Junior Farms Ltd v Commissioner of Inland Revenue (No 2) HC Auckland CIV-2009-404-2870

[2011] NZHC 1226

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-2870

BETWEEN  JUNIOR FARMS LTD Plaintiff

ANDCOMMISSIONER OF INLAND REVENUE

Defendant

Hearing:         (On the papers) Counsel:          S P Bryers for Plaintiff

M Deligiannis for Defendant

Judgment:      5 October 2011

JUDGMENT (NO.2) OF BREWER J

This judgment was delivered by me on 5 October 2011 at 10:30 am pursuant to Rule 11.5 High Court Rules.

Registrar/Deputy Registrar

SOLICITORS

Martelli McKegg (Auckland) for Plaintiff

Crown Law (Wellington) for Defendant

COUNSEL Stephen P Bryers

JUNIOR FARMS LTD V COMMISSIONER OF INLAND REVENUE HC AK CIV-2009-404-2870 5 October

2011

[1]      On  22  July 2011  I delivered  a  judgment  granting  an  application  by  the plaintiff for a declaration to the effect that a sale of land by it in 2001 is not assessable for income tax pursuant to s CD1 of the Income Tax Act 1994.[1]     The amount of income tax at issue was $989,967.18.

[1] Junior Farms Ltd v Commissioner of Inland Revenue HC Auckland CIV-2009-404-2870, 22 July 2011.

[2]      I awarded costs to the plaintiff on a 2B basis.

[3]      The plaintiff now applies for an order for the recall of the judgment so that the award of costs can be reconsidered.  The application is based on a Calderbank offer by the plaintiff to pay $50,000 to the defendant. The existence of this offer was not known to me at the time I delivered the judgment.

[4]      The defendant does not oppose the recall of the judgment.  It does oppose any increase in the costs award.

[5]      Both parties have filed submissions on the application and on the issue of what costs should be awarded.  They are content for me to decide these matters on the papers.

Recall

[6]      It is clear that I may recall the judgment.   Rule 11.9 gives an unqualified discretion in that regard.   It is equally clear that recalling a judgment is a serious step.   The well known dicta of Wild CJ in Horowhenua County v Nash (No 2)[2] remains the leading statement in New Zealand law on this point:

[2] Horowhenua County v Nash (No 2) [1968] NZLR 632 at 633.

Generally speaking,  a judgment  once  delivered  must  stand for  better  or worse subject, of course, to appeal.  Were it otherwise there would be great inconvenience and uncertainty.  There are, I think, three categories of cases in which a judgment not perfected may be recalled — first, where since the hearing there has been an amendment to a relevant statute or regulation or a new  judicial  decision  of  relevance  and  high  authority;  secondly,  where

counsel have failed to direct the Court’s attention to a legislative provision or authoritative decision of plain relevance; and thirdly, where for some other very special reason justice requires that the judgment be recalled.

[7]      The issue of costs is of real significance in any civil proceeding.  The High Court Rules have as a principle that “so far as possible the determination of costs should be predictable and expeditious”.[3]    The learned  authors of McGechan on

[3] Rule 14.2(g).

Procedure explain why: [4]

[4] McGechan on Procedure (online looseleaf ed, Brookers) at [HR14.2.01(6)].

The considerations behind these twin objectives are:

(a)       Predictability enables parties to assess the likely cost of litigation: will it be worthwhile?  This is achieved by requiring that the r 14.1 general discretion as to costs be exercised in conformity with the detailed rules governing the calculation of costs.

(b)       The costs rules are designed to be “self-calculating”, removing from Judges  the  burden  of  having to  fix  costs.    Other  than  resolving questions as to the expenses of expert witnesses etc., all that the Judge should have to do is fix the band(s) under r 14.5(2), and deal with any application under r 14.6 or r.14.7.

(c)       The  result  should  be  that  costs  can  be  calculated  and  agreed promptly, so that the party entitled to them is out of pocket for its recoverable litigation costs for the minimum time.

[8]      The plaintiff was, of course, precluded from advising me of the existence of the  Calderbank  offer  by  r 14.10(2).    However,  common  practice  where  a  party believes that costs on a particular outcome might require the Judge to depart from the standard regime is to ask the Judge to reserve costs so that parties can be heard if necessary. That was not done in this case.

[9]      Nevertheless, I have decided that I should recall the judgment.  The existence of a Calderbank offer very often has a material effect on the determination of costs. This is an unusual case in the sense that the plaintiff, although successful and entitled to costs in any event, was actually resisting an impost claimed by the defendant and was the maker of the offer.  I believe it to be in the interests of justice that costs be determined taking into account this relevant factor.  The plaintiff’s application for

recall of the judgment for the purpose of reconsidering my costs order is granted.

[10]     I will now reconsider the award of costs.

[11]     I consider, first, the effect of a successful Calderbank offer.   Rule 14.11 provides (relevantly):

(1)      The effect (if any) that the making of an offer under rule 14.10 has on the question of costs is at the discretion of the court.

[12]     Rule 14.11(3) refers to a party being entitled to costs on the steps taken in the proceeding  after  the  offer  is  made  if  the  offer  made  exceeds  the  amount  of  a judgment obtained by the other party against it, or if the offer made would have been more beneficial to the other party than the judgment obtained by the other party against the offering party.

