Drummond v Commissioner of Inland Revenue

[2013] NZHC 3480

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2012-419-185 [2013] NZHC 3480

BETWEEN  PETER SCOTT DRUMMOND First Plaintiff

PATRICK JOHN DYER Second Plaintiff

RONALD BOET Third Plaintiff

KERRY NOTT PHARMACY LTD Fourth Plaintiff

CHERYL LEANN RENOUF Fifth Plaintiff

ANDTHE COMMISSIONER OF INLAND REVENUE

Defendant

Hearing:                   (On the papers)

Counsel:                  JH Coleman for Plaintiffs

H Dempster for Defendant

Judgment:                19 December 2013

JUDGMENT OF BREWER J (COSTS)

Solicitors:               North End Law (Hamilton) for Plaintiffs

Crown Law (Wellington) for Defendant

DRUMMOND v THE COMMISSIONER OF INLAND REVENUE [2013] NZHC 3480 [19 December 2013]

Introduction

[1]      In my judgment of 15 July 2013, I found in favour of the defendant.1    The defendant now seeks costs on a 2B basis.   The plaintiffs, while accepting the 2B basis, submit that I should exercise my discretion to deny the defendant costs or to order reduced costs.

Background

[2]      The   plaintiffs   challenged   income   tax   assessments   by   the   defendant disallowing their shares of write-downs of the purchase price of a colt in the income years 2008 and 2009.  The central issue was whether the colt had been bought for breeding in the plaintiffs’ breeding business.   The defendant’s Adjudications Unit had decided that, although the plaintiffs were part of a syndicate which was in business generally, that business was not the breeding of bloodstock.

[3]      The defendant, as part of her response to the claim brought by the plaintiffs, departed from the findings of the Adjudications Unit by pleading that there was no intention by the plaintiffs as members of a syndicate to use the colt in their breeding business and, in law, there was no business of any sort being conducted by the plaintiffs as members of a syndicate.

[4]      The  plaintiffs  submit  that  these  departures  from  the  decision  of  the Adjudications  Unit  breach  the  defendant’s  obligation,  as  part  of  the  Executive Branch of Government, to be a model litigant.  The plaintiffs accept that the decision of the Adjudications Unit is not legally binding on the defendant, but submit that a model litigant would not argue against findings adverse to her position.  Three cases are cited in support: Solicitor-General v Miss Alice;2  Dotcom v Attorney-General;3

and Minister of Conservation v Maori Land Court.4

[5]      The plaintiffs also argue:

1      Drummond & Ors v The Commissioner of Inland Revenue [2013] NZHC 1768.

2      Solicitor-General v Miss Alice [2007] 2 NZLR 783 at [44].

3      Dotcom v Attorney-General [2012] 3 NZLR 115 at [143].

4      Minister of Conservation v Maori Land Court [2009] 3 NZLR 465 at [127].

(a)      The proceeding concerned a matter of public interest and the plaintiffs have acted reasonably in the conduct of the proceeding.

(b)The defendant failed in relation to the issue of whether the syndicate conducted any business at all, which significantly increased the costs of the plaintiffs.

(c)      The defendant has contributed unnecessarily to the time or expense of the proceeding by making application seeking orders for the plaintiffs’ evidence to be ordered inadmissible.   These applications were unnecessary and caused unwarranted costs in responding.

[6]      The defendant replies that she conformed to the decision of the Adjudications Unit which related to a GST dispute and to deductions.  However, in responding to the claim brought by the plaintiffs in relation to the assessments disallowing shares of write-downs of the purchase price of the colt, the defendant was entitled to take a different approach on the reasoning leading to the Adjudications Unit’s decision.

[7]      The defendant does not accept that this was a test case and submits that the public interest factor does not, therefore, come into play.   It was not designated formally a test case pursuant to s 138Q of the Tax Administration Act.  It was simply a case which was the first to consider the particular issues of fact and law.

[8]      The defendant submits also that her failure to establish there was no business at all did not lead to increased costs for the plaintiffs.   As a matter of law, the plaintiffs had the onus of proving that the defendant’s assessments were incorrect, and by how much.  The defendant denied there was a breeding business and hence the plaintiffs had to adduce sufficient evidence to satisfy the onus on them to prove the contrary.  Whether or not there was any sort of business was subsumed by that issue.   The defendant points out that, without objection, the plaintiffs had their evidence  taken  as  read,  which  shortened  the  hearing  by more  than  a  day  with concomitant reduction in costs.

[9]      The defendant does not accept that she unnecessarily contributed to costs. The issues of admissibility raised by the defendant were not treated by the Court as separate matters requiring adjudication.   The issues raised by the defendant were subsumed by the trial process.

[10]     The  defendant  addresses  alleged  computational  errors in  her  schedule  of costs.  These errors relate to the time allocated to the preparation of briefs (item 30) and the preparation of the bundle of authorities (item 32).

[11]     So far as item 30 is concerned, the defendant accepts that the two-and-a-half day allocation for the preparation of three briefs of evidence is generous, and is prepared to accept one day.  This amounts to $1,990 on a band 2B basis.  Similarly, for item 32, the defendant accepts that the two day allocation allowed should be reduced to one day. Again, this amounts to $1,990 on a band 2B basis.

