Dunedin Catering Supplies v Mr Chips Ltd
[2013] NZHC 1815
•18 July 2013
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2012-412-001002 [2013] NZHC 1815
IN THE MATTER of the Companies Act 1993
AND
IN THE MATTER of a Statutory Demand
BETWEEN DUNEDIN CATERING SUPPLIES Applicant
ANDMR CHIPS LIMITED Respondent
Submissions: Memorandum filed 9 May 2013
Counsel: D W Sim for the Applicant
A M Hutton for the Respondent
Judgment: 18 July 2013
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to costs
[1] The application for an order setting aside a statutory demand issued by the respondent was for hearing on 7 May 2013. The applicant filed a notice of discontinuance on 22 April 2013.
[2] The respondent seeks an order for costs and disbursements. It seeks costs and disbursements on a solicitor/client basis.
[3] The credit account application completed by the applicant and containing the terms and conditions of the contractual relationship includes a provision as to costs:
DUNEDIN CATERING SUPPLIES v MR CHIPS LIMITED [2013] NZHC 1815 [18 July 2013]
I/We agree to pay any costs, commissions and legal expenses whatsoever, arising from the collection of any overdue monies. I/We agree that all collection costs on unrecoverable solicitor costs expended in recovering payment of this account will be paid on demand.
The principles – indemnity costs pursuant to contract
[4] Courts and lawyers interchangeably talk of either “indemnity costs” or
“solicitor/client costs” although there are potentially differences between the two.
[5] The term “indemnity costs” is defined by r 14.6(1)(b) High Court Rules as meaning
…the actual costs, disbursements, and witness expenses reasonably incurred
by a party.
[6] The Court’s power to award indemnity costs is a matter of contractual right
arising under r 14.6(4)(e) which provides:
The court may order a party to pay indemnity costs if—
…
(e) the party claiming costs is entitled to indemnity costs under a contract or deed;
…
[7] The Court of Appeal in Black v ASB Bank Ltd observed the following features of the indemnity costs provision:1
(a) Indemnity costs pursuant to a contractual provision are of a distinctly different nature from orders for indemnity costs under other limbs of r 14.6(4).2
(b)The word reasonable in r 14.6(1)(b) does not import a discretion in the usual sense.3
1 Black v ASB Bank Ltd [2012] NZCA 384 at [77] – [99].
2 At [79].
3 At [78] citing Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd (1994) 2 NZ ConvC 191, 873 (CA) at 191, 886 – 191, 887 and Beecher v Mills [1993] MCLR 19 (CA).
(c) Rule 14.6(4)(e) recognises the well-established principle that one party may contractually bind itself to pay the other’s full solicitor/client costs.4
(d)In assessing whether the indemnity costs claimed under a contract are reasonable, the Court makes an objective assessment of whether the tasks undertaken were reasonably necessary and were covered by the contract, whether the charge rates were reasonable, and whether any other general contract law principles should deny the claimant its prima facie right to judgment.5
(e) The time and other pressures on Judges and Associate Judges leave “room for robust judgment as to the costs considered reasonable in all the circumstances” adopting the Court’s observation in Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd.6
(f) If the party liable to pay indemnity costs is not content with that “robust judgment” there are possibly three avenues open to the Court being:7
(i) The making of a costs order subject to taxation under rr 14.18
– 14.21 and 14.23 High Court Rules.8
(ii)Agreement by the parties to be bound by the decision of a suitably qualified practitioner whose assessment would then be
referred to the Court before a formal order.9
4 See Black v ASB Bank Ltd, above n 1, at [78] citing ANZ Banking Group (NZ) Ltd v Gibson
[1986] 1 NZLR 556 (CA) and Beecher v Mills, above n 3.
5 Black v ASB Bank Ltd, above n 1, at [80]; Frater Williams & Co Ltd v Australian Guarantee
Corp (NZ) Ltd, above n 3, at 191,887; Watson & Son Ltd v Active Manuka Honey Association
(2009) NZCA 595 at [20].
6 Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd, above n 3, at 191,887.
7 Black v ASB Bank Ltd, above n 1, at [81].
8 Above at [82].
9 At [83].
(iii)(Possibly) through the liable party bringing a complaint to the complaints service of the New Zealand Law Society under s 132(2) Lawyers and Conveyancers Act 2006 (although
access to this jurisdiction is not clearly established).10
Discussion
[8] It is appropriate in this case that costs follow the event: r 14.2(a) High Court
Rules.
[9] The respondent has a contractual entitlement to solicitor/client costs. The applicant, as the party liable to pay indemnity costs has not indicated a requirement for a detailed vetting of the reasonableness of the costs in this case. The Court has received through the provision of the detailed fee invoices of the respondent’s solicitors’ firm the breakdown of fees and disbursements, supported by identification of the attendances involved in each fee invoice.
[10] The fees (including “bureau fees”) of the respondent’s solicitors themselves totalled $7,660 plus GST of $1,149.
[11] The fees of the Dunedin solicitors who acted on agency instructions are covered by three invoices totalling $3,356.85 (fees of $2,919.00 plus GST of
$437.85). Remaining disbursements total $157.78 (disbursements of $137.20 plus
GST of $20.58).
[12] The respondent’s solicitors’ disbursements (excluding agency fees) totalled
$38.70 (disbursements of $33.66 plus GST of $5.04).
