Erris Promotions Ltd v Commissioner of Inland Revenue

[2003] NZCA 163

IN THE COURT OF APPEAL OF NEW ZEALAND

CA68/03

BETWEENERRIS PROMOTIONS LIMITED AND OTHERS

Appellant

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:19 June 2003

Coram:Blanchard  J
Tipping  J
Anderson J

Appearances:  J R Eichelbaum for Appellant

J A Farmer QC and J H Coleman for Respondent

Judgment:24 July 2003 

REASONS FOR JUDGMENT OF THE COURT DELIVERED BY ANDERSON J

[1]        On 19 June 2003 we heard and allowed this appeal, indicating that our reasons for judgment would be handed down in due course.  They are as set out below.

[2]        This appeal is from an interlocutory ruling of Wild J declining an application that he recuse himself from trying a number of substantive proceedings scheduled to be heard together in the High Court on 14 July.  Those proceedings concern disallowance by the Commissioner of Inland Revenue of claims for depreciation in respect of software packages, the subject of joint ventures by many people including the present six appellants.  The litigation is said to be in the nature of test cases involving large sums of money and affecting many taxpayers.

[3]        Case management practices in the High Court involve the assignment by the Executive Judge of long cases, as this is, to a particular Judge.  The advantages of supervisory management by a single Judge in respect of long and complex causes needs no expatiation.  The proceedings in question were assigned to Wild J in the latter part of last year.

[4]        On 31 January this year counsel for the appellants sent an e-mail to the  Registrar of the High Court at Wellington in the following terms:

The judge wouldn’t have had time to read enough of the papers involved to make this link yet, but prior to appointment His Honour acted for a company called Exicom.  The principal director of Exicom was Mr Scott Crawford Anderson.  Mr Anderson is also, at least in the defendant Commissioner’s view, the central witness for the taxpayers in this case, being the principal director of Actonz, which arranged the contentious software acquisitions for the six plaintiffs.

[5]        As Wild J notes in the ruling under appeal, he responded in the following terms:

My practice records show that Hughes Robertson (Mr Nigel Hughes) instructed me on 6.11.97 for Exicom.  I do not retain any of my barristers’ files.  However, my recollection (possibly now astray) is that the Exicom matter involved a commercial dispute over the ownership/rights to software under development which would enable electricity meters to be read remotely.  I recall being impressed by this prospect!  Beyond that I have no recollection of Exicom.

I have a vague recollection of Mr Anderson – of briefing evidence from him in relation to the matter.

My position is this.  I am grateful to Mr Eichelbaum for drawing the Exicom connection to my attention.  I do not consider it disqualifies me from trying the Erris Promotions proceeding.  Different entities and different areas of the law were/are involved.  I was not required to make, and did not make, any assessments of Mr Anderson that might compromise me in any way in Erris Promotions.  If Mr Eichelbaum and/or counsel for the Commissioner do not share that view, then I request that you arrange a telephone conference with counsel so that I can deal with the matter.

…

[6]        On 12 February the Commissioner indicated to the Registrar that he had no objection to Wild J hearing the case.  The appellants, however, did object and their counsel sent an e-mail to the Registrar seeking a hearing and a written ruling on the issue.  Counsel submitted that Wild J could not hear the application because he had already expressed a view and had thereby prejudged or predetermined the issue.

[7]        Counsel for the appellant subsequently made inquiry whether the substantive proceeding could be reassigned, administratively, to a different Judge.  The executive Judge declined to do so and directed that the appellants must formally apply to Wild J on 19 March, which they did.

[8]        In support of their application the appellants filed an affidavit by Mr S C Anderson, in which he deposed as follows:

1.    I am a Director of the Actonz Investment joint venture, which acquired the software packages at the heart of this dispute between the six Plaintiffs and the Commissioner of Inland Revenue, and am duly authorised to make this affidavit on the joint venture’s behalf.

2.    The dispute concerns the acquisition of a number of software packages by the joint venture in 1996.  The six Plaintiffs subsequently invested in the joint venture in 1997, 1998 and later.

