LSG SKY CHEFS NEW ZEALAND LIMITED v PACIFIC FLIGHT CATERING LIMITED [2015] NZHC 685

LSG SKY CHEFS NEW ZEALAND LIMITED v PACIFIC FLIGHT CATERING LIMITED [2015] NZHC 685 [13 April 2015]IN THE HIGH COURTOF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-000277[2015] NZHC 685BETWEEN LSG SKY CHEFS NEW ZEALANDLIMITEDPlaintiffAND PACIFIC FLIGHT CATERING LIMITEDFirst DefendantPRI FLIGHT CATERING LIMITEDSecond DefendantHearing: On the papersAppearances: P Skelton QC and A Borchardt for plaintiffR B Stewart QC and J K Goodall for defendantsJudgment: 13 April 2015JUDGMENT OF WOOLFORD J[As to costs]This judgment is delivered by me on Monday, 13 April 2015 at 4.00 pmpursuant to r 11.5 of the High Court Rules......................................................Registrar / Deputy RegistrarCounsel:P Skelton QC, AucklandR Bruce Stewart QC, AucklandA Borchardt, AucklandJK Goodall, AucklandSolicitors:G Pollak & Co. Ltd, AucklandKensington Swan, AucklandSummary[1] This is a costs dispute between the plaintiff, LSG Sky Chefs Ltd (LSG), and the defendant, Pacific Flight Catering (Pacific), in respect of litigation heard in the Auckland High Court in 2012.1 Pacific claims they should be entitled to indemnity costs, for the period following 14 June 2012, in the sum of $63,243.25. They claim $41,015.75 in costs if awarded on a scale 2B basis.[2] LSG argue that costs should not be awarded at all, or in the alternative, that the Court should use its discretion to reduce scale costs by 50% to $20,000.[3] Although LSG was successful in the High Court, Pacific was successful in the Court of Appeal and at the Supreme Court.2[4] In the High Court, LSG relied on a common law action relating to dischargeof another's debt, to the effect that where a claimant has been compelled by law to pay money which the defendant was ultimately liable to pay, the defendant was indebted to the claimant in the amount of that payment. LSG claimed that Pacific was indebted to it for the cost of paying out their employees' leave entitlements, which was a statutory requirement. The statute was however found by the Court of Appeal and Supreme Court to prevail over the common law right.[5] Unrelated to this legal issue, a question had arisen as to the actual sum of money involved. Because of the way in which the appeals were dealt with, this question has never been resolved. The initial claim by LSG was for over $200,000, based on an assessment of employees' accumulated leave given to it by Pacific. Although this figure was formally admitted in its statement of defence, Pacific later challenged it as an inflated figure. LSG brought evidence that Pacific had deliberately inflated the sum of money involved, an allegation not disputed by Pacific. Pacific continues to claim that LSG was wrong for bringing the claim, knowing that the sum of money had been inflated.1 LSG Sky Chefs New Zealand Ltd v Pacific Flight Catering Ltd HC Auckland CIV-2011-404-277.2 They were awarded costs of $25,000 in the Supreme Court, and $19,846.65 in the Court of Appeal.[6] The issue for this Court is determining on what basis costs should be assessed, and the effect of the quantum dispute and the behaviour of each party in relation to that dispute on the overall claim.Background[7] In 2011, LSG won a contract previously held by Pacific to provide Singapore Airlines with in-flight airline meals. In February 2011, 40 staff of Pacific elected to transfer to LSG, under the Employment Relations Act 2000 (the Act), which granted certain employees a statutory right to transfer to LSG on the same terms and conditions of employment.[8] Part 6A of the Act requires the new employer of transferred staff to recognisea transferred employee's entitlement to annual holidays, alternative holidays or sick leave that they have accrued prior to the transfer.[9] LSG attempted to obtain payment from Pacific in respect of the payments made (and to be made) to cover those entitlements, under the common law actionrelating to the compulsory discharge of another's debt. This required Pacific to have residual liability for the sum in question, giving rise to questions of the interpretation of Part 6A of the Employment Relations Act.[10] LSG claimed Pacific was liable for $257,809.05, as the sum of money Pacific had informed them represented the accrued leave entitlements of the 40 employees. On later evidence it appeared that the sum was far less than this, with one suggested figure of $90,000 - $140,000, although due to the outcome in the Court of Appeal and Supreme Court the quantum has not been settled.High Court[11] In the High Court, I gave judgment in favour of LSG. I held that Pacific was obliged to pay the employees' annual holidays, alternative holidays and sick leave. As Pacific would have had to meet these entitlements if the staff had remained with Pacific, they had a residual liability. I was of the view that the EmploymentRelations Act 2000 had not abrogated those obligations, or displaced the common law action by placing exclusive liability on LSG.