Commissioner of Inland Revenue v Pemberton [2018] NZHC 1245 (30 May 2018)

Last Updated: 6 August 2018

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE

CIV-2017-435-19 [2018] NZHC 1245

BETWEEN	COMMISSIONER OF INLAND REVENUE Judgment Creditor
AND	MARIANN TERESA PEMBERTON Judgment Debtor

	CIV-2017-485-22
BETWEEN	COMMISSIONER OF INLAND REVENUE Judgment Debtor
AND	KIM MACKLIN Judgment Creditor

	CIV-2017-485-991
BETWEEN	THE COMMISSIONER OF INLAND REVENUE Judgment Creditor
AND	CRAIG COOLEY Judgment Debtor

Hearing:	22 May 2018
Appearances:	C R Mailer for the judgment creditor in all proceedings No appearance by any of the judgment debtors
Judgment:	30 May 2018

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

COMMISSIONER OF INLAND REVENUE v PEMBERTON [2018] NZHC 1245 [30 May 2018]

[1] These cases were all heard in the Wellington commercial list on 22 May 2018. In all three I made an order adjudicating the judgment debtor bankrupt, but reserved costs. I did so because in a recent judgment of this Court, CIR v New Orleans Hotel (2011) Ltd,¹ Associate Judge Matthews refused costs to the Commissioner of Inland Revenue on the basis that the Commissioner was represented by lawyers employed by her, as opposed to external lawyers.

[2] For the Commissioner, Ms Mailer invites me to depart from New Orleans Hotel. I accept that that decision is not binding on me, though of course it is highly persuasive. Ms Mailer made detailed and helpful submissions. The Commissioner’s argument could not have been put more powerfully. I reserved my decision in order to give myself an opportunity to reflect on those submissions.

[3] First, some contextual background.

[4] In Henderson Borough Council v Auckland Regional Authority,² the Court of Appeal concluded that the ARA, which had been successful in both the High Court and that Court, should be entitled to its costs. The ARA had been represented throughout by lawyers employed by it: “in-house lawyers” is the description commonly in use.

[5] Of the three judges in Henderson, only Cooke J addressed this issue in any detail, though both Woodhouse P and Richardson J expressed agreement with his conclusion.

[6] I set out below the passage from Cooke J’s judgment dealing with the point:

As to costs, there is first the question of principle, whether any award to the Regional Authority should be refused in the light of the fact that the Authority was represented by an employee both as solicitor and counsel. Much of the work was counsel’s work. In England an employed barrister cannot appear as counsel for his employer in the superior Courts: see generally 3 Halsbury’s Laws of England (4^th ed) para 1202; Final Report of the Royal Commission on Legal Services 1979, Cmnd 7648, vol 1, chapter 20; Rules for Employed Barristers approved by the Bar Council on 31 March 1980.

¹ CIR v New Orleans Hotel (2011) Ltd (2018) NZHC 971.

² Henderson Borough Council v ARA [1984] 1 NZLR 16 (CA).

In New Zealand the two branches of the profession are not strictly fused, but a duly qualified practitioner may act in both capacities. In New Zealand I do not think it can be said to be improper for an employed barrister to represent his employer. Nor did counsel for the appellant so argue. A fortiori an employed solicitor duly enrolled and with a current practising certificate may properly act as solicitor for his employer. Against that background it appears to me that the fact that an employed practitioner has acted for the successful party is not sufficient reason for denying that party an award of party and party costs: after all, the time of a salaried employee has been occupied.

In this particular litigation Mr Field has played an assiduous and valuable part. In no way do the observations about to be made qualify one’s appreciation of his work in this case. They are directed to principle and the future.

Although an employed barrister may properly represent his employer, it is as well to stress the importance of the independent consideration of a case that will more often be given by a barrister or barrister-and-solicitor whose experience and responsibilities are not confined to representing one client. This kind of professional detachment can be of value to the client in that it is likely to result in the more effective presentation of the client’s case. In turn it is of value to the Court. And of course the more important the litigation the more important it tends to become. It is to be hoped that these factors will always be borne in mind by those concerned in deciding whether an “in-house” counsel should take the responsibility of conducting any particular litigation for his employer.³

[7] Henderson was decided in the mid 1980s. Since then it has been accepted as the leading case on the point. Courts throughout the country have made awards in favour of parties represented by in-house lawyers on countless occasions (most especially in bankruptcy and liquidation proceedings in the commercial lists).

[8] As an example Ms Mailer referred me to the judgment of Associate Judge Gendall (as he was) in CIR v Harbour City Tow and Salvage (2003) Ltd.⁴ In that case Associate Judge Gendall dealt with a costs claim made by the Commissioner following the withdrawal of liquidation proceedings. His Honour relied on Henderson in concluding:

In line with these authorities, I find that the plaintiff here in bringing these liquidation proceedings is in reality in no different position to that of any other litigant. Costs have been routinely granted to this plaintiff (but in other proceedings) and to other institutional plaintiffs for work done by in-house counsel. In addition, these plaintiffs have also on occasions been subjected to costs orders against them.

³ At 23, lines 2-32.

4. CIR v Harbour City Tow and Salvage (2003) Ltd (unreported), High Court, Wellington Registry, 12 February 2017.

⁵ At [24].

[9] His Honour expressly acknowledged the strong policy reasons for treating litigants such as the Commissioner who conduct litigation through in-house lawyers similarly to litigants who choose to do so through external lawyers. To the extent that the language of the Rules as they then stood presented any impediment because it tended to assume that external lawyers would be involved, his Honour saw the answer to this as being the Court’s overriding discretion in relation to costs.

