Hofer v Howell Developments Pty Limited

10 IN THE LAND AND Matter No.: 30218 of 1999 ENVIRONMENT COURT Coram: Lloyd J OF NEW SOUTH WALES Decision date: 21 March 2001

Victoria Hofer Applicant v Howell Developments Pty Limited Respondent REASONS FOR JUDGMENT [No. 2]

1. The applicant, Mrs V Hofer, brought proceedings for relief under the Encroachment of Buildings Act 1922. She sought an easement for support for so much of her building which encroaches over the respondent's land. The respondent, on the other hand, sought the removal of the encroaching building. Following a hearing over six days between 28 June 2000 and 23 August 2000 I delivered a reserved judgment in which I ordered the removal of so much of the applicant's building which encroached onto the respondent's land (Hofer v Howell Developments Pty Limited [2000] NSWLEC 191).
2. The successful respondent now seeks an order that the applicant pay its costs on an indemnity basis. The applicant submits that there should be no order for costs. The basic facts
3. I need not repeat the facts which led to my previous judgment. I refer only to those additional facts which bear upon the question of costs.
4. From 18 August 1999 the applicant made offers to settle with the respondent, Howell Developments Pty Limited, on terms that the respondent granted for the encroachment an easement and agree to the extinguishment of an existing right of footway, in exchange for an easement for sewerage and drainage and a new right of way across a different part of the applicant's property. The first offer of monetary compensation from the applicant came on 3 November 1999 when, in a letter, she offered to pay $2,000 per square metre for the easement which she sought. (The area of the respondent's land occupied by the encroaching building is about 16.7 square metres). On 22 February 2000 the applicant offered to pay $10,000 for an easement, or alternatively to purchase the land on which the encroachment stood for $70,000. The offer to pay for an easement was later increased to $50,000 (in a letter dated 15 June 2000) and I am told that the offer to purchase the freehold was increased to $75,000 on the first day of the hearing. All of these offers were rejected. At no time did the applicant make any offer which involved the removal of the encroachment.
5. Neither did the respondent ever make an offer to the applicant on the basis that it would allow the encroachment to remain. In its first recorded offer of 7 October 1999 it sought not only the removal of the encroachment but, in addition, the creation of a setback which would see the applicant's wall rebuilt at 3.4 metres' distance from the wall of the respondent's premises. In consideration of this, the respondent offered to pay the costs of demolition, reconstruction and re-finishing of the relevant part of the encroaching building. In a later offer of 12 January 2000 the respondent said that in exchange for removal of the encroachment alone it was willing to make a contribution of $10,000 to the costs of the work. Its offer of contribution was increased to $25,000 on 5 June 2000, at which time it also offered the applicant reasonable access for the demolition and re-building. This offer remained open throughout the proceedings. The respondent's submissions
6. Mr R A Parsons, appearing for the respondent, argues that several aspects of the case justify an order for indemnity costs. Firstly, he points to the applicant's failure in negotiations preceding and during the hearing to offer to remove the encroachment on any terms, although removal of the encroachment has been found by this Court to be the best solution in all the circumstances. Neither, according to Mr Parsons, did the applicant ever make a realistic offer of compensation commensurate with what the respondent was entitled to for continuation of the encroachment. In his submission the applicant's final offer, made on the first day of the hearing, of $75,000 represented the value of the strip of land alone (as assessed by the respondent's valuer), whereas the respondent would have been entitled to treble damages for the land, together with special damages, as assessed by the respondent's valuer at $250,000 (pursuant to section 4 of the Encroachment of Buildings Act 1922).