[12] Although a disclosure regime in the Act theoretically allowed a new employer to gain an estimate of the costs of the accrued leave prior to any tender, I as of the view that it was a sufficiently vague regime that the new employer could not use it to calculate quantum in any meaningful way. The disclosure regime in this case had also evidently not worked, given that the quantum alleged by LSG to be at issue was challenged by Pacific at trial, despite the figures having been provided by Pacific through the mechanism of the Act.[13] Although Pacific initially admitted the sum of money in question, after the evidence at trial had been completed, counsel for Pacific made an application for leave to file a second amended statement of defence, now denying the sum of money at issue. This application was based on new evidence at trial, which Pacific argued established that the figure claimed by LSG was incorrect. Pacific argued there was no basis for LSG receiving more than the actual amount of accrued leave entitlements.[14] It was established that the leave balance information provided to LSG by Pacific was deliberately inflated, although no formal factual findings were made as quantum was left to the parties to consider. Pacific accepted that it altered the pay records of all but two or three of the staff to increase their leave balances by between 40 and 100 hours, as well as their pay rates. No explanation for this was ever given. I infer however that this was done out of commercial spite for having lost the contract to a rival, in order to make the contract financially disadvantageous for LSG.Court of Appeal[15] The Court of Appeal approached the issue as one of statutory interpretation –whether Part 6A of the Employment Relations Act extinguished the old employer'sobligations. The Court saw nothing in Part 6A as meaning the old employer remained liable, either to the employees or to the new employer for the pre-transfer entitlements.[16] With regards to the quantum of the leave entitlement, the Court of Appeal noted that, although the final amount was to be quantified later, Pacific submitted it was likely to be $90,000 - $140,000 which was substantially less than the original sum of money Pacific had provided to LSG. Responding to submissions from counsel for LSG, Mr Skelton QC, that this was due to deliberate inflation of theemployees' leave balances and pay rates, the Court said "Pacific's conduct in that regard appears to have been reprehensible, but we do not see it as having any bearingon the issues before us in the present appeal".3Supreme Court[17] The Supreme Court held that LSG could only succeed if it established that Pacific had ongoing liabilities to the accrued entitlements after the transfer of its employees to LSG. As no residual indebtedness of Pacific remained following thetransfer, the payments LSG made could not be to discharge Pacific's liability andthus the common law action could not stand. They did not address the inflation of pay entitlements.SubmissionsPacific's submissions[18] In addition to seeking scale costs in the sum of $41,015.75, Pacific seek indemnity costs or increased costs for the part of the trial period following 14 June 2012. They also seek disbursements in the form of $14,878.00 for the costs of the statement of defence, the sealing orders, and the fees of Russell Toplis, an expert witness.[19] Counsel for P, Mr Bruce Stewart QC, submits that the Court should exercise its discretion under r 14.6(4)(a) of the High Court Rules to order indemnity costs. Following the leading case of Bradbury v Westpac Corp, the existence of"allegations which ought never to have been made, or unduly prolonging a case by groundless contentions", justified an indemnity order.3 At [8].[20] Mr Stewart states that on the weekend prior to trial, meetings occurred between counsel for the parties to determine the quantum of the claim, and the process for payment if the liability claim succeeded. Pacific proposed to pay the amount of actual accrued leave paid and owed to the transferred employees; and to reimburse LSG for any accrued leave entitlements found owing and payable to certain transferred employees who were advancing employment claims against LSG. He submits that this would have allowed:(a) the removal of all issues in the proceeding relating to quantum of leave entitlements and the sum of LSG's claim to be removed from the proceedings; and(b) allowed all witness statements to be taken as read with no cross examination required.[21] This would have reduced the trial time to a half day, solely on the narrower issue of whether the common law action could succeed in light of the Employment Relations Act.