3.    Despite the existence of valuations from Price Waterhouse Coopers and an equally reputable US software valuation house, the Commissioner is persisting in a contention that the software packages were acquired at over-valuation.  The Commissioner contends that excessive purchase prices gave rise to exaggerated depreciation and GST benefits.

4.    The GST and depreciation benefits flow inextricably from the nature of the product, assuming that the Commissioner accepts the product as in principle being depreciable per se.

5.    One of the Commissioner’s contentions in the proceeding is that the acquisition of the software packages was a “sham”  This allegation flows from the Commissioner’s submission that the vendor deliberately, in conjunction with the purchasers of the software, contrived to “trick” the Commissioner into acceptance of the claim.

6.    However, the Plaintiffs/taxpayers say in rebuttal that they were perfectly entitled to expect the tax benefits referred to above to flow from the transaction, given the Commissioner’s processing of a similar software product previously for a company by the name of Exicom Intellectual Limited (Exicom).  There, in identical circumstances, as referred to in paragraph 29.8 of the Statement of Claim, the Commissioner approved the GST refund for that company.

7.    Justice Wilds’s brief for Exicom.

8.    Prior to his appointment as a Judge, Justice Wild acted for Exicom.

9.    I was the Director of Exicom and briefed Justice Wild prior to his appointment.  I was the beneficial owner of 80% of the shares in Exicom, so effectively was the client.

10.   I attended at least two briefing sessions with Justice Wild as Counsel and he was fully briefed with the affairs of the company Exicom, and the transaction which is referred to in paragraphs 29.8 and 29.9 of the Statement of Claim.

11.   I am, at least from what we can gather from his contentions to date, from the Commissioner’s perspective at the very heart of these proceedings.  Certainly, I am the principle (sic) person directing the Actonz Investment Joint Venture, which acquired the contentious software.  According to the Commissioner’s case, which we do not accept, I was at the very heart of software acquisitions which the Commissioner alleges were designed to deceive him into wrongly allowing significant GST and depreciation benefits.  According to the defendant, then, my motives and intentions (and presumably character) will be directly in issue.

[9]        Counsel for the appellants also made available to the High Court a fax dated 21 November 1997 from Mr John Wild QC, as the Judge then was, to Hughes Robertson, Solicitors, and draft submissions covered by that fax in connection with litigation then extant in the High Court at Wellington entituled Anderson and Exicom Intellectual (1996) Limited v Traveller, Fisk, Huso, Abbott & Futter CP 287/97.  Counsel also supplied a copy of the judgment of Gallen J dated 20 November 1997 on the interlocutory hearing to which the draft submissions relate.  (We observe that the date on the fax must have been wrong because it anticipates the High Court hearing.  The correct date is probably also 20 November but nothing turns on this).

[10]     It appears that Wild J had no other dealings with Mr Anderson or Exicom.  He was appointed a Judge of the High Court on 15 July 1998.  He was subsequently assigned by the Executive Judge at Wellington to hear a case, said to be identical to the present, involving Exicom which had changed its name to PLM Software:  PLM Software v CIR CP 124/00 Wellington Registry.  Although he could not recall the matter at the time of the hearing and judgment under appeal, Wild J in fact disqualified himself from hearing of the PLM Software litigation, as both the appellants and the respondent, by counsel, accept.

High Court arguments

[11]     The essentials of the argument advanced by the appellants before Wild J are that Mr Anderson is an important witness in the litigation, as the Commissioner accepted; that his credibility will be in issue on crucial matters relating to the Commissioner’s position that the transactions involving software are dishonest shams; that information disclosed to the Judge when he was a barrister, in legally privileged briefings by Mr Anderson, may or may seem to influence the Judge in his adjudication; and that the situation was no different from the PLM Software case where the Judge had disqualified himself.

