Chesterfield Preschool Ltd v Commissioner of Inland Revenue Notes

Introduction

• The judgment addresses issues following the delivery of the second judicial review proceedings on November 25, 2008.
• It concerns:
  • Costs in the first and second judicial review proceedings, excluding disputed interlocutory order costs.
  • The Commissioner's application for a stay of execution of the second judgment.
  • A request to borrow $16,000$ against unencumbered assets.

First Issue: Costs

• The plaintiffs succeeded in the second judicial review and are entitled to costs.
• The proceedings are classified as category 2.
• Most steps in the litigation warrant a Band C classification due to the large volume of materials.
• Rule 48C applies because the proceedings vindicated the plaintiffs' complaint that the Commissioner didn't follow the court's directions in the earlier December judgment.
• The court should make an increased costs order as contemplated by r 48C(1)(a), applying r 48C(3)(d).
• Submissions will be heard on whether the Commissioner should pay the plaintiffs' indemnity costs because the Commissioner ignored the court's directions in the December judgment, applying r 48C(4)(b).
• The Commissioner's concern about security over assets is accommodated to ensure plaintiffs recover a significant portion of their costs, consistent with insolvency law.
• If parties can't agree on costs within ten working days, they must file submissions within 13 working days, with an option for an oral hearing.
• Parties can also apply for costs reserved in the December judgment and other interlocutory judgments, treated separately but under the same terms.

Sub-issue (a): Indemnity costs on second review

• The plaintiffs seek indemnity costs of $98,858.78$ for the second judicial review, representing approximately 247 hours of work.
• They rely on r 14.6(4)(b) and (f), which allow indemnity costs if a party has ignored or disobeyed a court order or if another reason justifies it.
• Indemnity costs are rarely awarded and have never been awarded against the Crown, typically requiring flagrant misconduct or abuse of court process.
• The plaintiffs argue "ignore" can mean "failed to consider," while the defense argues it implies a deliberate decision to ignore.
• The court agrees deliberate conduct is required, finding the Departmental officers didn't intend to ignore or disobey the formal directions but didn't consider themselves obliged to adopt the reasons underpinning those directions.
• The court cites paragraphs [49] and [50] of the second review, noting the Commissioner's officers treated the High Court's judgment as merely the judge's views.
• It would be extraordinary to award indemnity costs against the Crown, and the court is not making a finding that officers of the Crown were deliberately ignoring decisions of this Court.
• The court considers other reasons justifying indemnity costs, relying on the finding in paragraph [90] that the Commissioner's officers breached s 4(6) of the JAA by not considering the Court's reasons.
• The Inland Revenue Department officers, including solicitors, didn't appreciate the implications of s 4(6) of the Act, focusing on the directions without regard to the detailed reasoning.
• The first judgment was complex and open to interpretation, so the failure of the Commissioner's officers to properly consider the reasoning cannot be entirely blamed on them.
• With hindsight, the first judgment should have made it plain the directions were to be carried out faithfully to the reasoning, and any doubts should have been brought back to the Court.
• The plaintiffs also relied on the incomplete disclosure of the Aronsen notes from 1999 to 2006, which caused difficulties for the plaintiffs, delaying their case assembly.
• Mr. Andrews also cited the failure of the officers to seek further directions and discuss their review exercise with Mr. Hampton, but this point lacks clarity.
• The reasons cited, even cumulatively, don't justify indemnity costs, especially considering they are rarely awarded and seemingly never against the Crown in New Zealand.
• The plaintiffs suffered unnecessary costs, but High Court litigation rarely offers a perfect outcome, and costs could always be lower had proceedings run more efficiently.
• The fact that more prompt and focused disclosure and discovery didn't occur isn't a ground for indemnity costs on its own.
• The plaintiffs should not obtain indemnity costs in the second proceedings.