[13]     The  rule  is  worded  on  the  assumption  that  the  offering  party  will  be  a defendant which has a judgment made against it.  In this case the plaintiff made the offer because in reality it was defending a claim by the defendant for income tax.  In this judgment I will exercise my discretion on a basis that reflects this reality.  I will regard the plaintiff as being in the same position as a defendant whose Calderbank offer was refused by a plaintiff but who then succeeded in having the plaintiff’s claim dismissed in its entirety.

[14]     The plaintiff submits that by the time the Calderbank offer was made the positions of the parties were well known to each other as a result of the adjudication process which preceded the issuing of proceedings. The defendant’s failure to accept the plaintiff’s offer brings the case within r 14.6 and justifies costs being increased above scale.  The plaintiff does not seek indemnity costs and is content to leave the percentage of any uplift to the Court’s discretion.  It proposes that any uplift should apply to all steps taken by the plaintiff in the proceeding (with the exception of step 1) and  acknowledges  that  in  respect  of step  4.5  a reduced  uplift  might  be necessary to reflect the fact that some of the work to carry out that step had been completed before the offer was made.

[15]     The defendant submits that an entitlement to increased costs does not arise until the matter reaches the threshold described in r 14.6(3)(b)(v), namely that the defendant failed without reasonable justification to accept an offer of settlement. The defendant argues that it was reasonable for it to reject an offer amounting to only

5% of the assessed taxation and relies on the decision of the Court of Appeal in Bradbury  v  Westpac  Banking  Corporation.[5]    In  that  case  the  Court  held  that increased costs may be ordered where there is failure by the paying party to act reasonably.

[5] Bradbury v Westpac Banking Corporation [2009] NZCA 234, [2009] 3 NZLR 400 at [27].

[16]     In response, the plaintiff submits that the Court’s overriding discretion as to costs means that even where the refusal of an offer is not unreasonable, the fact that an offer has been made can still justify increased costs.  The plaintiff submits that there are good policy reasons why a refusal to accept a Calderbank offer will generally attract costs consequences and cites Health Waikato Ltd v Elmsly[6]  and

Moore v McNabb.[7]  It concludes its submission on this point:[8]

In summary, the plaintiff submits that the refusal of a Calderbank offer which is made on grounds that are later confirmed by a Court decision, will prima facie lead to increased costs consequences for the party who refuses the offer, in the absence of any other relevant circumstances.  Alternatively, that in such a situation, the Court is entitled to conclude that the refusal was unreasonable and thus that increased costs are justified.

[6] Health Waikato Ltd v Elmsly (2004) 17 PRNZ 16 (CA).

[7] Moore v McNabb (2005) 18 PRNZ 127 (CA).

[8] Memorandum of counsel for the plaintiff in reply, at para 11.

[17]     For my part, I agree with Clifford J in Oceania Furniture Ltd v Debonaire

Products Ltd,[9] where His Honour said:

In my view a successful Calderbank offer does not in and of itself give rise to an entitlement to indemnity or increased costs.   Any such entitlement depends  upon  the  separate  provisions  in  r 14.6.    In  my  judgment,  that conclusion is confirmed by the provision of r 14.11(2)(b), which provides that the entitlement under r 14.11(3) “do not limit rule 14.6 or rule 14.7”.  I think  that  makes  clear  that  the  costs  a  party  may  be  entitled  to  under r 14.11(3) are scale costs, but that such a party may also apply for indemnity costs in appropriate circumstances.

[9] Oceania Furniture Ltd v Debonaire Products Ltd HC Wellington CIV-2008-485-1701, 16 September 2010 at [41].

[18]     I assess this case against the following findings:

(a)      I retain a discretion as to the awarding of costs notwithstanding the making of the Calderbank offer;

(b)      There  are  good  policy  reasons  why  the  making  of  a  successful

Calderbank offer will generally lead to an award of increased costs;

(c)      The Calderbank offer, if accepted, would have required the defendant to relinquish about 95% of its claim for income tax.  My inquiry as to the reasonableness of the defendant rejecting the Calderbank offer must focus on the time when the offer was rejected.   At that time, following the comprehensive assessment and adjudication process which the parties had undergone, the defendant had been confirmed in its position.  It would be quite unrealistic to find that the defendant’s rejection of the Calderbank offer was unreasonable;

(d)The  defendant  did  not,  by  its  rejection  of  the  Calderbank  offer, contribute unnecessarily to the time or expense of the proceeding.[10]

[10] Rule 14(3)(b).

[19]     In my view, the making of a very small Calderbank offer, one which bears little or no relation to the quantum of the sum sought, should not engage the policy considerations discussed in cases such as Health Waikato Ltd v Elmsly and Moore v McNabb.   Instead, the case for an uplift should be determined by the other considerations set out in r 14.6.

[20]     In this case, I considered, and the plaintiff has not argued to the contrary, that the other provisions of r 14.6 did not call for an uplift.

[21]     In all these circumstances I confirm my order that the plaintiff is entitled to costs and that these are to be calculated on a 2B basis.

Brewer J