The vexed issue of court costs for in-house counsel
When is an in-house lawyer not the equal of external counsel?
In relation to claiming costs, when in-house counsel are undertaking litigation work on behalf of their employer... or so it is claimed.
What is happening in the Courts?
As noted in both LawPoints and the Insider last month leave has been granted for the Supreme Court to consider the issue of whether lawyers who are litigants in person should be able to claim costs (on appeal from JJ McGuire v Secretary for Justice).
What is the aim of the appeal?
The appeal seeks to overturn the established ruling in Joint Action Funding v Eichelbaum [2017] NZCA 249 which concluded that costs mean "costs actually incurred", and more specifically to "costs billed by a lawyer retained by a party litigant for legal services provided by the lawyer to that litigant".
But why should this concern the in-house legal community?
The plot thickened in the later case of Commissioner of Inland Revenue v New Orleans Hotel where the High Court ruled that this same principle applied to in-house lawyers claiming costs for their employer. The High Court noted that since the in-house lawyer did not render a bill to the Commissioner of Inland Revenue (as he was in-house) there were no ‘costs actually incurred’.
While the High Court in this case acknowledged the distinction between the self representation in Joint Action and the situation in this case, the Court nonetheless concluded that the principles set down in the earlier Joint Action and McGuire cases should be followed and declined to allow costs.
What is the impact of this decision?
In one foul swoop we believe the ruling created an unreasonable, and potentially untenable, situation for organisations who employ in-house counsel for litigation by effectively creating two classes of lawyer in relation to litigation:
1. In-house counsel employed to conduct litigation on behalf of their employer whose costs cannot be claimed as they cannot ‘render a bill’ and so have not ‘incurred costs’.
2. External counsel retained by the employer company or institution whose costs can be demonstrated as ‘actually incurred’.
The end result effectively diminishes the value of in-house counsel in comparison to external counsel based only on their employment status. As a consequence even in cases where in-house counsel may be qualified and possibly more effective to litigate on behalf of their employer, employers may instead opt to engage external counsel solely due to the ability to recover costs if successful.
What action has ILANZ taken on behalf of its members?
ILANZ contributed to the NZLS submission to the Supreme Court on the McGuire case. ILANZ argued on behalf of its members that the current approach is unreasonable. We asserted that a distinction should be drawn between self-representation (where there is inherently a personal interest in the outcome) and the case where an employer simply chooses to use its internal counsel as a viable alternative to external counsel. We also noted that as judges have taken varying approaches in this matter, a more sustainable change may require amendments to the High Court Rules.
What is the ILANZ rationale?
Our primary grounds for this view is a belief that the use of in-house counsel is a legitimate economic choice for employers. We assert that it seems unreasonable for the High Court rules to be interpreted in a way that penalises an employer for what is essentially a commercial decision. An employer should have commercial discretion to choose the legal representation that best meets its budget and represents its interests. The current Court approach of following the McGuire decision, has the effect of limiting commercial choices on how to best source legal services for litigation.
How common is the use of in-house counsel to litigate for their employer?
The steady rise in the number of in-house lawyers (around 22 per cent of the legal profession) and anecdotal reports would indicate this practice is becoming more rather than less common.
Is the cost issue the key factor in choosing in-house to litigate vs external counsel?
ILANZ does not think so. We consider that the choice to use in-house lawyers is not based on incurring an ‘actual’ cost (use of external counsel) versus no ‘actual’ cost (use of internal resources). Instead, the decision factor at large is the option of the employer to have a choice between two equally legitimate sourcing models for legal services.
The reasons for using internal resources may include a reduction in the time taken to prepare for matters, a lower overall cost of litigation due to the elimination of hourly billing, and better risk management due to institutional knowledge of in-house counsel.
Is the use of In-House lawyers to litigate actually ‘cost free’?
It is clear that the use of in-house counsel is not a cost free exercise. As noted in the New Orleans case there is longstanding authority (Henderson Borough Counsel v Auckland Regional Authority [1984] 1 NZLR 16) that costs may be awarded in respect of litigation where the successful party is represented by in-house lawyers. In that case it was expressly noted that at the very least the use of in-house counsel incurs the cost of the salary for that employee.
ILANZ submits that all litigants that employ in-house lawyers will, in addition to the salary costs, incur a wider set of costs including general overheads such as accommodation, technology, and administration. Fundamentally we argue that these are costs directly incurred in relation to the litigation and as such they should be recoverable.
A summary of the ILANZ view
ILANZ submits that:
- If the Court elects to expressly prohibit the recovery of any element of costs of an in-house lawyer who litigates on behalf of its employer, this has the effect of removing an employer’s right to procure the legal services that best meets its needs
- The Court should therefore permit the recovery of in-house costs, including employer overheads
- If not, there could be a resulting effect that an in-house litigator is not a viable or recognised legal services model
- This could result in a perception that an in-house litigator is a ‘second tier’ or ‘second choice’ of legal services provider for litigation regardless of ability or success rates.
- That the in-house profession has a recognised, independent standing as a distinct section of the legal profession and its offering as a commercially viable legal services choice should be recognised by the Court to evolve and keep pace with the evolution of our section of the profession.
We will watch this space with interest and keep working on your behalf!