[13] The respondent accordingly seeks an order for the total of $12,362.33 (of which the GST exclusive figure is $10,749.86).
[14] I place that total in context. The respondent was opposing an application to set aside a statutory demand for payment of $78,393.30. The grounds of the
10 At [84] – [99].
application meant that the respondent was in effect challenged to provide a complete accounting of all transactions in the course of a busy trading relationship over the course of ten months. Detailed affidavit evidence was provided by the respondent’s financial controller. That was supported by evidence from the respondent’s collection agent. The application was then set down for hearing. Following that, the respondent filed additional evidence on some specific aspects of the case.
[15] The parties then entered a period of negotiation which ultimately proved fruitless but led to the vacation of a fixture and further adjournment to a new fixture date.
[16] The discontinuance was filed little more than two weeks before the fixture.
[17] The level of fees was appropriate to the nature of the proceeding and the steps involved. There is nothing in this case to cut across the respondent’s prima facie entitlement to costs on a solicitor/client basis.
[18] Mrs Hutton’s memorandum as to costs assumes that the Court will award the total legal costs rendered to the respondent, inclusive of Goods and Services Tax (“GST”).
GST as a component of an award for indemnity costs and disbursements
[19] GST has been part of the New Zealand tax landscape since 1985.11
[20] Indemnity costs have been available throughout the period since 1985. In that period, thousands of judgments will have dealt with costs and disbursements on an indemnity basis. Yet the Courts have differed on whether or not to include the GST component of solicitor/client costs and disbursements when awarding
indemnity costs.
11 As introduced by Goods and Services Tax Act 1985.
[21] The difference in this case between indemnity costs, inclusive of GST and exclusive of GST, is:
Inclusive of GST $12,362.33
Exclusive of GST $10,754.90
[22] The respondent’s application to include GST in the indemnity costs recovered requires a consideration of the principled approach to GST as a component of any award of indemnity costs.
The principles – GST in relation to costs generally
[23] Before dealing with the topic of GST in relation to indemnity costs, it helps to consider the much more common situation of party/party costs other than on an indemnity basis.
[24] The courts’ approach to costs awards is that they are GST neutral. Such has been the settled approach, at least since the decision of Chambers J in Burrows v Rental Space Ltd.12 His Honour explained that the losing party is not paying for a service provided to it by the successful party or its lawyers. His Honour treated as wrongly decided an earlier case in which the scale costs payable under the prescribed rates in the Second Schedule High Court Rules were to be treated as GST inclusive.13 His Honour noted that he had taken the step of discussing the issue both with the Judge involved in the earlier decision and with the chair of the Rules Committee.
[25] In Burrows v Rental Space Ltd, Chambers J did not refer to earlier judgments which had adopted the same (GST neutral) approach. Tipping J in Bellis v NZMC Ltd (No. 2) observed:14
… it does not seem to me that party and party costs are themselves subject to
GST. They are simply a contribution made by the losing party to the
12 Burrows v Rental Space Ltd (2001) 15 PRNZ 298 at [14]. See also Sim’s Court Practice HCR
14.2.11; McGechan on Procedure HR Pt 14.03.
13 Shephard v All Steel Services Ltd (2000) 14 PRNZ 707 (HC).
14 Bellis v NZMC Ltd (No. 2) HC Christchurch, CP 412/90, 26 March 1992, per Tipping J at 3.
successful party in respect of that party’s solicitor and client costs which will
of course themselves be subject to GST.
[26] Similarly, the Court of Appeal observed in Thoroughbred & Classic Car
Owners Club Inc v Coleman:15
The appropriateness or otherwise of adding GST in a costs order has not been argued to any extent this morning, but our present view, on which the Court will act unless and until on full argument we are satisfied otherwise, is that in a party-and-party costs order it is not normally appropriate to add GST.
[27] The Court of Appeal vacated the costs judgment made in the Court below to the extent of its GST content.
[28] These cases establish a principle, now clearly settled, that in relation to the award of party/party costs the award of such costs is GST neutral.
The principles – the inclusion of GST in an award of indemnity costs
The general discretion as to costs
[29] All provisions as to costs (whether as to indemnity costs based on a contract or otherwise) are subject to the discretion of the Court under r 14.1(1) High Court Rules: r 14.1(2). Such was recognised by the five-Judge Court of Appeal in Commissioner of Inland Revenue v National Insurance Company of New Zealand Ltd.16
The non-profit rule
[30] A non-profit rule is incorporated as one of the seven identified principles under r 14.2 which apply to the determination of costs. It is stated thus:
(f) an award of costs should not exceed the costs incurred by the party
claiming costs …
15 Thoroughbred & Classic Car Owners Club Inc v Coleman CA 203/93, 25 November 1993, per
Cooke P, delivering the judgment of the Court at 2 – 3.
16 Commissioner of Inland Revenue v National Insurance Company of New Zealand Ltd (1999)
19 NZTC 15,135 (CA) at [57].
[31] In the United Kingdom, the same principle has been recognised in General of Berne Insurance Co v Jardine Reinsurance Management Ltd.17 The Court of Appeal upheld an appeal from the decision of the costing Master who had allowed the plaintiffs to recover a greater sum than they themselves were obliged by contract to pay their own solicitors. May LJ observed that on such an approach:18
... the receiving party would either make a profit on the costs to which they were entitled or would be recovering part of the costs to which they were not entitled. That would offend the indemnity principle.
