SOVEREIGN ASSURANCE COMPANY LIMITED v COMMISSIONER OF INLAND REVENUE HC AK CIV-2005-404-6802

SOVEREIGN ASSURANCE COMPANY LIMITED v COMMISSIONER OF INLAND REVENUE HC AK CIV-2005-404-6802 [20 December 2012]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2005-404-6802CIV-2005-404-6803CIV-2008-404-2609CIV-2009-404-6443[2012] NZHC 3573UNDER the Tax Administration Act 1994BETWEEN SOVEREIGN ASSURANCE COMPANYLIMITEDFirst PlaintiffASB BANK LIMITEDSecond PlaintiffSOVEREIGN SERVICES LIMITEDThird PlaintiffCBA ASSET FINANCE (NZ) LIMITEDFourth PlaintiffCBA FUNDING (NZ) LIMITEDFifth PlaintiffCBA DAIRY LEASING LIMITEDSixth PlaintiffAND COMMISSIONER OF INLANDREVENUEDefendantOn papersJudgment: 20 December 2012JUDGMENT OF DOBSON J(Costs)This judgment was delivered by me on 20 December 2012 at 4pm,pursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:Bell Gully, DX CP20509, Auckland for plaintiffsCrown Law, PO Box 2858, Wellington for defendant[1] I have now had a fuller opportunity to consider the content of the memoranda filed, respectively on behalf of the defendant (the Commissioner) dated 4 and 24 October 2012, and on behalf of the plaintiffs (Sovereign) dated 19 and 30 October 2012. My recent minute of 19 November 2012 addressed the reasons for the delay in determining costs, which is regretted.[2] The Commissioner succeeded before me, essentially on all arguments in a complex tax dispute involving the application of the accruals rules to international reinsurance arrangements. There were substantial amounts of money at stake, over a number of tax years, and some specific issues arose that had not been litigated before.[3] Both parties were well-resourced and the case was argued by highly competent counsel, appropriate for its complexity. Whilst the trial was run with a commendable degree of co-operation between counsel, all live issues were vigorously and thoroughly contested.[4] It was a case in which the issues were addressed more broadly at the stage of exchange of briefs than at trial, but there were no respects in which Sovereign could complain that the Commissioner unnecessarily expanded the scope of matters in issue. At an early stage, the parties had agreed that the proceedings be treated under category 3 for costs purposes.[5] On a basis itemised in accordance with the High Court Rules, the Commissioner claims the sum of $383,082 for costs, and $716,667.45 for disbursements.Disputed components of costs claim[6] The major component of the costs claim that was disputed is the Commissioner's claim for trial preparation under items 30, 32 and 33 of the scale. Under the current regime, band C provides an allocation of 14 days for those components of trial preparation. Instead, the Commissioner claims 60 days asreasonable. The Commissioner's initial memorandum indicated that a total of 100 days was committed by counsel, but that is not necessarily a relevant yardstick.[7] I note that under the previous schedule for costs, preparation was allowed for at the ratio of two days for each one day of the substantive trial. Here, the trial was conducted over 21 days, so that would have generated an entitlement under the former scale of 42 days' preparation.[8] Under the current regime, the default position can be altered to what the Court considers is reasonable in the circumstances of the particular case. Rule 14.6(3) provides as follows:14.6 Increased costs and indemnity costs(3) The court may order a party to pay increased costs if—(a) the nature of the proceeding or the step in it is such that the time required by the party claiming costs would substantially exceed the time allocated under band C; or(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—(i) failing to comply with these rules or with a direction of the court; or(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or(c) the proceeding is of general importance to persons other than just the parties and it was reasonably necessary for the party claiming costs to bring it or participate in it in the interests of those affected; or(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.[9] Sovereign objects, first, that an increase to 60 days is unreasonable, given what it perceives to have been the more confined task of reasonable preparation ofthe Commissioner's case. Sovereign calculates the increase from 14 to 60 days asbeing some 429 per cent. It argues that that is substantially beyond any comparable decision, and in particular is grossly in excess of a guideline of 50 per cent increaseon scale. Sovereign's initial memorandum cited numerous cases recognising aguideline or "rule of thumb" that increases are likely to be limited to 50 per cent.1[10] It is possible that a process of accretion gives the 50 per cent figure more status as an upper limit than it deserves. In Holdfast NZ Ltd v Selleys Pty Ltd,2 the Court of Appeal recognised a 50 per cent uplift as the upper limit where increased costs were being considered on the basis of the criteria that is now in r 14.6(3)(b), namely where a party opposing costs has contributed unnecessarily to the time or expense of the proceeding. In that decision, the Court of Appeal recognised that even on that ground, uplifts of more than 50 per cent might be justified,3 but did not purport to address any limits on what the Court might consider reasonable as the allowance for time taken in relation to preparation in any particular case. The reference to 50 per cent as a "rule of thumb" comes from the observation of Simon France J in New Zealand Fish & Game Council v Attorney-General where, in allowing a 100 per cent uplift, his Honour observed:4 That is of course an increase of more than the 50% rule of thumb, but Iam applying it to only one step and it is in any event a guideline not a rule.