COMMISSIONER OF INLAND REVENUE v NEW ORLEANS HOTEL (2011) LTD [2018] NZHC 971

COMMISSIONER OF INLAND REVENUE v NEW ORLEANS HOTEL (2011) LTD [2018] NZHC 971 [7May 2018]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2016-409-000814[2018] NZHC 971IN THE MATTER of the Companies Act 1993BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND NEW ORLEANS HOTEL (2011) LIMITEDDefendantHearing: 16 April 2018 (Determined on the papers)Counsel: R P Lemm for PlaintiffR A Hearn for DefendantJudgment: 7 May 2018COSTS JUDGMENT OF ASSOCIATE JUDGE MATTHEWS[1] The Commissioner of Inland Revenue applied for an order appointingliquidators to New Orleans Hotel (2011) Limited. After a number of adjournments,granted on each occasion for reasons related to prospects of imminent repayment ofthe taxation owing to the Commissioner, full payment was made and the applicationwas withdrawn. The Commissioner now seeks costs on a 2B basis.[2] The defendant opposes an award of costs on the basis that there is no evidencethat the Commissioner has incurred costs in the sense contemplated by Part 14 of theHigh Court Rules 2016.[3] It is common ground that throughout this proceeding the Commissioner hasbeen represented by a barrister and solicitor employed by the Commissioner's office,referred to in cases decided in this context as in-house counsel. The principal premiseof the defendant's argument is that there were no "costs incurred" in terms of r 14.2 ofthe High Court Rules and in particular, in terms of r 14.2(1)(f), no costs should beawarded because "an award of costs should not exceed the costs incurred by the partyclaiming costs", here nil.[4] Longstanding authority, binding on this Court, directs that costs may beawarded in respect of litigation where the successful party was represented by in-housecounsel. In Henderson Borough Council v Auckland Regional Authority, Cooke Jsaid:1As to costs, there is first the question of principle, whether any award to theRegional Authority should be refused in the light of the fact that the Authoritywas represented by an employee both as solicitor and counsel. Much of thework was counsel's work. In New Zealand I do not think it can be said to be improper for an employedbarrister to represent his employer. Nor did counsel for the appellant so argue.A fortiori an employed solicitor duly enrolled and with a current practisingcertificate may properly act as solicitor for his employer. Against thatbackground it appears to me that the fact that an employed practitioner hasacted for a successful party is not a sufficient reason for denying that party anaward of party and party costs: after all, the time of a salaried employee hasbeen occupied.[5] Woodhouse P and Richardson J agreed.[6] The decision in Henderson is regularly applied. Perhaps the most commonexample of this is in the context of the present case. The Commissioner presents manyhundreds of applications to this Court each year for adjudication in bankruptcy ofindividuals, and appointment of liquidators of companies. It is the common (thoughnot invariable) practice of the Commissioner's office to arrange representation beforethe Court on those applications by in-house counsel, as in this case. Equallycommonly it is the practice of this Court to award costs to the Commissioner on suchcases where she is successful. The argument presented to the Court by the defendantin the present case would, if it were accepted, amount to a departure from this practice,and would be contrary to Henderson.1 Henderson Borough Council v Auckland Regional Authority [1984] 1 NZLR 16 at 23.[7] The argument presented for the defendant was based on the decision of theCourt of Appeal in Joint Action Funding Ltd v Eichelbaum,2 in which the Courtexamined in detail the question of whether a lawyer who brings or defends aproceeding in person may, if successful, receive an award of costs, a long-establishedexception to the general principle that a self-represented litigant is not entitled to anaward of costs. In this decision the Court of Appeal analysed the provisions of Part14 of the High Court Rules which were introduced to the Rules in 2000 and materiallyaltered the way in which a court is to determine awards of costs. Of present relevanceare rr 14.1, 14.2 and 14.6:14.1 Costs at discretion of court(1) All matters are at the discretion of the court if they relate to costs –(a) of a proceeding; or(b) incidental to a proceeding; or(c) of a step in a proceeding.(2) Rules 14.2 to 14.10 are subject to subclause (1).(3) The provisions of any Act override subclauses (1) and (2).14.2 Principles applying to determination of costs(1) The following general principles apply to the determination of costs:(a) the party who fails with respect to a proceeding or aninterlocutory application should pay costs to the party whosucceeds:(b) an award of costs should reflect the complexity and significanceof the proceeding:(c) costs should be assessed by applying the appropriate dailyrecovery rate to the time considered reasonable for each stepreasonably required in relation to the proceeding or interlocutoryapplication:(d) an appropriate daily recovery rate should normally be two-thirdsof the daily rate considered reasonable in relation to theproceeding or interlocutory application:(e) what is an appropriate daily recovery rate and what is areasonable time should not depend on the skill or experience ofthe solicitor or counsel involved or on the time actually spent by2 Joint Action Funding Ltd v Eichelbaum [2017] NZCA 249.the solicitor or counsel involved or on the costs actually incurredby the party claiming costs:(f) an award of costs should not exceed the costs incurred by theparty claiming costs:(g) so far as possible the determination of costs should be predictableand expeditious. 