[12]     The Commissioner did not oppose the application but instructed counsel to assist the Court, which he did.  Mr Farmer elucidated the decision of the English Court of Appeal in Locabail (UK) Ltd v Bayfield Properties Ltd [2000] QB 451 and submitted that the receipt of instructions to act for a party in the case would not ordinarily disqualify a Judge. Here Mr Anderson was not a party but merely a witness and not one whose credibility was regarded as central to the outcome of the proceeding. Moreover, the issue in CP287/97 was contractual and concerned with interim relief in connection with the contract whereas here the issue was tax deductibility. Locabail stressed the significance of the passage of time and in this case six years separated the prior receipt of instructions and the proposed hearing.  Finally, as Callaway JA observed in Clenae Pty Ltd v Australia and New Zealand Banking Group Ltd [1999] VSCA 35 at para 89(e):

As a general rule, it is the duty of a judicial officer to hear and determine the cases allocated to him or her by his or her head of jurisdiction.  Subject to certain limited exceptions, a judge or magistrate should not accede to an unfounded disqualification application.

That passage was cited by the Court of Appeal in Locabail.

High Court decision

[13]     Wild J felt unable to deal with the matter of his earlier disqualifying himself in the PLM Software case, because he could not recollect it and was accordingly unaware of what it involved.  He regarded Locabail as the primary authority particularly since it had been adopted by this Court in Man O’War Station v Auckland City Council [2001] 1 NZLR 552.

[14]     Having in mind that Locabail provides that receipt of instructions would not ordinarily disqualify a Judge but that the particular facts, the nature of the issues, the lapse of time and other relevant factors might affect the ordinary position, he took account of the following:

(a)   His prior instructions were for Mr Anderson and Exicom, neither of whom was a party in the current proceedings.

(b)   However Mr Anderson will be a witness whose bona fides in devising and implementing the relevant transaction will be in issue.

(c)   The prior instructions related to a contractual dispute and relief by way of urgent interim injunction.  Taxation issues were peripheral.  The issues in respect of which he was instructed were distinctly different from those in the current proceeding.

(d)   The prior instructions required no assessment of Mr Anderson’s credibility.

(e)   The passage of time was 5½ years and the Judge had no recollection of the matter going to Court.

[15]     Wild J did not consider himself a person closely associated with Mr Anderson, who was unknown to him before the instructions were received, with whom he had only a brief and professional contact for the duration of the instruction, and with whom he had had no contact ever since.

[16]     Nor was Wild J persuaded by the argument that instructions or information given in confidence might influence his adjudication, because he could not recall the detail of his instructions and there was no correlation between the issues in the cases.

[17]     Wild J considered that the test for apparent bias must be applied bearing in mind the reality of the New Zealand situation, where Judges frequently have some knowledge of or connection with the parties appearing before them; see Man O’War Station Ltd for example.  In the result, he declined to disqualify himself.

The conduct of the appeal

[18]     At the outset of the appeal Mr Eichelbaum sought and, without objection or consent on behalf of the Commissioner, obtained leave to introduce evidence in the form of a further affidavit from Mr Anderson.  This deposed that there were at least two briefing sessions with the Judge in his capacity as counsel in 1997.  In the course of these counsel was advised in detail of the circumstances surrounding Exicom’s GST refund when purchasing a software package known as “VAM”.  The background of that refund is said to be an important aspect of the factual matrix of the present proceedings.  He deposed that his own personal tax situation will be directly affected by the outcome of the proceedings and he annexed extracts from briefs of evidence of himself and another proposed witness, a tax consultant.

[19]     What is now clear from the available evidence is that Mr Anderson has a substantial role and interest in the litigation both through companies with which he is significantly associated and in his personal capacity as a proposed witness.  The assessment of his credit will be an important factor in the proceedings.  Counsel’s draft submissions and Gallen J’s judgment show that amongst the matters which were or must have been discussed between Mr Anderson and Mr Wild QC were the GST implications, the receipt of $4.6 million by way of refund, and the application of that sum.  The background to certain clauses was discussed and the parties to the litigation disputed whether the documentation in fact represented the agreement of the parties to the software purchase.

[20]     For some reason which Wild J cannot recall he disqualified himself from the litigation, relating to the GST implications, entituled PLM Software v CIR.  The inevitable conclusion is that the Judge considered there was such a connection between him and the parties or issues as to render it inappropriate for him to adjudicate.  The appellants maintain that the same connection exists and the same disqualifying reason or reasons must exist, albeit that the Judge cannot now recall them.