[22] Mr Stewart submits that LSG's subsequent refusal to agree to the memoranda that came out of this meeting, without concession to new and unexpected conditions, required Pacific and the Court to "deal with irrelevant evidence and arguments",which included a claim for a greater sum than was in fact at stake.[23] In summary, Pacific alleges that the following actions were all improper:(a) sabotaging the conditional agreement;(b) insisting at trial on oral evidence and cross examination in relation tothe "irrelevant" issue of increased leave, directed toward the admitted fact that the leave balances had been increased after Pacific lost the tender but before the transfer;(c) the baseless claim to recover a sum in excess of the actual leave entitlement.[24] Pacific argues that these formed part of a trial strategy to adduce prejudicial evidence to encourage the Court to look favourably upon its legal position, a tactic which needlessly lengthened the trial.[25] If the court does not accept that the awarding of indemnity costs is justified, Pacific seeks increased costs, under r 14.6(3)(b)(ii) for "taking or pursuing an unnecessary step or an argument that lacks merit". They seek an uplift of 50%, based on the attempt to recover increased accrued entitlements.LSG's submissions[26] Counsel for LSG, Mr Philip Skelton QC, submits that the Court should exercise its discretion under r 14.1 and order that costs lie where they fall, or that in the alternative the Court should substantively reduce scale costs.[27] Mr Skelton submits that costs may be refused where the successful party has brought the litigation on itself through misleading conduct. The reduction or refusal of costs here is said to be justified because:(a) the plaintiffs would not have brought the challenge if the defendants had not deliberately inflated the employees' accrued leave balances, as LSG would not have brought proceedings if it had known the sum was less than $140,000;(b) the parties may have settled if the defendant had acknowledged the actual sum in question prior to trial commencing; and(c) Pacific would not have incurred the cost of their expert accounting witness if they had provided LSG with the correct accrued leave entitlement balance at the outset or prior to trial.Pacific's Reply[28] Pacific's reply argues that the claim that they brought the litigation on themselves through inflation of the leave balances is factually incorrect and fundamentally misconceived. This is because:(a) the proceedings were unconnected to the leave balances;(b) the increase to the accrued leave entitlements was irrelevant to LSG'Samended claim;(c) LSG was aware at the outset that accrued leave entitlements had been increased, but sought to maintain the claim on the basis of the incorrect entitlements;(d) LSG refused to agree quantum based on the actual amounts of accrued leave;(e) LSG's submission that the claim would not have been pursued had the leave balance not been increased is not credible; and(f) LSG's submissions on the motivations behind the leave adjustments are unsupported by factual findings.[29] Pacific submits that, pursuant to the requirement that costs awards should be predictable and expeditious, the Court should avoid making moral judgments about the conduct of the parties prior to litigation.Relevant Law[30] Rule 14.2 of the High Court Rules sets out the principles applying to the determination of costs, including the basic principle that the party who fails should pay the costs of the party who succeeds, and that the determination of costs should be predictable and expeditious. There are no set guidelines on how costs should be assessed by the initial court where the initial court's ruling has been overturned by anappellate court, although applications appear to have been treated as if the party who successfully appealed had also been successful in the lower court.4[31] There is no real disagreement in this case that Pacific are the successful party, unlike in cases where there are mixed results on appeal.[32] The main area of contention lies in significant disagreement over theappropriateness of each party's behaviour and the effect of that on the litigation.Specifically, the parties disagree on whether Pacific's uplifting of the leaveentitlement was relevant in relation to the lawsuit, or whether it was a separate legal issue.Indemnity Costs[33] Indemnity costs are governed by r 14.6(4) of the High Court Rules. Pacific claims under the following ground:14.6 Increased costs and indemnity costs(4) The court may order a party to pay indemnity costs if—the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in aproceeding; [34] The leading case on indemnity costs is Bradbury v Westpac and the principles within it have recently been confirmed by the Court of Appeal.5 The Westpac Court stated:6(a) standard scale applies by default where cause is not shown to depart from it;4 See, for example, the Court of Appeal's treatment of costs in relation to a leave to appealapplication subsequently approved by the Supreme Court in Haronga v Waitangi Tribunal[2011] NZCA 670, in which the parties and the court agreed that the question of cost should be decided as if the judgment had been decided the same way by the Court of Appeal. This is the same approach taken by the parties here, although there is no legal argument about the appropriateness of this approach.5 Bradbury v Westpac Banking Corporation [2009] 3 NZLR 400 (CA); Ben Nevis Forestry v Commissioner of Inland Revenue and Redcliffe Forestry Venture Limited [2014] NZCA 348.6 At [27].