New South Wales Supreme Court CITATION : Bromley & Ors v Forestry Commission of New South Wales; Sweetman v Forestry Commission of New South Wales [2001] NSWSC 629 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 1847/96; 1525/97 HEARING DATE(S) : 19 July 2001 JUDGMENT DATE : 25 July 2001 1847/96 James Edward Bromley (First Plaintiff) Christine Many Pollitt (Second Plaintiff) PARTIES : Patricia Ruth Bromley (Third Plaintiff) Forestry Commission of New South Wales (Defendant) 1525/97 Kenneth Irwin Sweetman (Plaintiff) Forestry Commission of New South Wales (Defendant) JUDGMENT OF : Bergin J COUNSEL : AS Martin SC (Plaintiffs) SJ Gageler SC (Defendant) SOLICITORS : Deacons (Plaintiffs) IV Knight (Defendant) CATCHWORDS : Application for indemnity costs on basis of conduct claimed to be unreasonable - Failure to follow express findings in a judgment referring cost determinations to the defendant for re-determination. One.Tel Ltd & Ors v Commission of Taxation (2000) 101 FCR 548 CASES CITED : Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin (1997) 186 CLR 622 Rosniak v Government Insurance Office (1997) 41 NSWLR 608 DECISION : See paragraph 36. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BERGIN J DATE: WEDNESDAY 25 JULY 2001 1847/96 - BROMLEY & ORS v FORESTRY COMMISSION OF NEW SOUTH WALES 1525/97 - SWEETMAN V FORESTRY COMMISSION OF NEW SOUTH WALES BERGIN J JUDGMENT 1 These are applications brought by the plaintiffs for an order that the defendant pay their further costs from 2 September 1999 to date on an indemnity basis. 2 These cases were heard together in 1999 and I gave judgment in respect of what was referred to as the "s.30E(2) claims" on 5 August 1999: Bromley & Anor v Forestry Commission of New South Wales; Sweetman v Forestry Commission of New South Wales [1999] NSWSC 791. This judgment should be read in conjunction with that judgment at pages 21 - 55. 3 There were two periods in respect of which I made findings in relation to the defendant's determinations of costs. The first period was 1 January 1990 to 31 December 1991 and the second was 1 January 1992 to 30 January 1996. 1 January 1990 - 31 December 1991 4 The findings relied upon by the plaintiff relate to the determination by the defendant of costs of (a) the construction and maintenance of permanent roads (roading costs) and (b) the administration costs (overheads). On 2 September 1999 I made orders setting aside each of the defendant's determinations and referred the matters to the defendant to determine the costs according to law (the re-determinations). 5 The findings in respect of the roading costs and overhead costs relied upon by the plaintiffs in these applications are contained in paragraphs 214, 222 - 226 in respect of roading costs and 238 - 244 in respect of overhead costs. 6 The findings in relation to the roading costs included a finding that the defendant had failed to take into account the fact that the permanent roads, which were identified at par 214 as Shire Road, Barrington Tops Forest Road, Dilgry Circle Road, Thunderbolts Road and Gummi Road, had been constructed for purposes other than in connection with the harvesting of the timber in question. There was also a finding that the defendant had failed to take into account the fact that the permanent roads, as identified above, had been used for purposes other than the harvesting of the timber in question. 7 The finding in relation to the overhead costs was that the defendant had taken into account overheads of non-forestry related activity (par. 238 - 244). 8 On 15 October 1999 the defendant issued a re-determination in respect of this period. In respect of the roading costs the re-determination stated: Non-forestry related costs associated with road maintenance activities in the Gloucester Accounting Unit (primarily associated with the Barrington Tops Forest Road) were excluded from lessee costs calculations by the Defendant. Re-determination of these costs was therefore not considered necessary by the Defendant. … The Barrington Tops Forest Road was the only road used to access the Bromley and Sweetman leases in the Gloucester Accounting Unit that was used in any significant manner over the period for uses other than to transport harvested timber. 9 The re-determination also dealt with overheads and stated: There were no non-forestry related overheads taken into account in the original calculation of Overhead Costs. For this reason re-determination of Overhead Costs was not considered necessary by the Defendant. 10 On 20 October 1999 the plaintiffs' solicitors wrote to the defendant's solicitors with the following complaints: The statement claims that apportionment of costs (presumably both construction costs and maintenance costs) for permanent roads other than in Barrington Tops Forest Road on the basis that those roads have been used (and constructed) for other purposes has not been made because they were not used in any significant manner over the period for uses other than to transport harvested timber. Again, this is contrary to findings in the judgment (paragraphs 222 - 4 and 225 - 6). … Although the statement enclosed with your letter states that all non-forestry overheads were excluded from lessee costs calculations, and for that reason overheads have not been re-determined, Bergin J expressly held that the evidence demonstrated that the pooling of overheads included overheads for non-forestry related activities (paragraph 242). We submit that it is not open to the defendant to refuse to re-determine overhead costs in the light of that finding and her express finding that the plaintiffs' complaint in respect of administration costs is made out (paragraph 244). 11 On 10 November 1999 the defendant responded to the plaintiffs' complaints in the following terms: The Barrington Tops Forest Road was the only road used to access the Bromley and Sweetman leases in the Gloucester district accounting unit that was used in any significant manner over the period for uses other than to transport harvested timber. As no roading costs associated with the said road have been included in the re-determination, no apportionment of costs for other uses or other roads in the Gloucester district accounting unit was considered necessary. The defendant has complied with Bergin J's judgment by excluding costs associated with the only road to which an apportionment should have applied. The defendant submits that it has not refused to re-determine overhead costs in line with the findings of Bergin J..indeed notwithstanding Bergin J's acknowledgement in paragraph 242 that the issue of non-forestry related costs was far from straightforward, the defendant has met with the principles laid down in her judgment and clearly states that all non-forestry related overheads have been excluded from lessee cost calculations for the re-determination of overhead costs. 