New Zealand: Court of Appeal revisits the lawyer-litigant exception in costs

Last Updated: 22 August 2017
Article by Shane Campbell

Introduction

It has long been held that a litigant appearing in person is not entitled to recover costs, save for exceptional cases (see for example Commissioner of Inland Revenue v Chesterfields Preschoolds Ltd [2010] NZCA 400 at [162]).

There was an equally longstanding exception to the above principle that a lawyer appearing in person (i.e. a lay litigant, save that he or she holds a practicing certificate) is entitled to recover his or her costs. In Joint Action Funding Limited v Eichelbaum [2017] NZCA 249 [JAFL v E] this dichotomy was explained as follows (citations omitted):

[2] Although a litigant in person in New Zealand is not entitled to recover costs except in exceptional cases, there is a long recognised exception that a practicing barrister and solicitor who brings or defends a proceeding in person is entitled to the same costs as when acting on behalf of a client (the lawyer-litigant exception).

On 14 June 2017 the Court of Appeal in JAFL v E released a decision which held that the lawyer-litigant exception is not justifiable under the specific costs rules now in place. A long-standing rule was thereby abolished which could have significant ramifications for the legal profession which has organised its affairs in accordance with the rule. In so holding the Court of Appeal held as follows:

[58] We consider that the lawyer-litigant exception is inconsistent with the text of pt 14 of the High Court Rules and its retention would undermine the objectives of the current costs rules to a significant degree. We cannot discern anything in the purpose of the costs rules which counters that view. Consequently, we conclude that the lawyer-litigant exception should no longer apply in New Zealand.

This article will summarise the rationale of the Court of Appeal's decision and provide brief comment on its implications moving forward.

The Court of Appeal's decision

Origins

The Court of Appeal commenced its judgment with a discussion of the origin of the lawyer-litigant exception (at [4]–[9]). The origins and underpinning policy considerations can be summarised:

  1. The point of departure for New Zealand is the decision of the Court of Appeal in Brownie Willis v Shrimpton [1998] 2 NZLR 320 (CA) at 327 which affirmed the exception.
  2. The rationale for the exception is an amalgam of the following:
  1. In the event the exception was not upheld, it is likely that a solicitor would simply employ another solicitor to thereby incur the costs that may then be recovered.
  2. Professional skill and labour (i.e. skill and labour of lawyers) can be measured by the law, but skill and labour of lay-persons cannot.
  3. It would be absurd to permit a solicitor to charge for work when done by another solicitor, but not when done by him/her or by a member of his or her practice.
  4. The exception is beneficial to the public because it permits the lawyer-litigant's opponent to get the benefit of certain deductions from the fee which is not otherwise incurred (i.e. the time involved in taking instructions from a client, because the lawyer is his or her own client).
  5. The question of the exception involves important matters of policy and practice, and is not really a matter that can be resolved by a court.

After reviewing the origins of the rule, the Court of Appeal commented that "the retention or otherwise of the exception ... is 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" (at [8]).

Australian position

The Court of Appeal next referred to a line of Australian authority which had questioned the lawyer-litigant exception and noted that the rationale of the exalted position solicitors occupied, in terms of costs was unconvincing and perhaps not logical (at [10]–[15]). Nonetheless, to date, the exception has remained intact, primarily because there was binding High Court authority holding that the exception remained, namely Guss v Veenhuizen [No 2] (1976) 136 CLR 47. The decision in Cachia v Hanes (1994) 179 CLR 403 at 411–413, which questioned the exception, was only obiter.

Therefore, despite many lower court decisions querying the status of the exception, it still remains in Australia. The Court of Appeal captured the "prevailing mood in Australia" by referring at para [15] to the following excerpt of the Law of Costs (G E Dal Pont Law of Costs (3rd ed, LexisNexis Butterworths, Chatswood (NSW), 2013) at [7.40]):

"The issue therefore awaits definitive High Court authority, but obiter remarks in Cachia v Hanes, coupled with the tenor of judicial statements to date, suggest that the Chorley exception is likely to have a limited lifespan."

English position

The position in England was that the exception remained until the mid-1970s, though the Court of Appeal noted that this was "without enthusiasm" (at [16]). There then followed a series of legislative and regulatory reforms which seemed to alter the position such that lawyer-litigants would be treated like any litigant-in-person (at [17], referring to the Litigants in Person (Costs and Expenses) Act 1975 (UK) and Civil Procedure Rules 1998 (UK), r 48.6).

Since those reforms, a practice direction was issued modifying the application of the rules. The practice direction was further followed by a decision of the English Court of Appeal that substantially restored the application of the exception (at [18]–[19]).

Approach of the Court

It is interesting to note that the Court of Appeal effectively engaged in its own research and review of materials when determining the dispute before it. The Court of Appeal expressly noted as follows (citations omitted and emphasis added):

[20] Against that backdrop, we turn to consider the position in New Zealand where the High Court Rules governing costs have changed since Brownie Wills. The appellant's written submission focussed primarily on the second and third issues, [32] and the respondent's submissions likewise engaged primarily with those contentions. Neither side's submissions explored in any depth the current costs rules and their implications for the first issue. Consequently, in order to address the purpose of the costs rules it has been necessary to undertake our own research on the travaux préparatoires in the form of the Rules Committee minutes.