(b) increased costs may be ordered where there is failure by the paying party to act reasonably; and(c) indemnity costs may be ordered where that party has behaved either badly or very unreasonably.[35] The rarity of indemnity costs was emphasised consistently by the Court, whodescribed the necessary behaviour as "exceptionally bad" or "flagrant".7[36] The Westpac Court laid out the available categories in which indemnity costs have been ordered.8 In this case, the defendants rely on just one category: making allegations which ought never to have been made or unduly prolonging a case bygroundless contentions (arguing a "hopeless case").[37] This ground refers to the statement of French J in an Australian case that indemnity costs are justifiable where a "party persist on what should on proper consideration be seen as a hopeless case."9 The Court of Appeal recently determined that hopeless cases are ones where the plaintiff should have known there were no reasonable grounds for success, leading to the presumption that the litigation was brought only to create incentives on the parties to settle or for no good purpose at all, due to inertia and carelessness.10 The Court also held that, if a case was hopeless, these presumed ulterior motives were sufficient to meet the Westpac test forindemnity costs of there being a "failure by the paying party to act reasonably".11Whether the case, or ground argued, is hopeless must be proven by Pacific as the party claiming indemnity costs bears the onus of persuading the court that the award is justified.127 Citing Prebble v Awatere Huata (No 2) [2005] 2 NZLR 467 (SC) at [6].8 At [29].9 J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 (FCA) at 303.10 See Ben Nevis, above n 5, summarising the discussion of French J in J Corp Pty, above n 9.11 At [27].12 Radfords Ltd v Advertising Works New Zealand Ltd HC Auckland, CIV-2006-404-325, 25 April 2006.[38] Pacific alleges three reasons why indemnity costs are justified: (a) sabotaging the conditional agreement on quantum, (b) insisting on evidence and cross examination on the issue of increased leave and (c) the baseless claim to recover a sum in excess of the actual leave entitlement. These are all characterised as unreasonable and improper actions in continuing the proceedings. I consider each ground in turn.[39] The first relates to the alleged "sabotage" of the conditional agreement as toquantum. LSG argues that if they had accurate information about the leave balances of each employee, they would have been able to come to an agreement sooner, so the failure to agree is not their fault. Further, they say that the additional terms inserted in the counter-proposal by LSG were not unreasonable given that the two Pacific employees pursuing litigation against LSG were being funded by Pacific and were being represented by the same solicitors as part of an ongoing vendetta against LSG.[40] The contemplated agreement was not an offer in the sense of a Calderbank offer, nor can it be assessed using similar principles as firstly, there has been no conclusion as to the quantum at stake so it is difficult to assess whether the offer should have been accepted, and secondly, the negotiations appear to have been continuing. Negotiations were continuing because, although it was agreed that Pacific, if found liable, would pay the costs of reimbursing the annual service entitlements, that sum had not actually been determined yet. This issue was subject to further negotiation.[41] Given the fundamental disagreement as to quantum between these parties, agreeing to the offer as it then was could still have lead to a potential need for evidence relating to the quantum of the claim. Although the settlement agreement provided that the discovery sought by LSG would be provided, this does not mean that quantum would have been easily resolvable. Evidently, the payslips showed a number of different leave entitlements and rates of pay, all of which would, no doubt, have been subject to considerable dispute and discussion. Agreeing to the offer would not necessarily have significantly reduced the time required for arguing the claim.