Oha Honey Limited Partnership v Kohiti Limited

[2018] NZHC 3068

IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKAORIORI ROHE

CIV 2018-435-26

[2018] NZHC 3068

BETWEEN

OHA HONEY LIMITED PARTNERSHIP

Plaintiff

AND

KŌHITI LIMITED

First Defendant

AND

DANIEL JOHN WATSON

Second Defendant

Hearing:	23 November 2018
Counsel:	M N Dunning QC and R M Dixon for Plaintiff K P Sullivan and S M Horner for Defendants
Judgment:	23 November 2018

JUDGMENT OF SIMON FRANCE J

[1]    The plaintiff and defendant are parties to an agreement whereby the defendant authorised the plaintiff to place up to 2,500 beehives on land it owns. The defendant has issued a termination notice in relation to the agreement and is preventing the plaintiff from accessing its land. The plaintiff has issued proceedings.

[2]    It is common ground that the time for placing the hives is imminent. Accordingly, the plaintiff seeks an interlocutory injunction requiring the defendant to comply with the terms of the agreement until the substantive proceeding is determined. In practical terms, that means it seeks an order that the defendant allow the plaintiff access to its land for the purposes of placing 1,682 hives on the property and then tending to them as required.

OHA HONEY LTD PARTNERSHIP v KŌHITI LTD [2018] NZHC 3068 [23 November 2018]

[3]    The brief history of the matter is that the plaintiff is the successor of a company known as Watson and Son Partnership Ltd. In October 2015 interests associated with Ngāi Tahu Holding Corporation Ltd (NT Holdings) bought into the business which related to the honey industry. In effect NT Holdings, through other entities, purchased half of the business.

[4]    The business was operated through three entities. The relationship proved difficult and in October 2017 what the parties term a divorce agreement was entered into. In general terms, NT Holdings took over the honey business and the Watson interests took over all the associated medicinal manuka honey business.

[5]    However, a company owned by Mr Denis Watson (the second defendant’s father) continued to own a property called Manuka Wilderness. As part of the divorce, the parties entered into a Beehive Placement Agreement (the Agreement). This Agreement gave the plaintiff (a NT Holdings entity) a 10 year exclusive right to place hives on the property. The Agreement records that the plaintiff “has assessed” the property and:

recommends up to: 2,500 hives, across 840 ha, and reserved the right to adjust numbers to maximise honey production during any season.

A payment formula is then provided which is based on honey yield and quality. The Agreement first came into effect for the 2017/18 season.

[6]    The Agreement contains a dispute clause which would send the parties to mediation. If that fails court proceedings are permitted. Nothing in the Agreement prevents the parties from seeking urgent injunctive relief. There is a provision which authorises the plaintiff, in the event of termination occurring through no fault of the plaintiff, to pursue recovery of overpayment, or withhold payments due. The landowner acknowledges that the payment formula is linked to the 10 year term of the agreement.

[7]    This year, the Denis Watson entity that was the landowner wished to sell the property to Mr Watson’s son. The Divorce Agreement gave the plaintiff a right of first refusal, except where the sale was to a “Watson Related Party”. If that was the

situation, the landowner had only to obtain the plaintiff’s consent which could not be unreasonably withheld. Consent was initially not forthcoming. Proceedings were issued by the landowner but eventually agreement was reached and the transfer occurred. This was in May of this year.

[8]    It is necessary to backtrack to note the 2017/18 season, the first under the Agreement, had not gone well in that there were many disputes between the plaintiff and then landowner. The 2018 transfer to the present owner, the first defendant, expressly reserved to the previous parties any rights and disputes concerning that season.

[9]    The second defendant, Mr Denis Watson, is the principal of the first defendant. As part of the transaction acquiring the land he signed a Deed of Accession the relevant terms of which are:

(a)an acknowledgement that the Agreement was on foot;

(b)an acknowledgement of the exclusivity provision;

(c)an acknowledgement that the plaintiff’s first right of refusal continued; and

(d)a covenant by the second defendant to procure the compliance of the first defendant concerning that exclusivity.

[10]   This Deed specifically records that neither of the former parties acknowledged that during the 2017/18 season they had committed a breach of the Agreement. It can be noted these disputes and alleged breaches in the 2017/18 season were fully known to Mr Daniel Watson at the time he signed this Deed.