Sir Brian Neill said simply:19
The receiving party is not entitled to a bonus.
[32] In that statement his Lordship applied both the language and the decision of the English Court of Appeal in Gundry v Sainsbury.20
[33] In Suttie v Bridgecorp Ltd Winkelmann J, in refusing to include in an indemnity costs judgment the GST portion of the successful party’s solicitor’s fees, explained that were that party to recover the GST portion, it would represent an “over recovery”.21 To similar effect, Associate Judge Faire in Crown Money Corporation Ltd v Grasmere Estate Trustco Ltd explained the non-inclusion of the GST component in a costs award upon the basis that it would “lead to a double recovery”.22
The relevance of the GST position of the successful party
[34] Generally speaking, a party which is GST registered will recover from the
Commissioner of Inland Revenue a GST input credit for the GST which the party has paid to the solicitor representing it in the litigation.
17 General of Berne Insurance Co v Jardine Reinsurance Management Ltd [1998]
2 All ER 301 (CA).
18 At 308.
19 At 312.
20 Gundry v Sainsbury [1910] 1 KB 645 in which Cozens-Hardie MR observed of the proposition that a plaintiff receive a bonus by way of costs “that is contrary to justice and commonsense and also to the law as laid down in Harold v Smith” (1860) 157 ER 1229, 5H & N 381.
21 Suttie v Bridgecorp Ltd HC Auckland, CIV-2006-404-3667, 8 December 2006 (HC) at [19].
22 Crown Money Corporation Ltd v Grasmere Estate Trustco Ltd (2008) 19 PRNZ 591 at [7].
See also Merringtons Pty Ltd v Luxottica Retail Australia Pty Ltd [2006] VSC 525 at [35].
[35] One would have anticipated if the non-profit rule is to be observed, that the Courts would therefore have excluded from the quantum of any indemnity award of costs the GST recovered. That is precisely what was done by Winkelmann J in Suttie v Bridgecorp Ltd.23 It is also the approach taken by Associate Judge Faire in his interim costs judgment in Crown Money Corporation Ltd v Grasmere Estate Trustco Ltd in which his Honour refused to allow recovery of the GST portion because it
would involve a double recovery and directed that the plaintiff first file a memorandum and affidavit evidence establishing (amongst other points):24
(a) Is the plaintiff registered for GST purposes?
(b) If so, will the plaintiff be able to claim an input credit for the GST
portion of the costs?
(c) If so, what is the net fee payable in respect of the bill of costs?
(d) If the GST portion is not recoverable, what is the gross fee, plus
GST, but excluding disbursements?
[36] The same GST exclusive approach to indemnity costs, where the successful party will have recovered GST, has been adopted many times by this and other Courts.25
[37] However, instances can be found where the Courts have expressly included GST in indemnity costs awards, albeit without apparent argument. An example is Scottwood Charitable Trust v Bank of New Zealand in which Morris J said:26
There is no firm rule on when GST can be added but that when solicitor/client costs are considered the figure to be used is the amount actually paid, including GST.
23 Suttie v Bridgecorp Ltd, above n 21, at [20].
24 Crown Money Corporation Ltd v Grasmere Estate Trustco Ltd, above n 22, at [7], and [14]-[15].
25 Signature Carpet Distributors Ltd v Shaw Carpets Ltd HC Auckland CP265/94, 20 March 1995;
Bunschoten v ANZ Banking Group (NZ) Ltd HC Auckland, CP 7/97, 11 May 1998;
Delta Installations Ltd v Hamilton Joinery Ltd (2003) 16 PRNZ 814 (HC); Suttie v Bridgecorp Ltd, above n 21; Crown Money Corporation Ltd v Grasmere Estate Trustco Ltd, above n 22; Entwisle v Dunedin City Council [2002] 2 ERNZ 23 (EmpC); Maruha Corporation v Amaltal Corporation Ltd HC Auckland CIV-2002-404-1773, 13 February 2004; Gibson v Complaints Assessment Committee HC Auckland CIV-2005-404-7353, 17 February 2009; Prasad v Indiana Publications (NZ) Ltd HC Auckland CIV-2010-404-3333, 14 June 2011; Walters v Icon Central Ltd (No. 2) HC Auckland CIV-2010-404-4877, 12 August 2011; Snowdon v Radio NZ Ltd [2012] NZ EmpC 165; Weston v Advkit Para Legal Services Ltd [2013] NZ EmpC 6.
26 Scottwood Charitable Trust v Bank of New Zealand HC Hamilton M152/92, 13 May 2002 at [6].
[38] More recently in Reid v Rose City Funeral Home Ltd, the Court awarded indemnity costs to the second respondent (the Palmerston North District Court).27
That sum included GST,28 but there was no discussion in the judgment as to any
inability of the Court to claim a GST input credit.
[39] In his 2009 article “Costs awards and GST”, Andrew Beck reviews the Court’s approach to GST when making costs awards in a number of situations.29 In his discussion of indemnity costs, Mr Beck concludes that a variety of approaches has been followed. Mr Beck refers to a number of the cases which I have footnoted. Mr Beck concludes that:30
There cannot be a proper determination of the full recovery amount without knowing the GST liabilities of the successful party.
[40] There remain situations in which the successful party will not have been entitled to a GST credit input. The two most obvious are where the successful party is not GST registered and where the subject of the dispute does not for other reasons lend itself to a GST input credit.
