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Bunnings sought $291,341.38, the majority of costs incurred during an appeal hearing for its proposed Queenstown warehouse and retail outlet, and disbursements.
However, the council submitted, and the court agreed, that was "unjustifiably high for a two-day hearing''.
The costs application came after the Environment Court overturned an earlier decision to refuse consent for the development on a 1.6ha site on the Frankton Flats.
Judge Jon Jackson said costs were not usually awarded against a local authority unless it had neglected its duty, or acted unreasonably.
Bunnings submitted it did the latter because it had an "entrenched, unreasonable position'' relating to industrial land supply.
The council said its defence, in the first instance, was in accordance with its duty to administer the district plan on its terms and in line with previous court decisions.
But Bunnings argued the council's reliance on earlier decisions regarding plan change 19 - Frankton Flats was "misplaced''.
Judge Jackson said the law relating to the national policy statement on urban development capacity needed testing, and that strongly suggested costs should not be awarded.
However, council expert Derek Foy had brought its economic evidence "into centre stage'' as it was fundamental to accurately assess industrial land supply and the quantity of land demanded.
He considered Mr Foy incorrectly calculated the amount of industrial land potentially able to be supplied and "queried his independence in this case''.
"It is on that basis I consider an award is justified on the basis that the council has neglected its duty, although not to the extent contended by Bunnings.''