In Vaai v Moana Pacific Fisheries Ltd [2013] NZERA Auckland 510, a costs determination of the Employment Relations Authority involving a legally aided party, the Authority declined to make either an ‘exceptional circumstances’ costs order or a ‘but for legal aid’ order because of the aided person’s impecuniosity. This note examines the relevant statutory provisions, the Authority’s determination and leading case law, and suggests that the Authority was (a) right about the ‘exceptional circumstances’ costs order, and (b) wrong about the ‘but for legal aid’ order.

The statutory regime

The liability of a legally aided person for costs in civil proceedings is governed by s 45 of the Legal Services Act 2011 (LSA 2011). Section 45(6) aside (which concerns the liability of a next friend or guardian ad litem), the section provides:

• An aided person's liability for costs in civil proceedings “must not exceed an amount (if any) that is reasonable for the aided person to pay having regard to all the circumstances, including the means of all the parties and their conduct in connection with the dispute” (s 45(1)). (Hereafter referred to as the ‘reasonable to pay in the circumstances’ criterion for liability.)
• No order for costs may be made against the aided person “unless the court is satisfied that there are exceptional circumstances” (s 45(2)), which may include the (generally cost-increasing) types of conduct listed in s 45(3). If any such order for costs is made against the aided person, it “must specify the amount that the person would have been ordered to pay if this section had not affected that person's liability” (s 45(4)). (An ‘exceptional circumstances’ costs order.)
• If no order for costs is made against the aided person because of s 45, “an order may be made specifying what order for costs would have been made against that person with respect to the proceedings if this section had not affected that person's liability” (s 45(5)). (A ‘but for legal aid’ order.)

An ‘exceptional circumstances’ costs order under s 45(2)–(4) will specify an amount that the aided person is liable to pay personally and a ‘but for s 45’ amount. A ‘but for legal aid’ order under s 45(5) will specify only a ‘but for s 45’ amount. In both cases the party in whose favour the order is made can apply to the Legal Services Commissioner under s 46 for payment of “some or all of the difference between the costs (if any) actually awarded to that party against the aided person and those to which that party would have been entitled if section 45 had not affected the aided person’s liability” (s 46(2); see also s 46(1)). The details of the s 46 decision-making process are outlined in s 46(3)–(7).

The leading case on the liability of an aided person for costs is Laverty v Para Franchising Ltd [2006] 1 NZLR 650 (CA) (which was cited to and by the Authority in Vaai, and is discussed below).

The Vaai case

The employee V was granted legal aid in relation to a personal grievance claim (unjustifiable constructive dismissal). The Authority determined (in Vaai v Moana Pacific Fisheries Ltd [2013] NZERA Auckland 370) that V did not have a personal grievance. The employer then sought costs of $3,500, based on the daily tariff often applied by the Authority. (Actual costs were said to exceed $10,000.) The employer applied for an ‘exceptional circumstances’ costs order under s 45(2)–(4) of the LSA 2011, or alternatively a ‘but for legal aid’ order under s 45(5).

Regarding the prospect of an ‘exceptional circumstances’ costs order, the Authority briefly considered the leading case law (Laverty) on the meaning of “exceptional circumstances” and its applicability or not in the present case. However, the Authority was satisfied from the submissions received that V “has no ability whatever to make a contribution to the costs” of the employer, since “he has no obvious means of support, no assets, and has five dependent children” (at [16]; see also [9]). From this the Authority concluded: “The short point is that the Authority is not persuaded that Mr Vaai is in any financial position to make any contribution to costs in this matter” (at [20]). In other words, the Authority ruled out any costs order being made against V personally — which effectively ruled out any prospect of making an ‘exceptional circumstances’ costs order.

The Authority then turned to the alternative of making a ‘but for legal aid’ order and determined as follows:

“[20] … The next question is whether the Authority should fix costs on a but for basis in reliance on s 45(5) of the Legal Services Act 2001. That section applies where the Authority is satisfied that because of the fact of legal aid, no award of costs can be made.

“[21] The Authority has given earnest consideration to the question whether it can fix costs in reliance on that sub-section and concluded that it cannot. This is because the reason that the Authority has determined that no costs can reasonably be fixed in this matter is not because Mr Vaai is legally aided but because he is impecunious.

“[22] While the two may amount to the same thing in reality, it seems to the Authority that a proper construction of s 45(5) of the Legal Services Act 2011 is that the but for costs fixing is able to be made because of this section.

“[23] In the present case, the Authority's decision not to require Mr Vaai to make a contribution to the successful party's costs and therefore to allow costs to lie where they fall is based not on the fact that Mr Vaai was legally aided but, as the Authority has noted, on the fact that Mr Vaai is impecunious and is not in any position to make any contribution to costs whatever.”

So neither an ‘exceptional circumstances’ costs order nor a ‘but for legal aid’ order was made, and costs were left to lie where they fell.

Discussion

It is respectfully submitted that the Authority’s determination is right about the ‘exceptional circumstances’ costs order and wrong about the ‘but for legal aid’ order.

