No costs entitlement without lawyer's invoice – parties using in-house lawyers lose entitlement to costs
17 Jul 2018
Since 1983 it has been the position in New Zealand that a party can recover costs in cases where it has been represented by a lawyer that it employed. A recent decision by Associate Judge Matthews in the Christchurch High Court held that this is no longer the case.(1) The judge considered that he was bound by a 2017 Court of Appeal decision which had reversed the previously settled practice of successful 'lawyer-litigants' receiving awards of costs. The Court of Appeal decision had turned on the fact that such a party incurred no actual costs.
The decision will have a significant impact on entities, including national and local government bodies such as the commissioner of inland revenue and local councils, which are routinely represented in court proceedings by in-house lawyers.
Costs for in-house lawyers
In 1983 the Court of Appeal in Henderson Borough Council v Auckland Regional Authority held that a successful party that had been represented by a lawyer that it had employed (ie, an in-house lawyer) could recover costs because the time of a salaried employee had been occupied in conducting the litigation.(2)
Since then, it has been the consistent practice in New Zealand for certain entities, particularly national and local government bodies, to be represented in court by in-house lawyers and awarded costs when successful.
While a litigant in person may not be awarded costs for their time, an exception has long been applied in New Zealand in cases where the litigant in person is a practising barrister or solicitor who brings or defends the proceeding in person. In Joint Action Funding Ltd v Eichelbaum, the Court of Appeal considered whether it was appropriate to continue doing so. It held that the exception was not "truly a matter of practice but turns on the proper construction of the rules relating to costs as set out in the High Court Rules".(3)
The court noted that, under the High Court Rules, while costs are at the discretion of the court, seven general principles apply expressly.(4) These include a provision for costs to be calculated by multiplying a time allocation for each step of the litigation by the appropriate daily recovery rate.
Both the daily recovery rate and the time allocation vary depending on the complexity and significance of the proceeding and the circumstances applying to the step. Another express general principle is that "an award of costs should not exceed the costs incurred by the party claiming costs". (5)
The Court of Appeal held that the term 'costs' in this context means costs actually incurred by a party, not including disbursements and witness expenses. Such costs, the court held, took the form of invoices to a litigant for legal services and did not include time spent on litigation on which a
notional value could be placed, but for which no invoice was issued.(6) In summary, the court held that recoverable costs were "confined to legal costs billed by a lawyer retained by a party litigant for legal services provided by the lawyer to that litigant" and that continuing the practice of awarding costs to lawyer-litigants would undermine the objectives of the current costs rules to a significant extent.(7)
The conclusions reached in Joint Action Funding were later challenged unsuccessfully before a full bench of the Court of Appeal in McGuire v Secretary for Justice.(8) The full bench considered that it would not be appropriate to consider the findings of Joint Action Funding in any detail because the court's findings on the substantive appeal meant that the lawyer-litigant would not have been entitled to his costs in any event.(9) The court nevertheless observed that there was an "inherent tension" between policies which allow lawyers as one class of litigant in person to claim costs but deny costs to all other litigants in person.(10) The court recorded the submission of the New Zealand Law Society that:
- the decision in Joint Action Funding was correct; and
- the lawyer-litigant exception risked appearing self-serving and could undermine the public confidence in the legal profession and the administration of justice.(11)
Application of Joint Action Funding to costs claims for in-house lawyers
In Commissioner of Inland Revenue v New Orleans Hotel (2011) Ltd, the commissioner applied for liquidators to be appointed to the defendant company.(12) After a number of adjournments, full payment was made to the commissioner and the application was withdrawn. The commissioner, who had been represented throughout by a lawyer employed by the Inland Revenue Department, sought costs. The defendant argued that the Court of Appeal's decision in Joint Action Funding meant that no costs could be recovered where a party had been represented by an in-house lawyer as there had been no costs actually incurred.
The application of Joint Action Funding to representation by an in-house lawyer would be contrary to the previously accepted position and the Court of Appeal's earlier decision in Henderson Borough Council v Auckland Regional Authority. However, with regard to the Court of Appeal's conclusion in
Joint Action Funding, the judge held that "in the context of the current costs rules the proper meaning of the composite phrase 'costs actually incurred' is confined to legal costs billed by a lawyer retained by a party litigant for legal services provided by the lawyer to that litigant" applied outside the context of a lawyer-litigant. He considered that he thus had to apply Joint Action Funding in preference to the earlier Henderson decision. Such a course was justified because, in Henderson, the Court of Appeal had not undertaken any analysis of the then applicable costs rules. Those rules, unlike the current High Court Rules, contained no express limitation on awards of costs exceeding costs actually incurred.(13) The judge accordingly dismissed the Inland Revenue commissioner's application for costs.
The Inland Revenue Department has publicly announced its intention to appeal the decision. In another case, the question of costs has been deferred pending the outcome of an expected appeal. In the meantime, the decision is expected to have an impact on entities that employ in-house lawyers to
conduct litigation. In a recent media report, New Zealand's largest local authority, Auckland Council, indicated that, to save money, it uses its in-house legal team for 90% of the cases in which it appears. It also expressed concern that the decision would encourage litigation against the council as
litigants, in those cases, would face no risk of an adverse costs award.
The extension of the 'costs actually incurred' approach adopted in Joint Action Funding to representation by in-house lawyers is a logical application of the current costs rules. The basis for a principled exception to allow for awards of costs in respect of representation by in-house lawyers is not obvious, although there may be policy considerations which make it desirable. Many of the entities that are regularly represented by in-house lawyers are funded by taxes or rates. The decision means that they must choose between giving up their ability to claim costs and outsourcing legal services, increasing the financial burden on tax and rate payers.
(1) Commissioner of Inland Revenue v New Orleans (2011) Ltd  NZHC 971.
(2) Henderson Borough Council v Auckland Regional Authority  1 NZLR 16 (CA) at 23.
(3) Joint Action Funding Ltd v Eichelbaum  NZCA 249  2 NZLR 70 at .
(4) At .
(5) High Court Rules 2016, r 14.2(1)(f).
(6) At .
(7) At  and .
(8) McGuire v Secretary for Justice  NZCA 37.
(9) At .
(10) At .
(11) At .
(12) Commissioner of Inland Revenue v New Orleans (2011) Ltd  NZHC 971.
(13) At .