BEN NEVIS FORESTRY VENTURES LTD & ORS v THE COMMISSIONER OF INLAND REVENUE CA51/2014 [2014] NZCA 348

BEN NEVIS FORESTRY VENTURES LTD & ORS v THE COMMISSIONER OF INLAND REVENUE CA51/2014 [2014] NZCA 348 [5 August 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA51/2014[2014] NZCA 348BETWEEN BEN NEVIS FORESTRY VENTURESLIMITEDFirst AppellantBRISTOL FORESTRY VENTURELIMITEDSecond AppellantCLIVE RICHARD BRADBURYThird AppellantGREGORY ALAN PEEBLESFourth AppellantAND THE COMMISSIONER OF INLANDREVENUERespondentCA55/2014AND BETWEEN REDCLIFFE FORESTRY VENTURELIMITEDFirst AppellantGARRY ALBERT MUIRSecond AppellantACCENT MANAGEMENT LIMITEDThird AppellantLEXINGTON RESOURCES LIMITEDFourth AppellantAND THE COMMISSIONER OF INLANDREVENUERespondentCourt: O'Regan P, Stevens and Wild JJCounsel: G J Judd QC for the Appellants in CA51/2014G A Muir for the Appellants in CA55/2014R L Roff and S J Leslie for RespondentJudgment:(On the papers)5 August 2014 at 12 pmJUDGMENT OF THE COURTA The appeals are allowed. The award of costs on an indemnity basis in the High Court is quashed and replaced with an award of costs on a 2C basis. We certify for two counsel.B The respondent must pay the appellants' costs for this appeal at 50 per cent of the amount of costs that would be payable for a standard appeal on a band A basis plus usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by O'Regan P)[1] Both of these appeals relate to the same High Court decision, a judgment of Brewer J awarding indemnity costs in favour of the Commissioner against all appellants.1 With the agreement of all parties the appeals were determined on the papers. The issues about the appropriateness of indemnity costs awards also arose in relation to a number of other appeals involving the appellants and associated parties, which the present panel dealt with and in respect of which judgments are being issued at the same time as the present judgment.2Background[2] The judgment of Brewer J deals with the Commissioner's claim for costs inrelation to a proceeding commenced by the appellants seeking an order to set aside a decision of the High Court. The proceeding the appellants sought to have set aside1 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 3411.2 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2014] NZCA 349; Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2014] NZCA 350; and Accent Management Ltd v Attorney-General [2014] NZCA 351 .was one in which the High Court ruled that an arrangement to which the appellants and a number of other taxpayers were parties, known as the Trinity scheme, was a tax avoidance arrangement.3 (We will call the decision that the appellants sought tohave set aside "Accent 2004"). The Commissioner filed a protest to jurisdictionunder r 5.49 of the High Court Rules in relation to the proceeding seeking an order setting aside Accent 2004. That protest was upheld by Venning J.4 (We will call the decision of Venning J "Redcliffe 2010"). This Court overturned Redcliffe 2010, not on the merits but on the basis that the r 5.49 procedure was not the appropriatevehicle for the Commissioner's challenge to the application to set aside the Accent 2004 judgment.5 However, the Supreme Court allowed the Commissioner's appeal against the decision of this Court and reinstated Venning J's judgment.6 (We will callthese three decisions collectively "the Redcliffe proceedings").[3] A summary of the Redcliffe proceedings is set out in our judgment in Accent Management Ltd v Attorney-General.7 We will not repeat it here. All that needs to be said in this context is that the appellants alleged in Redcliffe 2010 that the Commissioner had dishonestly concealed the possible applicability of subpart EH of the Income Tax Act 1994 and had allowed the matter to be dealt with under subpart EG of that Act. Venning J determined that the High Court did not have jurisdiction to recall the judgment in Accent 2004 unless it had been obtained by fraud. He found that there was no fraud, and that the allegation made by the appellants was, at best, an allegation of an error of law.[4] The context for the judgment in Redcliffe 2010 is recounted in our judgment in Accent Management Ltd v Attorney-General.8 We adopt that summary in the present judgment without repeating it. We acknowledge that some of the matters referred to in the summary postdate Redcliffe 2010.3 Accent Management Ltd v Commissioner of Inland Revenue (2004) 22 NZTC 19,027 (HC).4 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2011] 1 NZLR 336 (HC).5 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue [2011] NZCA 638; [2012] 2 NZLR 823. This Court considered the appropriate vehicle was an application under r 15.1 of the High Court Rules to strike out the application to set aside.6 Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94; [2013] 1 NZLR 804.7 Accent Management Ltd v Attorney-General, above n 2, at [17]–[21].8 Accent Management Ltd v Attorney-General, above n 2, at [11]–[23].Decision under appeal[5] The essence of the decision of Brewer J was that the application to set asideAccent 2004 was "hopeless from the outset" and amounted to "a collateral attack on legal matters which had already been pronounced upon by the Supreme Court".9 He said that the only possible basis on which the Court could have recalled its judgment in Accent 2004 was if the original judgment had been obtained by fraud, but fraud had not been pleaded and could not have been pleaded.