14.6 Increased costs and indemnity costs(1) Despite rules 14.2 to 14.5, the court may make an order –(a) increasing costs otherwise payable under those rules (increasedcosts); or(b) that the costs payable are the actual costs, disbursements, andwitness expenses reasonably incurred by a party (indemnitycosts).(2) The court may make the order at any stage of a proceeding and inrelation to any step in it.(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 timerequired by the party claiming costs would substantially exceedthe time allocated under band C; or(b) the party opposing costs has contributed unnecessarily to the timeor expense of the proceeding or step in it by –(i) failing to comply with these rules or with a direction of thecourt; or(ii) taking or pursuing an unnecessary step or an argument thatlacks 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 anorder for discovery, a notice for further particulars, a noticefor interrogatories, or other similar requirement underthese rules; or(v) failing, without reasonable justification, to accept an offerof settlement whether in the form of an offer under rule14.10 or some other offer to settle or dispose of theproceeding; or(c) the proceeding is of general importance to persons other than justthe parties and it was reasonably necessary for the party claimingcosts to bring it or participate in it in the interests of thoseaffected; or(d) some other reason exists which justifies the court making anorder for increased costs despite the principle that thedetermination of costs should be predictable and expeditious.(4) The court may order a party to pay indemnity costs if –(a) the party has acted vexatiously, frivolously, improperly, orunnecessarily in commencing, continuing, or defending aproceeding or a step in a proceeding; or(b) the party has ignored or disobeyed an order or direction of thecourt or breached an undertaking given to the court or anotherparty; or(c) costs are payable from a fund, the party claiming costs is anecessary party to the proceeding affecting the fund, and theparty claiming costs has acted reasonably in the proceeding; or(d) the person in whose favour the order of costs is made was not aparty to the proceeding and has acted reasonably in relation to it;or(e) the party claiming costs is entitled to indemnity costs under acontract or deed; or(f) some other reason exists which justifies the court making anorder for indemnity costs despite the principle that thedetermination of costs should be predictable and expeditious.[8] In Joint Action Funding the Court noted the use of the word "incurred" inrr 14.2 and 14.6:3[31] However in three instances the word [costs] is used in conjunction withthe word "incurred" to describe the successful party's expenditure oroutgoings (a phrase we adopt as a neutral description) in fact accrued inconnection with representation by a qualified lawyer. Sequentially the threedifferent phrases are:(a) the costs actually incurred by the party claiming costs: r 14.2(e);(b) the costs incurred by the party claiming costs: r 14.2(f);(c) the actual costs, disbursements and witness expenses necessarilyincurred by a party: r 14.6(1)(b).[9] The Court then examined these questions:4Is the phrase confined to legal fees rendered to and paid by a party (in otherwords, a solicitor's bill of costs or counsel's fee referred to the definition ofdisbursement)? Or does it include a monetary amount assessed as reflecting3 At [35].4 At [31].the time and effort expended by a lawyer litigant in self-representation? Ordoes it [thirdly] extend to the opportunity cost of time lost, and concluded:[41] We therefore consider that the natural meaning of the phrase "costsactually incurred", and thus "costs incurred", envisages invoices rendered forlegal services provided by a legal practitioner to a litigant. We do not thinkthat the phrase is apt to include a period of time spent in connection withlitigation upon which some notional numerical value is placed but which isnot the subject of a bill of costs.[43] Consequently it is our conclusion that in the context of the current costsrules the proper meaning of the composite phrase "costs actually incurred" isconfined to legal costs billed by a lawyer retained by a party litigant for legalservices provided by the lawyer to that litigant.[44] Because a lawyer-litigant who has no separate legal representation willnot have a liability for such costs actually incurred, the effect of the sixthgeneral principle in r 14.2(f) will be that no award of costs should be made infavour of such a party. In mathematical terms, a lawyer-litigant's "costsincurred" will be zero and hence no award of costs can be made.[10] For the present case, the crucial conclusion is that in paragraph [43].[11] In the present case it is not suggested that the lawyer who represented theCommissioner rendered a bill to the Commissioner for so doing. As "costs actuallyincurred" is confined to legal costs billed by a lawyer retained by a litigant for legalservices provided by the lawyer to that litigant, there are no costs actually incurred inthis case in respect of which an award of costs could be made, if the principles in JointAction Funding are to be applied.