Indemnity costs awarded
2010 case note - shows that the CIR when faced with ill-conceived or unmeritorious litigation may apply and can be successful in seeking indemnity costs.
Income Tax Acts, High Court Rules
The Commissioner was awarded indemnity costs following an unsuccessful judicial review application by the taxpayer.
Impact of decision
The case illustrates that the Commissioner, when faced with ill-conceived or unmeritorious litigation, may apply and can be successful in seeking indemnity costs.
After an unsuccessful High Court challenge (Accent Management Ltd & Ors v Commissioner of Inland Revenue (2005) 22 NZTC 19,027 ("Trinity")) of the Commissioner's assessments relating to its 1997 and 1998 income tax years, and subsequent unsuccessful appeals to the Court of Appeal (Accent Management Ltd & Ors v Commissioner of Inland Revenue (2007) 23 NZTC 21,323 (CA) ) and the Supreme Court (Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue  2 NZLR 289 (SC)), Accent Management Ltd ("Accent") applied for a judicial review of the validity of those same assessments.
In response, the Commissioner applied for a strike-out of Accent's judicial review proceeding together with an application for an order for indemnity costs.
On 12 March 2010, the High Court (Keane J) struck out Accent's judicial review proceeding on the basis that it was an abuse of process and asked both parties for their submissions on the issue of indemnity costs (Accent Management Limited v The Commissioner of Inland Revenue HC AK CIV 2008-404-8649 12 March 2010).
The Commissioner's submissions
The Commissioner submitted that indemnity costs were appropriate because Accent's judicial review proceeding was "manifestly wholly unmeritorious as a matter of law", and had been pursued with the ulterior motive to frustrate, or at least delay, Accent's tax liability crystallising in accord with Ben Nevis Forestry Ventures Ltd v CIR.
Accent submitted that indemnity costs were not appropriate because it had not acted vexatiously, frivolously, improperly or unnecessarily; was not culpable of flagrant misconduct; had not acted either badly or very unreasonably, or with an ulterior motive.
It was further submitted that no safe conclusions could be made about Accent's conduct "in the absence of a complete and thorough review of the evidence in the challenge proceedings".
Before reaching its conclusion on the indemnity costs issue, the High Court provided an overview of the three types of costs and the circumstances in which they could be awarded.
In relation to indemnity costs, the High Court confirmed that, pursuant to High Court Rules (HCR) 14.6(4)(a), indemnity costs "are to be imposed only, in the main, where a party has acted ‘vexatiously, frivolously, improperly or unnecessarily in commencing, continuing or defending a proceeding or a step in a proceeding'". The High Court went on to say, citing the Court of Appeal's formulation of different cost types in Bradbury v Westpac Banking Corp  3 NZLR 4, that indemnity costs could be ordered where a party "has behaved either badly or very unreasonably".
To determine whether Accent had acted in a way that warranted an award of indemnity costs, the High Court asked itself two questions. Firstly, whether the case was hopeless from its inception, and secondly whether the party should have known that to be so (Bradbury v Westpac Banking Corp).
The High Court concluded, as it had in its earlier strike-out judgment (Accent Management Limited v The Commissioner of Inland Revenue HC AK CIV 2008-404-8649 12 March 2010), that Accent's judicial review proceeding was "wholly unmeritorious and self evidently so from the outset". This was because Accent was advancing the same argument that had been rejected by the Supreme Court; that argument being radically different from the argument that Accent had advanced in the High Court and Court of Appeal previously.
Furthermore, the High Court decided that Accent could not say that the Commissioner hade made his assessments dishonestly or defectively, and that in reality, the judicial review proceeding was a "collateral attack on the assessments and decisions adverse to it" and as such, was an abuse of process.
The High Court chose not to speculate as to Accent's purpose or whether Accent had an ulterior motive in seeking judicial review because the self-evidently, wholly unmeritorious judicial review proceeding justified indemnity costs in any case.