[21]     The arguments for the appellants and the respondent emphasised the same principal points made before Wild J, coloured to some extent by the additional evidence before this Court.

Discussion

[22]     We fully appreciate the difficulties of conscientious judges in busy courts when faced with requests for recusal.  Sometimes a relevant fact, once brought to notice, will clearly require disqualification; sometimes a request will be immediately obvious as an attempt by a querulous or obsessive litigant to disrupt proceedings or may seem to reflect irrational concerns, and will be dismissed accordingly.  But within these extremes may fall a case where the facts create a tension between, on the one hand, the possibility of disqualification and on the other hand the Judge’s commitment to duty and understandable reluctance to pass the burden to another busy colleague.  Although in practice a Judge may seek a colleague’s views, ultimately the decision must be for the particular Judge.  There is no authority for another judge in the same jurisdiction to rule on the issue, as Mr Eichelbaum, contrary to the view he indicated in e-mail to the Registrar, now accepts.

[23]     The underlying principle in considering whether a judicial officer ought be considered disqualified for possible impairment of impartiality is that described by Lord Hewart CJ in R v Sussex Justices, Ex parte McCarthy [1924] 1 KB 256 at 259:

…it is not merely of some importance but is of fundamental importance that justice should not only be done, but should manifestly and undoubtedly be seen to be done.

[24]     The integrity and moral authority of a legal system depends on those factors which satisfy the reasonable informed observer that it is fair in practice.  To be fair in practice its adjudicators must be and must appear to be impartial.

[25]     The importance of appearances has been expressed by the High Court of Australia in Eber v Official Trustee (2001) 205 CLR 337, at 344, in these terms:

Where, in the absence of any suggestion of actual bias, a question arises as to the independence or impartiality of a judge (or other judicial officer or juror), as here, the governing principle is that, subject to qualifications relating to waiver … or necessity … a judge is disqualified if a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide.  That principle gives effect to the requirement that justice should both be done and be seen to be done, a requirement which reflects the fundamental importance of the principle that the tribunal be independent and impartial.  It is convenient to refer to it as the apprehension of bias principle.

[26]     In the common law domain there are differences of judicial opinion as to the test for ensuring the appearance of impartiality.  The New Zealand approach is indicated by the following passages from Man-O-War Station Ltd v Auckland City Council [2001] 1 NZLR 552 paras [12] and [13]:

[12]     There was no substantial disagreement between the parties on the applicable legal principles. They are those set out in the speech of Lord Goff of Chieveley in R v Gough [1993] AC 646 and accepted by this Court in Auckland Casino Ltd v Casino Control Authority [1995] 1 NZLR 142.

[13]     In Gough Lord Goff of Chieveley, with whom the other members of the House of Lords agreed, said at p 670:

“In conclusion, I wish to express my understanding of the law as follows. I think it possible, and desirable, that the same test should be applicable in all cases of apparent bias, . . .. Furthermore, I think it unnecessary, in formulating the appropriate test, to require that the court should look at the matter through the eyes of a reasonable man, because the court in cases such as these personifies the reasonable man; and in any event the court has first to ascertain the relevant circumstances from the available evidence, knowledge of which would not necessarily be available to an observer in court at the relevant time. Finally, for the avoidance of doubt, I prefer to state the test in terms of real danger [emphasis added] rather than real likelihood, to ensure that the court is thinking in terms of possibility rather than probability of bias. Accordingly, having ascertained the relevant circumstances, the court should ask itself whether, having regard to those circumstances, there was a real danger of bias on the part of the relevant member of the tribunal in question, in the sense that he might unfairly regard (or have unfairly regarded) with favour, or disfavour, the case of a party to the issue under consideration by him; . . ..

[27]     But eight years after R v Gough, which this Court had followed in Auckland Casino Ltd v Casino Control Authority, the House of Lords in Porter v MaGill [2002] 2 AC 357 “adjusted” the test which, in terms of paragraph 103 of that judgment, has the following articulation:

The question is whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility [emphasis added] that the Tribunal was biased.