Impecuniosity can rule out ‘exceptional circumstances’ costs orders

The Authority’s determination uses V’s impecuniosity as a reason to rule out the making of an ‘exceptional circumstances’ costs order. It is submitted that this is correct under the statutory regime, because a finding of exceptional circumstances under s 45(2)–(3) is not the only requirement for the making of such an order. There is also the ‘reasonable to pay in the circumstances’ criterion under s 45(1). As the Authority notes, the “fundamental precept … is the principle that the costs liability … must not exceed an amount … that is reasonable for the aided person to pay having regard to all the circumstances” (at [15], quoting s 45(1)). So even if exceptional circumstances are found to be present, the circumstances of the aided person (in this case, “no obvious means of support, no assets, and … five dependent children”) can ‘trump’ the exceptional circumstances. This is not always recognised — sometimes in costs cases involving legal aid it appears that the focus is simply on whether or not exceptional circumstances are present, the apparent presumption being that this alone will determine the costs result. But such an approach overlooks the overarching principle in s 45(1).

So the Authority’s determination correctly highlights the ‘reasonable to pay in the circumstances’ criterion for any personal costs liability arising for an aided person, and accordingly it was open to the Authority to determine in this case that V’s impecuniosity ruled out the making of an ‘exceptional circumstances’ costs order.

Impecuniosity does not rule out, but rather enables, ‘but for legal aid’ orders

The Authority’s determination also uses V’s impecuniosity as a reason to rule out the making of a ‘but for legal aid’ order. The Authority reasoned that it was V’s impecuniosity alone, not his being legally aided, that made him unable “to make any contribution to costs” (at [20] and [23]). In the Authority’s view, this meant it was impecuniosity, not s 45, that was the operative factor — and “but for costs fixing is able to be made because of this section” (at [22], quoting s 45(5)). Hence s 45(5) did not apply in the Authority’s view, and no ‘but for legal aid’ order could be made.

However, this is to drive a wedge where none can be driven. Impecuniosity is what gave V legal aid in the first place and brought s 45 into play for costs purposes. Impecuniosity is why the ‘reasonable to pay in the circumstances’ criterion in s 45(1) ‘trumped’ any prospect of an ‘exceptional circumstances’ costs order under s 45(2)–(4). It cannot be that, despite this, impecuniosity is not related to s 45(5) as well — that it is impecuniosity alone, not impecuniosity and s 45, that is relevant to the issue of a ‘but for legal aid’ order under s 45(5). With respect, impecuniosity is precisely the reason why (the whole of) s 45 applies, and why (applying s 45(1)–(4)) no order for costs was made against V personally. Therefore impecuniosity is also the reason why (contrary to the Authority’s view) the opening words of s 45(5) do indeed apply (“If, because of this section, no order for costs is made against the aided person …”). Accordingly, the rest of s 45(5) applies as well, and the Authority (in its discretion under the subsection) could — and arguably should — have made a ‘but for legal aid’ order.

This is perhaps best explained by way of the following passage from the Court of Appeal in Laverty, which examines the rationale for (what was then) ss 40 and 41 of the Legal Services Act 2000 (now ss 45 and 46 of the LSA 2011 respectively):

“[19] Section 40 … facilitates access to legal services by restricting the amount of costs orders that the Courts may make against a legally aided person. Its effect is to reduce, although not to remove, the risk such a person otherwise faces that, despite having legal aid, if unsuccessful in the litigation, the person may be required to pay substantial costs despite having limited means. Without such protection the potential for such a costs order would deter persons of limited means from exercising their right of access to the Courts, even with the support of legal aid. To counter that disincentive, s 40 limits the circumstances in which a substantial order for costs can be made on normal cost principles against a litigant who has legal aid.

“[20] ... We agree that the means of an aided person will often be a circumstance relevant to a decision on what it is reasonable for an aided person to pay on an order for costs made under s 40 of the 2000 Act.

“[21] The corollary to the better access to legal services that legal aid provides is that the unaided opponent of a litigant granted legal aid can be put at a disadvantage in the conduct of the litigation. In Saunders (Executrix of the estate of Rose Maud Gallie (deceased)) v Anglia Building Society (formerly Northampton Town and County Building Society) (No 2) [1971] 1 All ER 243 at p 246, Lord Reid recognised this situation and the way in which legislatures have addressed it:

‘It seemed obvious to many people when the 1949 Act was passed that granting legal aid to one party would in many cases cause serious loss to his opponent if the opponent was not poor enough also to get legal aid. By means of legal aid unsuccessful actions would be brought which otherwise would never have been brought and the unaided defendant would have either to give in or to bear his own costs. Perhaps Parliament thought that legal aid would seldom be given to plaintiffs who failed to succeed or perhaps there were other reasons for not giving any relief. By 1964 it had become clear that the existing system was causing substantial injustice. In that year Parliament enacted provisions calculated to afford a limited degree of relief. A successful unassisted party was enabled to recover part or all of his costs from the legal aid fund, if certain conditions were satisfied.’

