Lin v Commissioner of Inland Revenue

[2017] NZHC 1548

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-2267 [2017] NZHC 1548

IN THE MATTER

of Part VIIIA, Tax Administration Act

1994

BETWEEN

PATTY TZU CHOU LIN Plaintiff

AND

COMMISSIONER OF INLAND REVENUE

Defendant

On the papers
Counsel:	G D Clews and S J Davies for Plaintiff M Deligiannis and J Cheng for Defendant
Judgment:	6 July 2017

JUDGMENT OF THOMAS J (COSTS)

This judgment was delivered by me on 6 July 2017 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:………………………….

Solicitors:

Simpson Western, Auckland for Plaintiff

Crown Law, Wellington for Defendant

LIN v COMMISSIONER OF INLAND REVENUE [2017] NZHC 1548 [6 July 2017]

Introduction

[1]      On 12 May 2017, I gave judgment for the plaintiff, Ms Lin, in her claim against the defendant, the Commissioner of Inland Revenue.1     The plaintiff now seeks costs on a category 3 basis of $92,070 plus disbursements of $24,374.30.  The calculation and allocation of costs is not agreed by the Commissioner.

[2]      Rule 14.2 of the High Court Rules 2016 sets out the principles applying to determination of costs as follows:

14.2     Principles applying to determination of costs

The following general principles apply to the determination of costs:

(a)       the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds:

(b)       an award of costs should reflect the complexity and significance of the proceeding:

(c)       costs should be assessed by applying the appropriate daily recovery rate to the time considered reasonable for each step reasonably required in relation to the proceeding or interlocutory application:

(d)       an appropriate daily recovery rate should normally be two-thirds of the daily rate considered reasonable in relation to the proceeding or interlocutory application:

(e)       what is an appropriate daily recovery rate and what is a reasonable time should not depend on the skill or experience of the solicitor or counsel involved or on the time actually spent by the solicitor or counsel involved or on the costs actually incurred by the party claiming costs:

(f)       an award of costs should not exceed the costs incurred by the party claiming costs:

(g)       so far as possible the determination of costs should be predictable and expeditious.

[3]      There are three areas of disagreement between the parties concerning:

(a)       the classification of the proceeding and whether it is category 2 or category 3;

1      Lin v Commissioner of Inland Revenue [2017] NZHC 969, (2017) 28 NZTC 23-016.

(b)      the increase of time band allocations from B to C for certain steps;

and

(c)       accountancy fees of $9,021.57 claimed as a disbursement.

Category 2 or category 3?

[4]      Rule 14.3 contemplates the categorisation of a proceeding at an early stage providing:

(2)       The court may at any time determine in advance a proceeding’s category, which applies to all subsequent determinations of costs in the proceeding, unless there are special reasons to the contrary.

[5]      On 29 February 2016, the parties filed a joint memorandum in advance of the first case management conference advising they considered the proceedings should be classified as category 2 for costs purposes.

[6]      The joint memorandum requested the Court to issue a Minute if satisfied with the content of the joint memorandum and excuse the parties from their appearance. The Court issued a Minute on 3 March 2016 but did not record an allocation of the costs category.  On this basis, the plaintiff says that no costs category has ever been assigned.

[7]      In those circumstances, Mr Clews, counsel for the plaintiff, submits the Court is now able appropriately to categorise the proceedings as category 3, saying the previous view of the parties regarding costs in the joint memorandum is irrelevant.

[8]      Category 3 is sought for the following reasons:

(a)       The proceedings were not of “average complexity” typically found in

category 2 proceedings.

(b)The proceedings were considerably complex.   They required the determination of a novel and difficult point of law, which included a thorough and detailed assessment of, inter alia:

(i)the double tax agreement between New Zealand and China relating to tax sparing credits for controlled foreign company income;

(ii)      New Zealand domestic law;

(iii)     New Zealand’s international tax policy and approach to double

tax agreements; and

(iv)the role and effect of the OECD and UN Model Conventions and Commentaries.

(c)      The  complexity  of  the  proceedings  was  further  illustrated  by  the Court’s request that both parties file supplementary submissions following the trial.

(d)The proceedings were significant, both in terms of the amount of money involved, and in terms of the precedential effect they will have on international jurisprudence concerning the interpretation and application of double tax agreements.   This is particularly so in circumstances where the issues had not previously been considered by courts in New Zealand or elsewhere.

(e)      As a result of the complexity and significance of the proceedings, both parties elected to engage counsel with specialist skill in tax law and with significant High Court experience.