7. Mr Parsons' second argument is that the conduct of Mrs Hofer's case shows that certain elements of the case, especially her contentions as to the heritage significance of the encroaching part of the building and the structural difficulties in altering it, were "purely self-seeking and not brought forward in good faith". In his submission Mrs Hofer brought forward a heritage case, asserting the need to preserve the building intact, in spite of having herself made fundamental changes to the fabric of the building; and she made false contentions about certain elements of the building which were contradicted by the earlier finding of a heritage expert Mr D Sheedy, whom she had commissioned to write a report in support of her own proposed alterations. Mr Parsons claims that she asserted a need to preserve certain features which in the course of the hearing were found not to be heritage items. Mr Parsons also relies upon the fact that Mrs Hoffer put forward and engineering report (later withdrawn) which was based upon an incorrect understanding of what was entailed in removing the encroachment, "with no care as to its veracity", and that her valuer used a different method in valuing the respondent's land from that which he had used in valuing Mrs Hofer's land. In his submission the fact that Mrs Hofer put forward arguments, which were not in good faith and which, properly advised, she should have known were hopeless, should justify an award of indemnity costs against her.
8. Thirdly, Mr Parsons submits that the respondent's compromise offers should entitle it to an award of indemnity costs, as the applicant would have done as well by accepting one of these offers as she did by the judgment of the court. He puts forward two possible offers as points from which indemnity costs should be awarded: either the offer of 12 January 2000, when the respondent proposed to contribute $10,000 to the costs of removing the encroachment, or at least the offer of 5 June 2000 of a $25,000 contribution therefor. Indemnity costs should be awarded, he submits, if not from those dates, then from within a reasonable time after those dates to allow the applicant time to have made a considered response. The applicant's submissions
9. Mr T F Robertson, appearing for the applicant, submits that there should be no order for costs. Mr Robertson submits that under the power of the court to make an order for costs under section 14 of the Encroachment of Buildings Act, the usual practice that costs follow the event does not apply because the purpose of the section is to give the court a totally unfettered discretion. In Mr Robertson's submission section 14 of the Act supposedly makes it clear that the court's discretion is not governed by the usual rule that costs follow the event. He argues that the court should not follow the judgment of Bignold J in Droga & Ors v Proprietors of Strata Plan 51722 ([1996] NSWLEC, 28 November 1997, unreported) because, the court having its own powers under section 69 of the Land and Environment Court Act 1979 to award costs, the section has no utility except to override the usual principles relating to costs.
10. Mr Robertson submits that in the exercise of its unfettered discretion the court should take into account the applicant's offers to settle and the fact that the respondent gains a benefit from the order, namely an increase in the value of its property valued by the respondent's valuer at about $250,000 due to the detaching of the two buildings and the removal of the encroachment. He argues that the applicant does not gain a comparable benefit because hers is a commercial property which does not gain amenity from the separation of the buildings, but loses floor space and hence rental income.
11. As to the respondent's argument for indemnity costs based on the offers of compromise, Mr Robertson submits that the applicant's rejection of the respondent's offers and her refusal to consider any option which involved demolition of the encroachment were linked to her belief that the heritage status of the building would preclude any alterations to it being made. The Court's finding, which went against the applicant, was based on an assessment of the heritage value of the building, as to which there was evidence on both sides and which was, therefore, a question which needed to be resolved by the court. In these circumstances, it is submitted, the applicant's refusal of the respondent's offers cannot be seen as unreasonable.
12. Mr Robertson also submits that in awarding costs in encroachment cases, the "Calderbank" letters should have less weight than they otherwise would have because such proceedings often create fresh rights rather than declare existing rights and are highly discretionary in nature, so that it is difficult to predict the outcome of such cases. In this respect, Mr Robertson also submits that the court should not follow Droga, in which Bignold J decided that the usual costs principles should apply in relation to applications under the Encroachment of Buildings Act. Costs under the Encroachment of Buildings Act
13. The Court's discretion to make orders for costs under the Encroachment of Buildings Act is described in section 14 in the following terms: In any application under this Act the Court may make such order as to payment of costs charges and expenses as it may deem just in the circumstances and may take into consideration any offer of settlement made by either party.
14. I am not persuaded by the applicant's arguments that either the nature of the proceedings under the Encroachment of Buildings Act or the discretion granted by section 14 of the Act justify departing from the general principle that costs should normally follow the event. I have no reason to find that Droga was not correctly decided. It is difficult to see how, in granting such a discretion to the court, the legislature can be supposed to have disturbed any settled principles relating to the discretion to make orders for costs. If the legislature had intended to do so, it could easily have made this plain. Since it has not done so it cannot be assumed that the discretion is to be exercised otherwise than in accordance with settled principles.