1 January 1992 - 30 June 1996 12 On 29 October 1999 the defendant issued a re-determination in respect of the costs during this period. That re-determination stated relevantly: Non-forestry related overheads associated with such activities as picnic area maintenance, recreations tasks, etc and including wet weather overheads associated with public good activities, were all accounted for under specific job numbers in the defendant's FMRS. All non-forestry related overheads have been excluded from the re-determination of overheads for the leases. Therefore, re-determination of overheads by applying the original formula as the original lease calculation work sheets, is not possible as records of some individual cost items have not been retained by the defendant. The defendant has applied the same principles in its re-determination of overheads as the original calculation work sheets by calculating proportions of expenses rather than revenue to determine overheads. However in the absence of records of some specific items, the defendant has endeavoured to calculate overheads by utilising all available records of actual costs to re-determine overheads. … The Barrington Tops Forest Road was the only road used to access the Bromley and Sweetman leases in the Accounting Unit that was used in any significant manner over the period for uses other than to transport harvested timber. As the Defendant has not included any road construction costs associated with the said road in its re-determination, no apportionment of costs for other uses of the remaining un-amortised roads in the Accounting Unit was considered necessary. 13 On 2 November 1999 the plaintiffs' solicitors wrote to the defendant's solicitors with the following complaints in respect of the re-determination: Road maintenance costs have been calculated not by reference to the costs of maintaining the roads used for the purpose of carrying timber harvested from the leases, but as a proportion of the maintenance costs for all roads in the Gloucester Accounting Unit. In our view, this in inconsistent with the principles laid down in the judgment. The calculation of the road maintenance costs appears to make no allowance for use for other purposes. This is again inconsistent with the principles laid down in the judgment. 14 On 10 November 1999 the defendant responded to the plaintiffs' solicitors stating that: The road maintenance costs were re-determined in the same manner as applied in the original lease calculation work sheet. These calculations involved the calculation of a total Road Maintenance Cost for the Accounting Unit as a proportion of the total Gross Royalty from the Accounting Unit and the multiplication of that ratio by the Gross Royalty from the lease for each relevant period. It is unclear on what basis the plaintiffs suggest that the re-determination of maintenance costs is inconsistent with the judgment. As the formula expresses Road Maintenance Costs as a proportion of Gross Royalty from the specific lease, no apportionment for other harvesting operations is necessary as that proportion only applies to the lease in question. The defendant submits that the judgment did not find against the method of calculating Road Maintenance Costs nor did it find such costs to be manifestly unreasonable. It is unclear therefore on what basis the plaintiffs claim that the re-determined Road Maintenance Costs are manifestly unreasonable. 15 Further debate between the parties took place between November 1999 and February 2000 at which time they had not reached any agreement. The matter was then placed back before me for further directions and on 7 April 2000 I made orders by consent appointing Professor Birkett as a referee. That reference hearing commenced on 31 July 2000 and on 1 August 2000 Professor Birkett directed the defendant to undertake a further re-determination. 16 On 17 October 2000 the defendant issued a further re-determination for both periods. There was further disputation between the plaintiffs and the defendant in respect of the further re-determination and the matter was again heard by Professor Birkett on 19 December 2000 and 20 December 2000. On this latter date the parties reached final agreement and settled their differences in respect of the competing claims. 17 The plaintiffs submitted that the defendant's re-determinations produced results which were unreasonable and were demonstrably unreasonable. The plaintiffs also submitted that the defendant's approach to the litigation was unreasonable in that the defendant would not entertain settlement discussions because it felt it needed to "have a finding" rather than settle the proceedings. I am not persuaded that this last matter is of any significance in these applications. 18 The defendant submitted that its conduct was not unreasonable. It submitted in line with what I had said in my judgment of 5 August, that the matter was "far from straightforward" and it had done the best it could in the circumstances. It submitted there was nothing upon which the Court could conclude its conduct had been unreasonable so as to justify an order for indemnity costs. 19 The parties are not at issue in respect of the principles to be applied in deciding whether conduct by a party warrants an indemnity costs order. Ultimately the real question in this case is whether I am of the view that the defendant's conduct was unreasonable in the circumstances: Rosniak v Government Insurance Office (1997) 41 NSWLR 608 at 616. 20 The defendant submitted that the process of re-determination was concluded by a settlement being reached between the parties on 20 December 2000 and in those circumstances an indemnity costs order should not be made: Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin (1997) 186 CLR 622 at 625; One.Tel Ltd & Ors v Commissioner of Taxation (2000) 101 FCR 548 at 552-554. 