Current season

[11]   The evidence filed includes much material about the previous dealings between Mr Watson Snr and the plaintiff entities, and the disputes over the 2017/18 season.

There is limited, if any, relevance of those matters to the present application so I will refer to that evidence only to the extent I see necessary.

[12]   The plaintiff assigned a new person, Mr Luke Morrison, to deal with the 2018/19 season. Mr Morrison first introduced himself by email on 6 August 2018, requesting a meeting to get planning under way. There was a follow up and finally a response from Mr Watson (all references to Mr Watson hereafter are to the second defendant) on 23 August. Mr Watson referred to serious breaches of the Agreement the previous year and indicated he was keen to get a clear picture of the number and quality of hives that the plaintiff intended to place on the property (number and quality being issues from the previous year).

[13]   Mr Morrison replied the following day saying his focus was to look forward. Mr Watson had suggested independent testing of the hives and Mr Morrison said that would not be a problem. A meeting was sought. No reply was received despite several follow ups.

[14]   Mr  Watson  finally  replied  on  13 September 2018,  and  a  meeting  for   17 September was confirmed, and took place. Of that meeting Mr Morrison says:

(a)he indicated strong hives would be placed on the property; and

(b)the plaintiff wanted to work to an ethical model that represented one hive per hectare. On Mr Morrison’s incorrect understanding of the size of the property that would be 647 hives (the correct figure on this basis is 840 hives).

Mr Watson is said to have replied the property would sustain more, and Mr Morrison said he would reconsider.

[15]   Mr Morrison says he thereafter visited the block and reassessed its capacity as 1,500 hives. He emailed this figure to Mr Watson on 5 October with a follow up on 11 October.

[16]   No reply was received until 2 November 2018. Mr Watson said he had been consulting with his lawyer. He said 1,500 appeared to be a figure plucked out of the air and was unacceptable. Mr Watson said the agreement provided for 2,500 hives, with alteration allowed only to maximise production. Mr Watson said he was considering termination and gave Mr Morrison five days to respond. Mr Morrison sought a meeting.

[17]   Mr Watson suggested 5 or 6 November  with  his  lawyer  attending.  Mr Morrison did not want that and eventually the two men met alone at a café on     9 November. He considered it an amicable meeting but Mr Watson said he needed to talk to his lawyer.

[18]   On 13 November 2018, Mr Watson emailed, terminating the agreement immediately. The letter continued:

(a)In the next paragraph it reflected on the plaintiff’s options for relocating the 1,500 hives and on Mr Watson’s belief as to the plaintiff’s capacity to do this.

(b)In the following paragraph it set out the risk to Mr Watson’s business if production is not maximised. These points had been set out in previous emails and involve claims that a similar poor performance by the plaintiff this season as it had last season would cause the first defendant financial difficulty. There was reference to the plaintiff withholding a final payment from the last season and delays in it paying the landowner last year. It is noted other providers are willing to put more than 1,500 hives on the block. If the plaintiff put the hives on, Mr Watson would have to carefully assess the plaintiff’s performance and he did not have time to do so. Mr Watson concluded by observing Beehive Placement Agreements are regularly terminated (it appears he means by agreement) and he wished to be treated the same.

[19]   I observe of this list that the first defendant only acquired the property in  May 2018 and signed the Deed of Accession with knowledge of the 2017/18 disputes.

It is difficult to see how those previous events could provide any support for a termination decision prior to there having been even one season of honey production between the present parties.

[20]   Turning to the balance of the plaintiff’s evidence, the plaintiff disputes the defendants’ claim that it can place the hives elsewhere. Three deponents being an officer of NT Holdings, Mr Morrison and Ms Nadine Tunley (the plaintiff’s chief executive) all state there is no Manuka equivalent site available.

[21]   The figure the plaintiff is committed to is 1,682 hives. The plaintiff has budgeted a gross return from this number of hives of over $2 million. Thirty per cent of that will be payable to the defendant under the Agreement. The plaintiff has flown over the property and notes flowering is imminent. It considers the hives need to be placed in the next week. The plaintiff suggests that the reasons given by the defendant for termination (i.e. concerns over income) indicate the defendant will not be able to meet a damages claim if the season is wrongly lost to the plaintiff.

