A new meaning for sunk costs? Redland City Council v Kozik and making restitution for charges spent but unlawfully levied

The recent High Court decision in Redland City Council v Kozik [2024] HCA 7 is a useful addition to the ever-growing list of cases dealing with claims in restitution under the Australian common law. Of particular interest was the raised defence of "good consideration" by Council to making restitution where Council had openly conceded it had, for a number of years, invalidly levied and collected from landowners in its local government area certain charges which Council then applied to undertaking certain works for the benefit of those landowners.

The invalid Council levy

Council was required to undertake maintenance and cleaning works in waterways in its local government area under the Coastal Protection and Management Act 1995 (Q) and the Local Government Act 2009 (Q) (LGA). In performance of those obligations, between 2011 and 2016 Council had, for particular waterways, dredged, removed rubbish and debris, and repaired some revetment walls that protected banks from erosion.

To partly fund the works, Council resolved in the stated years to levy a special charge under the LGA on land Council considered would specially benefit from the works, being land adjoining the waterways.

After completing the works, Council determined that it had not complied with a requirement of the prescribed process for the levying of special charges under each of the Local Government Regulations of 2010 and 2012 as made under the LGA. Specifically, Council had failed to ensure that a mandatory "overall plan" identified in its resolutions to levying the special charges included statements about the estimated cost and time for carrying out the overall plan. As required by the Regulations, the overall plan otherwise described the works as a service or activity and the rateable land to which a special charge applied.

Because of Council's default, its resolutions to levy the special charges were invalid. Council refunded to landowners so much of the total amount of the charges collected in the relevant years but which remained unspent on works by Council. Council otherwise refused to refund the balance of the charges that had been levied and paid.

Certain landowners commenced representative proceedings to recover the unrefunded portion of the special charges from Council.

The Queensland Court of Appeal had found in favour of the landowners. Council was required to make restitution by refunding the unrefunded portion. Separately, however, the landowners had not been successful in arguing that "return provisions" of the Regulations had required Council to refund that portion.

The High Court's views on restitution and "return provisions"

A majority of the High Court dismissed Council's appeal on the restitution claim. The court unanimously dismissed the landowners' appeal on the "return provisions" point.

Both the majority and minority found it unnecessary (and, indeed, inappropriate) to determine whether the principle stated by the House of Lords in Woolrich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 should be part of the Australian common law. That principle holds that money paid by a person to a public authority as a tax or other levy pursuant to a demand that was beyond power of the authority was prima facie recoverable by the person as of right.

It may strike the reader as peculiar that, if a local government (or any other public authority) authorised to levy a charge does not strictly comply with the statutory requirements for levying the charge, it may not be obliged to return the collected charge. Matters are, however, not straightforward, especially where the local government and the payer of the charge have no (other) relationship with each other. In some circumstances, the local government may have a defence to a prima facie claim for the return of the unlawfully levied charge. In other circumstances, the claim may not even arise.

Did "return provisions" of the Regulations require Council to refund the unrefunded special charges?

The LGA and the Regulations gave effect to the basic constitutional principle that a tax, impost, rate or duty must be authorised by statute. Local governments are authorised by the Queensland Parliament to levy various rates and charges under chapter 4, part 1 of the LGA. Special (rates and) charges are for services, facilities and activities that have a special association with particular land because, among other things, that land or its occupier specially benefits from the service, facility or activity. The charges are levied over and above general rates.

Council could only levy a special charge (or any rate) by giving a rate notice to the owner of rateable land. The owner was then obliged to pay the charge.

Each Regulation contained a provision for the return of a special charge if a rate notice included a charge levied on land to which the charge did not apply. The rate notice was not, however, invalid. The 2012 Regulation had been amended in 2014 to provide that, in any proceedings about special charges, a resolution or overall plan was not invalid because neither identified the rateable land to which the charge could have been levied.

If, by these "return provisions", there was a statutory right to recover the unrefunded special charges, then, the issue of any common law claim for restitution (as considered below) would not have arisen.

The landowners argued that the "return provisions" left open the reasons why a special charge did not apply to land or should not have been levied. For instance, if a resolution to levy a special charge was invalid (as was the case here), the charge could not be said to be levied on land.

Although Council's resolutions for levying the special charges were invalid, the issuing of rate notices (which may have included other rates and charges) triggered the legal obligation for the landowners to pay the full amount of the charges. The return provisions were directed at administrative errors and were engaged only when there was, in fact, a valid resolution to levy the special charges but the special charges had been incorrectly levied on a landowner in a rate notice or, as relevant, Council had incorrectly included a levied parcel of land in the resolution. That was not the case here: the special charges were not validly levied.