“[22] Section 41 is a provision of the kind that Lord Reid had in mind. It [provides] a further scheme of legal assistance. Under this scheme contributions are made from public funds to the costs of an unaided person who, but for the restraining effect of s 40, would have been entitled to a more substantial award of costs against the aided party. Parliament has sought, in enacting the two provisions, to achieve the twin purposes of securing access to justice for persons of limited means, while at the same time compensating, to the extent appropriate, part or all of the countervailing disadvantage thereby caused to unaided parties. In administering these provisions the Courts, and for that matter the Legal Aid Agency, must have due regard to these purposes.

“…

“[32] If s 40 has impacted on the amount of costs awarded, the Court will generally go on to specify the figure, or the higher figure, that the costs against the aided person would have been had the party concerned not been legally aided … . In that case the way is open for an application to the Legal Services Agency under s 41.”

(It should be noted that ss 45 and 46 of the LSA 2011 are not completely identical to ss 40 and 41 of the Legal Services Act 2000 as they were at the time of Laverty — some legislative changes were made in March 2007 and have been carried through to the current sections. But it is submitted that ss 45 and 46 are substantively similar in all respects that are relevant to the Court of Appeal’s comments above.)

So there are “twin purposes” to the statutory regime: (a) securing access to justice for persons of limited means; and (b) compensating for the countervailing disadvantage thereby caused to unaided parties. Impecuniosity is the very trigger for the statutory regime and its twin purposes. V’s impecuniosity was therefore completely relevant to the making of a ‘but for legal aid’ order under s 45(5), and the Authority was wrong to conclude otherwise.

Downstream implications for V?

What led the Authority to its conclusion? A possible (though purely speculative) explanation is that the Authority was concerned about the implications for V personally if a ‘but for legal aid’ order was made. As already noted, the Authority concluded from submissions that V was in dire financial straits. If the Authority considered that a ‘but for legal aid’ order might have some financial impact on V personally, then it would perhaps be natural to regard such an order as inappropriate. (For example, in a non-legal aid situation the Authority might invoke its equity and good conscience jurisdiction and limit an award of costs against an impecunious party, as discussed in Employment Law (online looseleaf ed, Brookers) at [ERSch3.19.06(2)].) In the present legal aid situation a similar concern to avoid a perceived financial impact on V might well lead to the novel approach to s 45(5) of the LSA 2011 taken the Authority, ie with a wedge driven between impecuniosity and a ‘but for legal aid’ order. That the Authority may well have had such a concern when considering whether to make a ‘but for legal aid’ order (at [20]–[23]) is suggested by its closing remarks on the issue:

“[23] In the present case, the Authority's decision not to require Mr Vaai to make a contribution to the successful party's costs and therefore to allow costs to lie where they fall is based not on the fact that Mr Vaai was legally aided but, as the Authority has noted, on the fact that Mr Vaai is impecunious and is not in any position to make any contribution to costs whatever.” (emphasis added)

If indeed the Authority was concerned about downstream implications for V, then it is respectfully submitted that such a concern was misplaced. It is certainly true that an ‘exceptional circumstances’ costs order under s 45(2)–(4) can have downstream implications for an aided person (in addition to the immediate personal liability for at least some costs). If the other party applies to the Legal Services Commissioner under s 46 for payment of the difference between the personal liability amount and the ‘but for s 45’ amount specified in an ‘exceptional circumstances’ costs order, and the Commissioner elects to pay all or some of that difference, then the Commissioner “may recover any payment made under this section from the aided person as a debt due to the Commissioner” (s 46(6)). However, it is important to read s 46(6) in full:

“(6) The Commissioner may recover any payment made under this section from the aided person as a debt due to the Commissioner, unless the payment relates to an order made under section 45(5).” (emphasis added)

In other words, a ‘but for legal aid’ order under s 45(5) is free from any downstream implications under s 46 for the aided person. Only an ‘exceptional circumstances’ costs order under s 45(2)–(4) has the potential to be revisited upon the aided person (presumably stemming from the prior court findings of exceptional circumstances and a financial position that is able to sustain at least some personal costs liability). In the case of a ‘but for legal aid’ order, however, only the other party and (if a s 46 application is made) the Legal Services Commissioner are involved downstream. (Perhaps the leading case on point is Para Franchising Ltd v Legal Aid Review Panel [2008] 2 NZLR 257 (HC), which concerned the ‘but for legal aid’ order made in Laverty.)

So if in Vaai the Authority was concerned about possible downstream implications arising for V personally from a ‘but for legal aid’ order under s 45(5), it need not have been.

Conclusion

V was legally aided, so for costs purposes ss 45 and 46 of the LSA 2011 applied. V was adjudged impecunious by the Authority. The usual effect of impecuniosity in relation to the “twin purposes” of ss 45 and 46 is that an ‘exceptional circumstances’ costs orders under s 45(2)–(4) is ruled out, and a ‘but for legal aid’ orders under s 45(5) is enabled (to facilitate a subsequent application by the other party to the Legal Services Commissioner under s 46). Therefore it is respectfully submitted that the Authority was (a) right to regard V’s impecuniosity as a reason for not making an ‘exceptional circumstances’ costs order, and (b) wrong to regard V’s impecuniosity as a reason for not making a ‘but for legal aid’ costs order.

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