Sub-issue (b): Increased costs on second review

• A blanket band C classification is not possible; Rule 48 contemplates a categorization of the proceeding.
• It is necessary for the party claiming costs to establish why, for each individual step, a comparatively large amount of time is reasonable.
• The submissions received from counsel for the applicants were the distillation of a lot of analysis of a massive quantity of documents.
• Mr. Andrews sought increased costs relying on r 14.6(3).
• Normally, the uplift does not go beyond 50% because the basic scale is two-thirds of the appropriate daily rate, so an uplift of 50% recovers the whole of the appropriate daily rate.
• Increasing costs above 50% will usually result in a sum well short of indemnity costs.
• Mr. Andrews sought the maximum uplift possible to give his clients 90% of their reasonable costs, arguing the defendant's conduct was egregious and the Commissioner has obtained orders preventing the plaintiffs from dealing with their assets without approval of the Court.
• Costs were incurred by the plaintiffs because the IRD officers failed to comply with the directions of the first judgment and took unnecessary steps; Rule 4.6(3)(b)(i) and (ii) apply.
• Despite the necessary work for IRD officials following the first judgment's directions, the voluminous material assembled was surprising and flowed from an error of law.
• The Inland Revenue officers failed to appreciate that they should have followed the directions in the light of the findings that were made and interpretations of the powers of discretion contained in the judgment.
• The Departmental officers did not appreciate that these remedies are extraordinary, and can often, and in this case did, override normal Departmental practices; for this reason, much of their laborious work was unnecessary.
• Rule 46(3)(d) also applies; this is an exceptional case that justifies the reversal of the onus set out in paragraph [112].
• The plaintiffs provided two schedules endeavoring to collect the work done against items in Schedule 3; the first schedule was provided on the basis of invoicing, and the second schedule, at the end of the oral hearing, was provided on the basis of time allocations under Band C.
• Perusal of those schedules has reassured me that this is a case where Band C should apply.
• Using the second spreadsheet provided by Mr. Andrews, calculating costs on a 2C basis against the items in the schedule, the standard time allocations total 30 days, including attendance of second counsel (which I certify for) on a standard recovery of $49,120$.
• A period of 30 days (six weeks) compares with Mr. Andrews' estimate of the time actually taken, which was five weeks of a partner's time and one and a half weeks of an intermediate solicitor's time.
• A 50% uplift would result in the sum of $73,680$. In his second schedule, Mr. Andrews increased time allocations in slightly different ways, reaching an uplift of $75,520$.
• The Court of Appeal has directed that the starting point must be the steps and time allocations in Schedule 3.
• The court's normal response should be to provide an uplift on scale costs to what the rules contemplate a reasonable fee for that step to be.
• An increase of 50% on scale costs should grant the costs-claiming party a fair recovery for the step unnecessarily forced on it, assuming that the time allocated to the step has been reasonably calculated under the bands or under r 48C(3)(a).
• In this case, an uplift of more than 50% is justified, as this litigation was forced on the plaintiffs by the error-ridden response of the Commissioner's officers in attempting to give effect to the first judgment; the second judicial review was unavoidable.
• An uplift of 50% above the current scale cannot pretend to come close to current charging; this is a set of circumstances where a higher award than 50% is justified; however, it is too much to go to a lift of 90%, which would take it close to the actual billings.
• This case justifies a 75% uplift on scale, which is the sum of $85,960$. The plaintiffs are awarded that sum together with the undisputed disbursements totaling $2,858.78$, a total of $88,818.78$.

Costs in the first proceedings

• Costs were reserved by me in the first proceedings; I made no specific directions as to quantum.
• The plaintiffs seek costs on a 2C basis, allocating time according to the items in Schedule 3, totaling 42 days; the cost recovery on that basis amounts to $82,200$.
• An uplift of 50% is justified since the time allocation for a claim of this complexity in the schedule items would exceed the allocated time of 28 days.
• Mr. Andrews actually seeks an increase of time allocation of 45 days; he seeks five days for amendments to the statement of claim and another half day in respect of items 4.12 and 4.14 as an equivalent for the OIA and Privacy Act requests and reviewing the Aronsen file notes.
• I allow a total of 76½ days, which at $1,600$ a day computes to $122,400$. The next question is whether or not that sum should be reduced by a percentage on the basis that the plaintiffs largely recovered but were not wholly successful.
• The Crown submitted that the terms of the judgment of 15 December reflected findings of the Court whereby the plaintiffs were only partially successful.
• At the end of the first hearing, I did not make an order of entitlement for costs; I invited the application at the end of the second hearing when it had become clear to me from that hearing that the plaintiffs had been largely successful in the first hearing.
• The Commissioner is taking the word “partially successful” as appears in paragraph [24] out of context; the reference to “largely successful” appears in the 2008 judgment.
• Calculating the degree of relative success of the parties to the first proceedings by separating out the six causes of action as independent components of the case is quite inappropriate and produces a misleading result; I am quite satisfied now that the plaintiffs were largely successful in the first judicial proceeding.
• Inasmuch as some discount is appropriate from whatever the total costs are, it should be 20%.
• Accordingly, the aforesaid sum of $122,400$ is reduced by 20%, resulting in a total recovery of $97,920$ plus disbursements (also to be reduced by 20%).