[22]   Concerning hive numbers, the plaintiff says the number of hives on the property in the last five years starting in the season 2013/14 has been 480, 1,180, 1,568, 1,288 and 1,112. To its knowledge the 1,682 hives it proposes to place on the property is the largest number ever placed on the property.

[23]   Defendant affidavits have been filed by Mr Watson, and Mr Watson Snr. The latter’s evidence is filed as a response to material contained in the affidavit filed by an officer of NT Holdings. It includes a history of the dispute between NT Holdings and Mr Watson Snr. It repeats allegations made about Mr Watson. I observe I see no good basis for there having been included.1

[24]   Mr Watson Snr is not involved with the first defendant and has not been involved in the matter since the Deed of Accession. He makes some observation on the Manuka Wilderness property which are of relevance, and which I have noted. In the plaintiff’s evidence, it is claimed that at the time the Agreement was negotiated,

1      Suppression orders have been made concerning some of this material and also some commercially sensitive material.

Mr Watson Snr sought to have included provision for a minimum number of hives, namely 800. Mr Watson Snr disputes this. He also comments on hive numbers, explaining the lower numbers that have previously been on the property as being a product of bee keeper capacity rather than the capacity of the land. Mr Watson Snr suggests that within the industry these Beehive Placement agreements are treated as “slightly more valuable than a handshake”. Finally, I observe Mr Watson Snr supports his son’s evidence concerning the plaintiff’s ability to find alternative placements. He says that when it was Watson and Son there were 50,000 placements available for 30,000 hives. Within this scale of things, spreading 1,500 hives over existing sites is not difficult for an enterprise the size of the plaintiff.

[25]   Mr Watson’s affidavit details his concerns over the 2017/18 season. He acknowledges the effect of the Deed of Accession is that the Agreement remained in place and the plaintiff had an exclusive right to place hives on the property. He says, “he has been left to inherit an entirely unsatisfactory situation”. Of that observation, it must be commented that Mr Watson made that knowing choice in May 2018.

[26]   Mr Watson disputes that the choice of the number of hives rests with the plaintiff. A landowner would not licence a bee keeper on that basis. The overriding obligation is to put on the number of hives that will maximise production. The starting point and expectation is 2,500 hives, with some seasonal adjustment possible.

[27]   Mr Watson says Kōhiti Ltd is particularly reliant on maximising production done to loans secured over the property. The affidavit indicates alternative arrangements have been made but does not provide detail other than to say it will involve at least 2,200 hives, with hopes of increasing that number to 2,500. It is anticipated the yield will be medical grade and worth as high as $100 per kg.

[28]   Mr Watson says swarming (bees leaving the hive) is an issue this year, which will impact on production. I infer from this it is an argument in favour of having larger numbers to offset the issue. Mr Watson asserts numerous other such agreements have been terminated. In submissions Mr Sullivan submitted this was the first time that a landowner’s right to cancel an agreement had been challenged in court, indicating the loose nature of these contracts.

[29]   Mr Watson disputes the existence of the “ethical rule” referred to by Mr Morrison at the first meeting and emphasises the 2,500 figure in the Agreement as being the assessment at the time of what the property could sustain. Mr Watson calculates the difference to the first defendant between 1,500 and 2,500 hives, at a yield of $80 per kilo, is $720,000. He re-emphasises the risk to the first defendant if “he allows” the plaintiff to have the block this season. He expresses concern over the ability of the plaintiff to place quality hives on the property.

Submissions

[30]   The plaintiff submits the correct interpretation of the Agreement is that the plaintiff is exclusively entitled to place hives on the property up to a maximum of 2,500. It does not claim an unlimited discretion but rather that its decision must reflect its assessment of the number of hives that will maximise honey production during any season. That assessment is its to make. It disputes 2,500 is a starting point. If that were the intent it would have been easy to word the Agreement so that it plainly required 2,500 hives.

