You can’t always get what you want: The dissatisfied acquiring authority and the stringency of the law

The proliferation of urban and infrastructure development across Sydney has seen varying and new pressures placed on Councils.

Among them, a rise in the frequency of costly and technical compulsory acquisitions.

Such acquisitions can easily lead to disputes about the fair value of the property being acquired. Under s66 of the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act), dispossessed landowners who are dissatisfied with the Valuer General’s determination of compensation may appeal to the Land and Environment Court (LEC).

Acquiring authorities (such as Councils), on the other hand, have no equivalent rights of challenge should they be dissatisfied with the Valuer General’s determination.

But that doesn’t mean they have no rights of challenge at all.

If the acquiring authority – which we’ll assume is a Council from this point – can establish jurisdictional error, a determination may be challenged and the Court may set aside what is an administrative decision.

So, what constitutes a jurisdictional error? Typically, it means the decision maker (in this case, the Valuer General) has taken into account irrelevant considerations, or has failed to consider relevant material which they were required to consider, or has failed to comply with relevant legislative requirements. Decisions made unreasonably or based upon an irrationality may also be set aside. 

The bar for unreasonableness is set high. It must be demonstrated that no reasonable person acting lawfully would have arrived at that conclusion.

We consider these general principles further below.

What determines whether a consideration is irrelevant? Section 55 of the Just Terms Act makes that clear by stating that “regard must be had to” each of the following, and only the following, in determining the amount of compensation to be paid. They are:

1. the market value of the land on the date of its acquisition

2. any special value of the land on the date of its acquisition

3. any special value of the land to the person on the date of its acquisition

4. any loss attributable to the severance

5. any loss attributable to disturbance

6. the disadvantage resulting from relocation; and

7. any increase or decrease in the value of any other land of the person at the date of acquisition which adjoins or is severed from the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired.

If it can be established that a mandatory consideration was ignored, the determination of compensation may be invalidated. The same applies if there was insufficient process of evaluation or consideration of those matters.

Similarly if the decision was made unreasonably or was based upon an irrationality.

What a Council cannot challenge is a merely poor decision. Said more rigorously, the rights of an acquiring authority in judicial review proceedings do not extend to a merits review.

Once again, the bar is set high for Councils who wish to challenge. For one thing, it is generally an implied condition that a statutory power will be exercised reasonably.

The test for legal unreasonableness is necessarily stringent, extremely confined and a conclusion of unreasonableness will be rare where the reasons for the decision demonstrate a justification for the particular exercise of that power. For one example, see the Court’s finding in Minister for Immigration and Border Protection v SZVFW [2018] HCA 30.

Given that, what would it take for a decision to be sufficiently unreasonable or irrational to give rise to jurisdictional error?

A failure to comply with appropriate valuation principles is one way. For example, if the decision maker ignored a transaction that provided evidence of value, and did so irrationally, it could be argued that there has been an error of law.

Or the absence of probative evidence on which fundamental planning assumptions are based could be construed as having led to an error of law.

So while the bar is high, it is not insurmountable.

In summary, if an acquiring authority can demonstrate that errors have been made, and that those errors constitute a failure to comply with valuation principles, or that the errors comprise errors of law as opposed to errors of fact, it may be possible to establish jurisdictional error such as to vitiate the decision.

We are aware of at least two challenges to determinations by the Valuer General currently awaiting judgment. It remains to be seen whether the Court will consider the alleged errors as jurisdictional errors. 

Can Council be awarded costs? Only in extreme cases

It is rare for an acquiring authority to be the beneficiary of a costs order in compulsory acquisition matters in the Land and Environment Court.

The power of the Land and Environment Court to award costs in the exercise of its Class 3 proceedings is conferred by section 98 of the Civil Procedure Act 2005 (NSW). Under that Act, the Court’s power to award costs:

1. is subject to rules relating to offers of compromise and the consequences of such orders; but

2. is not subject to rules relating to the presumption that costs ‘follow the event’. That is, the successful party will not necessarily be entitled to an order for costs against the unsuccessful party and … an unsuccessful party may still be entitled to costs from the successful for seeking the court to determine the adequacy of compensation received.

Rule 42.15 of the Uniform Civil Procedure Rules 2005 (UCPR) states that a respondent who makes an offer of compromise which is more favourable than a judgment later obtained by the applicant is prima facie entitled to a special costs regime. 