[12] The decision in Joint Action Funding related to a practising lawyer whorepresented himself in the proceeding. The issue was whether the exception for self-representing lawyers to the general rule that litigants in person are not entitled to anaward of costs continued to apply. In the present case the Commissioner and herappointed counsel are separate legal entities, the latter employed by the former. Thiswas the fact situation in Henderson, and the passage quoted earlier from that caseexpressly recognises the distinction between the employer and the employee. Theargument presented for the defendant in this case is based squarely on the decision inJoint Action Funding: is the interpretation of the present rules applicable to all contextsin which they are to be applied? On that basis it is argued that there should not be anaward of costs in any context where costs are not actually incurred by the party seekingan award of costs.[13] Joint Action Funding was considered by a Full Bench of the Court of Appealin McGuire v Secretary for Justice.5 In that case the Court noted that Joint ActionFunding:6 afforded an opportunity, for the first time, for a comprehensiveconsideration of the proper interpretation of the relevant rules now in pt 14 ofthe High Court Rules. The position reached as a result of the analysis carriedout was consonant with the fundamental idea, recognised for hundreds ofyears, that costs awards should be for professional legal costs actuallyincurred.[14] This supports the proposition that the interpretation of the rules in Joint ActionFunding is of application outside the context of a litigant representing him or herselfin person. This is also borne out, in my view, by other passages in the judgment inJoint Action Funding:7 In each case involving a lawyer-litigant an inquiry would need to beundertaken either as to the extent of the litigation conduct for which the lawyershould be compensated or in the assessment of the time expended as a measureof the lawyer's opportunity cost. In the decision under appeal, deductions onthis account were made to the scale time allocations for commencement ofproceedings, preparation of briefs and preparation for hearing, but thesedeductions were necessarily somewhat arbitrary in nature.The fact that such an exercise must be undertaken dilutes the predictabilityand expedition in the costs determination and hence tends to undermine theobjective in r 14.2(g). We therefore consider that such a consequence tellsagainst the retention of the lawyer-litigant exception in the new costs regime.[15] These passages appear in the context of a specific discussion on the lawyerlitigant exception, but of present relevance is the Court's view of the exercise whichwould need to be undertaken by the Court if costs were to be allowed to a lawyerlitigant. Adjustments would need to be made for the attendances of the lawyer, asnoted in London Scottish Benefit Society v Chorley:85 McGuire v Secretary for Justice [2018] NZCA 37.6 At [72].7 At [56] and [57].8 London Scottish Benefit Society v Chorley (1884) 13 QBD 872 (CA) at 876.It is true, however, to say that the costs of a solicitor appearing in person mustbe taxed differently from those of an ordinary litigant appearing by a solicitor.The unsuccessful adversary of a solicitor appearing in person cannot becharged for what does not exist, he cannot be charged for the solicitorconsulting himself, or instructing himself, or attending upon himself. The truerule seems to be that when a solicitor brings or defends an action in person, heis entitled to the same costs as an ordinary litigant appearing by a solicitor,subject to this restriction, that no costs which are really unnecessary can berecovered. Of this kind are the costs of instructions and attendances.[16] This case was decided under a regime of taxation of costs by the Court. In thepresent case, of course, the Commissioner claims costs on scale. Her claim is for 8.6days based on the time allocations in Schedule 2. Those time allocations, though, areintended to cover all the work which is involved in the actual attendance described inthe schedule. For example, the time for commencing a proceeding includesattendances on taking instructions and so forth. Thus, even a claim by in-housecounsel for scale fees involves a claim for attendances on fellow members of staff.[17] Whether such attendances are to be regarded in the way described in Chorleyis moot. They are not attendances by a lawyer on himself, but by a lawyer upon otherstaff of his or her employer. But the undesirability of undertaking such an exercisewas a factor leading the Court of Appeal to its interpretation of the Rules in JointAction Funding and McGuire.[18] Thus this Court is now called upon to decide whether to apply Henderson, orthe interpretation of the Rules in Part 14 in accordance with Joint Action Funding. Ihave concluded that this Court should follow Joint Action Funding and McGuire. Inboth cases the Court of Appeal expressly interpreted the current Rules. In neither casedid the Court limit its interpretation to application only in relation to self-representinglawyers. Nor does there appear to be any principled basis upon which the rules couldbear one interpretation in one context and another in a different context. Theinterpretation set out by the Court excludes an award of costs to in-house counselunless the circumstances of that counsel's retainer fit within the terms of these cases.