[6] Brewer J noted that the application in Redcliffe 2010 had been commenced while a related proceeding on very similar issues was awaiting the decision of Keane J.10 Awarding the Commissioner indemnity costs, Keane J found that therelated proceeding was "wholly unmeritorious and self-evidently so from theoutset".11[7] Brewer J then referred to the decision of the Supreme Court in Commissionerof Inland Revenue v Redcliffe Forestry Venture Ltd in which the Court emphasised that the fraud exception was clearly not available in Redcliffe 2010.12[8] Brewer J concluded that the application in Redcliffe 2010 was both unnecessary and improper; though he said he did not go so far as to say that the case was frivolous or vexatious. He also rejected the proposition that the application inRedcliffe 2010 was brought for an ulterior and vexatious motive.13[9] Brewer J rejected a submission that indemnity costs could not be awarded because Venning J did not make any finding on the merits of the application, but rather dealt only with jurisdiction. He considered that, because the application was both unnecessary and improper, indemnity costs could be awarded.149 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue, above n 1, at [19].10 Accent Management Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,126 (HC).11 Accent Management Ltd v Commissioner of Inland Revenue (2010) 25 NZTC 20-022 (HC) at [22].12 Redcliffe Forestry Venture Ltd v Commissioner of Inland Revenue, above n 1, at [23];Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd, above n 6, at [40] and [42].13 At [24].14 At [26].Indemnity costs: principles[10] Despite a general rule that so far as possible the determination of costs should be predictable and expeditious, the court may award indemnity costs if:15(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.[11] It was common ground that none of the other grounds in r 14.6 of the High Court Rules and r 53E(3) of the Court of Appeal (Civil) Rules 2005 apply in the present case.[12] The leading case on indemnity costs is Bradbury v Westpac Banking Corp.16In that case, the appellants were a firm of lawyers who had acted for Westpac.17When Westpac ceased instructing the firm, the firm claimed this was a breach of the contract of retainer and sought damages in the High Court. The trial Judge considered the proceedings were hopeless from inception and had been improperly brought, awarding indemnity costs of over $960,000. The appellants appealed that order to this Court.[13] This Court noted there is an important question as to how readily or reluctantly a court should depart from the usual scale of costs, and observed that access to justice is a fundamental right.18 The Court considered access to justice is a15 High Court Rules, r 14.6(4). See also Court of Appeal (Civil) Rules 2005, r 53E(3).16 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400.17 Messrs Bradbury and Muir are appellants in the present case: Mr Bradbury in CA51/2014 and Mr Muir in CA55/2014.18 At [9]–[10].significant, although not dominant, factor supporting the New Zealand position inlimiting a losing party's liability for costs.19[14] The Court addressed the approach to costs in the United States,20 England,21and Australia,22 concluding that the general international experience is increasingly to lean against indemnity costs.23[15] The distinctions between New Zealand's three broad approaches to costswere summarised as follows:24(a) standard scale applies by default where cause is not shown to depart from it;(b) increased costs may be ordered where there is failure by the paying party to act reasonably; and(c) indemnity costs may be ordered where that party has behaved either badly or very unreasonably.[16] The Court listed the following, non-exhaustive categories in which indemnity costs have been ordered:25(a) the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;(b) particular misconduct that causes loss of time to the court and to other parties;(c) commencing or continuing proceedings for some ulterior motive;19 At [10].20 At [13]–[14]21 At [15]–[20].22 At [21]–[23].23 At [24].24 At [27].25 At [29], citing Colgate-Palmolive Co v Cussons (1993) 46 FCR 225 (FCA) at 232–234 andHedley v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [11].(d) doing so in wilful disregard of known facts or clearly established law; or(e) making allegations which ought never to have been made or unduly prolonging a case by making groundless contentions, summarised in French J's "hopeless case" test.[17] The reference to French J's "hopeless case" test is to an observation made byFrench J (now Chief Justice of Australia) in J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) that indemnity costsmay be awarded where "a party persists in what should on proper consideration beseen as a hopeless case".26 French J relied on an earlier decision in which Woodward J said that it was appropriate to consider awarding indemnity costs"whenever it appears that an action has been commenced or continued incircumstances where the applicant, properly advised, should have known that he hadno chance of success".27 Woodward J added that such a case must be presumed to have been commenced or continued for an ulterior motive or because of some wilful disregard of the known facts or the clearly established law. In that case the presumed ulterior motive was to pressure the respondents to settle. The other possibility was that the proceeding was pursued for no good purpose at all, due to inertia and carelessness.Impact of earlier proceedings[18] There was discussion during the hearing of the appeals referred to at [1]above about the impact of conduct in one proceeding on costs awarded in another. Because counsel had not addressed this issue in relation to those appeals, we decided, with the consent of all parties, to allow written submissions on costs inrelation to all but one of those appeals. The parties' submissions also encompassed the present appeals.26 J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 (FCA) at 303.27 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 (FCA) at 401.