted. 69 At the cessation of the relationship, the only joint property held by the parties was the home and land at Yippen Creek, together with the contents of the house and plant and equipment on the land. Yippen Creek was valued at $575,000, subject to a mortgage of $115,634, giving a net value of $459,366. The property was registered in the names of the parties, as to 75% in the name of Mr Baker and as to 25% in the name of Ms Towle. There was a dispute as to the value of the furniture and contents of the house, the appellant noting that it had been insured for $45,000, while the respondent said that it was not worth $20,000. His Honour did not attempt to resolve this dispute and, on the evidence, any resolution would have been largely arbitrary. 70 Each had a motor vehicle, the vehicle of the appellant having been sold for $21,000 and the vehicle of the respondent being valued at $10,000. It appears that the Holden Statesman driven by Ms Towle was in fact registered in Mr Baker's name: the order providing that he transfer his interest in the vehicle to her was not in dispute. Nor was it in dispute that he was entitled to remove the plant and equipment at Yippen Creek, whilst she was to keep the furniture and contents of the house. There was evidence that the appellant paid his former partner, Mr Thompson, $12,500 for a half-interest in the shed at Yippen Creek. The value of the plant and equipment may have been over $25,000. The furniture and contents probably had a value between $20,000 and $45,000. However, on the unsatisfactory state of the evidence, it seems likely that his Honour did not consider it worthwhile to make a precise assessment of the respective values of the cars and the value of the furniture as against the plant and equipment. It was appropriate to treat each party as having property of equivalent value in these respects. 71 The other assets of Mr Baker were cattle, which he valued at $22,000, but which the respondent valued at $31,000. Mr Baker's financial accounts for the year ended 30 June 2004 indicate the value of livestock and sales for the year as $31,128 which should be the figure adopted for cattle. The figure of $57,500 may be accepted as an amount eventually sourced to the sale of the butcher's shop, through the property disposals referred to above at [64] which resulted in that amount being repaid by Mr Scott Baker to the appellant in 1999. 72 The respondent sought to bring into account a further $215,000 which the appellant had disposed of to his sons through the sale of the Warlters Street property and Elanora. However, although those sales took place during the course of the relationship, Warlters Street was owned by Mr Baker prior to the relationship and Elanora was ultimately purchased in 1993 from the proceeds of the sale of Rosevale, which in turn was financed from the sale of the butcher's shop. The butcher's business operated during the first seven years of the relationship, but as $57,500 of the proceeds of the sale of that business has been brought into account, the remainder may be disregarded as properly attributable to the share in the shop which had resulted, not from any contribution to the relationship on the part of the respondent, but through Mr Baker's prior activities. If, which is not entirely clear, the trial judge took those amounts into account as part of the financial resources of the appellant acquired during the course of the relationship, that would have been inappropriate. Those were assets of the appellant to which the respondent did not contribute. 73 The respondent sought to bring into account a loan by the appellant to her son Troy Thompson of $9,294 and a loan to the appellant's son, Bradley Baker of $4,109. The appellant sought to bring into account liabilities to Bradley Baker of $7,197 and to his parents in an amount of $10,182. His Honour clearly did not take into account these liabilities (Judgment, at [55] and [56]); in circumstances where there was clear evidence of parents making contributions to the financial resources of their children, his Honour appears to have treated these amounts as probably involving gifts. It seems unlikely that his Honour took account of the amount provided by the appellant to the respondent's son Troy, or the small amount of the debt allegedly owing to Bradley Baker, in circumstances where he had been the beneficiary of the proceeds of the sale of Elanora. These amounts should all be disregarded. 74 There were other small amounts which the parties sought to bring into account: these included a superannuation entitlement of Ms Towle in the amount of $2,600, and a small holding of IAG shares said to be worth $1,000. Mr Baker, on the other hand, had Telstra shares worth $3,760. Ms Towle had a little over $5,000 in a credit union account although it had reduced to $600 by the time of the hearing. She also held the term deposit with the ANZ Bank, totalling $17,555, which had been the retained portion of her earlier marriage property settlement. These amounts can be disregarded, the last because it was not a contribution made by the respondent and the others because the amounts are not significant. 75 Mr Baker's business assets were to be assessed as follows: 1. Proceeds of sale of butcher shop $57,500 2. Cattle $31,000 3. Loan repayable by Baker Pastoral Co $45,000 4. Proceeds of sale of transport business $105,000 5. Superannuation $170,000 Total $408,500