[41] A recent example of the first category (successful party not GST registered) is seen in the judgment of Wylie J in Jin v North Shore District Court.31 His honour noted that there was nothing to suggest that the second respondents (a couple who had purchased a residential property) were entitled to claim back GST. In awarding them indemnity costs, Wylie J therefore included the GST content.32 An example of the second category of case (the dispute not lending itself to a GST input credit) is Hogan v Commercial Factors Ltd.33 In that case, the successful party provided financial services which, being an exempt supply under the GST legislation, precluded it from recovering an input tax credit for its legal fees. William Young J,
delivering the judgment of the Court, observed:34
27 Reid v Rose City Funeral Home Ltd [2013] NZHC 1002 at [11].
28 At [1] and [11].
29 Andrew Beck “Costs awards and GST” [2009] NZLJ 69.
30 At 70.
31 Jin v North Shore District Court [2013] NZHC 810.
32 At [20]-[21].
33 Hogan v Commercial Factors Ltd CA 225/03, 7 March 2005.
34 At [2].
As the financial services provided by the respondents were in the nature of exempt supplies, however, there was no entitlement to an input tax credit with the result that an indemnity order must cover the costs actually incurred on a GST inclusive basis.
[42] There was a very substantial award of indemnity costs in Bradbury v Westpac Banking Corporation.35 In that case, Harrison J found the successful defendant entitled to an award of indemnity costs and awarded on that basis $996,712 as the actual legal costs reasonably incurred by the defendant.36 His Honour awarded also witness expenses and disbursements of $60,979.25.37 There appears to have been no suggestion of reducing the quantum of the awards for any GST content. Andrew Beck, in his excellent article, refers to Bradbury v Westpac Banking Corporation and says of it that although it is one of the most significant recent cases considering the principles applicable in awards of indemnity costs, the Judge did not address the
issue of GST. My reading of the detail of that case, for instance the breakdown of charge-out rates at [212] in Harrison J’s analysis of costs, suggests that the figures sought by Westpac were the actual fees, exclusive of GST. Assuming Westpac’s provision of financial services is an exempt supply, Westpac’s non-addition of a GST component to its claim is in keeping with a principled approach to GST recovery in this area.
[43] Mr Beck also refers to McCluskie v Narish, a costs judgment in which the award was on the basis of the solicitor’s fees of $74,800 plus GST.38 Mr Beck notes that it does not appear that in that case the Court followed the approach in Crown Money Corporation Ltd v Grasmere Estate Trustco Ltd of requiring the applicant to file submissions in evidence as to GST registration and input credit entitlements.39
However, as the successful claim was for removal of the trustee,40 it would seem
likely that the plaintiff would have been unable to obtain a GST input credit in relation to his legal fees.41 Assuming that to be the case, the McCluskie costs
35 Bradbury v Westpac Banking Corporation (2008) 18 PRNZ 859 (HC).
36 At [214].
37 At [219].
38 McCluskie v Naresh HC Auckland CIV-2007-404-6152, 12 December 2008 at [11] and [13]; Beck, above n 29, at 71..
39 Crown Money Corporation Ltd v Grasmere Estate Trustco Ltd, above n 22; Beck, above n 29, at
71.
40 See McCluskie v Naresh, above n 38; Beck, above n 29, at 71.
41 A point recognised in the commentary - see Beck, above n 29, at 69-70.
decision again fits within a principled approach to GST recovery in indemnity awards.
The Australian position
[44] The position adopted by courts in Australian states appears similar to that in New Zealand. The courts have recognised that GST input credit must be taken into account so as to avoid the successful party receiving a sum greater than the sum required to indemnify it. For instance, Campbell JA, delivering the leading judgment of the New South Wales Court of Appeal in Gagner Pty Ltd v Canturi Corporation Pty Ltd, referred to a consistent approach taken in a number of state
jurisdictions.42 Referring to the position in relation to party/party legal costs payable
on a court scale, his Honour noted that the total amount of professional costs assessed in accordance with the scale can be recovered.43 He then added:44
This is subject to a qualification that the costs actually paid by the party entitled to the costs order exceed the scale amount plus what the GST would be on that scale amount. If the costs actually paid do not exceed the scale amount plus what the GST would be on the scale amount, the principle of indemnity requires that the party with the benefit of the costs order should receive no more than the amount it is actually paid: Hennessey at [139]- [140], ChongHerr at [9]. That seems consistent with the position in England and South Africa, as discussed in Merringtons at [22]-[26].
[45] In his judgment in Merringtons Pty Ltd v Luxottica Retail Australia Pty Ltd, the Master noted rules or practices in England, Ireland and South Africa, all of which brought input credits into account in jurisdictions with a Value Added Tax regime.45
The Master noted:46
21. In England, where a similar tax regime applies under the Value Added Tax Act 1983, it is apparent that provisions have been made for the treatment of this tax in bills of costs. Paragraph 5.3 of the ‘Practice
42 Gagner Pty Ltd v Canturi Corporation Pty Ltd trading as Indochine Cafe [2009] NSWCA 413.
For the consistent approach taken in various Australian state jurisdictions, see Merringtons Pty Ltd v Luxottica Retail Australia Pty Ltd, above n 22 at [34], Keen v Telstra Corporation Ltd [2006] FCA 834 at [46]; Hennessey Glass and Aluminium Pty Ltd v Watpac Australia Pty Ltd [2007] QDC 57 at [138]-[139]; ChongHerr Investments Ltd v Titan Sandstone Pty Ltd [2007] QCA 278 at [9].
