An analysis of the High Court decision in Redland City Council v Kozik [2024] HCA 7
In 2022, I authored an article in Issue 88 of Hearsay about the Supreme Court of Queensland decision in Kozik & Ors v Redland City Council [2021] QSC 233 (see The Fruits of an Unlawful Demand). That decision concerned the entitlement of plaintiff ratepayers to restitution of tax paid pursuant to an unlawful demand by a local government. Since that article was published, Bradley J’s decision has been the subject of appeals to the Queensland Court of Appeal and, more recently, the High Court.
In my previous article, I emphasised Bradley J’s finding that the plaintiffs had a statutory entitlement to restitution. That finding removed the need to consider any common law action for unjust enrichment. For the sake of discussion, I then explored the counterfactual: identifying difficulties that may confront plaintiffs in recovering unlawfully exacted tax under the common law where legislation does not require repayment.
Since my article, that counterfactual became reality in this case. Contrary to Bradley J’s findings, the High Court in Redland City Council v Kozik [2024] HCA 7 held that no statutory entitlement to restitution arose. It was therefore necessary for the Court to confront the unjust enrichment issue – an issue that split the Court 3/2. The decision is a fascinating one and has real implications for the law of restitution in Australia.
BACKGROUND
The background to this matter is summarised in my previous article on this case. In short, the appellant, Redland City Council, had passed resolutions to levy special charges on an area of land, including land owned by the respondents, to fund services relating to nearby water reserves. The Council demanded, and was paid, the special charges by the respondents and other landowners.
It was later discovered that each of the Council’s resolutions to levy the special charges was unlawful. This was so because, contrary to requirements in statute, the resolutions did not properly identify an ‘overall plan’ for the services to which the special charges applied.
The Council refunded the unspent portion of the special charges but refused to refund the remainder on the basis that it had been spent on services benefiting those who had paid. The respondents, who were plaintiffs in a representative action on behalf of other affected landowners, sought the repayment of the remainder of the funds.
At first instance, Bradley J determined that the rate notices by which the Council levied the special charges were not invalid by virtue of regulations passed pursuant to the Local Government Act 2009 (Qld) – referred to as ‘validating regulations’. Because the validity of the rate notices was preserved, His Honour found the respondents had not paid under a mistake of law so as to give rise to a common law claim for restitution. Nevertheless, under the same validating regulations, the respondents were entitled to recover the remainder of the funds as a debt.
On appeal, a majority in the Court of Appeal held that the validating regulations did not apply to the special charges and that, consequently, the rate notices were invalid and payments made by the taxpayers were not recoverable in debt. It was determined that, instead, the payments were recoverable as restitution on the ground of a mistake of law.
The matter ultimately split the High Court. A majority (Gordon, Edelman and Steward JJ) dismissed the Council’s further appeal; largely affirming the Court of Appeal’s reasoning. The minority (Gageler CJ and Jagot J) held that a prima facie entitlement of the landowners to restitution was displaced by a defence not previously recognised by the High Court. The majority and minority decisions are explored below.
OPERATION OF VALIDATING REGULATIONS
Contrary to the findings of the primary judge, all justices of the High Court concluded that the validating regulations were not engaged. In so deciding, the Court distinguished between, firstly, errors at the stage of resolving to levy the special charges, and, secondly, errors at the stage of actually levying the tax. The validating regulations only preserved rate notices in the event of certain kinds of error at the second stage. Application of the validating regulations was said to be premised upon the existence of a valid resolution.
Here, none of the resolutions were valid and, consequently, the Council lacked power to levy the charges. As explained by the majority, ‘there was nothing to which the rate notices issued by the Council to the respondents could attach…’.[1]
RESTITUTION OF UNJUST ENRICHMENT
The absence of any statutory right to restitution brought into focus the respondents’ common law action for restitution of unjust enrichment. The High Court has previously described the term ‘unjust enrichment’ as referring to categories of case where the law imposes upon a defendant an obligation to make restitution for a payment, or other benefit, derived at the expense of a plaintiff.[2]
All actions for restitution for unjust enrichment involve a two‑stage inquiry. At the first stage, a plaintiff must demonstrate a prima facie entitlement to restitution. To do so, the plaintiff must establish that a recognised ‘qualifying or vitiating factor’ operated on the making of the payment. Factors capable of founding a taxpayer’s entitlement to recover tax paid in an action for restitution include ‘mistake of law’. At the second stage, it is open for a defendant to displace the plaintiff’s prima facie entitlement by pointing to ‘circumstances which the law recognizes would make an order for restitution unjust’.[3]
In this case, the first stage of the inquiry was uncontentious. The landowners were said to have demonstrated a prima facie entitlement to restitution. They had paid the special charges in the mistaken belief that they were under a legal obligation to do so and, consequently, the ‘mistake of law’ factor was engaged. It was the second stage of the inquiry that divided the Court.