Decision

The Court of Appeal approached its task as a purely interpretive exercise and noted that the current iteration of the costs rules (now found in the High Court Rules 2016) are substantially different from their more general predecessor (at [21]–[24]). The Court then analysed the current pt 14 of the High Court Rules and commented as follows:

  1. While the "overriding discretion concerning costs is preserved", seven general principles are stated in r 14.2 (at [25]). Rules 14.2(b)–(e) represent material differences from the predecessor regime (at [26]).
  2. Rule 14.2(f) is significant because it caps the amount of costs a party can claim by reference to the costs incurred by the party claiming costs (at [27]). The Court stated that this reflects the "long-standing principle that the function of an award of costs is a partial indemnity, not reward or ... punishment" (at [27]).
  3. While the word "costs" is not defined in the High Court Rules, it is used in the following two senses:
    1. In most instances the term refers to the monetary amount of an award which is made, either by application of the formulae in the rules, or by adjustment pursuant to the preserved discretion (at [30]).
    2. In three instances, the term is used in conjunction with the term "incurred" where a party in fact incurs costs by utilizing the services of a lawyer (at [31]–[32]).
  4. Two consequences flow from the above. First, costs are distinct from disbursements. Secondly, the reference to costs in r 14.2(f) means actual costs, meaning the costs actually incurred (see [33]–[34]).
  5. This led the court to consider whether the concept of costs actually incurred can extend to the "opportunity cost of time lost" by a lawyer doing work which, if for a client, they would have been paid for (at [35], citing Atlas Corporation Pty Ltd v Kalyk [2001] NSWCA 10 at [9]). Many cases have grappled with such an interpretive exercise, which invariably turns on the specific context of the case (at [36]). In the context of the High Court Rules the Court of Appeal stated as follows:
    1. We therefore consider that the natural meaning of the phrase "costs actually incurred", and thus "cost incurred", envisages invoices rendered for legal services provided by a legal practitioner to a litigant. We do not think that the phrase is apt to include a period of time spent in connection with litigation upon which some notional numerical value is placed, but which is not the subject of a bill of costs.
    2. We consider that, that interpretation gains support from the context of the costs rules, in particular the fifth general principle in r 14.2(e), which distinguishes between "the time actually spend by the solicitor or counsel involved" and "the costs actually incurred by the party claiming costs."...
    3. Consequently it is our conclusion 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.
    4. Because a lawyer-litigant who has no separate legal representation will not have a liability for such costs actually incurred, the effect of the sixth general principle in r 14.2(f) will be that no award of costs should be made in favour of such a party. In mathematical terms, a lawyer-litigant's "costs incurred" will be zero and hence no award of costs can be made.
    5. It follows that, in our view, the effect of r 14.2(f) is that the lawyer-litigant exception should no longer be available in New Zealand. ...

Having reached the view that the plain words of the High Court Rules lead to an interpretation that the lawyer-litigant exception cannot be sustained, the Court nonetheless cross-checked this analysis against the purpose of the rules (at [46]–[57]). In this respect the Court of Appeal remarked as follows:

  1. There is nothing in the purpose of the costs rules, as distilled from the minutes of the Rules Committee, which detracts from the conclusion the Court of Appeal reached from the plain words of the High Court Rules (at [48]–[49]). The Court stated that "[t]he most that can be said is that [the rules committee minutes are] not inconsistent with the meaning we have attributed to the text of the rules" (at [49]).
  2. Where a lawyer-litigant claims actual costs, this is inconsistent with the stated purpose of the High Court Rules that the determination of costs should be predictable and expeditious (at [50]–[51]). This is particularly so given that under the exception as currently framed, not all of a lawyer's costs are claimable in the litigation. The court of appeal framed the issue in these terms:
    1. ... In each case involving a lawyer-litigant, an inquiry would need to be undertaken either as to the extent of the litigation conduct for which the lawyer should be compensated, or in the assessment of the time expended as a measure of the lawyer's opportunity cost...
    2. The fact that such an exercise must be undertaken dilutes the predictability and expedition in the costs determination and hence tends to undermine the objective in r 14.2(g). We therefore consider that such a consequence tells against the retention of the lawyer-litigant exception in the new costs regime.

For the foregoing reasons the Court of Appeal reached the conclusion that the exception should no longer apply in New Zealand.

Comment

In terms of an exercise in statutory interpretation, it is difficult to take much objection to the process followed or the outcome reached. The only areas of uncertainty which were not addressed are as follows:

  1. The fact that at the time the Rules Committee were devising the new costs regime, the members were well aware of the exception and its criticisms. If it was meant to be abolished, this would have been done so expressly.
  2. The implications of the decision from a policy perspective. Notwithstanding the Court's interpretation of the High Court Rules, there is no examination of why a law firm is not entitled to alter the incidence of costs arising under a retainer by a contract for that purpose. The

    contractual element of costs in this respect is left somewhat uncertain, including the possibility of liquidated damages being included in a contract.

  3. How the decision will actually impact on the management and administration of a law firm. For example, it may be that costs shifting mechanisms will be utilized which ultimately impose a greater burden on the debtor. Such mechanisms could include the retention of external counsel, the use of litigation funding arrangements, or the sale of debt to third parties.

Only time will tell how the decision will impact both lawyers and clients.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Shane Campbell
 
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