[12]     Finally, the defendant denies a claim by the plaintiffs that a refusal by the defendant to accept an offer to settle the issue of whether there was  a business contributed unnecessarily to the time or expense of the proceeding.  The defendant points to the filing by the plaintiffs of an amended statement of claim just before the setting down date making unparticularised allegations at paras 36.3 and 36.4 which asked for costs or indemnity costs on the alternative basis that the defendant had failed to honour its statements to the syndicate manager that it would be bound by the finding of the Adjudications Unit.  Following an application seeking orders for further and better particulars, the plaintiffs supplied the particulars and as a result the defendant felt obliged to brief witnesses on the issue.   The defendant says that a subsequent settlement offer provided by way of letter dated 21 March 2013 was not refused without reasonable justification.   In the letter, the plaintiffs offered to withdraw their claim for costs if the defendant would concede the plaintiffs were “in business generally”.  If that offer had been accepted then, the defendant submits, she might have been prejudiced in making her case that there was no breeding business.

Discussion

[13]     Costs are not determined with the aid of a microscope.   Generally, costs follow the event and their determination should be predictable and expeditious.

[14]     Rule 14.7 gives the Court a discretion to refuse to make an order for costs or to reduce costs if appropriate.   Guidance is given as to the circumstances which might cause the discretion to be exercised.  In my view, the discretion should not be exercised unless the circumstances of the case are significantly outside those of the normal run of cases.  Otherwise, predictability and expedition are lost and the costs regime undermined.

[15]     I do not consider that the “model litigant” concept is relevant to this case. The concept, which is of high constitutional importance, can be simplified to the proposition that the Crown must act in the public interest in the administration of justice, and must therefore act as a model litigant.   That does not mean that the Crown is to be held to a higher standard than other litigants.  It means that the Crown is expected always to conduct its litigation with probity and to the high standard to which all parties should adhere.

[16]     In this case, there was a decision of the defendant’s Adjudications Unit.  The defendant, as she said she would, abided by its result.  The plaintiffs (as was their right) challenged the result by issuing proceedings against the defendant in this Court.   The defendant did not depart from the high standards of probity and fair dealing expected of the Crown by putting before the Court in her defence arguments which she considered to be available on the facts and the law applicable to the case.

[17]     I find that the proceeding did not concern a matter of public interest.   This was not, as the plaintiffs submit, a test case.   The case concerned the proper construction of the plaintiffs’ syndicate agreement against the relevant factual and legal matrix.  The legal principles upon which the case was decided are established

law: Grieve v Commissioner of Inland Revenue.5    There were aspects of statutory

interpretation  which  do  not  have a prior  record  of adjudication,  but  that  is  not unusual.   Finally, it might be that the case is of interest to syndicates claiming to have bloodstock breeding businesses – but I do not think that that makes the matter

one of public interest in itself.

5      Grieve v Commissioner of Inland Revenue [1984] 1 NZLR 101 (CA).

[18]     The  defendant  did  fail  in  relation  to  the  issue  of  whether  the  syndicate conducted any business at all.  I do not think that that issue significantly increased the costs  of the plaintiffs.   As  I look  back  on  the case,  that  issue was  largely subsumed by the crucial issue of whether there was a bloodstock breeding business. The examination of the crucial issue required a full review of the activities of the syndicate against its founding agreement.   I accept that the defendant’s denial that there was any business did increase the costs of the plaintiffs to some extent.  But this is why I commented earlier that costs are not determined with the aid of a microscope.

[19]     The costs regime is not intended to fully compensate the successful plaintiff or, alternatively, reduce readily the plaintiff’s costs award by sums attributable on analysis to deficiencies in pleadings or performance.  That is why r 14.7(d) uses the phrase “significantly increased the costs of the party opposing costs”.

[20]     I agree that the defendant contributed unnecessarily to the expense of the proceeding by filing late applications objecting to the plaintiffs’ evidence.  However, I put those to one side and did not require argument.   I am tempted (because I thought the defendant’s actions to be inapt) to accede to the plaintiffs’ submission on this point.  However, I nevertheless find that overall the defendant remained within the envelope of acceptable behaviour in our adversarial system.   Further, the behaviour reduced cost in one area.  The defendant provided me with the plaintiffs’ briefs of evidence and I had to read and consider them all just prior to trial in order to make sense of the defendant’s applications.   This enabled me to propose at the trial that the plaintiffs’ evidence be taken as read.  This was agreed to by both parties.

[21]     Under our system, a losing party cannot be liable to increased costs or to pay indemnity costs just because they were defeated comprehensively.   There is a threshold.  The same is true where a party has won on most but not all of the points taken, and the losing party seeks to eliminate or reduce their liability to pay costs.  In this case the threshold to that end has not been crossed.

Decision

[22]     The plaintiffs’ claim for no or reduced costs is dismissed.

[23]     The defendant is entitled to her costs on a 2B basis as claimed (but applying

the reductions described in [11] above).

Brewer J