15. I accept that proceedings under the Encroachment of Buildings Act are out of the ordinary in that they may extend beyond the vindication of existing entitlements and give the court a broad discretion to create new and sometimes valuable rights where this is demanded by justice and the circumstances of the case. It remains appropriate, however, to make orders for costs on a compensatory basis, since prima facie the successful party has been required to litigate to obtain what the court has found to be the appropriate outcome. Indemnity costs and offers of settlement
16. The usual practice is for orders for costs to be assessed on an a party and party basis. The court has a discretion, however, to depart from the practice when justified by the circumstances of the case. The principles which guide the exercise of the court's discretion were described by Merkel and Cooper JJ. of the full Federal Court in Re Wilcox; Ex parte Venture Industries Pty Limited (1996) 141 ALR 727 at 732-3: (1) Section 43 of the [Federal Court Act] confers an absolute and unfettered discretion on the court to make orders as to costs but the discretion must be exercised judicially. (2) In order to exercise the discretion judicially the following principles have been accepted by the court as applicable: (a) the court ought not to depart from the rule that costs be ordered on a party and party basis unless the circumstances of the case warrant the court in departing from the usual course; (b) the circumstances which may warrant departure from the usual course arise as and when the justice of the case so requires or where there may be some special or unusual feature in the case to justify the court in departing from the usual course; (c) while the circumstances in the cases in which indemnity costs have been ordered offer a guide, the question must always be whether the particular facts and circumstances of the case in question warrant the making on an order for costs other than on a party and party basis.
17. The award of indemnity costs is not limited to cases where it can be found that one party's conduct was "ethically or morally delinquent" (Rosniak v GIO (1997) 41 NSWLR 608 at 616-7). It has been said, however, that there must be at least circumstances which are out of the ordinary, such as an element of abuse of process, ulterior or extraneous purposes or unreasonableness (MGICA (1992) Limited v Kenny & Good Pty Limited [No 4] (1996) 140 ALR 707 at 711), or which show that one party, properly advised, should have known that it had no chance of success (Fountain Selected Meats (Sales) Pty Limited v International Produce Merchants Pty Limited & Ors (1988) 81 ALR 397 at 401).
18. The courts have often had to consider the appropriateness of indemnity costs in cases such as the present where one party has made an offer to settle on terms which later proved to be equally or more favourable to the offeree than the court's judgment. In the Supreme Court, pursuant to Part 52 Rule 17(4) of the Court's rules, such an offer when made by the plaintiff, entitles the plaintiff to an award of indemnity costs (although the Court still has a discretion to depart from this rule). In Multicon Engineering Pty Limited v Federal Airports Corporation (1996) 138 ALR 425 Rolfe J said (at 433): The effect of the rules is... to displace certain accepted principles in relation to the award of costs, at least in the circumstances of the making of a successful offer. Rolfe J proposed that where the rule did not apply in terms (for example, where the relevant offer was made by the defendant rather than the plaintiff) the court should nonetheless give effect to the policy behind the rule by recognising the offeror's prima facie entitlement to indemnity costs. Rolfe J did not suggest a departure from the principle that there is a need to find some element of, at least, unreasonableness in the conduct of the party against whom indemnity costs are awarded. Rather, he said that rejection of the offer should itself satisfy the requirement of unreasonableness, "which unreasonableness is demonstrated, prima facie, by the ultimate result". This approach, however, does not appear to have found favour in the Court of Appeal. In Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney [No 2] [1999] NSWCA 133, the Court of Appeal cautioned against giving too much weight to offers made otherwise than in accordance with the Supreme Court's rules. Instead, it approached the question in the traditional way, asking whether the appellant had "acted unreasonably in seeking to prosecute the appeal". It quoted with approval the following passage from Sanko Steamship Company Limited v Sumitomo Australia Limited (Federal Court, Sheppard J, 7 February 1996, unreported):