[11] The Commissioner's claim for trial preparation comprises 26 days for each ofpreparation of briefs of evidence and preparation for trial, plus eight days for1 For example, Chesterfield Preschools Ltd v Commissioner of Inland Revenue (2009) 24 NZTC23,504 (HC); Hunter Grain Ltd v J Swap Contractors Ltd [2012] NZHC 755, Ballance Agri-Nutrients Ltd v Ravensdown Fertiliser Co-Operative Ltd HC Auckland CIV-2009-404-2171,11 August 2011.2 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA).3 At [48].4 New Zealand Fish & Game Council v Attorney-General (2009) 20 PRNZ 557 (HC) at [15].preparation of the common bundle. Sovereign's objection includes making the point that it took primary responsibility for preparation of the bundle.[12] I consider an allowance of 50 days is the appropriate one for the relevant heads of preparation in this case. Any less would be niggardly, given the complexity of the task for counsel coming to grips with the arcane practices involved in reinsurance, and applying those to the equally arcane provisions in the accruals rules. I therefore intend to disallow 10 of the 60 days claimed for trial preparation.[13] There is a more confined dispute over the appropriate band for preparation of statements of defence. The Commissioner sought band C in relation to the initial defence, with subsequent substantive defences allocated band B and the amended and consolidated defences band A. Sovereign considers the original defence should be allocated band B, and that subsequent statements of defence should be allocatedband A. Perhaps having lived with the issue for so long, Sovereign's solicitorsoverlook the complexity that was involved even in pleading these disputes. I upholdthe Commissioner's claim in respect of preparation of the statements of defence.[14] As to costs claimed for preparation for the first case management conference and filing a memorandum in relation to it, the Commissioner claimed one day each, whereas items 10 and 11 from Schedule 3 only allow .4 of a day. Sovereign correctly contends that each of those components should be reduced from $2,940 to $1,176.[15] Accordingly, in summary, the Commissioner's claim for 60 days for the various aspects of trial preparation is reduced to 50 days, and the claims under items 10 and 11 in relation to the first case management conference are each reduced from $2,940 to $1,176. In other respects, the costs claim is upheld and subject to those adjustments that is the amount I order.Disbursements[16] Sovereign objects that a sum of approximately $514,000 for the four United Kingdom based expert witnesses called by the Commissioner is excessive. There isno dispute that the amounts have been incurred, but Sovereign relies on r 14.12(2)(d), under which disbursements can only be awarded to the extent that they are reasonable in amount.[17] Reflecting on the input from experts after the event, Sovereign submits that the Court was likely to receive little assistance from two of the Commissioner'sexperts in particular, Messrs Adams and Laker. Sovereign also argues that relatively confined references to their evidence in my judgment confirms the lack of relevance of the evidence provided by those experts. Sovereign proposes that the Commissioner should be limited to a recovery of $70,000 per witness for the United Kingdom experts.[18] I am satisfied that it was appropriate for the Commissioner to retain and call each of the experts that I heard. Solicitors and counsel for the Commissioner had to respond to comprehensive analyses of the range of possible outcomes from the tranches of insurance risks that were the subject of reinsurance arrangements, and comments on behalf of the taxpayers as to the commercial character of those arrangements. It was not an area that the litigants could expect any judge to have any thorough familiarity with, prior to engaging with the evidence in the case.[19] It is true that, in the end, I was able to explain my reasons for the conclusions I arrived at without extensive recitation of the evidence from some of the experts, but that is not a fair measure of whether the Commissioner was reasonable in treating their evidence on particular topics as relevant. There was a relatively well-matched level of expertise in the competing versions presented respectively on behalf of Sovereign and the Commissioner.[20] In these circumstances, I am satisfied that the totality of the disbursements incurred for the experts on behalf of the Commissioner was reasonable and allow the full extent claimed on that head. There were no other disputes in relation to the disbursements claimed, so they are allowed in full.Dobson J