AIR NEW ZEALAND LTD V E-GATEMATRIX NEW ZEALAND LTD & ORS HC AK CIV 2005-404-0215

AIR NEW ZEALAND LTD V E-GATEMATRIX NEW ZEALAND LTD & ORS HC AK CIV 2005-404-0215 20 March 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2005-404-0215BETWEEN AIR NEW ZEALAND LIMITED Plaintiff AND E-GATEMATRIX NEW ZEALAND LIMITED First Defendant AND JETLOGISTICS AG Second Defendant AND E-GATEMATRIX LLC Third Defendant Appearances: N. Gedye for Plaintiff B. Lobao for non-party Judgment: 20 March 2007 at 2pmCOST JUDGMENT OF ASSOCIATE JUDGE D.H. ABBOTTIn accordance with R540(4) I direct that the Registrar endorse this judgment with the delivery time of 2pm on 20 March 2007Solicitors: James Radcliffe, Air New Zealand Ltd, 29 Customs Street West, Auckland Phillips Fox, 209 Queen Street, Auckland[1] Kuehne + Nagel Limited (K+N) has applied for an order that the plaintiff, Air New Zealand Limited, indemnify it for expenses of $16,005 incurred in responding to an application for non-party discovery. Air New Zealand opposes the application. The matter is being decided on the opposing arguments set out in memoranda filed.Background[2] K+N is a freight forwarding company. For a number of years it provided freight services to the plaintiff, Air New Zealand Limited, as a subcontractor to the first defendant, E-Gatematrix New Zealand Limited. E-Gatematrix had an agreement with Air New Zealand to manage the inventory required for Air New Zealand's inflight services. [3] A dispute arose between Air New Zealand and E-Gatematrix over charges invoiced to Air New Zealand for freight services provided by K+N. The central issue in the dispute was whether E-Gatematrix was entitled to add a margin to these costs. Air New Zealand issued this proceeding on 21 January 2005. It claimed that addition of a margin was in breach of their agreement. It sought to recover the alleged overcharging. It also sought an order for the taking of accounts to determine what margins may have been added. [4] K+N was not joined as a party to the proceeding. [5] Air New Zealand subsequently (on 10 March 2005) applied under r 384 for an order for the making of an inquiry into whether E-Gatematrix had properly charged it for the freight services and for the taking of accounts as to any amount overcharged. That application was given a defended hearing date of 23 May 2005. The inquiry proposed was for an independent audit of the charges to be undertaken by a reputable firm of accountants. [6] As a consequence of that application, the Court did not make any orders in relation to discovery and inspection at the first case management conference on 15 March 2005. Instead it noted that discovery would need to await the outcome of theapplication for taking of accounts. That decision was no doubt based on the views of counsel for the parties set out in their joint memorandum for that conference:The scope and timetable for discovery and inspection will depend on whether the Court orders an inquiry under r 384 (see below). If an inquiry is ordered, discovery may be deferred pending the outcome of that inquiry.[7] On 7 April 2005 Air New Zealand applied for an order that K+N provide discovery of various documents relating to the services that K+N provided, and the charging for those services. These included the copies that K + N retained of freight invoices sent to E-Gatematrix and airway bills related to each invoice. [8] K+N filed notice of opposition and a supporting affidavit on 29 April 2005. [9] On 3 May 2005 (the day before the application for non-party discovery was to have its first call), counsel advised the Court there was a reasonable prospect of reaching agreement on access to K+N's documents (dependent on arrangements between Air New Zealand and E-Gatematrix then under discussion). The application was adjourned, with costs reserved. [10] The following day, counsel for the Air New Zealand and E-Gatematrix (and the other defendants) advised the Court that they were working towards an agreed position on the proposed order for an inquiry and asked that the scheduled hearing on 23 May 2005 be vacated as it was unlikely that an order would be required from the Court. [11] The proceeding was adjourned to a mention hearing on 3 June 2005. On 2 June 2005 counsel for all parties (plaintiff, defendants and non-party) filed a memorandum advising that the plaintiff and defendants were having settlement discussions, and as a consequence of that Air New Zealand was unlikely to pursue its application for non-party discovery, which would be withdrawn if settlement occurred. That is what eventuated. Air New Zealand withdrew its application on 9 September 2005 with costs reserved for determination on memoranda to be filed. Notice of discontinuance of the proceeding was filed on 6 November 2005.The application[12] Air New Zealand sought discovery of seven categories of documents related to freight movements between 28 October 1998 and 31 March 2005. The documents are set out in a schedule to the application:Schedule 11. All Kuehne+Nagel freight invoices sent to E-Gatematrix New Zealand Limited (E-Gate) and/or any Jetlogistics company for Air New Zealand inflight services freight movements between 28 October 1998 and 31 March 2005. 2. All air waybills related to each Kuehne+Nagel freight invoice noted in 1 above. 3. All rate schedules applied by Kuehne+Nagel for the movement of the above freight between 28 October 1998 and 31 March 2005 together with documentary evidence of when revisions to individual rates were applied. 4. All CASS Reports related to the movements noted in 1, 2 and 3 above. 5. Any correspondence or other document between Kuehne+Nagel and E-Gate and/or any Jetlogistics company as to the services to be supplied by Kuehne+Nagel for the movement of Air New Zealand inflight services freight including mechanisms for revisions to rates applied to the movement of Air New Zealand inflight services movements. 