76 The business resources of the appellant therefore totalled $408,500. From that must be deducted the overdraft account which was agreed at $49,403, giving a net business figure of $359,097. The respondent was a guarantor of the overdraft facility: a liability from which she should be released on settlement of her claim against the appellant. 77 Treating the divisible assets as the net value of Yippen Creek and the net amount of the appellant's business resources, one achieves a total of divisible assets of $818,463. The next question is the proportion in which his Honour intended that these assets be divided. As he did not reach a figure for the total pool, he did not state a proportionate division. However, he took into account the fact that at the commencement of the relationship the respondent "had little in the way of assets" whilst the appellant's assets "were quite significant": at [65]. He took into account the plaintiff's contribution of $26,000 to the purchase of Yippen Creek for $200,000 and the appellant's contribution in excess of $4,000 by way of the balance after the mortgage and associated costs. His Honour further accepted that throughout most of the relationship the respondent was not in receipt of income whilst the appellant was the principal breadwinner of the household and that the mortgage payments and other household expenses were met from his income: at [66]. He also held that the respondent made "significant and substantial contributions of a non-financial nature towards the acquisition, conservation and improvement of Yippen Creek, and gave assistance to the [appellant] in his business activities": at [67]. 78 Given that the relationship subsisted for 22 years and that in the course of that relationship the respondent, as parent and home-keeper, provided substantial services to the family as well as to the appellant, it seems likely that his Honour intended that the division of the resources at the cessation of the relationship should be roughly equal. If Yippen Creek were to be transferred to the respondent, as his Honour ordered, that would provide the respondent with a benefit valued at $459,366, rather than half of the total assets, which would have been $409,231. The transfer should therefore be conditional upon the payment by the respondent to the appellant of an amount, in round figures, of $50,000. 79 Given the respondent's limited cash resources, and the fact that she is apparently in receipt of a pension, there may be some doubt about her ability to service the mortgage on Yippen Creek, and find a further capital payment of $50,000. The appellant gave evidence in his affidavit of 21 April 2006 to the effect that neither party could afford to buy the other out and that accordingly Yippen Creek must be sold. The appellant does not appear to have contradicted that proposition. Accordingly, orders should be made allowing for the possibility that Yippen Creek will have to be sold, and the net proceeds divided. The payment due to the appellant is 11% of the net value of Yippen Creek, and his share of the proceeds should be expressed as a proportion to avoid unfairness resulting from changes in actual amounts, both of receipts and expenses. Costs 80 In relation to costs, as the trial judge noted, the appellant had been successful in part, but not in whole, in her claims. He accordingly ordered the present appellant to pay 75% of her costs. The appellant has been partly successful on appeal and accordingly the costs payable for the trial could be reduced, but only marginally. Further, the appellant's success on the appeal has been limited. 81 It is clear that the trial judge approached the exercise of his discretionary power with respect to costs on the basis that, unless it appeared that some other order should be made, costs should follow the event: Civil Procedure Act 2005 (NSW), s 98 and Uniform Civil Procedure Rules, r 42.1. 82 A different approach will apply where the Court orders an adjustment of a value or amount not exceeding the jurisdictional limit of a Local Court sitting in its General Division: UCPR r 42.30. In that circumstance, the general rule is that there should be no order as to costs. However, that rule was not engaged in the present case, the jurisdictional limit of the Local Court at the relevant time being $60,000 and the value of the transfer now required by order of this Court being approximately $300,000 (being the value of a three-quarter net interest in Yippen Creek - $344,500, plus the value of the car - $10,000, less the payment of $50,000 to the appellant): the jurisdictional limit was, when the proceedings commenced, to be found in s 12(1) of the Local Courts (Civil Claims) Act 1970 (NSW) and now, somewhat obscurely, in the definition of "jurisdictional limit" in s 4 of the Local Courts Act 1982 (NSW). Because UCPR r 42.30 applies in carefully limited circumstances, the starting point for the exercise of discretion in relation to costs incurred in proceedings under the Act must otherwise be r 42.1, as this Court held in Dunstan v Rickwood (No. 2) [2007] NSWCA 266 (McColl JA, Beazley and Ipp JJA agreeing): see