(f)      As a result of the complexity and significance of the proceedings, both parties instructed senior tax experts to provide evidence at trial, and their diverging expert opinions required cross-examination.

(g)Complex    tax    cases    are    regularly    categorised    as    category   3 proceedings.2

[9]      In Mr Clews’ submission, even if the parties’ previous view were relevant, they understated the appropriate costs category and the Court is free to allocate the appropriate category at this stage.

[10]     In the submission of Ms Deligiannis on behalf of the Commissioner, any application  to  change the classification  should  be made at  the point when  it  is apparent the existing classification is not appropriate.  In this case the change was raised for the first time in the plaintiff’s costs submissions.

[11]     Ms Deligiannis refers to the comments of Venning J  in  Body Corporate

No 189855 v North Shore City Council (Costs):3

[4]       The onus is on the plaintiffs to satisfy the Court that special reasons can be made out that justify a change in category after trial.   What might constitute special reasons to the contrary or, more accurately, what might not constitute special reasons was considered by the Court in J L Tindall & Ors v Far North District Council (unreported HC AK CIV 2003-488-000135 25

May 2007).   In that case Winkelmann J referred to the earlier decision of

Capital Property Limited v Cook (HC AK CP 257-IM-02 3 February 2003)

where Fisher J said:

I accept that a costs categorisation of the kind made at a judicial conference ... does not bind subsequent courts (as to skill category see in particular Rule 48(2)) but it is at least persuasive.  There are policy reasons for not departing from a judicial prediction of that sort without good reason.  It can be expected that in choosing how to conduct the proceedings the parties will have been influenced by the advance indication as to the level at which costs would ultimately be addressed.

[5]       In the Tindall case Winkelmann J observed:

[10]      In circumstances where application for reallocation is made by a successful party after a lengthy trial and after judgment, the Court will scrutinise closely the special reasons relied upon for a

2      See for example Bag Investments Ltd v Commissioner of Inland Revenue (2000) 14 PRNZ 300; Musuku v  Commissioner of  Inland Revenue [2016] NZHC 934, (2016) 27 NZTC 22-052; Trustpower  Ltd  v  Commissioner  of  Inland  Revenue  [2014]  NZHC  3072;  and  Sovereign Assurance Co  Ltd  v  Commissioner of  Inland Revenue  [2012] NZHC 3573. See also the comments of Asher J in InterCity Group (NZ) Ltd v Nakedbus NZ Ltd [2014] NZHC 1299, (2014) 22 PRNZ 152 at [8].

3      Body Corporate No 189855 v North Shore City Council (Costs) HC Auckland CIV-2005-404-

5561, 2 October 2008.

retrospective reclassification. In this case, the only special reason relied upon is that a category 2 classification does not adequately reflect the complexity of the proceeding.

[11]     When a party is seeking a retrospective reclassification of entire proceedings at the point in time when judgment has been delivered, the fact that the skill classification initially determined for the proceedings is not adequate is unlikely to be itself a “special reason”.

[6]       I agree with that analysis.

[12]     The Commissioner does not appear to disagree with the plaintiff’s assessment of the factors as to why category 3 is appropriate, rather saying there is nothing to justify a change or which would amount to a special reason.  Ms Deligiannis points out that, at the time the categorisation had been agreed, the parties had exchanged the documents relevant to the dispute, being the notice of proposed adjustment and response, and were well aware of the legal issues.

[13]     I agree  with  Ms  Deligiannis  that  the  plaintiff is  effectively requesting  a change of the costs’ classification.  The fact the Associate Judge did not specifically refer to any classification in his Minute does not change the fact that the parties had agreed to category 2 and had put that in writing to the Court.   No change in the classification was signalled by the plaintiff prior to the hearing.

[14]     That said, I agree with the plaintiff’s characterisation of the proceedings as

complex for the reasons set out in paragraph [8] above.

[15]     The real issue is whether there are “special reasons” to justify post trial

re-categorisation of costs from category 2 to category 3.

[16]     In Mr Clews’ submission, the extent of complexities could not have been known at the time of the joint memorandum, and the exchange of the notice of proposed adjustment and response did not reveal the complexities.  Mr Clews says the complexities developed as the litigation progressed and the arguments developed considerably following the briefing of their experts.  Mr Clews says:

The experts’ views diverged in fundamental ways, which resulted in the parties making complex and challenging submissions.  The extent of those complexities was not previously known.