6. All documents in the possession, power or control of Kuehne+Nagel Limited relating to charging for any aspect of Air New Zealand inflight services freight movements from 28 October 1998 and the present time. 7. All contractual documents between Kuehne+Nagel Limited and E- Gate and/or any Jetlogistics company relevant to the provision of the services in 1 hereof.[13] The application was made in reliance on r 302 of the High Court Rules which reads:302 Order for particular discovery against non-party after proceeding commenced(1) This rule applies if it appears to the Court that a person who is not a party to a proceeding (the person) may be or may have been in the control of 1 or more documents or a group of documents that the person would have had to discover if the person were a party to the proceeding.(2) The Court may, on application, order the person— (a) to file an affidavit stating— (i) whether the documents are or have been in the person's control; and (ii) if they have been, but are no longer, in the person's control, the person's best knowledge and belief as to when they ceased to be in the person's control and who now has control of them; and (b) to serve the affidavit on a party or parties specified in the order. (3) An application for an order under subclause (2) must be made on notice to the person and to every other party who has filed an address for service. (4) The Court may not make an order under this rule unless satisfied that the order is necessary at the time when the order is made.[14] The grounds given for the application were that these were documents that K+N would have to discover if it were a party, an order was necessary at that time to enable Air New Zealand to establish facts relating to the charges rendered by K+N to it via E-Gatematrix, and the order was needed for the hearing of an interlocutory application by Air New Zealand for taking of accounts pursuant to r 384 of the High Court Rules. [15] K + N opposed the application on the grounds that Air New Zealand could obtain the documents in the usual course of discovery from E-Gatematrix, and compliance would impose onerous time and cost burdens on it. It also said that the orders should not be granted without requiring Air New Zealand to pay its full expenses both in responding to the application and in complying with any order made.Applicable principles[16] The Court's general discretion as to costs applies to the costs of an application under r 302: McGechan on Procedure HR 303.02. [17] That general discretion is set out in r 46 of the High Court Rules:46 Costs at discretion of Court(1) All matters relating to the costs of and incidental to a proceeding or a step in a proceeding are at the discretion of the Court.(2) Rules 47 to 48G apply subject to subclause (1). (3) This rule is subject to the provisions of any Act.The High Court Rules do not provide specifically for costs where an application for non-party discovery is made but later withdrawn, before being decided. [18] When an order for non-party discovery is made (emphasis added), the Court has an express discretion under r 303 to order the person seeking the discovery to pay the expenses of the non-party (including solicitor and client costs). These can be expenses incurred in responding to the application, or in complying with the order:303 ExpensesIf an order is made under rule 301(2) or rule 302(2), the Court may, if it thinks fit, order the applicant to pay to the person from whom discovery is sought the person's expenses (including solicitor and client costs) of and incidental to the application and in complying with any order made on the application.[19] Notwithstanding that r 303 expressly provides that it applies "if an order is made under r 302(2)" the factors which the Court takes into account when an order is made are also relevant to applications that do not proceed, namely whether opposition to it was reasonable, particularly having regard to the outcome, and the motivation for the opposition: Clear Communications v Telecom Corporation of NZ Ltd (1994) 8 PRNZ 200. [20] The circumstances in which the Court may order indemnity costs are set out r 48C(4) of the High Court Rules. The relevant parts of that rule for this application read:48C Increased costs and indemnity costs (4) The Court may order a party to pay indemnity costs if— (a) The party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or (d) The person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to the proceeding; or (f) Some other reason exists which justifies the Court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.Opposing arguments[21] Counsel for K+N argued that an order for indemnity costs was justified under r 48C(4)(a),(d) and (f). He submitted that the application was unnecessary, K+N's opposition was reasonable, and the actual costs were appropriate having regard to the broad scope of the application and its implications for K+N. [22] Counsel submitted that the order was unnecessary as most of the documents were available from E-Gatematrix in discovery (K+N held only copies of the freight invoices and air way bills, the originals having been sent to K+N). Further, K+N had informed Air New Zealand before the application was made that it would consider a request for access to the documents, if still needed, after discovery. Counsel also pointed to the fact that Air New Zealand and E-Gatematrix had been able to resolve their dispute without recourse to any of the documents from K+N. [23] Counsel also submitted that the K+N's opposition was reasonable having regard to what was described as an "excessively broad" request which "could fairly be described as oppressive", with seven categories of documents being sought covering a seven year period, involving inevitable disruption to K+N's normal business operations and making it commercially reasonable to resist. Counsel also argued that K+N was justified in protecting itself against what it submitted was a fishing expedition, and in light of an earlier threat to join K+N as a party to the proceeding and an implication that K+N had acted dishonestly in Air New Zealand's evidence in support of the application that "impermissible margins" had been charged. [24] Lastly, counsel submitted that scale costs were clearly inadequate, and actual costs were justifiable having regard to the scope of the application and its implications for K+N. [25] Counsel for Air New Zealand pointed out that the Court was concerned only with costs of responding to the application. He submitted that this was to be decided under the Court general discretion, and an award in favour of the non-party was notautomatic. He accepted that the Court should take into account the factors identified in Clear Communications v Telecom.