[19] As to Henderson, the Court is left with no alternative but not to follow it.Justification for that unusual course lies in the fact that in Henderson the Court did notundertake any analysis of the then current costs rules which were contained in theCode of Civil Procedure and concentrated its attention on the propriety of an employedsolicitor acting for his employer, and whether that fact was a sufficient reason to denycosts which would otherwise be awarded. In any event, those rules did not contain alimitation on awards of costs to costs actually incurred.[20] In reaching this conclusion I am departing from the conclusion reached byAssociate Judge Gendall in Commissioner of Inland Revenue v Harbour City Tow andSalvage (2003) Ltd. His Honour awarded costs to in-house counsel after argumentthat costs should not be awarded because no costs had actually been incurred. HisHonour said:9[32] Also, I reject the suggestion from counsel for the defendant that first,there is nothing before the Court to indicate actual costs incurred by theplaintiff, and secondly, that as a result, r 47(f) prevents any award of costsbeing made here. Counsel for the plaintiff has confirmed that nearly 45 hoursof practitioner time was involved in this matter. I have no doubt that areasonable lawyer charge for the cost of this time plus usual office overheadand related expenses would provide an "actual cost" in this proceedingexceeding the $4,330 "deemed" scale costs sought by the plaintiff.[21] When this case was decided, his Honour clearly had the benefit of argumentestablishing that an actual cost was incurred. This case was decided before JointAction Funding, and the approach taken by his Honour is expressly rejected by theCourt of Appeal in that case, as is evident from the passage from the judgment of theCourt cited above at [13].[22] The approach taken by Associate Judge Gendall has been applied in at leasttwo further cases. I refer first to Grant v Pandey, a judgment of Courtney J on11 December 2013. In this case Courtney J said:10The real issue in this case is the basis upon which costs should be awardedwhere in-house counsel are involved. There is no specific provision in therules regarding costs where a party is represented by in-house counsel.Previous decisions of this Court have awarded costs on the same basis aswould have been awarded to a party represented by external counsel. I note,in particular, the approach and discussion taken by Gendall AJ (as he thenwas) in CIR v Harbour City Tow and Salvage (2003) Ltd.9 Commissioner of Inland Revenue v Harbour City Tow and Salvage (2003) Ltd HC WellingtonCIV-2006-485-2002, 12 February 2007.10 Grant v Pandey [2013] NZHC 3323, (2013) 21 PRNZ 676 at [6].[23] After rejecting an argument presented by counsel based on two judgments ofthe Employment Court, Courtney J concluded:11[Counsel's] approach, I think, proceeds on the flawed assumption that thecosts deemed by the Rules Committee to represent an appropriate level of timeand cost for certain types of work are somehow different when applied to in-house counsel as to external counsel. In general, there is no reason that thestatutory regime ought not operate effectively for both in-house and externalcounsel.[24] Secondly, in Bright v Auckland Council,12 Venning J noted that cases decidedunder Part 14 of the High Court Rules apply the principle enunciated in Henderson,and awarded costs to a party represented by in-house counsel. His Honour made thesame finding in Re Commissioner of Inland Revenue, ex parte Mills.13[25] All of these cases were decided before the decisions of the Court of Appeal inJoint Action Funding and McGuire, which have laid express emphasis on the correctinterpretation of the phrases "costs actually incurred" and "costs incurred". In the fourcases in this Court cited above the Court was prepared to proceed on the basis thatthere is a cost involved in being represented by in-house counsel. I do not demur fromthis proposition, but given the interpretation of the Rules now laid down by the Courtof Appeal I am unable to accept that I should proceed in the present case in the waythe Court did in these four cases.[26] Finally, I refer to r 14.1. This preserves the rule that all matters are at thediscretion of the Court if they relate to costs of a proceeding. Despite the apparentwidth of this discretion it is to be exercised on a principled basis, and it is establishedthat since the introduction of the detailed costs regime now contained in the HighCourt Rules, the discretion has not been unfettered. Rather, it is now qualified by thespecific costs rules in rr 14.2 – 14.10 and is exercisable only in situations notcontemplated by those specific rules or which are not fairly recognised by them.14Since Joint Action Funding and McGuire, it would not be a principled exercise of thediscretion given to the Court by r 14.1 to award costs in a circumstance where legal11 At [12].12 Bright v Auckland Council [2016] NZHC 2117.13 Re Commissioner of Inland Revenue, ex parte Mills [2016] NZHC 1189.14 McGechan on Procedure (online loose-leaf ed, Thomson Reuters) at HR14.1.02 and the casescited in that paragraph.costs have not been billed by a lawyer retained by a party litigant for legal servicesprovided by the lawyer to that litigant.Outcome[27] The application for costs by the Commissioner of Inland Revenue is dismissed.[28] Costs on this application were not argued. In my view, given the nature of thiscase, costs should lie where they fall. If counsel disagree memoranda may be filedwithin 10 working days._______________________J G MatthewsAssociate JudgeSolicitors:Inland Revenue Legal & Technical Services, ChristchurchCorcoran French, Christchurch