43 Gagner Pty Ltd v Canturi Corporation Pty Ltd, above n 42, at [152].
44 At [152].
45 Merringtons Pty Ltd v Luxottica Retail Australia Pty Ltd, above n 22, at [21]-[25].
46 At [21]-[25].
Direction about Costs’, which supplements parts 43-48 of the Civil
Procedure Rules 1998, states that:
V.A.T. should not be included in a claim for costs if the receiving party is able to recover the V.A.T. as input tax.
[Note: pro forma bills of costs displayed on the Department of Constitutional Affairs website in England provide for a third column under the heading “V.A.T.” (in addition to the columns for costs and disbursements)].
22. In Ireland a similar provision is to be found in the Rules of the Superior
Courts 1986. Order 99 Rule 1(6) headed ‘Right to Costs’ states:
An award of costs ...... shall include any sum payable by the party in favour of whom such an award is made by way of value added tax on such costs, where and only where such party establishes that such sum is not otherwise recoverable.
23. The South African Supreme Court of Appeal case of Price Waterhouse Meyernel v The Thoroughbred Breeders Association of South Africa (2003) (3) SA 54 is illustrative in relation to the treatment of V.A.T. in that country. In the judgment of Howie JA (a judgment with which Hefer AP, Vivier ADP, Harms & Conradie JJA concurred) at 61 (paragraph 18), it is stated:
A costs order – it is trite to say – is intended to indemnify the winner (subject to the limitations of the party and party costs scale) to the extent that it is out of pocket as a result of pursuing the litigation to a successful conclusion. It follows that what the winner has to show – and the Taxing Master has to be satisfied about – is that the items in the bill are costs in the true sense, that is to say, expenses which actually leave the winner out of pocket.
24. Further, at 62 (paragraph 21), it is stated that:
In short, any payment of input tax credit will inevitably be matched by a credit or refund. Consequently, if plaintiff is entitled to claim from the Revenue, as an input tax, the V.A.T. which it is required to pay to its attorney, it does not in respect of such input tax incur an out of pocket expense.
25. At 62 (paragraph 22):
... It is not without interest and significance that in England V.A.T. may be included in a claim for costs but a specific Practice Direction decrees that it must not be included if the party entitled to costs is able to recover V.A.T. as input tax: see Halsbury’s Laws of England 4th edition Reissue, vol 10, para 24.
The principles – GST in relation to increased costs
[46] I am not required in this case to consider an application for increased costs under r 14.6(3) High Court Rules. I make these observations only to recognise that
distinct issues will arise in relation to the treatment of GST where increased costs are awarded.
[47] The judgment of the Court of Appeal in Commissioner of Inland Revenue v National Insurance Company of New Zealand Limited concluded with observations on National Insurance’s cross-appeal in relation to the costs order made in the High Court.47 National Insurance submitted that the Judge erred by failing to allow for the impact of GST on the costs award.48 Richardson P and Henry J delivering the judgment of the Court, observed:49
For National Insurance it was submitted that as a firm rule an award of costs should have GST added to it. That is untenable as a general proposition. The Court has an overriding discretion (r 46 High Court Rules), and although that must be exercised in accordance with established principles, it is not to be fettered in such a way as is proposed. In our view all that needs be said on this issue is that where a Court decides to take into account the amount of a party’s solicitor and client costs, the appropriate figure to use for that purpose is the amount actually payable by that party, including where applicable the GST component of that liability. The amount of the actual award will however remain in the discretion of the Court in the usual way, and in exercising that the Court can take into account all other relevant considerations.
[48] It was common ground that National Insurance had been able to claim a GST input tax credit on the legal expenses incurred in the litigation, leading to the High Court judgment.50 It was also common ground that, in the hands of National Insurance, the costs recovered by National Insurance would be subject to GST in its hands by reason of s 20A(4) Goods and Services Tax Act 1985.51
[49] The Court of Appeal referred the costs issue back to the High Court for determination. The parties had agreed that the particular approach required for costs in relation to revenue cases, as identified by the Court of Appeal’s intervening judgment in Auckland Gas Company Ltd v Commissioner of Inland Revenue, now
had to be implemented.52
47 Commissioner of Inland Revenue v National Insurance Company of New Zealand Limited, above n 16, at [55]-[57].
48 At [55].
49 At [57].
50 At [56].
51 At [56].
52 At [55] and [58]. See also Auckland Gas Company Ltd v Commissioner of Inland Revenue
[1999] 2 NZLR 409 (CA).
[50] In the event, Williams J reconsidered the costs award. His Honour took particular account of the comments of the Court of Appeal in relation to GST in arriving at a reasonable contribution for the Commissioner to make to National Insurance’s actual costs.53
Principles – GST as an element of disbursements
[51] The inclusion of properly recoverable disbursements within a costs award is required by r 14.12(2) High Court Rules.
[52] Rule 14.12(1)(a) and (b) defines disbursements as meaning:
14.12 Disbursements
(1) In this rule,—
disbursement, in relation to a proceeding,—
(a) means an expense paid or incurred for the purposes of the proceeding that would ordinarily be charged for separately from legal professional services in a solicitor’s bill of costs; and
(b) includes—
(i) fees of court for the proceeding:
(ii) expenses of serving documents for the purposes of the proceeding:
(iii) expenses of photocopying documents required by these rules or by a direction of the court:
(iv) expenses of conducting a conference by telephone or video link; ...