21 It seems to me that the approach adopted by the defendant between September 1999 and April 2000 was not reasonable in the light of the findings that I made in respect of the roading costs and the overhead costs in the first period and in respect of the maintenance and construction roading costs in the second period. Mr Martin SC quite properly conceded during submissions that the re-determination of the overhead costs in the second period were less easily categorized as "unreasonable". 22 There were express findings made on 5 August 1999 that the costs in relation to all of the public roads, not only the Barrington Tops Forest Road, were to be re-determined in respect of the apportionment both for construction and maintenance costs. There were also express findings that overhead costs in the first period were to be re-determined. The approach initially adopted by the defendant in its re-determinations was inconsistent with those express findings. 23 Mr Martin Grealy, an officer of the defendant, gave evidence by way of affidavit in respect of the re-determination of the roading costs. He said that he took into account whether the roads were constructed for non-forestry related purposes. After looking at the files and consulting the defendant's staff he said "I determined that the Barrington Tops Road was the only road used to access the leases that was used in any significant manner over the period for use other than to transport timber". 24 It is all very well to look at files and to speak to the defendant's staff, however, it was inconsistent with the express finding of the Court that the other roads were used for purposes other than transporting timber. To completely ignore such use, whether it be significant or insignificant, in my view was unreasonable conduct by the defendant in the light of my express finding. I am not satisfied that Mr Grealy's explanation assists the defendant in this regard. 25 I am not satisfied that the defendant made a reasonable effort to comply with the order that was made in September 1999 in respect of overheads. The re-determination stated, inconsistently with the finding of the Court, that there were no non-forestry related overheads taken into account in the original calculation of overhead costs. Having said that it went on to determine that it was not necessary to do the very thing that the Court ordered it to do. In those circumstances I regard the approach adopted by the defendant in respect of overheads in the first period as unreasonable. 26 In the second period the approach adopted by the defendant in respect of overhead costs seems to me to have changed. It claimed in its re-determination that the formula was difficult to apply because of the lack of records and that therefore it had adopted a particular approach to the calculation. It therefore acted reasonably in trying to determine the costs, notwithstanding the difficulty encountered by a lack of proper accounting records. 27 However the defendant's approach to the roading costs in the second period was once again unreasonable. It once again re-determined the costs of only the Barrington Tops Forest Road. Once again it approached its task unreasonably in the light of my finding that it was required to apportion the costs in respect of other uses on other roads. To refuse to apportion any costs in respect of the other roads was in the light of the findings in my judgment unreasonable. 28 The defendant continued to defend its re-determinations until it was ordered by the referee to make a further re-determination. It is true that the defendant agreed to the orders being made to refer the matter to Professor Birkett. That agreement is taken into account in the exercise of my discretion in these applications. 29 Mr Gageler highlighted the fact that when the defendant made a further re-determination as directed by the referee the difference in the costs was approximately 4%. In highlighting that change as small, Mr Gageler submitted that I could infer that the conduct of the defendant was not unreasonable. 30 The change from 0% to 4% may be small but it is the amount of effort and costs that had to be expended by the plaintiffs in effectively forcing the defendant to comply with the orders made in September 1999 that is in issue here. 31 Mr Gageler also submitted that because the parties ultimately settled their differences in December 2000 a costs order in the plaintiffs' favour on a party/party basis is the appropriate order. He relied upon the following portion of McHugh J's judgment in Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin at 624: In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs: Latoudis v Casey (1990) 170 CLR 534. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201. To do so would burden the parties with the costs of a litigated action which by settlement or extra curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. 32 Mr Martin SC distinguished this case from the case in which there had been no hearing on the merits. He likened the process after the orders of September 1999 to "enforcement" proceedings. The matters were sent back to the defendant for re-determination according to law. The re-determinations made were not according to law in that they were inconsistent with the findings made by the Court on 5 August 1999. 33 I am satisfied that the defendant acted unreasonably in failing to apportion roading costs in both periods as required by the terms of my judgment of 5 August 1999 and the orders made on 2 September 1999. I am also satisfied that the defendant acted unreasonably in failing to re-determine the overheads in the first period consistently with the terms of my judgment. 34 The refusal to accept the plaintiffs' request for a further re-determination and the defending of the original re-determinations was also unreasonable. It was not until after the defendant provided the further re-determination as ordered by the referee that settlement discussions ensued. 35 In exercising my discretion I have taken into account the fact that there were complicated matters within the original determination, the re-determination and the further determination. However I am satisfied that the defendant's conduct up to 1 August 2000 when the referee ordered a further re-determination was unreasonable. 36 I order that the defendant pay the plaintiffs' costs on an indemnity basis from 2 September 1999 to 1 August 2000. Thereafter the defendant is to pay the plaintiffs' costs on an ordinary basis. ************* Last Modified: 07/26/2001 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.