[31]   It submits its case is strong. It is a straight forward agreement and the defendant is clearly in breach. Although asserting that the number of hives is for it to decide, it notes that the figure being proposed by the plaintiff is higher than the number of hives ever before placed on the site. The figure it has identified is the one it believes will maximise honey production and under the contract that is the plaintiff’s assessment alone.

[32]   Turning to the balance of convenience it is submitted that this factor has less weight in cases involving clear breach of contract. Reliance is placed on Shell (Petroleum Mining) Co Ltd v Todd Petroleum Mining Co Ltd where the Court observed:2

[124] … What his Honour was stressing is that this was an application for  an injunction to restrain a breach of contract. Cases to restrain breaches of contract are prime candidates for injunctive relief. As Dr Spry QC observes, it is going too far to say that, “where it is sought to restrain a breach of contract or a breach of covenant, the court has no discretion to refuse an injunction”

2      Shell (Petroleum Mining) Co Ltd v Todd  Petroleum Mining Co Ltd [2007] NZCA 586, [2008] 2 NZLR 418 at [124]–[125].

(Spry, p 392). But injunctions to restrain breaches of contract are nonetheless common because “ordinarily … considerations of hardship on the part of the defendant do not prevent the grant of an injunction, not because they are irrelevant, but because they are of diminished weight in view of the fact that he has by his contract or covenant deliberately undertaken not to perform the acts that are in question.

[125] It is also highly significant, in our view, that, if the courts were to permit the Shell-appointed directors to breach STOS’s contractual obligations, they will effectively be sanctioning a fundamental alteration in the parties’ overall venture. Shell wants that venture to continue, but on significantly different terms. It should not be able to have its cake and eat it.

[33]   That passage aside, it is submitted the balance of convenience anyway favours relief. If the contract is not performed, the plaintiff loses its income. Despite doubts from the defendant, the Court is asked to accept the evidence of the plaintiffs that it has no alternatives available. By contrast if the contract is performed both parties will receive the income the Agreement provides for. The incentive is on the plaintiff to maximise its own income, with a corresponding benefit to the defendant.

[34]   The plaintiff queries the lack of evidence from the defendant as to its capacity to meet damages. There is a claim to equity in the land but no detail. Further, the purported termination is based on the defendants’ need for income from the season and the argument that a difference between say 1,600 and 2,200 (the current alternative) will be crucial.

[35]   Finally, in terms of the overall justice the plaintiff points to the importance of respecting contracts. This Agreement was entered into only in May and has not yet had an opportunity to progress through even one season. The plaintiff initiated discussions promptly, was met with delay (which the plaintiff submits could be seen as calculated) and then a late termination which leaves it without options.

[36]   The defendant contests the interpretation of the agreement and otherwise contends it is a clear case where damages are an adequate remedy. If it is unable to maximise its income it is placed at risk, and it has deposed there is sufficient equity to meet any claim.

[37]   Concerning the Agreement, the defendants accept the interpretation advanced by the plaintiffs to the extent that the maximisation of production is the governing

principle. It is submitted that is a concession by the plaintiff not previously made. However, it asserts the obligation is 2,500, such obligation then being subject to the maximisation principle. The defendants submit it is a ground for termination of the contract if it is apparent that the plaintiff will put less hives on the property than will maximise production and that is what has happened. The defendants, seeking to rely on evidence from Mr Watson Snr as to the intent of the 2,500 hive provision at the time of the Agreement, and submit the 2,500 was the anticipated number of hives and it is much more than just a limit.

[38]   Concerning damages, Mr Sullivan stresses the size of the plaintiff and its capacity to absorb its claimed loss until the proceedings are resolved. Further, it is submitted the defendants’ evidence, which is from the past owners of the plaintiff, concerning the ability of the plaintiff to relocate the 1,500 hives should be accepted. The ability to mitigate increases the adequacy of damages as a remedy. It is submitted the financial information provided is sufficient to respond to the plaintiff’s claim.

[39]   It is noted that when Mr Watson was manager of the honey business, prior to the divorce and the Agreement, it is clear from the evidence he intended to locate 2,000 hives on the property. This shows the capacity of the property, and the inadequacy of the plaintiff’s proposal. Further, it refutes the plaintiff’s claim that the defendants’ figures are unrealistic and inflated to support the termination.

