Adcock & Devir v Marlborough District Council (Decision).doc (rp)

• Jurisdiction: New Zealand
• Judge: Judge FWM McElrea
• Judgment Date: 16 February 2011
• Neutral Citation: [2010] NZEnvC 35
• Date: 16 February 2011
• Court: Environment Court

In the Matter of an appeal under Section 120 of the Resource Management Act 1991 (the Act)

Between

Paul Leslie Adcock & Nicola Maydevir (ENV-2008-CHC-000211)

Appellants

and

Marlborough Council District

Respondent

Decision No. [2010] NZEnvC 35

Court:

Alternate Environment Judge FWM McElrea, sitting alone pursuant to Section 279 of the Act

BEFORE THE ENVIRONMENT COURT

Costs award and quantum in favour of the successful respondent Council in appeal proceedings — whether when fixing costs Court should exclude GST from the equation in considering amount of costs incurred by the successful party — whether GST ought to be payable by the losing party where there is no evidence or agreement in respect of the tax position of recipient of costs award — the appropriate quantum of costs in subdivision appeal cases.

Counsel:

Ms M J Radich for respondent (applicant for costs)

Mr D J Clark for the appellants (respondent on costs)

COSTS DECISION OF THE ENVIRONMENT COURT

Result: The appellants are to pay the respondent costs in the sum of $12,250

REASONS FOR THE DECISION

Introduction

1 Marlborough District Council is the applicant in respect of costs but also the respondent to the appellants' appeal, and so to avoid confusion is referred to in this decision as “the Council”. The appellants are referred to simply by that title.

2 By a reserved decision given on 6 September 2010, the Court dismissed the appellants' appeal against the Council's decision declining subdivision consent in respect an 8 ha property at Godfrey Rd, Renwick, near Blenheim. The land was owned by the parents of one of the appellants (Mr Adcock) and the appellants had built a second dwelling on the parents' land, after getting a resource consent to construct the same as “a family flat”. Having obtained that resource consent and while the dwelling was still under construction, they applied for a resource consent to subdivide off the new dwelling with a small parcel of land in one corner of the parent lot. The Court upheld the Council's decision to decline consent.

3 Costs in this case are sought primarily on the basis that costs are always at the discretion of the Court, but that where a party has been unsuccessful at first instance and on appeal — as was the case here — that party is “more vulnerable to an award of costs”. 1 Mr Clark for the appellants did not dispute that proposition or attempt to argue that there should be no award of costs, but rather sought to limit any costs award to the sum of $7,500.

4 The Council seeks an award in the sum of $13,000, being a fraction under 50% of legal costs actually incurred in the appeal after excluding costs relating to mediation. There was no dispute by Mr Clark with the quantum of costs incurred, except to argue that:

[a] $3,100 + GST appears to have been expended in relation to the appellants' application for a preliminary decision;

[b] GST should be excluded from costs, which would reduce the claim to $11,804.16.

I start with this last point.

GST in relation to costs orders

5 Ms Radich argues that there is no basis for the submission that GST should be excluded from the Council's claim. She cites a 1999 decision of Judge Bollard to the effect that where the Court decides to take into account the amount of costs actually incurred, the appropriate figure to use for that purpose is the amount actually payable by that party, including GST where applicable. 2

6 Given that the Environment Court is now more regularly looking to the High Court or District Court scales of costs as a guide as to quantum, cases decided under those Scales of Costs are also relevant. I refer to the first case cited at para HCR14.2.11 of Sim's Court Practice, namely Burroughs v Rental Space Ltd 3 where Chambers J, having conferred with Rodney Hansen J and with Fisher J (then Chair of the Rules Committee) stated:

Costs between parties are GST neutral. The losing party when required to make a contribution towards the successful party's costs is not paying for a service provided to it by the successful party or its lawyers.

7 While that is undoubtedly correct, a comment and two qualifications must follow:

[a] What is stated is not inconsistent with what was said by Judge Bollard in 1999.