[19] The appellants expressed the concern that an award of indemnity costs in one proceeding, based on conduct in another, could lead to the imposition of double costson the earlier proceeding. They relied on this Court's decision in Paper Reclaim Ltd v Aotearoa International Ltd for the proposition that a party's pre-proceeding conduct is not relevant to costs.28[20] The Commissioner did not seek to rely on conduct in earlier proceedings as a ground in itself for an award of indemnity costs. Rather, she argued that the history of the litigation between the appellants and associated parties and the Commissioner could be relevant in determining whether the appellants had commenced or continued proceedings for an ulterior purpose, whether the proceedings were hopeless and whether the appellants had acted in disregard of known facts or law (in the present context, facts or law determined in earlier proceedings).[21] We agree with the Commissioner's summary. And we accept the appellant'scontention that prior conduct is not, of itself, a basis for awarding indemnity costs.Costs appeals: principles[22] Decisions on costs are discretionary in nature and appellate courts exercise restraint in interfering with them.29 The appellate standard is, as for other discretionary decisions, that an appeal will succeed only if the decision maker acted on a wrong principle, failed to take account of a relevant matter, took into account an irrelevant matter or was plainly wrong.30Application of principles to this case[23] As noted earlier, Brewer J awarded indemnity costs on the basis that the appellants had pursued their application in Redcliffe 2010 when they knew or ought to have known the case was hopeless from the outset. He did not consider there was a proper basis for finding the proceeding had been commenced and continued for an ulterior motive and the Commissioner did not seek to disturb that finding on appeal.28 Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 (CA) at [160].29 Wilson & Horton v Attorney-General [1997] 2 NZLR 513 (CA) at 529.30 Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [15].The issue before us, then, is whether Brewer J erred in finding the appellants had pursued a hopeless case.[24] Timing is important in that determination. There was a delay of almost fouryears between Venning J's judgment in Redcliffe 2010 (26 February 2010) and the costs decision of Brewer J (17 December 2013). During that time there were numerous proceedings involving some or all of the appellants or their associates and the Commissioner, including the appeals to this Court and the Supreme Court againstRedcliffe 2010. We do not consider that what happened after Redcliffe 2010 was decided can have a bearing on the appropriate award of costs in Redcliffe 2010 itself.[25] At the time the statement of claim in Redcliffe 2010 was filed, this Court had already upheld a decision of Venning J refusing to recall his judgment inAccent 2004.31 An application for judicial review had been made to the High Court afew days after the delivery of the Supreme Court's decision upholding Accent 2004.32 All of the present appellants, apart from Mr Muir, were parties to that application. The application was struck out by Keane J.33 Indemnity costs were awarded.34 Appeals to this Court against those decisions were abandoned. ButKeane J's decision was reserved and had not been delivered when the statement ofclaim for Redcliffe 2010 was filed and ultimately Redcliffe 2010 was heard anddetermined before the delivery of Keane J's judgment. In those circumstances, wedo not think the decision of Keane J can be taken into account in determining costs for Redcliffe 2010.[26] In light of that finding, the question for determination is whether theappellant's case was a hopeless case, and ought to have been recognised by theappellants as a hopeless case at the relevant time.[27] The appellants argue that, even if their case was hopeless, that is not sufficient to justify indemnity costs. They argue it is also necessary that there be31 Accent Management Ltd v Commissioner of Inland Revenue (No 2) [2007] NZCA 231, (2007) 23 NZTC 21,366, dismissing an appeal against Accent Management Ltd v Commissioner of Inland Revenue (2006) 22 NZTC 19,758 (HC).32 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115; [2009] 2 NZLR 289. That decision was delivered on 19 December 2008.33 Accent Management Ltd v Commissioner of Inland Revenue, above n 10.34 Accent Management Ltd v Commissioner of Inland Revenue, above n 11.flagrant misconduct. We disagree. As Woodward J makes plain, if the case is truly hopeless the action must be presumed to have been commenced for some ulterior motive.35 It is clear from this Court's decision in Bradbury v Westpac Banking Corpthat the commencement and continuation of a hopeless case is, potentially, sufficient in itself to justify an award of indemnity costs. The dictum of French J says so unequivocally, and that dictum was adopted by this Court in Bradbury v Westpac Banking Corp.