[40]   In relation to public policy it is submitted the industry context, and the evidence that these agreements are not viewed as particularly binding, is relevant to the Court’s discretion.

Decision

[41]The criteria are well known and need not be set out.

[42]   Concerning an arguable case, it is appropriate to be circumspect. However, at this point I consider the strength plainly lies with the plaintiff. The second defendant affirmed the first defendant’s commitment to the Agreement as recently as May. It is in a Deed. At an interlocutory stage, I do not accept it is to be approached as other than a binding contract intended to be such.

[43]   The terms are plain. I accept that the operative clause is not exhaustive. It speaks of “up to”, but does not address a lower limit. A likely reading is that the lower limit is governed by the maximise production component. Where I part with the defendants is the proposition that disagreement with the rights holder’s assessment of what will maximise production affords the landowner the right to terminate. On the face of the Agreement, the decision as to what is the appropriate number of hives rests with the plaintiff. The exercise of that power is no doubt conditional to some extent so as to limit arbitrariness, but the defendants’ interpretation is not on its face an obvious one. It would be surprising if the mere belief that the figure was low entitled the landowner simply to terminate the Agreement.

[44]   Turning to balance of convenience, I accept that the passage from Shell is apposite. The Court’s primary role is to restrain a breach of contract. My assessment at this preliminary stage is that the defendants are merely repenting of a commitment struck as recently as May and wanting to sever the relationship in the hope of a better return elsewhere.

[45]   On the balance of convenience there are arguments both ways but enforcement of the contract is the option that best protects all parties. The defendants want income but have a right to it under the contract. The plaintiff has budgeted a return and has every incentive to try and obtain it. That will equally benefit the defendants. By contrast, if the apparent breach of contract is not restrained, whilst the defendants’ position is protected, the plaintiff’s is not. Whatever the former position of the company in its former manifestation, I accept the evidence of the plaintiffs as to its current position. It will be unable to relocate the hives. The income will be lost.

[46]   It is relevant that the number of hives it is intended to place on the site is greater than there has ever been before. The defendants advise they have alternative arrangements in place for more, but the Court is unaware of the terms, nor of the understandings of the hive owners as to the capacity of the land. Whatever the reasons why previous numbers are lower, the objective fact is the current proposal will be the highest number ever.

[47]   I do consider public policy is relevant here, and this goes back to Shell. On its face at this stage the defendants’ actions represent a clear breach of contract and its purported termination is invalid. It is a recent contract concerning which there has not yet been any opportunity to give effect to it. The defendants entered the contract only in May knowing the history and adopting the Agreement. Indeed, it was a requirement in order to get consent to acquiring the land.

[48]   This is not a contract for personal services.3 Other than allowing access to the land Mr Watson has no role at all, nor any need for contact. To grant the injunction, in a practical sense, is merely to direct the defendants to give the plaintiff the uninhibited access to the land it committed as recently as May to give.

[49]   The foregoing discussion makes it plain I consider the overall justice of the matter lies firmly with the plaintiff. The application is granted.

[50]   The parties were at odds over whether costs should be dealt with. I propose to make orders. The obvious outcome is costs follow the event. Memoranda may be filed if agreement is not reached.

Orders

[51]   I direct that pending resolution of the plaintiff’s claim, the defendants are required to give effect to the contract. In particular, that means the defendants are to allow access to the property as contemplated by the Agreement to enable the plaintiff to place its hives and thereafter tend to them.

[52]   I note my balance of convenience assessment has been undertaken on the basis that the plaintiff has committed to placing 1,682 hives on the property.

Simon France J

3      That distinguishes Finewood Upholstery Ltd v Vaughan [2017] NZHC 1195, [2017] NZAR 994 on which the defendants rely.

Addendum

[53]   The  plaintiff  seeks  confidentiality  of  one   aspect  of  the  affidavit   of   Mr Christopher Ford. It is, however, the other content of this affidavit that sparked the affidavit of Mr Denis Watson. I have made plain that some of the allegations in Mr Ford’s affidavit were irrelevant to these proceedings and should not have been there. They make accusations of impropriety that made it inevitable Mr Watson would reply. I direct the affidavits of Mr Ford and Mr Denis Watson are not to be searched without leave of the Court.