[53] The Court may approve expenses other than those listed in r 14.12(1)(b), and the approval is commonly granted in relation to the fees of expert witnesses.54
[54] In his article on “Costs awards and GST”, Andrew Beck discusses the GST
component of disbursements. He takes the example of fees of Court, which are
53 National Insurance Company Ltd v Commissioner of Inland Revenue (1999) 13 PRNZ 375 (HC), (1999) 19 NZTC 15,359 (HC) at 379.
54 Progressive Enterprises Ltd v North Shore City Council (2005) 17 PRNZ 919 (HC) at [22]-[26].
recoverable as a disbursement under r 14.12(b)(i).55 Such fees are inclusive of GST: reg 13 High Court Fees Regulations 2001.56 Rule 14.12(b) does not expressly provide for the disbursements to be payable less the GST component. If the GST were to be excluded from, say, a filing fee ($1,100) the successful plaintiff should recover only $977.78.57 Mr Beck notes that such has never happened in any
litigation in which he has been involved.58 Mr Beck concludes that the deduction of
GST from a costs award would appear to be contrary to the wording of r 14.12.59
[55] There might be argued to be a policy consideration which supports the ignoring of GST in relation to such disbursements. Disbursements generally will be less significant than the legal costs themselves. The absence of a potentially costly enquiry into whether or not GST was recovered or recoverable in relation to a
particular disbursement may be attractive on that basis.60
[56] An argument based on the doubtful economics of a GST analysis of disbursements would be more difficult to justify in relation to witnesses’ expenses and particularly those comprising the fees of expert witnesses. The total of expert witnesses’ expenses will sometimes involve sums approaching, if not exceeding, the legal costs themselves.
[57] An inconsistency in the way the courts treat the GST content of the legal fees and of other significant costs, such as expert witnesses’ fees, would be undesirable, particularly if the rules do not require such inconsistent treatment.
[58] Under r 14.12 High Court Rules the most relevant provision is r 14.12(2)
which determines what disbursements must be included in an award of costs. The rule provides:
55 Beck, above n 29, at 69.
56 The GST inclusive nature of court fees in New Zealand differs from the position in Australian states where there is no GST payable in relation to court fees: see the discussion in the Beach Retreat P/L v Mooloolaba Yacht Club Marina Ltd [2009] QSC 84 at [115]-[116].
57 Beck, above n 29, at 69.
58 At 69.
59 At 69.
60 In Jin v North Shore District Court, above n 31, the Court awarded $22,262.24 on solicitor/client costs and disbursements incurred to trial and an additional $3,306.24 for the costs of the Costs Memorandum which counsel filed.
14.12 Disbursements
(1) ...
(2) A disbursement must, if claimed and verified, be included in the costs awarded for a proceeding to the extent that it is –
(a) of a class that is either –
(i) approved by the court for the purposes of the proceeding;
or
(ii) specified in paragraph (b) of subclause (1); and
(b) specific to the conduct of the proceeding; and
(c) reasonably necessary for the conduct of the proceeding; and
(d) reasonable in amount.
[59] In my judgment, it is r 14.12(2)(d) which is most relevant to the Court’s treatment of any GST content within a disbursement. By that provision disbursements are to be included in the costs award to the extent that they are reasonable in amount. An underlying principle of all recovery (both costs and
disbursements) is expressed in the non-profit rule.61 Accordingly, where a successful
party claims a disbursement inclusive of GST where the GST has been recovered, the disbursement claim as to the GST content is unreasonable. It matters not whether the disbursement is one of the four expressly included under r 14.12(1)(b) or is a disbursement of another kind, such as an expert witness’s fee, which requires Court approval (which is caught by r 14.12(2)(a)(i)).
[60] The courts do not appear to have approached the GST aspect of disbursements consistently. One suspects that this may have arisen because counsel themselves have frequently not turned their minds to the point in the memoranda they have submitted as to costs. The inclusion of GST in relation to both costs and disbursements was the subject of a specific challenge in Maruha Corporation v Amontel Corporation Ltd.62 The exchange led Rodney Hansen J to record:63
Finally, the defendant questions whether GST should be included, a reservation subsequently acknowledged by the plaintiffs, who accept that
61 See above [30]-[33].
62 Maruha Corporation v Amaltal Corporation Ltd, above n 25.
63 At [11].
they are not entitled to recover the GST component on costs and disbursements.
[61] A GST exclusive approach was also adopted by Wylie J in Gibson v Complaints Assessment Committee.64 In that case, Wylie J ordered reasonable costs and disbursements (GST exclusive). The disbursements are identified as having totalled $3,639.90.65
[62] On the other hand, in McIntyre v Nemesis DBK Ltd, the Court allowed a claim in respect of the amount paid for expert witnesses’ fees without reference to the GST content.66 I have not been referred to a New Zealand decision in which the legal position concerning the GST on disbursements has been analysed by reference to the High Court Rules or other legal foundation. I conclude by reference in particular to r 14.12 that it is proper for the Court, in assessing the reasonableness of disbursements, to take into account the GST content.
