Blacktown City Council v Paciullo; Liang

Land and Environment Court (NSW)|2020-05-08|Before: Pain J

SOLICITORS: Houston Dearn O'Connor (Applicant) N/A (First Respondent) N/A (Second Respondent) File Number(s): 19/393344

Judgment

Blacktown City Council (the Council) commenced Class 4 civil enforcement proceedings seeking declarations of the illegal use of premises at 2/238 Prospect Highway Seven Hills (Premises) as a brothel inter alia. The proceedings were commenced on 13 December 2019 against two respondents. The First Respondent the owner of the Premises entered into consent orders on 21 February 2020 and agreed to pay costs of $4,000 within seven days of the orders.
The Second Respondent Ms Ni Liang, lessee of the Premises during 2019, also entered into consent orders on 6 March 2020 that: 1. From the date of these [sic] Ni Liang ("the Second Respondent") must not carry on any business in the Blacktown Local Government Area where the business involves or is otherwise associated with the use of any premises for the following: i. Providing sexual acts in exchange for payment; ii. Providing massage services (other than general remedial or therapeutic massage services) in exchange for payment; iii Providing adult entertainment involving nudity, indecent acts or sexual activity in exchange for payment or ancillary to other goods or services. 2. Order 1 has no force or effect in respect of any premises that has the benefit of a development consent that is in force such that those premises may be lawfully used for the provision of sexual acts in exchange for payment; massage services (other than general remedial or therapeutic massage services) in exchange for payment; and/or, adult entertainment involving nudity, indecent acts or sexual activity in exchange for payment or ancillary to other goods or services. 3. Costs are reserved. The matter to be fixed for hearing on the question of costs before the Registrar on 4. The proceedings are otherwise dismissed as against the second respondent.

Civil Procedure Act 2005 (NSW)

Relevant sections of the Civil Procedure Act 2005 (NSW) (CP Act) provide: Part 1 Preliminary 3 Definitions (1) In this Act - … costs, in relation to proceedings, means costs payable in or in relation to the proceedings, and includes fees, disbursements, expenses and remuneration. … Part 7 Judgments and orders … Division 2 Costs in proceedings 98 Courts powers as to costs (1) Subject to rules of court and to this or any other Act - (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis. (2) Subject to rules of court and to this or any other Act, a party to proceedings may not recover costs from any other party otherwise than pursuant to an order of the court. (3) An order as to costs may be made by the court at any stage of the proceedings or after the conclusion of the proceedings. (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to - (a) costs up to, or from, a specified stage of the proceedings, or (b) a specified proportion of the assessed costs, or (c) a specified gross sum instead of assessed costs, or (d) such proportion of the assessed costs as does not exceed a specified amount. …

Uniform Civil Procedure Rules 2005 (NSW)

Rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) provides: 42.1 General rule that costs follow the event Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.