... it seems to me that one needs to be careful about making orders based on perceived unreasonable conduct in refusing to accept offers. It is in the public interest, as well as in the interest of the parties to litigation, for negotiations to settle cases to take place and for settlements to be achieved if they possibly can be. It has been said that the fact that the law does not provide a full indemnity for costs may be an important spur to settlement; see the judgments of Devlin LJ in Berry v British Transport Commission (1996)1 QB 306 at 323 and of Handley J. A. in Cachia v Hanes (1991) 23 NSWLR 304 at 318... In some cases the so-called Calderbank approach may place a weapon in the hands of parties to litigation which ought not to be allowed to be abused. The ordinary rule is that costs when ordered in adversary litigation are to be recovered on the party and party basis. Any attempt to disturb that situation needs to be carefully considered. It should only be departed from where the conduct on the party against whom the order is sought is plainly unreasonable. 19. The Federal Court has explicitly declined to follow Rolfe J's approach in spite of the existence of rules in that jurisdiction entitling offerors, in certain circumstances, to indemnity costs (MGICA v Kenny & Good (1996) 140 ALR 707). I agree with Cowdroy J's conclusion in Port Stephens Council v Randell [2000] NSWLEC 169 that it is also appropriate for the Land and Environment Court to continue to follow the usual rule, the more so as there is no statutory rule governing this Court which could be said to disclose a legislative intention to especially favour the makers of offers of compromise. Although there are policy arguments in favour of putting the makers of compromise offers in a better position in relation to costs, these alone are not sufficient to justify departure from the well settled principles relating to costs where the legislature has not seen fit to intervene. In the end, these policy objectives may be better served by recognising compromise offers within the existing discretionary framework than by introducing a new presumption. The applicant's rejection of what proved to be a reasonable offer by the respondent is, therefore, only one consideration among many to be taken into account in determining whether there are special circumstances justifying an order for indemnity costs. The circumstances of the case 20. There are no unusual circumstances in this case sufficient to justify denying costs to the successful respondent. The respondent made a reasonable attempt to negotiate a solution to the difficult problems of the encroachment (which reduced the amenity of its own property), including the making of offers to contribute to the cost of removing the encroachment, although it was under no legal obligation to do so. It has not so much gained a windfall by the proceedings as regained, for a price, the use and enjoyment of its own land to which it was entitled by the plan of subdivision and the certificate of title. 21. Neither can be said that the applicant conducted her case so unreasonably or improperly as to justify an award of indemnity costs against her and which should operate from any particular point in the proceedings, or at all. While it is true that she received an offer, being the offer of 5 June 2000, which she would have done well to an accept rather than proceed and incur the costs of the case, her rejection of the offer was not unreasonable, given that it was her objective to preserve her building intact. Although a prolonged exchange of offers and counter offers occurred between the parties, both remained intractable in their desire to obtain their mutually exclusive aims: the applicant's to legalise the encroachment; and the respondent's to have it removed. Whilesoever this was the case, negotiations were unlikely to be fruitful and the dispute would, in the end, have to be resolved in Court. 22. As Mr Robertson pointed out, encroachment is a highly discretionary jurisdiction and the applicant had some evidence to support the case, although the evidence of the respondent proved to be more sound. The applicant's hope that she might be able to regularise the encroachment, given the heritage status of the building, was not totally unfounded. This was not a case, therefore, where the applicant, properly advised, should have known that she had no chance of success.

23. It follows that there must be an order that the applicant pay the respondent's costs. There will be no order for indemnity costs. That means that the costs payable will be on the usual party and party basis. As to the costs of the hearing on costs, the applicant sought no order as to costs and the respondent sought costs on an indemnity basis. It seems to me that both parties have failed in their primary contentions and there should as a consequence be no order in relation to the costs of this hearing on costs.
24. The orders of the Court are: 1. The applicant must pay the respondent's costs (on a party and party basis), other than the costs related to the application for costs. 2. Otherwise there will be no order as to the costs of the application for costs.

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