[28]     It will be observed that both in England now and in Australia the tests invoke the fair-minded objective observer but in England, where in terms of Gough the standard was “real danger”, the present standard is “real possibility”  In Australia the test involves “reasonable apprehension”.  The Australian position, which the High Court discussed in R v Webb (1994) 181 CLR 41, is closer to that of Canada where the Supreme Court has held that a trial will be rendered unfair if the words or actions of the presiding Judge give rise to a reasonable apprehension of bias in the informed and reasonable observer. See, for example, R v S [1997] 3 SCR 484.

[29]     In Man-O-War Station Ltd v Auckland City Council (Judgment No. 1) [2002] 3 NZLR 577, the Privy Council noted the present differences between the English and New Zealand tests but their Lordships were not persuaded that it would be right to restate the law for New Zealand without the benefit of the view of this Court. The judgment remarked at para [10]:

In any event, the distinction is a fine one, notably since even on the Gough test the Court undoubtedly had to take account of public perception and confidence.  On the facts of the present case the difference between the two tests cannot arguably influence the outcome.

[30]     Having regard to the authorities already mentioned and the observations of the English Court of Appeal at paragraph 17 of their judgment in Locabail, it can be seen that the New Zealand test differs from the jurisprudence of England, Scotland, Australia, South African, Europe, and Canada.

[31]     In a paper published in Part 1 [2003] New Zealand Law Review 99 at 100-101 Professor Michael Taggart observes:

At bottom, the difference between the Gough test and the Webb test is that the former relies on “the court’s own view” and the latter on “the court’s view of the public’s view” … To some this will appear to be playing with words.  And it is, in so far as in the vast majority of cases the result will be the same, whichever test is applied.  But, … there are the exceptional cases where it will make a difference.

[32]     This Court will no doubt need to consider, in due course, whether to discard the Gough test, as England has, and adopt not only a specifically objective approach but also a standard other than “real danger”, in terms of the English or other Commonwealth principles.  We would certainly have to make a choice if faced with a case where the outcome would be affected differently by different tests.  It is reasonably arguable that the Australian approach, which examines reasonable apprehension by a fair-minded and informed observer, gives full weight to public perceptions concerning the impartial administration of justice.  Public as well as litigant confidence in the impartial administration of justice is at the heart of the issue we have been discussing.  The observations made by Mason CJ and McHugh J in R v Webb (1994) 181 CLR 41, at 50-53 about the respective features of the then English and the Australian approaches are particularly helpful. A revised test, which gives full weight to the requirements of public perception and objectivity, as well as being capable of straight-forward application, might be “Would the reasonable informed observer think that the impartiality of the adjudicator might be/might have been affected?”. This suggestion is made, not in any declaratory way but as a reference for possible future discussion.

[33]     It is unnecessary to decide the issue now because at the conclusion of the appeal before us we were satisfied that even on the Gough test the appeal should be allowed.  Wild J had, when in practice, been briefed as counsel in respect of parties closely associated with the trial scheduled for hearing this month in the High Court.  These proceedings are significantly connected with the issues involved in his former brief.  When circumstances similar to the present arose in litigation formerly assigned to him in his judicial capacity he recognised sufficient justification for disqualifying himself then.  With the passage of time that earlier recusal and the circumstances for it lapsed from his memory, but the fact of their existence and the possibility that the matters which troubled him then might be recalled satisfied us that there was a real danger that he might, even unconsciously, be affected in his impartiality.  The principle that justice should both be done and manifestly be seen to be done mandated that such danger be averted.  Also, of course, the implications for a long and expensive trial should the Judge recall, in the course of it, those matters which led him to disqualify himself from the previous trial and then conclude that he should not continue with the present one, are practical considerations which reinforce the decision we reached by the application of the legal test.

[34]     For the reasons set out above we allowed the appeal.

Solicitors:
Hughes Robertson for Appellants
Crown Law Office, Wellington