[b] The High Court has subsequently, when ordering indemnity costs, excluded the GST portion of the parties' legal costs on the basis that the recipient was GST registered and would have claimed an input credit in respect of costs paid to its lawyers, so that a recovery of the GST portion “would represent an over recovery”; 4 and

[c] It would follow from the dictum of Chambers J that a party ordered to pay costs is not able to deduct those costs for GST purposes if it is GST registered — because it is not “paying for a service provided to it by the successful party or its lawyers”. On the other hand, Winkelmann J must be right in saying that a party who is GST registered and has deducted its legal costs as an input for GST purposes as they are incurred, would be over-

recovering if it received back all of its costs paid. By analogy, if the Court was seeking to award a particular proportion of costs to a GST-registered party, eg one-half, it would have to deduct the GST component to avoid an over-recovery of that proportion. (This however assumes that costs recovered by the Council are not themselves subject to GST.)

8 This leads me to conclude that when costs are sought it is helpful, and may be necessary, for the Court to know whether the party claiming costs is GST-registered, and whether it has claimed or will be claiming the costs incurred as an input (or if not, why not). Because this aspect had not been fully argued by counsel I issued a draft of this decision, with paras 1 to 7 exactly as set out above but without the last sentence of para 7, which has now been added. The Registrar then asked for counsel's comments on this and one other aspect of the draft, and I have now considered those further submissions.

9 In essence, Ms Radich for the Council advises (based on the Council's tax specialist's advice) that any sum of costs recovered by the Council will itself be subject to a liability to the IRD for an output tax under the GST regime of one-ninth. This would mean that the assumption that there would be an over-recovery by the Council is incorrect.

10 On behalf of the appellants Mr Clark submits that the view advanced for the Council “is not supported by any identified provision in the GST Act, any GST guide, or any IRD publication and appears contrary to case law on the issue”. 5 Mr Clark cites one case only, Signature Carpet Distributors Ltd v Shaw Carpets Ltd (High Court, Auckland, CP.265/94, 30 April 1998, Giles J) where the point is obiter as costs ended up being reserved. However at page 4 Giles J suggests that where the successful party is GST registered, “it would not be right for the GST liability to have any influence on the “reasonable contribution” [to be awarded] because the GST registered party will be making a full recovery in any event.”

11 At this point it seems to me that Giles J is making the same assumption as lies behind the observation of Winkelmann J in Suttie v Bridgeeorp Limited, 6 namely that there would be an over-recovery by the successful party, as they would have obtained a credit from IRD for the cost of their legal expenses, and the costs award itself is not

taxable 1 This latter premise is not stated in either judgment but is implicit in the reasons given. It is explicit in discussions of “the rule in Gourley's case”, dealing with the incidence of tax in damages awards. In that case, 8 the House of Lords held that in calculating damages for loss of earnings in a tortious claim, the income tax that would have been payable by the claimant must be taken into account. As is noted in McGregor on Damages, 9 is a prerequisite of this result that the damages received are not themselves taxable as income — which was agreed to be so in that case. There is some parallel between costs and tortious damages as both can involve an attempt to compensate another party for losses or expenses incurred

12 In any event, what Ms Radich seeks to do is to challenge that assumption by referring to advice given to the Council by its tax adviser. If that adviser is a specialist legal practitioner, then of course a submission in the name of that person could be proffered with detailed reasoning supported by statutory and case law sources. If that person is a specialist accountant, then with the leave of the Court expert evidence could be received from him/her and from any opposing expert. Perhaps because of the small difference it will make in dollar terms in this case, neither course has been followed by the Council. Mr Clark clearly does not accept the GST position as stated by Ms Radich — ie that the Council will have to pay GST “output tax” to the IRD on costs received. This Court will have to leave the point to be decided in a case where expert evidence and/or detailed submissions on the output tax point are proffered, in the meantime falling back on general principle.

13 What then are the general principles on which I should proceed? As I presently see it, the legal position can be summarised as follows:

(a) GST is not to be added to costs awarded, as “the losing party … is not paying for a service provided to it by the successful party or its lawyers”, to use the words of Chambers J in a slightly different context. 10

(b) Where indemnity costs are awarded, it will be relevant to know whether the successful party is GST-registered and whether any costs reimbursed will themselves give rise to a liability to pay...