[42] Given that I do not think agreeing to the offer would necessarily have saved time at trial, I do not need to consider whether the counter-offer from LSG, agreeing to settle on quantum contingent on Pacific halting litigation by former Pacific employees was a legitimate request. However, although Pacific have alleged that this was an inappropriate offer, an assessment of the realities of the extensive litigation between these parties following the awarding of the Singapore Airlines contract, indicates that LSG were not being entirely unreasonable to assume that Pacific could have been willing to negotiate with reference to the overall strategy they were engaging in. LSG were engaging in litigation between the exact same lawyers, on linked issues regarding the operation of Part 6A in the context of transferring Pacific employees, and there is acknowledgment in some of the related employment proceedings that these individual claimants were financially backed by Pacific.13 In this light, it was not unreasonable to perceive that the individual claims might form part of an overall strategy, which could be subject to negotiation.[43] The refusal to come to an agreement on quantum pre-trial was not so unreasonable or improper decisions as to justify indemnity costs being awarded. The defendants have not discharged their burden of showing that such an order is justified.[44] The two remaining issues both relate to the quantum of claim, and whether it was a relevant issue for trial. Pacific argues in relation to these two issues that LSG was merely attempting to adduce prejudicial evidence, hoping that the Court would look favourably on its legal position, despite the fact that the evidence was irrelevant to the issue of statutory interpretation. They therefore say that the claim, insofar as it related to quantum, unduly prolonged the proceedings.[45] LSG responds that Pacific had admitted in their pleadings that the sum was the $257,809 figure, and that Pacific's representations meant that they claimed the higher sum. Further, they state that this would also not have occurred if Pacific had provided the correct payroll information for the transferring employees as they were ordered to in the High Court.13 Alim v LSG Sky Chefs New Zealand Ltd [2013] NZERA Auckland 472.[46] There is no question that the action as a whole was not improper or a hopeless case. That it went to the Supreme Court indicates that the issue had merit, and was not straightforward. Moreover, in Ben Nevis, the Court acknowledged that although the case being run was then known to be hopeless, the position only became "clear and certain only as a result of the Supreme Court judgment."14 They did not see it as fair to allow indemnity costs where the hopelessness of the case was determined with the benefit of that hindsight. Like Ben Nevis, this case is one in which the claim "failed after due consideration",15 and was not so hopeless that there could only have been an ulterior motive for bringing it in the first place.[47] The "hopeless case" argument therefore solely relates to the question ofwhether bringing evidence about the inflation of leave entitlements and pay rates and the actual quantum of leave at issue was relevant to the proceedings as a whole.[48] Although the bringing of evidence related to the quantum, and the attempt to show that Pacific had deliberately inflated the leave entitlements and pay rates given to LSG were not strictly on point to the legal issue at trial, the question of quantum was still one which needed to be determined, if the legal claim succeeded. Given by the end of trial Pacific raised as a new issue that LSG could not claim more than they were entitled to, LSG were entitled to bring the evidence necessary to refute that element of the claim and to attempt to discover under oath what that sum was.[49] Further, Pacific's claims that there was no need for argument on quantum, but also that quantum claimed was inflated are somewhat contradictory. If the sum was inflated, then presumably argument was necessary to discover the actual amount.[50] In my view, this claim cannot meet the requisite standard of being a hopeless or flagrantly bad decision to justify indemnity costs.[51] The third justification for indemnity costs is that LSG brought a higher claim than otherwise required. The evidence given by Ms Marie Park did suggest that LSG knew there had been unjustified changes to the leave entitlements and pay14 At [32].15 At [33].rates. However, knowledge that some changes had been made does not entail knowledge on the part of LSG as to the actual sum for which they should claim. The only basis that LSG had to proceed on was the information provided by Pacific.[52] The redacted discovery of payroll information provided by Pacific appears to have obstructed any attempt on behalf of LSG to determine the correct quantum. In those circumstances, the suggestion that LSG maliciously attempted to claim a higher amount seems somewhat unreal. It is difficult to see what amount LSG should have claimed, given their inability to discover the actual sum in question. Their reliance on the figures provided by Pacific appears reasonable, even if they had some knowledge or suspicion that the numbers were not entirely accurate.