Council's evidence

The Council relied on the affidavit of its solicitor Mr Shneider sworn 6 April 2020 setting out a chronology of what has occurred in relation to these and other proceedings. Annexed to the affidavit were: (i) invoices issued by Lyonswood Investigations & Forensic to the Council (Annexure A); (ii) invoices for legal fees issued by Steven Shneider (Annexure B); (iii) correspondence between Mr Shneider and Mr Pan, a solicitor purporting to then act for the Second Respondent, exchanged between 7 and 14 January 2020, including Mr Pan's assertion in an email on 7 January 2020 that the Second Respondent had left the property a "long time ago" and a request that she be removed as Second Respondent in the proceedings (Annexure C); and (iv) email correspondence between Mr Shneider, the Second Respondent and Mr Walsh exchanged in March 2020 in which Mr Walsh denied the contents of the investigations carried out at the Premises and requested the action be dismissed (Annexures D and E).
Because the Second Respondent denied conducting unlawful activity, private inquiry agents carried out three investigations at the request of the Council at the Premises for the purpose of ascertaining if the business was providing sexual services unlawfully and billed the Council or its solicitors accordingly. Investigations were conducted on 25 February 2019, 6 June 2019 and in August 2019. These costs amount to $4,499.
Brothel closure orders were issued after the first investigation to the person operating the business at the Premises (the Second Respondent) on 15 March 2019 and to the First Respondent on 4 April 2019.
Three proceedings were commenced jointly on 13 December 2019 concerning the use of three different premises for a prohibited use of brothels. These proceedings as against the First Respondent were settled on 21 February 2020. By consent the Court made orders that the First Respondent comply with the brothel closure order, not use the Premises for the provision of sexual acts for payment, evict from the Premises any tenant using the Premises for those purposes and pay the Applicant's costs in the amount of $4,000 within seven days of the date of the orders. The Second Respondent appeared in Court on that day but did not enter into consent orders. The proceedings against the Second Respondent were stood over to 6 March 2020. On 6 March 2020, by consent the Court made orders that the Second Respondent not carry on any business in the Blacktown Local Government area involving the provision of sexual acts for payment. Costs were reserved.
The Council has incurred legal costs and disbursements of $9,061 in these proceedings to date, as itemised in Annexure B to the affidavit. Costs include legal costs incurred since 21 February 2020 in responding to Mr Pan solicitor, who sent correspondence on behalf of the Second Respondent, and who did not enter an appearance in the proceedings, and in investigating claims that the Second Respondent was not running the business at the relevant time in 2019.
Mr Shneider estimates that these proceedings have cost the Council about $15,000. Given that $4,000 was agreed to be paid by the First Respondent, that leaves the Council out of pocket by $11,000.
A further affidavit of Mr Shneider sworn 1 May 2020 attached an additional invoice paid by the Council on 9 January 2020 for investigation services.
An affidavit of Mr Roberts council officer sworn 9 January 2020 was read in part stating that the Premises were inspected by Mr Roberts and another council officer on 5 March 2019. During the inspection, Mr Roberts spoke with an individual who identified herself as "Ni Liang" and showed him drivers licence identification to that effect. Mr Roberts informed her of the Council's intention to serve a brothel closure order. The brothel closure order was given to the Second Respondent on 15 March 2019.
Documents annexed to the Council's written submissions were: (i) three reports of Lyonswood Investigations & Forensics dated 18 March 2019, 6 June 2019 and 28 August 2019 documenting the investigations (Annexure A); (ii) a lease for the Premises commencing 1 October 2019 in which an individual named Zia Zhang is named as the lessee (Annexure B); and (iii) an Australian Securities & Investments (ASIC) business name search conducted on 31 October 2019 showing that the business name "Golden Stone Remedial Massage Therapy" was registered on 28 February 2017 and held by the Second Respondent since that time up to the date of the search, with the Premises listed as the principal place of business from 25 February 2017 (Annexure C).

Second Respondent's affidavit

The Second Respondent swore an affidavit on 26 April 2020. The Second Respondent deposed that she has agreed to consent orders whilst not agreeing to any liability or concurrence with the Council's claim. The Council has bundled three actions run concurrently and their costs claim is grossly excessive. She said her offer to pay $500 was rejected and the Council had tried to bully her into paying up to $11,000.
The Second Respondent deposed that the leased premises were not used as a brothel or for sexual services and that clear signs in all areas and rooms ask clients not to ask for such services. Photographs of those signs were annexed to the affidavit. The Second Respondent said that her staff wear hygienic uniforms and no equipment for sexual services is on the premises. She said that the investigators employed by the Council have a history of bullying staff and providing their own sexual equipment.
The Second Respondent said her business has always been conducted in accordance with the development approval conditions. She is no longer involved with the business and is financially disadvantaged as a result.
During the costs hearing the Second Respondent stated that she had filed another affidavit with the Court on the day of the hearing. This affidavit was not before the Court, nor was any notice of intention to file the affidavit given to the Court or the Council and it had not been served on the Council. Leave to rely on this affidavit was not given.