[28] The appellants argue that their case was not hopeless. They point out that the proceedings were prepared and conducted by a senior counsel. That, however, does not immunise the parties to a hopeless case from an award of indemnity costs, as this Court made clear in Bradbury v Westpac Banking Corp.36[29] The appellants also point out that the decision in Redcliffe 2010 was reversed by this Court, and only confirmed after a further appeal by the Commissioner to the Supreme Court. They argue that if their case was hopeless, the success they had in this Court would indicate a hopeless decision by this Court.[30] We think that argument does not correctly address the case that is said to be hopeless. The Commissioner's argument is not that the arguments made by the appellants in response to the Commissioner's jurisdictional challenge were hopeless.Rather, the Commissioner says that the underlying claim was hopeless, because it was predicated on an ability to upset in the High Court a High Court decision confirmed on appeal by the Supreme Court in circumstances falling well short offraud. The fact that this Court accepted the appellants' position in relation to the Commissioner's jurisdictional argument does not indicate that this Court considered the underlying case to be meritorious. Indeed, its approach was that the better way of dealing with the case was to apply to have it struck out as an abuse of process. This is hardly a ringing endorsement of the underlying proceeding.[31] The appellants also point out that the Supreme Court did not award indemnity costs when it ultimately determined the issues raised in Redcliffe 2010 in its decision35 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd, above n 27.36 At [73](b) and [91].on appeal. Rather, it made a standard award of costs of $15,000. The appellants argue that if the Supreme Court did not consider that the case was such that indemnity costs should have been awarded, then it seems hard to understand why the High Court should do so. We accept there is some validity in that argument, but it must be recognised that the Supreme Court was dealing with an appeal instigated bythe Commissioner against this Court's decision. In those circumstances it would be difficult to say that the appellants' attempt to defend in the Supreme Court the decision in their favour in this Court amounted to conduct justifying indemnity costs. We see that as a significant distinguishing factor.[32] The case for the Commissioner is that the fraud exception to the finality of judgments is long established, and the appellants should have known that they needed to plead fraud (and needed to have a proper basis for such a plea) in order to succeed in having the High Court judgment set aside. While we agree that that is a longstanding principle, we also accept the appellants' submission that the positionapplying to the present facts has become clear and certain only as a result of the Supreme Court judgment. We do not believe it would be fair to the appellants to judge the hopelessness or otherwise of their case with the benefit of that hindsight.[33] While we have considerable sympathy for the Commissioner in having to deal with the serial attacks on the decision of the Supreme Court in Ben Nevis, we do not think that the case for indemnity costs is made out in relation to Redcliffe 2010,which was right at the beginning of the series of proceedings. The Commissioner'scase stands or falls on whether the claim was hopeless. It did ultimately fail and theSupreme Court's decision is decisive in identifying its shortcomings. But in the endwe see this case as simply a case where a claim has failed after due consideration, rather than one which was so hopeless that it should never have been brought in the first place. In the absence of a finding of flagrant misconduct, we do not think it is appropriate to award indemnity costs simply because a claim failed and was, after due consideration, shown to have been unsubstantiated. That runs the risk of opening up losing litigants to a risk of indemnity costs in circumstances where that would not be consistent with access to justice, a matter which was clearly identified as a concern in Bradbury v Westpac Banking Corp.[34] In our view, the Judge was wrong to take into account the subsequent litigation involving the appellants and others. We believe that was an irrelevant consideration. Once it is removed from consideration, we consider that the case for indemnity costs was not made out in this instance.Increased costs[35] For the reasons that we have declined indemnity costs we do not believe that increased costs were justified either. In our view, costs on a 2C basis were the appropriate award. That recognises the complexity of the jurisdictional challenge.Result[36] We therefore allow the appeal, quash the High Court judgment awarding costs on an indemnity basis and substitute an award of costs on a 2C basis, plus disbursements. We certify for two counsel. We understand that indemnity costs have been paid and the credit should now be allowed against other costs awards made against the appellants to reflect the difference between the amount awarded under the High Court judgment and the amount awarded as a result of this appeal.Costs in this court[37] As the appellants have been successful in this court, they are entitled to costs. However, as the matter was dealt with on the papers and in conjunction with a number of other appeals, and therefore involved only minimal additional work, we award to the appellants collectively one set of costs at 50 per cent of the costs that would be payable for a standard appeal on a band A basis and usual disbursements.Solicitors:Wynyard Wood, Auckland for Appellants in CA51/2014Stainton Chellew, Auckland for Appellants in CA55/2014Crown Law Office, Wellington for Respondent