[53] Pacific also appears to have immediately conceded the question of claiming above the actual quantum when it was raised in court, meaning there was no actual attempt to mislead the court as to the total sum owed. None of this suggests that there was an unreasonable attempt to either claim a higher sum than justified or to prolong the trial by doing so.[54] I am not satisfied that Pacific has met the onus of proving that indemnity costs are warranted with respect of the part of the trial following 14 June 2012. Although the trial was prolonged by the refusal to accept an offer settling quantum, and the quantum questions were not directly related to the issue, neither action was so unreasonable or so without foundation that they deserve the sanction of indemnity costs. In fact, as stated, it is unclear how else LSG could have determined the quantum in issue without bringing evidence at trial.Increased Costs[55] Rule 14.6(3) also governs increased costs. The defendants argue that the case falls under r 14.6(3)(b)(ii):(3) The court may order a party to pay increased costs if—(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by(ii) taking or pursuing an unnecessary step or an argument that lacks merit;[56] Pacific argues here solely under r 14.6(3)(b)(ii), on the basis that the behaviour it claimed required indemnity costs, if it does not meet that standard, constituted "taking or pursuing an unnecessary step or an argument which lacks merit."[57] The procedure to be followed by an applicant seeking increased costs has been summarised by the Court of Appeal in Holdfast NZ Ltd v Selleys Pty Ltd:16(a) Categorise the proceedings in terms of category;(b) Work out a reasonable time for each step in the proceeding (with reference to the daily recovery rates and the time allocations);(c) Apply for extra time for a particular step as necessary; and(d) Only after the preceding three steps have been complied with should the applicant step back and consider the amount of costs it would receive by this process, and then argue for additional costs if it is considered such can be justified.(e) It is also established that in only the most exceptional of circumstances would an increase of 50% above scale costs be warranted.[58] As emphasised by McGechan on Procedure in ordering increased costs, "thecourts uplift from scale, it is not a question of awarding a percentage of actualcosts".17[59] Pacific argue that additional costs are justified for the steps of the proceeding in which LSG pursued their claim for the increased accrued entitlements.16 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) at [43] – [45] and [48].17 Andrew Beck and others McGechan on Procedure (online looseleaf ed, Brookers) at HR 14.6.02 (1).[60] As stated above, I do not agree that the plaintiff maliciously or unreasonably tried to pursue the higher sum. I also do not consider that attempting to assess the actual matter of quantum at trial was an inappropriate step in a proceeding in which the actual quantum, at the High Court at least, formed a substantial issue over which both LSG and Pacific strongly disagreed. If Pacific had not felt the question of quantum to be important, they would not have brought their own expert witness to assess the size of quantum available.Reduced/Refused Costs Principles[61] A discretion to reduce costs exists in r 14.7(g) of the High Court Rules,allowing the refusal or reduction of an order for costs for any other reason, "despite the principle that the determination of costs should be predictable and expeditious."[62] LSG argues that Pacific's own misleading conduct brought on the litigation, and that this justifies refusing costs. They say that they would not have commenced or continued to pursue the proceedings if they had known the sum was less than $140,000. Further, they say they may have been able to settle entirely if Pacific had not inflated leave entitlements and pay rates. LSG points out that the costs of the expert witness, and all of the trial costs relating to quantum would have been avoided if Pacific had provided the correct information at the outset, or prior to trial. Instead, Pacific waited until closing submissions to amend their defence to retract the agreement to the quantum in their statement of defence.[63] LSG relies on Scales Trading Ltd v Far Eastern Shipping Co Public Ltd, which involved fraud on the part of the successful party.18 Scales Trading involved the creation of false invoices to allow the export of hard currency in breach of Russian exchange control restrictions. The question in the case was whether the fraud vitiated a guarantee made under the fraud, and whether the court had a discretionary power to uphold the guarantee anyway. The Court of Appeal held thatalthough one party had succeeded, it was "only upon an exercise of discretion, andnotwithstanding some more than unsatisfactory conduct on the part of Scales in the18 [1999] 3 NZLR 26 (CA); reversed in Scales Trading Ltd v Far Eastern Shipping Co Public Ltd[2001] 1 NZLR 513 (PC).course of the business affairs concerned."19 This justified making no order as to costs.