[10] The question is whether the Court of Appeal’s recent judgments in Joint Action Funding Ltd v Eichelbaum⁶ and McGuire v The Secretary for Justice⁷ have changed the law, as Associate Judge Matthews concluded in New Orleans Hotel.

[11] In those cases the Court of Appeal was dealing with circumstances which were different from, though closely related to, the situation which faced Associate Judge Matthews and with which I must deal. The issue in Joint Action Funding and McGuire was whether the exception to the general principle that a self-represented party cannot recover costs concerning lawyers representing themselves was justified and could stand. In Joint Action Funding the Court of Appeal concluded that the exception could not stand. It confirmed that conclusion in McGuire. In doing so the Court focussed on the current High Court Rules 2016.

[12] For convenience I set out r 14.1 and 14.2:

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)

⁶ Joint Action Funding Ltd v Eichelbaum [2017] NZCA 249.

⁷ McGuire v Secretary for Justice [2018] NZCA 37.

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 an interlocutory application should pay costs to the party who succeeds:

(b) an award of costs should reflect the complexity and significance of the proceeding:

(c) costs should be assessed by applying the appropriate daily recovery rate to the time considered reasonable for each step reasonably required in relation to the proceeding or interlocutory application:

(d) an appropriate daily recovery rate should normally be two-thirds of the daily rate considered reasonable in relation to the proceeding or interlocutory application:

(e) what is an appropriate daily recovery rate and what is a reasonable time should not depend on the skill or experience of the solicitor or counsel involved or on the time actually spent by the solicitor or counsel involved or on the costs actually incurred by the party claiming costs:

(f) an award of costs should not exceed the costs incurred by the party claiming costs:

(g) so far as possible the determination of costs should be predictable and expeditious.

[(2) Despite subclause (1)(f), costs for legal professional services provided in relation to a proceeding may be awarded to a party under this Part even though the services are provided under a conditional fee agreement.]

[(3) In subclause (2), conditional fee agreement means an agreement under which a party to a proceeding and a person who provides legal professional services agree that the party to the proceeding is liable for payment of some or all of the person’s fees and expenses depending on the outcome of the proceeding.]

[13] In Joint Action Funding the Court of Appeal, having reviewed the historical background, and the positions in comparable jurisdictions, focussed on the use of the term “incurred” in r 14.2 and concluded:

[41] We therefore consider that the natural meaning of the phrase “costs actually incurred”, and thus “cost incurred”, envisages invoices

rendered for legal services provided by a legal practitioner to a litigant. We do not think that the phrase is apt to include a period of time spent in connection with litigation upon which some notional numerical value is placed but which is not the subject of a bill of costs.

[42] We consider that that interpretation gains support from the context of the costs rules, in particular the fifth general principle in r 14.2(e), which distinguishes between “the time actually spent by the solicitor or counsel involved” and “the costs actually incurred by the party claiming costs”. The former phrase would be apt to describe the second and third possible meanings in [35] above.

[43] Consequently it is our conclusion that in the context of the current costs rules the proper meaning of the composite phrase “costs actually incurred” is confined to legal costs billed by a lawyer retained by a party litigant for legal services provided by the lawyer to that litigant.

[14] The Court of Appeal’s judgment in Joint Action Funding was confirmed by a full Court in McGuire, where the issue was relevant because the successful litigation, Mr McGuire, was a practising lawyer.

[15] In his judgment in New Orleans Hotel Associate Judge Matthews concluded that the Court of Appeal’s reasoning in Joint Action Funding and McGuire applied to exclude any litigant who conducted his, her or its litigation through in-house lawyers from a costs award, essentially because such a litigant had not “incurred” costs in the sense in which the Rules use that term. I agree, for the reasons he gave.

[16] From the Associate Judge’s carefully reasoned decision it is clear that he only reached this conclusion reluctantly, having regard to the sorts of policy considerations which Associate Judge Gendall had dealt with in Harbour City Tow and Salvage.

[17] Ms Mailer sought to distinguish Joint Action Funding and McGuire on the basis that those involved the position of lawyers representing themselves in litigation whereas the current situation involves a department of state acting through employees. But in my judgement that is a distinction without a difference. The essential point, forcefully made by Associate Judge Matthews in New Orleans Hotel, is that on a proper analysis the two situations are indistinguishable as a matter of principle.

[18] She also focussed on policy considerations. I accept without reservation that the current position is unfortunate. The Commissioner elects to conduct much of the
litigation she does in the courts, and especially in the commercial lists dealing with bankruptcies and liquidations, through in-house lawyers for good and proper reasons.

[19] I wish to make it clear that this result is driven by the terms of r 14 and the Court of Appeal’s decisions in Joint Action Funding and McGuire and that from a policy perspective I can see no compelling argument for not making suitable provision for government departments, corporations and the like who employ in-house lawyers for litigation purposes (always mindful of the important professional issues referred to by Cooke J in Henderson). For myself I suspect that had the drafters of r 14 known that this would be the outcome of the rule they would have made provision for this. Quite apart from anything else it is not difficult to see how this might have an impact on the Crown in relation to the conduct by it of litigation more generally.

[20] However, it is not for me to attempt to circumvent what I perceive to be a plain outcome of the application of the rule and the Court of Appeal’s recent decisions. If there is to be a change in this area — and, for my part, I would have thought that inevitable — then it is a change which needs to be addressed on appeal or dealt with elsewhere.

[21] For those reasons, I decline the Commissioner’s costs applications in these three cases.



Associate Judge Johnston