[26] Counsel submitted that the application was necessary, reasonable and appropriate in light of the pending application for r 384 inquiry, evidence of falsification of documents (to conceal that a margin was charged), and the fact K+N was directly involved in the provision of services even if they were legally provided through E-Gatematrix. [27] Counsel also argued that the offer to provide access to the documents, if required, after discovery was of no benefit given the proposed r 384 inquiry. Also there should not have been significant costs involved as K+N did not need to process or review the documents but just make them available. He said that K+N's argument that the documents were not necessary at the time of the application could have been raised and addressed as a simple and short argument. He submitted that although the outcome will not now be known, the Court was likely to have ordered the discovery (given the status of the documents and the relationship between the parties). He said that K+N was taking an unjustifiably defensive position because of its concerns that, as the party supplying the services, it might be joined to the proceeding (which was not a basis for resisting pre-commencement discovery under r 301). [28] Finally, counsel submitted that the costs being claimed ($16,005) were disproportionately high for costs relating just to opposition to the application, having regard to the content of the notice of opposition and the nine-page affidavit in opposition. He submitted that the numbers of documents, or categories of documents, did not make a substantial difference to the time required to prepare a notice of opposition and affidavit in opposition. He relied on Affco New Zealand Ltd v Anzco Foods Waitara Ltd & Ors (2005) 17 PRNZ 676 in support of the proposition that law firm "service fees" which comprise a small component of the costs claimed are not recoverable as actual expenses incurred.Discussion[29] There is no doubt that the documents being sought have some relevance to the proceeding. The freight and warehousing services provided by K+N comprised a substantial part of E-Gatematrix' performance of its agreement with Air New Zealand. The charges for those services are the starting point for Air New Zealand's complaints. [30] I do not accept that this was a case of "fishing" (in terms of AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190, 196). The documents that were being sought were described in specific and clear terms, and are clearly referable to the question of whether and, if so, what margins were applied on the K+N charges. I also accept that Air New Zealand made it very clear that it was open to discussion about narrowing the scope of the documents being sought (by reference to what those who were to carry out the proposed audit would need). Even if there was some element of "fishing", which I do not accept, it could have been addressed by focussing on categories of documents (perhaps such as the correspondence being sought) where the category might have been capable of further definition. [31] The major contest is whether or not it was reasonable for K+N to oppose the application. There were two general thrusts to its argument. The first was that an order was not necessary because the documents were available through discovery. The second was that K+N had legitimate commercial interests which it was entitled to protect. In that respect it pointed to potential disruption to its normal business operations. Further, in light of threats to join it as a party, and suggestions that it was implicated in any improper charging, it was entitled to take into account its own commercial interests and resist anything short of a Court order. [32] This is not a case where I consider it would have been appropriate to have deferred making an order until discovery had been completed between the parties. Notwithstanding the potential size of the task, I come to this view having regard to the purposes for which the documents were being sought at the time the application was made. This is set out in the affidavit of Mr Anderson, Risk Manager for Air New Zealand, sworn and filed in support of the application.[33] Mr Anderson recounts how the issue arose. There was an initial review by Air New Zealand of some of the charges followed by a review by the second defendant which accepted that margins had been added to freight charges and that some of E-Gatematrix' employees had falsified documents on some freight charges to conceal the margin. Given that Air New Zealand did not accept that E-Gatematrix had any entitlement to add the margins, this led to its desire to have all charges audited independently (both the initial review, and the review by the second defendant had been for limited periods of time only). Mr Anderson also referred to discrepancies in relation to the warehousing services charged. He made the point that K+N's documents were needed to establish "an important and substantial first layer of charging which has not yet been substantively reviewed". [34] I accept that the K+N documents potentially held different information from the documents sent to E-Gatematrix (such as the original invoices and waybills) and that the admission of falsification of some documents provides grounds for checking the validity of the original documents. I also accept that an independent audit would need to compare documents produced in support of charges with those retained