[63] That appears to accord with the position in relation to disbursements in the Australian states. In the various Australian decisions to which I have referred, there are a number of considered discussions of the position relating to disbursements, leading to the conclusion that by reason of the non-profit rule the amount recoverable on a disbursement (where the successful parties have the benefit of an input credit) is the amount paid minus the GST component.67
GST under s20A Goods and Services Tax Act 1985
[64] The judgment of the Court of Appeal in Commissioner of Inland Revenue v National Insurance Company of New Zealand Ltd contains the Court’s affirmation of the principle that the amount of any award remains in the discretion of the Court in
the usual way. The Court is to take into account all relevant considerations.68
64 Gibson v Complaints Assessment Committee, above n 25, at [36].
65 At [4] and [39].
66 McIntyre v Nemesis DBK Ltd HC Nelson CIV-2005-441-558, 14 April 2008.
67 Merringtons Pty Ltd v Luxottica Retail Australia Pty Ltd, above n 22, at [35]-[36] and [41]; Hennessey Glass and Aluminium Pty Ltd v Watpac Australia Pty Ltd, at [142]-[143]; ChongHerr Investments Ltd v Titan Sandstone Pty Ltd, above n 42, at [9]; Gagner Pty Ltd trading as Indochine Cafe v Canturi Corporation Pty Ltd, above n 42, at [152].
68 Commissioner of Inland Revenue v National Insurance Company of New Zealand Ltd, above n 16, at [55]-[57].
[65] As I have noted, National Insurance had been able to obtain a GST input tax credit on the legal expenses it had incurred in the tax litigation leading to the High Court judgment, pursuant to s 20A(2)(c) Goods and Services Tax Act 1985. National Insurance under s 20A(4) of the Goods and Services Tax Act would have to account for GST on any costs recovered.
[66] The latter consideration, specific to taxation litigation under s 20A of the GST Act, does not arise in ordinary civil litigation such as this. The significant relevance of the National Insurance decision in this case is the Court’s emphasis that the courts will have regard to all relevant considerations in exercising the cost discretion.
Summary of the principles in relation to indemnity costs and disbursements
[67] I summarise the principles which I adopt in fixing the amount to be awarded by way of indemnity costs and disbursements:
There is a general discretion as to costs (including indemnity costs): r 14.1 High Court Rules.
Thenon-profit rule is recognised under r 14.2 which provides that costs awarded should not exceed the costs incurred by a party.
Aparty which is GST registered will, in relation to most services, recover from the Commissioner of Inland Revenue a GST input credit for the GST which it has paid to its solicitor. Such recovered GST is not generally recoverable in an indemnity costs award.
There are situations where the successful party will not have been entitled to recovery of GST from the Commissioner of Inland Revenue including where the successful party is not GST registered or where the subject of the dispute does not for other reasons lend itself to a GST input credit such as where the service provided is an exempt supply under the GST
legislation. In such cases, the GST component will generally be recoverable in an indemnity costs award.
It is appropriate in a parallel manner to take into account or disregard the GST content of disbursements.
Procedure for fixing indemnity costs
[68] In Crown Money Corporation Ltd v Grasmere Estate Trustco Corporation Ltd, Associate Judge Faire first identified the principles which should govern an award of indemnity costs where there has been a GST element.69 His honour then identified the factual matters on which the Court would require information.70 His
Honour said:71
[14] What is required in this case is the following:
...
(e) Who were the authors who were working on each part of the legal work undertaken and which is referred to in the affidavits? What is required is a sufficient description of the work undertaken so that it discloses that it is work reasonably undertaken for the step and which also discloses that the step is a reasonable step taken in relation to the recovery of the outstanding debt in this case;
(f) What rate is charged in respect of each author; (g) What experience does each author have; and
(h) Any additional evidence which is relied upon to show that the rate charged is a reasonable one having regard to the principles normally applicable to solicitor/client costs. Counsel may find assistance from considering the approach which the Court approved in relation to the approval of liquidators’ fees. I refer to the full Court judgment Re Medforce Healthcare Services Ltd (in liquidation) [2001] 3 NZLR 145 at 154 [27]. There the Court endorsed as appropriate an affidavit from an experienced practitioner and not being a partner or associate of the liquidator concerned deposing that the hourly rates were appropriate for the particular liquidator and his employees.
[15] The above information should be provided by affidavit. A supporting memorandum should also be provided. I reserve leave to counsel to address oral submissions on these matters if counsel so desire. In that
69 Crown Money Corporation Ltd v Grasmere Estate Trustco Corporation Ltd, above n 22, at [14].
70 At [14].
71 At [14]-[15].
event, counsel should indicate to the Registrar and hearing time will be provided for that purpose.
[69] I am not aware of any other developed judicial discussion of an appropriate procedure. However, an examination of the decisions which have involved the fixing of indemnity awards suggest that there has frequently been a less onerous procedure than that suggested in Crown Money. For instance, Wylie J explained his decision to award indemnity costs in Jin v North Shore District Court in this way:72
[20] I have considered the various invoices which have been made available to me by the second respondents’ counsel. Those invoices clearly detail the work carried out, the amount charged, GST, and the disbursements incurred. The amount of time taken by counsel in dealing with the matter is not excessive. Counsel’s time has been charged at $250 per hour plus GST. Given counsel’s experience, that hourly charge out rate is, in my view, modest. Invoices have been made available recording that costs in the sum of $22,262.24, inclusive of GST and disbursements, have been incurred. I also accept that further costs totalling $3,306.24, GST inclusive, were incurred in preparing the costs memorandum. Counsel has made available his timesheets recording the time taken in relation to this work. ...