Council's submissions

The Council submitted that costs of investigation into the three premises which were linked by ownership and illegal activity being conducted was in the amount of about $43,000. The investigation costs of $4,499 were necessary because of the Second Respondent's behaviour. Costs were reasonably incurred leading up to the commencement of proceedings including investigation fees of $5,000. These proceedings were settled promptly by the First Respondent.
The Second Respondent has acted unreasonably in denying liability and by not settling the proceedings quickly, resulting in the Council incurring additional investigation and legal expenses. As a result of the correspondence from Mr Pan, the Council was put to the task of proving that the Second Respondent in fact occupied the premises and did so until at least 1 October 2019 when the lease was transferred to a new entity. The last investigation in August 2019 confirmed that the Second Respondent's business remained at the premises.
The Second Respondent could have taken steps to ensure that illegal activity was not occurring at the premises negating the need for legal proceedings to be commenced but failed to do so. The Second Respondent has capitulated, resulting in the consent orders.
In additional submissions addressing the basis on which investigation costs incurred before the commencement of proceedings are sought, the Council submitted that the words "and to what extent" in s 98 of the CP Act empower the Court to consider an award for any costs that it considers are incidental to the proceedings inclusive of costs incurred in the course of preparatory steps that are shown to be reasonably connected with the proceedings: Fifteenth Eestin Nominees Pty Ltd v Rosenberg (No 2) (2009) 24 VR 155; [2009] VSCA 178 at [9], relying on Re Hudson; Ex parte Citicorp Australia Ltd (1986) 11 FCR 141 at 143-144. Engaging private inquiry agents was a necessary preparatory step reasonably connected to the proceedings.
In Ryde City Council v Chen (No 2) [2012] NSWLEC 64 (Chen) at [25], Preston CJ considered apportionment of a costs award taking into account events leading up to Class 4 proceedings, as well as the events in the proceedings, following the cessation of the prohibited use as a brothel. Taking into account events leading up to the proceedings in this case includes taking into account the investigations that were by necessity undertaken in preparation.
If the Court does not award costs of all three investigations, the Council seeks the award of the costs of the second and third investigations as those took place after the Second Respondent had been put on notice that the premises were being used for the purposes of a brothel. If the Second Respondent had prevented the premises from being used for the prohibited use these proceedings would not have been commenced.
Costs orders in the Council's favour in the amount of $5,000 are sought, being part of the costs accumulated after 21 February 2020 and the costs of the three investigation reports. Alternatively, the amount sought if the cost of the first investigation report is not included is $3,826.52.

Second Respondent's submissions

The Second Respondent submits she is not liable for costs and disputes the basis of the Council's action against her. According to her affidavit she did not engage in the illegal activity, nor was she occupying the premises after 1 October 2019. The Second Respondent considers the First Respondent has offered substantial remuneration for costs to the Council. No further award of costs is warranted.
In reply, the Second Respondent submitted that the investigation costs cannot be attributed to court costs because the objective of civil proceedings is not to punish a defendant but to restore compliance with the law. The Council cannot show which investigative costs relate to the premises of the Second Respondent's business as investigation of three premises in the same building occurred concurrently. Continuing the costs claim is unreasonable because the Second Respondent left the business premises several months prior to the commencement of proceedings. The costs of the investigation were not a preparatory step or an event leading up to the proceedings.