by K+N in order to verify the authenticity of the charges. I also take into account the possibility that K+N held original source documents relating to its charges to E- Gatematrix which could also be relevant to any r 384 inquiry. [35] In light of the application for an inquiry under r 384 (pending at the time of the application for non-party discovery), I consider that Air New Zealand had a reasonable and bona fide need for these documents in April 2005, and that it was not reasonable to require them to wait for discovery from E-Gatematrix. In that respect, I note that Air New Zealand had both asked K+N to produce the documents voluntarily and also tried to get E-Gatematrix to obtain them under its contract with K+N. [36] K+N's Auckland branch manager, Mr Davidson, provided an affidavit in opposition to the application describing what was involved (as he saw it) in providing the discovery sought. He said that it could not be provided without disrupting K+N's normal business activities. On the basis of that evidence, counsel for K+N argued that it had been reasonable for K+N to oppose the application.Counsel for Air New Zealand disputed the extent of the disruption (he pointed out that E-Gatematrix had only to make documents available for the auditors, and Air New Zealand was not seeking full listing and discovery), but alternatively argued that this point could have been taken without the cost now being sought. [37] K+N's position seems to have changed slightly between the notice of opposition and counsel's submission. In its notice of opposition, K+N makes the point that the orders would impose onerous time and cost burdens upon it, and seeks the (usual) order that it be reimbursed fully for its expenses. This was developed further in counsel's memorandum where it was put on the basis just mentioned, namely that compliance would disrupt its normal business. I am dealing here only with costs on the application. I consider it reasonable for K+N to have raised its concern (as set out in Mr Davidson's affidavit), but I consider, in this case, that those concerns go to the terms on which the order is made (that is, reimbursement of expenses) rather than the making of the order per se. [38] The last factor which I wish to consider, other than quantum, is the motivation for the opposition. K+N argued that it was entitled to resist the application "to protect itself". I consider that this states the position too highly. It is certainly entitled to raise its concerns (as it did), but if relevant documents exist those commercial interests are no more ground for opposition by a non-party than if it was a party to the litigation. As to counsel's argument that it was entitled to protect itself from an implication of dishonesty, I consider that she was reading too much into the language used by Air New Zealand's in-house counsel, Ms Langdon, in her affidavit in support which I read as simply stating that Air New Zealand had reason for believing that "impermissible margins" had been charged to it. It is certainly not enough to raise any basis for resistance on the grounds of self-incrimination, if that was the point being raised. [39] Weighing these factors, I take the view that it was reasonable for K+N to raise its concerns in formal opposition to the application. Whether they would have proceeded with that opposition, and the outcome of any defended application, is now a matter of conjecture. Given that the application was, in effect, put on hold on 3 May 2005, I must consider the position as at that time, that is, shortly after the noticeof opposition was filed. By a narrow margin, I consider that it was reasonable for K+N to raise its concerns by way of the formal opposition which it filed. I turn then to consider quantum. [40] I am left with the strong impression that K+N over-reacted to the perceived threats to it from this application. It was reasonable to be concerned about the extent of the time that would be taken up in extracting the documents from its records. It was also reasonable to raise whether or not it was necessary to do so having regard to the known fact that E-Gatematrix held original copies of many of the documents. These issues were explored in correspondence both before and after filing of the application. I have no doubt that this was an evolving process for both sides, reflected in the fact that the parties were well on their way to working out a solution within days of filing of the notice of opposition. [41] I cannot accept, however, that the costs involved were reasonable. I accept that there is a valid distinction to be drawn in this case, between the costs of responding to an application and the costs of complying with the order (which may well, in this case, have been for full reimbursement). K+N's response to the application was "gold plated", no doubt motivated by K+N's concerns about possible joinder in the litigation, and its perception of a possible imputation of dishonesty. As I have said, I do not accept either of these matters as a basis for opposition, or that there is any reasonable foundation for the latter. [42] At the same time, I can accept that more time went into identifying and putting forward the concerns than is reflected by an award on a standard 2B basis. Having regard to the analysis of work undertaken (set out in counsel's memorandum) and the issues that had to be considered, and having regard to the significance for K+N, I consider that K+N should be entitled to an award on a band C basis, with an uplift of 50% under r 48C(3)(a) of the rules.Decision[43] The plaintiff, Air New Zealand Limited, is to pay costs to the non-party Kuehne+Nagel Limited for preparation and filing of opposition to the application for non-party discovery (item 4.13 of Schedule 3 to the High Court Rules) on a 2C basis with an increase of time of 50% pursuant to r 48C(3)(a). [44] Each party has had some success on this application for costs. I make no order in relation to the memoranda filed. ______________________________Associate Judge D.H. Abbott