‘Good consideration’ defence
As a defence to the restitution claim, the Council argued that the rate payments were made for ‘good consideration’ – namely, for the benefit conferred upon the taxpayers by the work the subject of the special charges. Both the majority and minority rejected that argument. The majority did so on three bases.
First, the majority said that restitution of the special charges would not ‘cause the basis of the Council’s performance of the relevant works to fail’. The Council was obliged by statute to perform the relevant works. The services were provided on that basis and not in exchange for payment of the special charges.
Second, the majority held the relevant works did not ‘benefit’ the landowners in the sense necessary to satisfy a defence of good consideration. Generally, A will obtain a benefit in that sense where B performs a non-gratuitous service that A had requested, or for which A freely accepted a liability to pay. The majority emphasised that, in this case, the landowners had not requested, nor freely accepted, the Council’s services. They were not in a position to reject performance of the works.
Third, the application of a ‘good consideration’ defence would, it was found, stultify the operation of the relevant legislation. The purpose of conditioning the power to impose special charges on the preparation of an overall plan was said to be one of community protection; ensuring local governments take care before incurring substantial costs that ‘will ultimately be borne by a section of the community’. The majority found that purpose would be undermined if, despite the lack of an overall plan, restitution to the taxpayers was prevented on the basis of ‘good consideration’.
‘Recipient not unjustly enriched’ defence
The central controversy arising in the majority and minority judgments was the application of a defence termed ‘recipient not unjustly enriched’ (‘RNUE defence’) – a concept recognised in the United States, but not previously by the High Court. Under the claimed RNUE defence, a prima facie entitlement to restitution of a benefit may be defeated where a defendant can show the benefit conferred ‘did not unjustly enrich the recipient when the challenged transaction is viewed in the context of the parties’ further obligations to each other’.[4] The RNUE defence is said to have a basis in equity; requiring consideration of the justice of the impugned transaction in light of ‘the larger transactional circumstances’.[5]
The majority decided that no separate RNUE defence should be recognised in Australia. Their Honours found that the RNUE defence uses the concept of unjust enrichment as a premise of direct application – that is, it contemplates an assessment of the ‘perceived injustice’ of the transaction in question. This is in circumstances where unjust enrichment is, properly understood, not a concept capable of direct application and is, instead, ‘a conclusion of a process of reasoning’.[6]
The majority rejected the equitable basis for the RNUE defence. It was said that, though the foundations of the law of unjust enrichment lie in the principles of natural justice and equity, those concepts are not capable of direct application in the context of restitutionary claims and defences. In view of the majority, it is not appropriate to determine whether an enrichment is unjust ‘by reference to some subjective evaluation of what is fair or unconscionable.’ Instead, restitution involves ‘determination, by the ordinary processes of legal reasoning’ of whether an obligation arises to make restitution.[7]
The minority disagreed; recognising the RNUE defence and finding that it defeated the landowners’ prima facie entitlement to restitution. The minority found that the Council’s retention of the payments did not result in the Council being unjustly enriched ‘when viewed in the context of the statutory obligations and entitlements of the Council and of the Landowners’.[8]
The minority outlined a number of circumstances demonstrating that the Council’s retention of the moneys would not be unjust.[9] First, it emphasised that the Council was statutorily obliged to undertake the works. Second, the works resulted in ‘special benefit’ to the land of the Landowners (as that term was defined in the relevant legislation), sufficient to entitle the Council to resolve to levy special charges for the works. Third, invalidity of the resolutions did not arise from a lack of statutory power to levy the special charges in fact levied but from an error in the process by which that power was purportedly exercised. Fourth, the Council in fact used the moneys paid to it by the Landowners as special charges exclusively for the purpose of funding the works, refunding the surplus to the Landowners. Fifth, the Council acted in good faith; honestly believing that it had complied with the required processes.