Consideration

Section 98 of the CP Act applies to costs in Class 4 proceedings and states that costs are in the discretion of the Court. Where there is an outcome in civil enforcement proceedings in favour of a council the costs generally follow the event: UCPR r 42.1. There has been no hearing on the merits in this case as the Second Respondent entered into consent orders on 6 March 2020. Those orders are largely in the terms of the Council's summons. It is not appropriate to hold a hearing on the merits of the case for the purpose of determining costs. Costs are compensatory not punitive per Latoudis v Casey (1990) 170 CLR 534; [1990] HCA 59. I have a wide discretion to make a costs order provided that discretion is exercised judicially.
Kiama Council v Grant (2006) LGERA 441; [2006] NSWLEC 96 (Kiama) helpfully identifies principles where there has been no hearing on the merits at [80] as follows: The principles that emerge from these cases are that in a civil enforcement or judicial review case where there has been no hearing on the merits: (a) where one party effectively surrenders to the other party by: (i) discontinuing without the consent of the other party; or (ii) giving undertakings to the Court or submitting to the Court making orders against the party substantially in the terms or to the effect claimed by the other party; the proper exercise of the costs discretion will ordinarily be to make the usual order as to costs, unless there is disentitling conduct on the part of the other party; and (b) where some supervening event or settlement so removes or modifies the subject of the dispute that no issue remains except that of costs, the proper exercise of the costs discretion will ordinarily be to make no order as to costs unless: (i) one of the parties has acted so unreasonably that the other party should obtain the costs of the action; or (ii) even if both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried so that the party should obtain the costs of the action
The Council has been put to the expense of commencing proceedings following the issuing of a brothel closure order in March 2019 which it considers was not complied with in the relevant timeframe. As identified in Kiama at [80(a)(ii)], where a party submits through the making of orders in the terms claimed by another party, the usual costs order is that the submitting party will pay costs in the absence of disentitling conduct.
The circumstances in relation to the reasonableness of commencing the proceedings are less than clear-cut in that the Council accepts that a lease was entered into by the owner of the Premises the First Respondent and another person with effect from 1 October 2019 (lease annexed to the Council's submissions) so that the Second Respondent was not apparently in occupation of the premises since then. That new lease is annexed to Mr Shneider's submissions. Proceedings were commenced on 13 December 2019. It is unfortunate that that circumstance was not communicated to the Council by the Second Respondent before these proceedings were commenced. I accept Mr Shneider's submission that this circumstance only came to light when the Council was contacted in January 2020 by Mr Pan solicitor who said his instructions were that the Second Respondent vacated the premises "a while ago" without providing evidence to that effect or advising of precisely when this occurred. Mr Shneider informed me that the Council made its own inquiries and obtained a copy of the new lease from a real estate agent. Before proceedings were commenced, the Council obtained an ASIC search as at 31 October 2019 which identified the business name held by the Second Respondent and the Premises as the principal place of that business. The Council reasonably commenced these proceedings.
While the Second Respondent disputes in her affidavit that she has undertaken any of the activity the subject of the Council's allegations and/or did not occupy the premises after 1 October 2019, on their face the orders she entered into by consent effectively surrender to the Council's claim. I consider the circumstances in [80(a)(ii)] of Kiama apply. There are no disentitling circumstances. The Council should obtain the small amount of legal costs incurred during the proceedings that it seeks (about $500).
The Council also claims pre-proceedings costs incurred before proceedings commenced, being three investigators' costs incurred for activity in February, June and August 2019. G E Dal Pont, Law of Costs (4th ed, 2018, LexisNexis Butterworths) (Dal Pont) provides guidance on determining such costs at [17.3]-[17.7]. At [17.3] Dal Pont identifies that costs are not limited to costs incurred only once a writ has issued. Whether earlier costs are necessary or proper for the attainment of justice must be determined (at [17.3]). At [17.4] (footnotes omitted): Drawing the line between what is, and what is not, allowable in respect of pre- proceedings costs is not capable of precise determination simply by statements of principle; the matter remains based in the discretion of the taxing officer on the facts of each case. To this end, Megarry VC in Re Gibson's Settlement Trusts noted the difficulty in extracting from the authorities 'the principles which are to be applied in the case of costs incurred before action brought'. His Lordship did, however, make useful remarks directed to honing the dividing line which, though lengthy, deserve full quotation: Obviously the test cannot be simply whether the materials in question proved in fact to be of use in the action, for otherwise when a case is settled before trial … it would often not be possible to say with any certainty which materials had been or would have been of use in the action. Nor would it be right to penalise the successful litigant for obtaining materials which appeared likely to be of use in the action but which, in the event, were never used because the other party did not contest the point … Neither the fact that at the time when the costs were incurred no writ or originating summons had been issued, nor the