Accordingly, there was no statutory obligation under the "return provisions" for Council to refund the unrefunded portion of the special charges.

Was Council required to make restitution of the unrefunded portion of special charges?

There was no controversy that the landowners had mistakenly paid the special charges to Council. Council argued, however, that although the landowners necessarily had a prima facie claim for restitution of the unrefunded portion, Council had a complete defence to that claim based on "good consideration".

The landowners' position (as accepted by Court of Appeal) was that Council had been unjustly enriched because they had a mistaken belief that they were under a legal obligation to pay the special charges as levied or that Council was legally entitled to payment of the charges. Unjust enrichment refers to categories of cases in which the law allows recovery by one person of a benefit retained by another. But there must be a particular cause of action; there is no cause of action simply of "unjust enrichment". One instance – being a qualifying or vitiating element – is the unjustified payment of money that benefits another where the benefit is the result of a mistake. The relevant benefit in Kozik was the receipt of the special charges by Council. And a way of understanding (but perhaps not explaining) making restitution as a remedy is it is compensation for the benefit of being unjustly enriched.

Therefore, the crucial point came down to whether in circumstances where the levying of the special charges was invalid, the landowners' mistaken belief that they were obliged to pay the charges provided a benefit to Council (the receipt of money) which Council could not retain. Any entitlement to recovery of the unrefunded charges would not be because the levying of the charges was invalid, but because, if Council was not required to make restitution, the landowners were effectively paying for works Council performed. This is where Council's argument collapsed. It was not an issue of whether, as a separate or super-added consideration, there would be an injustice to landowners if Council retained the unrefunded portion or to Council if landowners were to receive the portion.

The landowners (like any ratepayer) did not have a contractual or other transactional relationship with Council by which Council agreed or undertook to carry out works for which landowners paid Council a charge. At most, a landowner had a statutory obligation to pay the charge. If Council did not undertake the works, its only obligation to repay the charges arose, if at all, under statute. However, there, the respective obligations of the landowner and Council assumed that the levying of the charge was valid. As it was not, the landowners, when paying the charges, were acting under the mistaken belief they were legally obliged to do so. That gave rise to a prima facie right of recovery from Council: Council had been unjustly enriched unless it had a defence.

Although Council conceded that its resolutions levying the special charges were invalid, it maintained that it was not obliged to make restitution (of the unrefunded special charges) because it had provided "good consideration" for the receipt of the charges and, as such, was "not unjustly enriched". "Good consideration" here takes on a special meaning. Council could not obviously say that its undertaking of the works was consideration for the payment of "invalid" special charges. Rather, the consideration or basis for the receipt of the paid special charges (so argued) was a corresponding benefit (in a relevant sense) provided to the landowners when Council undertook the works.

The majority held that there was no benefit to the landowners that constituted a defence for Council. The relevant point was that any benefit which the landowners had received from the works (including any enhanced value of their lands) had nothing to do with their payment of the special charges.

Indeed, the majority rejected Council's "good consideration" defence on three independent grounds.

1. Making restitution of the unrefunded special charges would not cause any failure of the basis on which Council performed the relevant works. Council performed the works because it was obliged to do so under particular legislation. Council at least needed to show that its performing the works was not because of its statutory obligations. Council's performing the works was not done objectively on the basis they would be funded by the special charges; they were done wholly independently of Council's levying or receiving the charges.
2. Although the landowners may have received "special benefits" from the performance of the works within the contemplation of the LGA (that is, as representing the basis for the levying of the special charges), the works did not confer a "benefit" on the landowners in the necessary sense that they must have been requested, freely accepted or that they could have been reasonably rejected.
3. The "good consideration" defence would stultify the operation of the regulatory regime with which Council had failed to comply. Including statements of the estimated time and costs of the works in its "overall plan" was intended to ensure that Council took care before incurring substantial costs that were ultimately to be borne by ratepayers in its local government area.

The minority considered that the landowners had received a special benefit from Council's performance of the works within the contemplation of the LGA and for Council to be compelled to make restitution of the unrefunded portion of the special charges would have been unjust. The minority also (rather convincingly) rejected the "stultifying" argument: to say "the availability of a common law defence to a common law liability in restitution would 'stultify" a statutory scheme is to say that the statutory scheme depends on common law liability in restitution for the fulfilment of the legislative purpose and efficacy of that scheme".