[17]     I  agree  with  Mr  Clews’  observation  about  the  context  of  Fisher  J’s observations in Capital Property Limited cited in Body Corporate No 189855, that is, costs categorisations are often important because the parties can be expected to be influenced as to their conduct of the proceedings in light of the costs allocation. Tindall, for instance, concerned a Council seeking costs against an unsuccessful plaintiff which were higher than an inadequate initial categorisation.   In that case, Winkelmann J considered the original costs’ categorisation had an influence on the proceedings to the extent that any change following the hearing would prejudice the

plaintiff.4    Such  concerns  do  not  apply  here.     It  is  not  contended  that  the

Commissioner’s conduct of these proceedings was influenced by the costs categorisation and indeed it would be very surprising were it so.  The Commissioner briefed a leading expert in the area and used senior tax counsel within Crown Law. There is no suggestion that the Commissioner’s defence of the proceedings was in any way dictated by costs considerations.

[18]     One of the fundamental principles applying to determination of costs is that the award should reflect the complexity and significance of the proceeding.   As already  observed,  the  Commissioner  does  not  challenge  the  plaintiff’s characterisation of the complexity or significance of the case.  In the usual course, and particularly in light of policy considerations, it is unlikely special reasons will be found where there is only a change of opinion regarding the adequacy of the initial categorisation.  However, in my assessment, the circumstances of this case and the way in which the proceedings developed do amount to special reasons.  Category 3 is therefore the appropriate costs category.

Increased time bands

[19]     There is no suggestion the parties agreed the time allocation to be band B in this case.  The plaintiff seeks band C in respect of preparation of briefs, preparation for hearing and supplementary submissions.

[20]     The  Commissioner  opposes  the  increase,  noting  there  was  no  factual evidence at the hearing and, given the only evidence was expert evidence from

Professor Elliffe, the Commissioner does not accept the plaintiff’s counsel was required to undertake significant attendances in  preparing his brief of evidence. Rather,   in   Ms   Deligiannis’  submission,   minimal   input   would   be   required. Ms Deligiannis also points out that the plaintiff’s principal counsel is an experienced tax barrister.

[21]     Mr Clews’ response is to note that he was required to correspond and meet with Professor Elliffe, review his expert evidence and test it against the strength of his propositions.  He says these attendances required skill arising from the specialist nature  of  Professor  Elliffe’s  evidence  and  the  complexity  of  the  proceedings. Mr Clews points out that the Rules do not provide for any weight to be placed on the experience of counsel when determining a costs award; rather the Rules provide that the appropriate daily recovery rate and what is a reasonable time should not depend

upon the skill or experience of counsel involved.5

[22]     The issue is whether a “comparatively large amount of time for the particular steps  is  considered  reasonable”,  in  which  case  band  C  should  be  allocated,  or whether a “normal amount of time is considered reasonable”, in which case band B should be allocated.

[23]     I am satisfied in the circumstances of this case, and accepting Mr Clews’ position, that a comparatively large amount of time would have been required for preparation of the expert brief and for the hearing.   However, I am not satisfied a comparatively large amount of time would have been required for the supplementary submissions as I consider, having fully prepared for the hearing, dealing with the supplementary submissions would have required the normal amount of time considered reasonable.

[24]     For  these  reasons,  band  C  is  allocated  for  preparation  of  briefs  and preparation for hearing.  Band B is allocated for all other matters.

Disbursements: accountancy fees

[25]     The Commissioner objects to the plaintiff ’s claim for the accountancy fees charged by her accountant.   The plaintiff claims them as a disbursement, being a necessary and reasonable expense paid by her specifically for the purposes of the proceedings.6    The fees concern the accountant’s attendances in assisting with the discovery phase, assisting with the chronology and facts and assisting counsel.

[26]     The fees do not fall under r 14.12(1)(b) and therefore need to be approved by this Court.  In addition, under r 14.12(2)(b)–(d), they must be specific to the conduct of the proceeding, reasonably necessary for the conduct of the proceeding and reasonable in amount.

[27]     I agree with the Commissioner’s approach that, given the plaintiff engaged counsel with specialist skill in tax law, and was represented by two counsel at the hearing, with a highly qualified expert, there was no need to have the assistance of a chartered accountant.  There was no evidence from him, and my analysis of the case did not involve any issues specifically related to the accountant’s expertise.  The fees are  not  a  disbursement  which  was  reasonably necessary for  the  conduct  of the proceedings. The fees are therefore not properly claimable as a disbursement.

Costs order

[28]     For the reasons given, the plaintiff is awarded costs on a category 3B basis, save that band C applies to preparation of briefs and preparation for hearing. Disbursements as claimed, with the exception of the accountancy fees, are awarded.

Thomas J