fact that the immediate object in incurring the costs was to ascertain the prospective litigant's chances of success, will per se suffice to exclude the costs from being regarded as part of the costs of the litigation that ensues. Of course, if there is no litigation there are no costs of litigation. But if the dispute ripens into litigation, the question then arises how far the ambit of the costs is affected by the shape that the litigation takes. It is obvious that the matters disputed before a writ or originating summons is issued, and the matters raised by the writ or originating summons, and by any pleadings and affidavits, may differ considerably from each other. A wide-ranging series of disputed matters may be followed by a writ or originating summons which raises only a few of the issues; or a narrow dispute may be followed by proceedings which seek to resolve wider issues as well … If the proceedings are framed narrowly, then I cannot see how antecedent disputes which bear no real relation to the subject of the litigation could be regarded as being part of the costs of the proceedings. On the other hand, if these disputes are in some degree relevant to the proceedings as ultimately constituted, and the other party's attitude made it reasonable to apprehend that the litigation would include them, then I cannot see why the taxing master should not be able to include these costs among those which he considers to have been 'reasonably incurred'. The converse case, that of a narrow area of dispute followed by widely-framed proceedings, seems to me to be somewhat different. If a prospective litigant goes into a number of matters outside the immediate area of dispute, but he then finds that these matters fall within the widely- framed scope of his adversary's proceedings, it seems to be that those proceedings will almost of necessity make the costs of these matters part of the costs of the proceedings, subject always, of course, to the taxing master considering the costs to have been reasonably incurred. Even though the acts, when done, could not fairly be considered to be related in any real way to what was then in dispute, they will have subsequently been made part of the litigation; and if the costs of what was then done were costs reasonably incurred in relation to what subsequently became defined as the matters in dispute, it seems to me that the taxing master may properly allow them.
Further guidance is found in Costs Guide NSW (Thomson Reuters, Online) at [1.490] including: … although costs are defined as including disbursements, those disbursements must relate to the proceeding before the court. Thus disbursements incurred during preparation for litigation may be recovered. However, costs incurred that do not relate to resolving the dispute between the parties, (external consultant preparing report, hiring hall, advertising meeting) are not disbursements in the relevant sense (Warley Hospital Inc v Attorney-General (Vic) (2011) 33 VR 102; [2011] VSC 145) [Warley].
The Council relied on Chen at [25] to submit that events leading up to proceedings can be taken into account in the award of costs. In that matter Preston CJ was determining the appropriate apportionment of costs as between two respondents, and in doing so had regard to events leading up to and during the proceedings. No comment was made on the nature of the costs sought by the applicant council.
Taking into account the circumstances leading up to commencement of proceedings, I consider it is appropriate that the Council obtain some but not all of the investigation costs it seeks.
The Council incurred costs investigating three separate businesses. The Council's evidence has clearly identified the amounts it has incurred in relation to investigating illegal activity at the Premises and the proportion of costs necessarily incurred in relation to these proceedings because of the Second Respondent's behaviour in denying she was conducting unauthorised activity. The first investigation cost claimed for activity in February 2019 leading up to the issuing of a brothel closure order in March 2019 should not be paid as that is distant in time from these proceedings and resulted in the issue of a brothel closure order. The failure to comply with the brothel closure order is the trigger for these proceedings. The two subsequent investigations which were to establish if compliance with the order was occurring in June and August 2019 are reasonably claimed by the Council. These are costs (disbursements) which are sufficiently connected to the commencement of proceedings and are directly relevant to the subject matter of the litigation, as reflected in the lengthy quote extracted from Dal Pont in [33] above and can be described as costs incurred in the preparation for litigation as identified in Costs Guide NSW citing Warley above at [34].
The Council has incurred $11,000, is to receive $4000 from the First Respondent and seeks $5,000 from the Second Respondent. Invoices issued by Lyonswood Investigations & Forensics attached to Mr Shneider's affidavit dated 18 April 2019, 11 June 2019 and 10 September 2019 relate to the investigations conducted in February, May and August respectively. The amount that remains after deducting the earliest invoice ($1,173.48) from the $5,000 claimed is $3,826.52. The Second Respondent is ordered to pay the Council's costs and disbursements of $3,826.52. Payment is usually required within 28 days unless a different period is ordered.
As there has been a disputed hearing on costs in which the Council has incurred further legal costs and generally succeeded, costs of this costs application should also be paid by the Second Respondent.

Orders

The Court orders: 1. The Second Respondent is to pay the Council's costs and disbursements of $3,826.52 within 28 days. 2. The Second Respondent is to pay the Council's costs of the costs hearing the subject of Order 1.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 June 2020

Legislation Civil Procedure Act 2005(NSW)

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