Court costs when using employed lawyers – return to status quo ante
6 Aug 2019
In Commissioner of Inland Revenue v New Orleans Hotel (2011) Ltd, Associate Judge Matthews of the High Court held that a party represented by an employed lawyer was not entitled to recover court costs (for further details please see "No costs entitlement without lawyer's invoice – parties using in-house lawyers lose entitlement to costs").(1) The judge considered that he was bound by the Court of Appeal's decision in Joint Action Funding Ltd v Eichelbaum, which held that a lawyerlitigant was not entitled to costs as no costs had actually been incurred.(2)
New Orleans Hotel would have had serious consequences for organisations and companies that are commonly represented by employed lawyers. Many of these entities are public organisations, and the change would have led to an increased financial burden on taxpayers and ratepayers as the organisations would have had to elect either to use outside counsel (usually at a higher than internal cost) in order to recover some costs, or to receive no costs recovery if successful in the proceeding.
The position set out in Joint Action Funding (that lawyer-litigants are not entitled to costs) has since been overturned by the Supreme Court in McGuire v Secretary for Justice.(3)
Lawyer in person exception and employed lawyer rule
Before the Court of Appeal's decision in Joint Action Funding, the primary rule was that successful litigants in person were entitled to recover disbursements but not costs. However, litigants in person who were also lawyers could recover costs, contrary to the primary rule (the lawyer in person
exception). Parties that were represented by lawyers who were employed by that party could also recover costs (the employed lawyer rule).
In Joint Action Funding, the Court of Appeal applied a general principle contained in Rule 14.2 of the High Court Rules that "an award of costs should not exceed the costs incurred by the party claiming costs" to mean that a party could claim legal costs only of the kind billed by a lawyer retained by a party-litigant for legal services provided by the lawyer to that litigant,(4) with the result that a lawyer-litigant, who would not have been billed for their own services, would have no claim to costs. This has since been referred to as the 'invoice required approach'.(5)
In New Orleans Hotel, the judge followed Joint Action Funding and declined to award costs to the commissioner, who had been represented by an employed lawyer. The judge held that there appeared to be no principled basis on which the rules could bear one interpretation in the context of a lawyer-litigant and a different interpretation in the context of an employed lawyer. Accordingly, the judge found that he had no alternative but to decline to award costs, despite earlier longstanding authority to the contrary.(6)
McGuire v Secretary for Justice
In 2013 Mr McGuire, a lawyer, successfully defended a strike-out application by the secretary for justice in the course of a judicial review claim that he had brought against the secretary. McGuire represented himself. Although successful, the High Court awarded McGuire only his disbursements and not his costs.(7) No reasons were given for the refusal to award costs, despite the fact that it contrasted to the then accepted position (the decision being before the Court of Appeal's decision in Joint Action Funding, referred to above).
Both parties appealed to the Court of Appeal. The secretary was successful in the Court of Appeal. As a result, McGuire's cross-appeal against the refusal to award costs was moot.(8) McGuire appealed to the Supreme Court. The New Zealand Law Society and the New Zealand Bar Association were given leave to appear as interveners on the costs issue. Although the Supreme Court dismissed McGuire's appeal on the substantive issue, the court nonetheless went on to consider his appeal on the costs issue and the correctness of Joint Action Funding. The court unanimously held that Joint Action Funding had been wrongly decided, although Justice Ellen France wrote separately on the costs issue.
The decision of the majority of the Supreme Court, delivered by Justice William Young, was that the analysis undertaken in Joint Action Funding had been incomplete. The majority reasoned that it was unclear that the Court of Appeal would have adopted the invoice required approach if it had reflected on the approach in the District Court Rules and Family Court Rules and considered the inconsistency between the invoice required approach and the employed lawyer rule.(9)
The majority noted that the current costs regime is substantially the same as that which came into effect in January 2000. Shortly after the introduction of those rules, the Rules Committee considered whether the primary rule remained appropriate. In 2002, the Rules Committee concluded that, if the primary rule were to be changed, such a change should be effected by legislation.(10)
The Supreme Court unanimously considered that the general principle expressed in the rules – namely, that "an award of costs should not exceed the costs incurred by the party claiming costs" – was merely a restatement of a longstanding principle and was not intended to effect a departure from the prior position.(11) Accordingly, the Supreme Court held that, if there were to be a reform of the law as it stood before Joint Action Funding, the reform should be through legislature, or possibly the Rules Committee, following proper consultation. In the meantime, the primary rule, the lawyer in person exception and the employed lawyer rule should continue to be applied.(12)
Appeal of New Orleans Hotel
Following the Supreme Court's decision in McGuire, the commissioner of inland revenue appealed the decision not to award costs in New Orleans Hotel. The Court of Appeal subsequently allowed the appeal by consent.(13)
The certainty created by the Supreme Court's return to the pre-Joint Action Funding position will be a relief to lawyer-litigants and organisations that are regularly represented in court by employed lawyers alike. However, the intervening decisions indicate that the days of the status quo may be numbered – in particular, the differential treatment of lawyer-litigants and lay-litigants.
In McGuire none of the parties represented before the Supreme Court sought to uphold the entirety of the position as it was before Joint Action Funding. However, there was disagreement between the parties as to whether it is the lawyer in person exception that must be abandoned or the primary rule itself.
Therefore, although there has been general support for the need for reform, the precise nature of this remains uncertain.
For further information on this topic please contact Natalie Foster at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]). The Wilson Harle website can be accessed at www.wilsonharle.com.
(1) Commissioner of Inland Revenue v New Orleans Hotel (2011) Ltd  NZHC 971, (2018) 28 NZTC 23-058.
(2) Joint Action Funding Ltd v Eichelbaum  NZCA 249,  2 NZLR 70.
(3) McGuire v Secretary for Justice  NZSC 116,  1 NZLR 335.
(4) Joint Action Funding Ltd v Eichelbaum  NZCA 249,  2 NZLR 70 at .
(5) McGuire v Secretary for Justice  NZSC 116,  1 NZLR 335 at .
(6) At [18-19].
(7) McGuire v Secretary for Justice  NZHC 365.
(8) McGuire v Secretary for Justice  NZCA 37,  3 NZLR 71.
(9) At .
(10) At .
(11) At  and .
(12) At .
(13) Commissioner of Inland Revenue v New Orleans Hotel (2011) Ltd  NZCA 4, (2019) 29 NZTC 24-002.