[70] The approach taken by Wylie J may suggest the selection of a procedure for considering an award which bears some relationship to the sums involved. Appropriately such an approach would carry with it significant flexibility. It would reflect a graduated approach as now adopted as for instance adopted in relation to the assessment of liquidators’ fees pursuant to Flynn v McCallum.73 In considering the need for a relatively simplified approach, I am mindful that where the successful party’s contractual entitlement is to solicitor/client costs, any additional procedural obligations which are placed upon that party by the Court in principle will result, if
the costs claim was in order, in yet a further addition to the costs award. As I have observed, where counsel in Jin v North Shore District Court satisfied the Court on the basis of a memorandum, the additional costs awarded were $3,306.24, an additional 15 per cent over the costs to hearing.
[71] The general approach to a procedure which I favour has regard to the aim of the High Court Rules, particularly under r 14.2(d) and (e), namely to allow two-
thirds of costs considered reasonable for the proceeding (or the particular step) to be
72 Jin v North Shore District Court, above n 31, at [20].
73 Flynn v McCallum [2013] 1 NZLR 207 (HC) at [157]: The Court adopting for liquidators’ fees remuneration tiers adjusted to (a) Tier 1: up to $7,500; (b) Tier 2: between $7,500 -$25,000; and (c) Tier 3: excess of $25,000 (all exclusive of GST and disbursements).
recovered as scale costs (consequentially without the need for the parties to produce evidence or argue over the actual costs incurred).
[72] In a case in which the solicitor/client costs sought are no more than 50 per cent higher than the appropriate scale award, I would generally require from counsel a memorandum setting out the costs application and attaching to it the relevant fee note or notes. The fee note or notes would be expected to include a reasonable summarised description of the attendances involved. They would not be required to include a detailed explanation of author experience and charge-out rates. The memorandum would also annex as a schedule the calculation of the appropriate scale fees and disbursements for comparison.
[73] For matters I am determining as an Associate Judge within the Associate Judges’ jurisdiction, I favour a second rule of thumb which is to require only the same, simple memorandum and attached invoices where the solicitors charged fees (exclusive of GST and disbursements) was less than $25,000. I am conscious that if, in a case such as Jin v North Shore District Court, there had been a requirement of affidavit evidence, the additional costs of providing that may have imposed upon the judgment debtor an increase of the order of 30 per cent rather than the 15 per cent that resulted.
[74] Where costs claims fall outside these two categories, I would respectfully adopt the approach set out in Associate Judge Faire’s judgment in Crown Money Corporation.
[75] I refrain from any comment as to a procedure relating to the costs likely to be assessed following a civil trial, save to observe that the Crown Money Corporation approach is likely to be seen as almost invariably appropriate when litigation has been concluded through trial.
[76] I view it as incumbent upon counsel when applying for indemnity costs to include a clear statement as to the relevant GST position of the successful party. That will entail in the narrative part of the memorandum a statement as to whether there has been a GST input credit received. Then, by reference to the detail
contained in the attached invoices counsel will identify the extent of the GST input recovery in relation to both fees and disbursements. Counsel’s memorandum will then identify the correct net figures for both fees and disbursements. Because of the requirements upon providers of services to identify in their invoices the GST content of the invoice the required calculations should be straight-forward.
[77] Counsel, in preparing costs memoranda, will need to address the issues identified by Associate Judge Faire in Crown Money Corporation at [14] (a)-(d), together with any other relevant matters, such as whether the transaction, the subject of the litigation, was GST exempt. From that base of knowledge, it will be the responsibility of counsel to provide in their memorandum an accurate calculation of the net costs. Counsel must be satisfied that the indemnity award sought will not exceed the net costs and disbursements incurred. By reason of r 14.2(f), counsel has an obligation, at least in relation to the costs content of an indemnity award, to not present an application for a sum which is greater than the costs incurred by the party.
In relation to disbursements, the same principle must apply by analogy.74 These
requirements are reinforced by the duty upon all counsel not to mislead the Court.75
[78] In the memorandum of counsel in this case, Mrs Hutton has applied for indemnity costs pursuant to the contractual agreement between the parties to which I have referred.76 The memorandum attaches the fee notes of Mrs Hutton’s firm and of its agents, in each case encompassing also the disbursements. The invoices identify the GST content.
[79] Mrs Hutton’s memorandum does not record that the respondent is registered for GST but, the invoices exhibited to affidavits filed in the proceeding establish that the respondent is GST registered.
[80] I find the attendances referred to in the various invoices to be appropriate to this litigation and the total of fees and disbursements of $10,749.86 (exclusive of
74 High Court Rules, r 1.6.
75 High Court Rules, r 1.20; Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, r 13.1.
76 See above at [3].
GST)77 to be reasonable. As Mrs Hutton filed a simple memorandum in support of the costs application and did not expressly seek an additional allowance for the costs of the memorandum, I make no allowance for that item.
[81] I am satisfied that the appropriate order for costs in this case is an order that
the applicant pay the respondent’s costs and disbursements in the sum of $10,749.86.
Order
[82] I order that the applicant pay to the respondent the costs and disbursements of this proceeding in a sum of $10,749.86.
Associate Judge Osborne
Solicitors:
Downie Stewart, Dunedin.
R A Fraser & Associates, Christchurch
77 See above at [10]-[13].
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