[64] Pacific argues that Scales bears no resemblance to the facts, and that primarily costs were allowed in that case because of the partial success of the appellant on appeal.[65] This interpretation is supported by the Court of Appeal in New Zealand. Discussing Scales subsequently, the Court of Appeal has said that it is trite to say that fraud unravels all, and that Scales could not provide material assistance in a case about whether costs should be reduced under the High Court Rules in which there was a general question of reducing costs.20 In that case an actual deficiency in the plans for a building was irrelevant where the legal question of causation had not been able to be proved. The focus, essentially, was on the legal issue not the"rightness" or otherwise of the actions of the parties.[66] The other cases applying Scales to which LSG point, such as C-Dax v Franklin,21 also involved misleading actions which actually lead to a difference in the substantive legal claim being brought. In C-Dax, the late provision of a deed(one day before trial) was a "king hit" to the applicant's statutory demand claimwhich the defendants would previously have been very unlikely to resist.22 The deed went to the heart of the legal claim, and the Judge accepted that had the plaintiffs been presented with the deed at the outset, they would not have proceeded with the claim.[67] In this case, by contrast, a change in the quantum sum did not induce the actual legal claim. It merely formed part of the overall context in which LSG decided to attempt to pursue the claim. Further, as noted by Pacific, LSG chose to pursue this claim to the Supreme Court despite having confirmed that the sum at issue was substantially reduced from the original claim, even without having an established quantum.19 At 49.20 North Shore City Council v Body Corporate 188529 [2010] NZCA 234 at [9] – [10].21 C-Dax v Franklin HC Palmerston North CIV-2009-454-000513.22 At [34].[68] While the behaviour of the defendant may have been, as termed by the Courtof Appeal, "reprehensible", it was not fraudulent in the sense which Scales appears to have been applied. I am not convinced that the cases cited by LSG support the proposition that misleading conduct as to the quantum at stake in a legal claim can be considered fraudulent behaviour inducing LSG to pursue its claim.[69] LSG's other suggestion for justifying reduced or no costs is that they andPacific might otherwise have been able to settle if the true quantum had been known. As I have already noted, this litigation forms part of a wider contest between LSG and Pacific. Given the attempts at settling the issue of quantum prior to trial, andLSG's own rejection of that for evidently tactical reasons indicates that the quantumat stake was not central to the choice to continue the litigation.[70] I am of the view that there is therefore no justification for refusing costs in line with Scales on the basis of Pacific's misleading behaviour causing LSG to enterthis litigation.[71] I am however of the view that there is real justification for using my discretion to reduce costs in relation to the failures to discover the accurate costs at the interlocutory stage of proceedings. In this regard I do not agree with Pacific'ssubmission that I am necessarily required to avoid making moral judgments about their conduct outside of litigation.[72] Although no authority was given by counsel for that point, the principle that only conduct after the proceedings have been issued may be taken into account was made in the context of increased and indemnity costs in Paper Reclaim v Aotearoa International Ltd.23 In that case, the Court of Appeal considered that the judge at first instance could not consider general bad conduct in the course of a contract. If actions had been unlawful, the remedy was a separate damages claim not a reduction in costs.24 However, this was in the context of generally poor conduct across a contract, rather than a specific action which had added to the impetus for the claim. Giving false evidence as to the existence of a contract in comparison, although not23 [2006] 3 NZLR 188.24 At [160].made out on the facts, was seen as a valid ground for a finding of improper behaviour in a proceeding.[73] In PAE (New Zealand) Ltd v Brosnahan,25 the plaintiffs were successful in making out only one of the four alleged causes of action against the defendants. Although the other three claims had failed, which Mallon J found would usuallyreduce the costs in the plaintiff's favour, deliberate steps taken by one of thedefendants towards concealing errors in calculations and accounts was seen as relevant to costs discretion.26 The defendant's actions made it difficult to determinethe full extent of the errors in accounts, increasing the costs to PAE in attempting to discover the true situation. This went toward justifying letting costs lie.