The rule provides that unless the court ‘orders otherwise’:

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

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

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

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

In the decision of Croghan V Blacktown City Council [2019] NSWCA 248 (Croghan 3) the Court was asked to consider whether the applicant had acted ‘reasonably’ in not accepting an offer of compromise, and if it was reasonable, then whether it justified the Court ‘ordering otherwise’ in relation to costs under rule 42.15.

Two years earlier, in Faroll v Hobbs (No 2) [2017] NSWCA 12, the Court considered the presumption that rule 42.15 of the UCPR might be displaced and the Court could ‘order otherwise’ by demonstrating that the rejection of the offer of compromise was reasonable.

Key considerations influencing reasonableness include:

1. Where the full parameters of the dispute are still uncertain at the time of the offer;

2. Where the offeror’s case changes after an offer;

3. Where all relevant evidence has not been served before the offer; and

4. Where the proceedings are not pursued in a way which gives rise to unnecessary delay and expense.

What is reasonable will depend on the circumstances of a particular case. In essence, what matters is the extent to which the claimant and its advisers (including legal) are in a position at the time of the offer to assess the likely outcome of the litigation.

Ordinarily, this will require that the issues on which that outcome depends can be determined, and that the lay and expert evidence of the parties regarding those issues has been made available. This was not held to be the case in Croghan 3.

The facts in Croghan were:

• On 13 October 2016, the Valuer General determined the compensation payable for the acquisition pursuant to the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) to be $4,802,000, comprising market value of $4,791,000 and loss for disturbance of $11,000.

• The Class 3 compensation proceedings were commenced in late November 2016, the hearing proceeding in mid-February 2018.

• On 27 September 2017, the Council made a formal offer of compromise under rule 20.26 of the UCPR to resolve the proceedings for $5,246,204 plus legal costs “as agreed or assessed on a party/party basis.” This offer was open for 28 days and was not accepted.

Ultimately the court determined compensation in the amount of $4,227,314, comprising $4,195,000 for market value and $32,314.98 for loss attributable for disturbance (Croghan v Blacktown City Council (No 2) [2019] NSWLEC 9).

Molesworth AJ held it was not appropriate for the court to ‘order otherwise’ in relation to costs order under rule 42.15 of the UCPR because:

1. It was an instance where a patently inflated or exaggerated claim had been lodged by the applicant (initially $11,157,252 and then $8,405,752), in light of a Valuer General determination of compensation supported by a well-reasoned expert valuation ($4,802,000), which was bettered by an offer of compromise a year later of nearly half a million dollars more ($5,246, 205) which could not be characterised as a ‘low offer of compromise’; and

2. The applicant had not acted reasonably in refusing the offer of compromise. This was because the amount of the offer exceeded the Valuer General’s well-reasoned determination and expert evidence but the applicant had persisted in their higher claim and relied solely on their expert evidence, consequently causing unnecessary cost and delays as a result of pursuing a claim weakened by ‘ill-conceived and exaggerated arguments’.

Consequently, Council (Respondent) was entitled to costs under rule 42.15 of the UCPR.

On 15 October 2019, the New South Wales Court of Appeal overturned the decision of Molesworth AJ. That is, it was deemed appropriate for the court to ‘order otherwise’ in relation to the costs order under rule 42.15 of the UCPR.

Meagher J held that the applicant was reasonable in rejecting the offer of compromise and was justified in bringing the proceedings to test the adequacy of the statutory offer because:

• Council had discredited the Valuer General’s determination by making a higher offer;

• When the offer of compromise was made by Council, the parties had not formulated their respective positions in pleadings and no expert reports, joint or otherwise, in relation to valuation, hydrology and traffic engineering had been exchanged. Thus, the applicant could not assess the position taken by Council on those issues by reference to its proposed evidence. So, by mid-2017, the applicant’s position remained that it could not make a realistic assessment of the likely outcome of the litigation (versus accepting the offer of compromise);

  • Therefore, an initially exaggerated claim and reliance upon flawed evidence by the applicant are not sound bases for denying an applicant their cost of proceedings, if it was still possible they could not have known their claim was exaggerated and would result in unnecessary delay or expense; and

• A more favourable reading of parts of the applicant’s expert evidence may have resulted in greater compensation than the determination by the Valuer General.

Consequently, the respondent Council was ordered to pay the applicant costs of the proceedings in the Land and Environment Court on an ordinary basis, and Council’s prima facie entitlement to costs under rule 42.15(2) of the UCPR was overturned.

We will continue to provide updates from the Court in this ever-changing environment.

Authors: Dennis Loether and Joram Richa

Read further articles in Council Connect