Seemingly in response to the majority’s criticisms, the minority asserted that the RNUE defence involves no ‘direct application’ of the concept of unjust enrichment. Rather, the defence was said to indicate circumstances which can operate to deny an ‘occasion of unjust enrichment supporting claims for restitutionary relief’.[10] The minority argued that the range of circumstances establishing a defence to a prima facie entitlement to restitution should not be narrowly confined; particularly in light of its ‘equitable underpinning[s]’ of the common law action.[11]
In answer to the majority’s concerns about stultification of the statutory regime, the minority observed that common law liability in restitution, where it arises in the event of breach, is a collateral consequence of statutory invalidity. The liability is exposure only to a prima facie entitlement to restitutionary relief. Accordingly, there was said to be no ‘stultification’ in the Court staying its hand in the face of the RNUE defence.[12]
WOOLWICH
In my article about the first instance decision, I explained that English courts have recognised that claims for restitution of unjust enrichment can be grounded solely upon the unlawful act of a public authority – that is, without the need to demonstrate a right to restitution on any other ground. I discussed the decision in Woolwich Equitable Building Society v Inland Revenue Commissioners [13] where the House of Lords held that money paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by the authorities was recoverable as of right.
Whether the Woolwich principle should be imported into the common law of Australia was described by the minority in Kozik as ‘a large question’; involving consideration of existing High Court authority and, interestingly, the scope and content of the prescription in s 64 of the Judiciary Act 1903 (Cth) that ‘[i]n any suit to which the Commonwealth or a State is a party, the rights of parties shall as nearly as possible be the same … as in a suit between subject and subject’.[14]
However large the question, the Court ultimately refused to answer it; both the majority and minority finding it not determinative of the issues on appeal. The minority expressed a view that, regardless of its application in Australia, entitlement of a taxpayer to recovery on the Woolwich principle was prima facie and subject to displacement by defences. This was so despite references in English caselaw to ‘high principles of public policy’ tending against the recognition of defences to the principle.[15]
IMPLICATIONS
A number of principles can be distilled from the majority’s reasoning in Kozik. Most fundamentally, the decision makes clear that Australian law does not recognise a RNUE defence to a claim for restitution of unjust enrichment. The term ‘unjust enrichment’ is not a premise capable of direct application and concepts of justice or fairness are not themselves relevant to either stage of the unjust enrichment inquiry. That is, they are irrelevant to whether a prima facie entitlement to restitution has arisen, nor are they relevant to the question of whether that entitlement has been displaced.
The decision also confirms that the Woolwich principle is not yet recognised in Australian law. In this sense, restitutionary claims against governments are treated no differently from claims against private citizens. Aggrieved taxpayers must rely on orthodox restitutionary principles to recover tax the subject of unlawful demands.
However, as Kozik demonstrates, when those principles are applied to claims for restitution by citizens who have paid tax under a mistaken belief that government has complied with the law in demanding that tax, the prima facie entitlement to restitution that arises will often be very difficult to displace.
Finally, the decision is a reminder of how claims for restitution of unjust enrichment should be pleaded. As identified by the majority, such claims should not seek to directly invoke the concept of ‘unjust enrichment’. Doing so will render a pleading liable to be struck out as disclosing no cause of action. Instead, reference should be made to an established category of restitution (for example, mistake or duress). Similarly, practitioners should refrain from pleading in a defence ‘no unjust enrichment’ as a premise of direct application. Instead, reference should be made to a recognised defence to any prima facie entitlement to restitution.[16]
The High Court’s decision can be found here.
[1] Redland City Council v Kozik [2024] HCA 7, [176] (Gordon, Edelman and Steward JJ).
[2] Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498, 516.
[3] Redland City Council v Kozik [2024] HCA 7, [73] (Gageler CJ and Jagot J) referring to David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 379.
[4] Redland City Council v Kozik [2024] HCA 7, [215] (Gordon, Edelman and Steward JJ).
[5] Redland City Council v Kozik [2024] HCA 7, [94] (Gageler CJ and Jagot J).
[6] Redland City Council v Kozik [2024] HCA 7, [217] – [219] (Gordon, Edelman and Steward JJ).
[7] Redland City Council v Kozik [2024] HCA 7, [226] (Gordon, Edelman and Steward JJ).
[8] Redland City Council v Kozik [2024] HCA 7, [131] (Gageler CJ and Jagot J).
[9] Redland City Council v Kozik [2024] HCA 7, [120] – [125] (Gageler CJ and Jagot J)
[10] Redland City Council v Kozik [2024] HCA 7, [97] (Gageler CJ and Jagot J)
[11] Redland City Council v Kozik [2024] HCA 7, [74] (Gageler CJ and Jagot J).
[12] Redland City Council v Kozik [2024] HCA 7, [130] (Gageler CJ and Jagot J).
[13] Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70.
[14] Redland City Council v Kozik [2024] HCA 7, [78] (Gageler CJ and Jagot J).
[15] Redland City Council v Kozik [2024] HCA 7, [78] – [83] (Gageler CJ and Jagot J).
[16] Redland City Council v Kozik [2024] HCA 7, [217] (Gordon, Edelman and Steward JJ).