also Hayes v Marquis [2008] NSWCA 10 at [145] (McColl JA). To the extent that a contrary approach was proposed in Kardos v Sarbutt [No. 2] [2006] NSWCA 206 at [35] I agree that it should not be followed: see Dunstan at [35]-[37]. However, the dictum in Kardos to the effect that a "starting position" was that the Court should make no order as to costs was restricted to the case where it could not be said that either party had been "wholly or substantially successful" or had bettered his or her offer of compromise. The qualifications to this proffered "starting position" should properly be understood as being in conformity with r 42.1, in circumstances where the appropriate characterisation of the outcome of the proceedings ("the event" referred to in the rule) may involve elements not common to other forms of litigation. 83 An application under s 20 for adjustments to interests in assets should involve a specific claim and a defence which should indicate the degree (if any) to which the defendant is willing to concede the adjustment sought. The pleadings will then identify the scope of the dispute. The next question is whether any degree of success on the part of the plaintiff should be sufficient to justify an order for payment of her costs in full, or whether the costs order should in some sense be proportionate to the degree of success. In such a case, the "event" may be identified with greater or less precision by reference to the extent of the adjustment ordered. 84 This kind of case differs from cases where a proportion of costs only has been awarded, based on an assessment of the specific issues on which each party has been successful: see, eg, Cretazzo v Lombardi (1975) 13 SASR 4 at 12 (Bray CJ) and 16 (Jacobs J); Trade Practices Commission v Nicolas Enterprises Pty Ltd (1979) 42 FLR 213 (Fisher J); Hughes v Western Australian Cricket Association Inc [1986] FCA 382; 8 ATPR ¶40-748 at p 48136 (Toohey J); Commissioner of Australian Federal Police v Razzi [1991] FCA 267; 101 ALR 425 at 430 (Wilcox J), being cases discussed and applied in Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd [1993] FCA 259; 26 IPR 261 at [26]-[28] (Gummow, French and Hill JJ); see also James v Surf Road Nominees Pty Ltd (No. 2) [2005] NSWCA 296 at [31]-[36] (Beazley, Tobias and McColl JJA) and generally Dal Pont, Law of Costs (1993) at [8.6]-[8.9]. On the other hand, this is not a case where the plaintiff seeks to establish liability in, say, breach of contract or negligence, and obtains a judgment for somewhat less than the total amount claimed. Unless there are severable elements on which the plaintiff failed, in a case of that kind apportionment will rarely be appropriate. However, in a case involving adjustment of interests in assets, it may be thought that justice is best done by an apportionment of costs depending upon the plaintiff's degree of success. The trial judge was not in error in adopting that approach in the present case, and the approach may properly be applied in relation to the appeal. 85 The appellant's position, both at trial and on appeal, was that his three-quarter interest in Yippen Creek should be transferred to the respondent, but in exchange for a payment of $250,000. The monetary effect (taking into account the transfer of the car) would therefore have been a transfer to the respondent of a little over $100,000, or about one-third of the value of the order now obtained by the respondent. The costs order made by the trial judge was, not inappropriately, designed to reflect the respondent's degree of success by reference to the totality of her claims, not only as pleaded, but as pursued at trial. No error has been asserted in that approach and, although the proportion should be adjusted, the same approach should be adopted. 86 In this Court, the appellant sought an adjustment of the order made below by a payment to him of $250,000. He has been successful to the extent of $50,000, or 20% of the amount claimed. Adopting the same approach, the appellant should receive part of his costs, but not all. The proportion need not be the same as the proportion of his success measured against his claim, but should reflect the limited degree of his success. 87 The appropriate costs order in relation to the trial should be varied so that the defendant at the trial (Mr Baker) be ordered to pay two-thirds of the costs of the plaintiff (Ms Towle). In relation to the appeal, the appellant has been partly successful and should obtain an order that the respondent pay him 25% of the costs of the appeal. 88 It would be surprising (and disappointing) if no offers of settlement have been made in these proceedings. If there is an offer of settlement on which either party wishes to rely and on the assumption that the appropriate result cannot be achieved by agreement, each party has leave to seek within 14 days an adjustment of the costs order, but only on that basis. Conclusion 89 The following orders should be made:

BAKER v TOWLE

At a glance

Court

Decision date

Before

Source

Judgment (59 paragraphs)

Parties

Legislation Cited (5)

Cases Cited (20)

Cited By (50)