[74] The distinction between PAE and the current case is twofold: first, again, evidence of actual accounting errors would have meant that the actual legal claim was made out. Secondly, the alleged dishonest behaviour had occurred during the trial, in the process of discovery.[75] It seems arguable that there is some distinction between allegedly lying in court, and that lie going to proving a direct legal issue in the case (as in PAE andPaper Reclaim), and misleading behaviour outside of court which goes merely to quantum, not to the legal issue. However, the omission or misleading behaviour in the current case extended to refusing accurate discovery to prevent the error being rectified, and that behaviour was relied on in court. This is not therefore entirely"outside of court" behaviour.[76] There is no reason to suggest that the courts cannot take into account badbehaviour of one party in a quasi "moral judgment" in assigning costs, given thediscretionary nature of the assessment. On first principles, one reason for maintaining exceptions to the general rigid costs structures must be to allow for more subjective assessments that are, in exceptional circumstances, necessary.27 However,judges' discretion is not unfettered, and that in particular, the central maxim in25 HC Wellington CIV-2005-485-843, 7 November 2008.26 At [17].27 Body Corporate 97010 v Auckland City Council CA234/00, 30 August 2001 at [21].awarding costs is that the successful party should receive costs.28 This meansgeneral perceptions of the "bad behaviour" of one party must be subject to theoverriding assessment of who, in fact, succeeded.[77] I am of the view that costs should be reduced in this case by 50%. I am of the opinion that the failure of Pacific to properly engage in discovery was sufficiently bad behaviour to warrant exercising my discretion to reduce costs. It seems relatively clear that evidence as to quantum would not have been needed if full and accurate discovery of the pay records of Pacific employees had been provided earlier in the process.Disbursements[78] Under r 14.12, disbursements claimed must be:(a) specific to the conduct of the proceeding; and(b) reasonably necessary for the conduct of the proceeding; and(c) reasonable in amount.[79] While all other disbursements are agreed by the parties, they disagree over the reasonableness and necessity of the witness fee for Russell Toplis, which forms $14,720.00 of the total disbursements claimed. LSG say that Mr Toplis' evidencewas unnecessary, as he would not have needed to be called if Pacific had not inflated the leave requirements.[80] The defendants dispute this, stating Mr Toplis' evidence was required toaddress the leave calculations and errors found in the quantum schedules at trial. They argue this would not have been necessary if the plaintiffs had accepted prior to or during trial that the sum of the quantum claim could not be maintained.28 Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [15] – [22].[81] Clearly, Mr Toplis' evidence was specific to the conduct of the proceeding, and there is no contest that his fee was not reasonable in amount. The sole question is whether his evidence was reasonably necessary for the conduct of the proceeding.[82] Evidently, Mr Toplis' evidence did not go to a point of law necessary to solving the dispute, nor did it actually solve the question of the amount of leave which was owed, as this is still disputed by the parties involved.[83] However, Mr Toplis' evidence appears to have clearly established that theleave being claimed was inflated. This was an issue that both LSG and Pacific sought to show at trial, although for different purposes. Given the conflict over what the actual leave transfer balance was, it seems reasonable and necessary that toward the end of the trial, as the dispute over the appropriate quantum became a central area of questioning, Pacific sought to provide the Court with accurate figures.[84] There is room for the exercise of discretion here as to whether the evidence of Mr Toplis is considered reasonably necessary. By a slim margin, I allow the disbursements claimed.Conclusion[85] In my opinion, Pacific has failed to make out a case for indemnity or increased costs, and LSG has failed to make out a case for costs to lie where they fall. However, I am of the view that LSG has made a case for the reduction of costsas Pacific's failure to engage properly in the discovery process was particularlyegregious.[86] Costs are awarded to Pacific against LSG on a 2B basis reduced by 50%. The disbursements in relation to Mr Toplis are also allowed..Woolford J