Issue 3: Stay

• Relying on r 12 of the Court of Appeal (Civil) Rules 2005, the Commissioner seeks a stay of the execution of the judgment in the second judicial review proceedings pending determination of the Commissioner's appeal to the Court of Appeal against the whole of that judgment.
• Rule 12(3) provides that pending the determination of an application for leave to appeal or an appeal, the court appealed from or the Court may order a stay of the proceeding or a stay of the execution of the decision, or grant any interim relief.
• It is common ground that in determining a stay application, counsel is required to balance two principles: a successful litigant should not be deprived of the fruits of his or her litigation, and an appellant should not be deprived of the fruits of a successful appeal.
• The factors that can eventually be taken into account in balancing these competing interests are compiled by McGechan on Procedure at paragraph CR 12.01(1)(c).
  • Whether the appeal may be rendered nugatory by the lack of a stay.
  • Whether the successful party will be injuriously affected by the stay.
  • The bona fides of the applicant as to the prosecution of the appeal.
  • The effect on third parties.
  • The novelty and importance of questions involved.
  • The public interest in the proceeding.
  • The overall balance of convenience and the status quo.
• The Commissioner argued that the appeal would be rendered nugatory by the lack of a stay because the Commissioner would have to act yet again on the December 2006 judgment, pay costs in the absence of any security, risking non-recovery in the future of those costs should the appeal be successful, and be obliged to have the Anolbe sham issues set down for hearing before the High Court.
• Mr. Andrews acknowledged that in the ordinary course of events, it would be normal for the Court to grant a stay; it has already been noted, however, this was an exceptional case.
• He submitted that if a stay is granted absolutely, he will withdraw, leaving the plaintiffs unrepresented, which is obviously not in the interest of the plaintiffs.
• The National Bank has allowed time for the matter before the Court to be resolved on the basis that in the event you were awarded costs, this would enable you to clear the overdraft debt and loan arrears (respectively $160,663.86$ and $54,016.44$).
• By cross-reference to the grounds of appeal against the second judgment, Mr. Andrews argued that in truth, the Commissioner is seeking to use the right of appeal against the November 2008 judgment in order to re-litigate the 2006 judgment; he also noted that the findings of the 2008 judgment were that the defendant had failed to implement the 2006 judgment.
• He submitted the overall balance of convenience clearly favored the plaintiffs who are ordinary citizens who have endured this dispute over many years and are suffering significant ongoing financial difficulties and great personal stress; the Crown, on the other hand, can much more reasonably be expected to overcome whatever difficulties may arise from refusing the defendant's application.
• The Commissioner does not seek a stay in any order of payment of costs in respect of the first judgment, which he did not appeal; the application for stay is confined to the execution of the judgment in the second judicial review.
• Examining the grounds of appeal, it's clear that the Commissioner wishes to challenge in the Court of Appeal the findings that I made in paragraph [155] of the first judgment; the Commissioner's officers handling this file do not want to act on the obligations set out in paragraph [155] (however it be interpreted) until their contentions can be tested in the Court of Appeal.
• The plaintiffs have the means to meet the immediate requirements of the National Bank if they can complete the consolidation of three properties, which are unencumbered, and sell them, or alternatively sell them now; however, because of the undertaking, they cannot sell them without the approval of the Court.
• The Commissioner does not want to pay the legal costs accruing against the Department to date without security for repayment, knowing that it is not possible in this context for the plaintiffs to provide additional security for all their assets.
• The Commissioner has not made out a case for a stay, and it would be positively wrong to grant a general stay when the real goal of the Commissioner is to avoid recognizing the proportionality obligations set out in paragraph [155] of the first judgment.
• The Commissioner cannot have it both ways; if the Commissioner is demanding a slower, more lengthy adjudication process, it hardly justifies the Commissioner to continue to obtain the benefits of the undertaking which was put in place on the basis pending judgments from this Court, assuming they would be acted upon.
• For the reasons set out, I see no basis for any qualified stay; Mr. Palmer has sought an interim stay pending appealing this judgment to the Court of Appeal.

Issue 3: Application to borrow $16,000$

• This is an application to borrow $16,000$ in order to complete consolidation of titles on three properties; this expenditure can be funded from the award of costs.

Other issues

• This judgment does not deal with costs arising out of interlocutory hearings, of which there have been many, and some significant; the parties are encouraged to try to reach a settlement in respect of those items; in the event that they come to Court for resolution, care needs to be taken to ensure there is no double recovery of costs.
• There are likely to be ongoing applications for relief from the terms of the undertakings from time to time; there may indeed be an application for a significant amendment of those undertakings.

Costs in these proceedings

• The plaintiffs are entitled to costs in respect of these proceedings; if the parties cannot agree costs, I will receive submissions.