Settlers Honey Limited v First Honey NZ Limited
[2021] NZHC 2650
•6 October 2021
IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKAORIORI ROHE
CIV-2021-435-7
[2021] NZHC 2650
BETWEEN SETTLERS HONEY LIMITED
Plaintiff
AND
FIRST HONEY NZ LIMITED
Defendant
Hearing: 21 September 2021 Appearances:
N Jessen for Plaintiff
S J Iorns for Defendant
Judgment:
6 October 2021
JUDGMENT OF ASSOCIATE JUDGE LESTER
SETTLERS HONEY LIMITED v FIRST HONEY NZ LIMITED [2021] NZHC 2650 [6 October 2021]
[1] The plaintiff, Settlers Honey Limited (Settlers Honey) seeks summary judgment against First Honey NZ Limited (First Honey) in the sum of $648,254 being the proceeds of an export shipment of 17,266 kg of medical grade manuka honey at
$37 per kg.
[2] The buyer of the honey was a company incorporated in the United States, First Honey LLC (First Honey US), which has a close association with First Honey. While it was honey belonging to Settlers Honey that was exported and while Settlers Honey invoiced First Honey on terms requiring payment to be made to Settlers Honey, First Honey US paid the sum in issue to First Honey. First Honey has refused to account for the money received from First Honey US, in substance claiming it has a set-off against that amount.
[3] Mr Iorns, counsel for First Honey, submitted a constructive trust claim was not apposite to what he submitted was “a straightforward debt claim … whereby [First Honey] would (but for its set-off) be liable to pay [Settlers Honey]”.
[4] Settlers Honey claims the export deal was put in place by First Honey as its agent. Settlers Honey relies on two causes of action: that First Honey holds the sale proceeds as constructive trustee with or without an agency relationship between the parties and, in the alternative, a claim for money had and received.
The relationship between the parties
[5] Settlers Honey is in the beekeeping industry. Mr Matthews is its sole director and one of its shareholders. Settlers Honey owns land, which it uses along with land of third parties, for the placement of beehives. It harvests honey which it processes to different commercial grades. It describes itself as being involved in all aspects of the production, manufacture and supply of honey for a variety of uses.
[6] First Honey sells medical grade manuka honey as an alternative to antibiotics. Mr Watson is the sole director and shareholder of First Honey. Mr Scarlet is the Chief Operating Officer of First Honey US and is Mr Watson’s brother-in-law.
[7] The commercial arrangements between Settlers Honey and First Honey are informal. While Mr Matthews says he has known Mr Watson for about 10 years, it is apparently only in the last two or three years that a business relationship has developed between the companies.
[8] I mention at this point a company called Land & Bee’s Limited of which Mr Matthews is director and shareholder. Mr Watson describes Land and Bee’s Ltd at one point having owed First Honey about $800,000 which was being paid at the rate of $6,500 per week. In respect of this indebtedness Mr Watson says: “the wash up arising from it is part of our broader dispute”.
[9] The business relationship between Settlers Honey and First Honey included the placement of beehives on each other’s properties and the purchase of honey from each other’s hives to fulfil orders. Mr Matthews says Settlers Honey often purchased honey from First Honey under this arrangement and, on other occasions, Settlers Honey sold honey from hives kept on First Honey’s land.
[10] As to sales by Settlers Honey to First Honey US, Mr Matthews says as far as he can recall, there were only two previous sales and, on both occasions, they were export deals brought to Settlers Honey by Mr Watson. Mr Matthews says Settlers Honey relied on First Honey to specify the requirements for the purchase as broker.
[11] In addition to the above arrangements, Settlers Honey also stored substantial quantities of honey contained in large drums on behalf of First Honey. I was told these drums typically hold 300 kg of honey and that Settlers Honey stored some thousands of kilos of honey of different grades for First Honey during 2020.
[12] The terms upon which Settlers Honey stored First Honey’s honey are in dispute. There is a document called “2020 Extraction Records” comprising the inventory held by Settlers Honey for First Honey as at 16 April 2020 sent by Settlers Honey to First Honey. Settlers Honey also sent a price list it prepared dated 11 June 2020 recording the amounts Settlers Honey was prepared to pay for First Honey’s honey held in its store (the June 2020 price list). The price varied according to the grading of the honey.
[13] First Honey’s position is it had not, in effect, made a standing offer to sell the stored honey to Settlers Honey at the prices in the 2020 price June list. First Honey considered the prices were too low and treated the June 2020 price list as no more than indicating the level at which Settlers Honey was prepared to purchase the honey. As First Honey was not willing to sell at those prices, First Honey says no response was called for, nor did Settlers Honey contact it during 2020 offering to buy stored honey at the price in the June 2020 price list.
[14] Settlers Honey says in the 2018/2019 season it purchased all First Honey’s honey it had in storage and submitted there was a course of dealing that permitted it to purchase at the price in the June 2020 price list as and when it wanted to.
[15] The uncertainty around the terms upon which Settlers Honey held First Honey’s stock cannot be resolved in this context. Had the arrangement been as suggested by Settlers Honey, then I would have expected that, as Settlers Honey acquired First Honey’s stock, it would have produced a buyer-generated invoice and sent it to First Honey to advise what stock had been acquired and to make payment. It does not follow from Settlers Honey having purchased all of First Honey’s honey in the previous season that Settlers Honey was entitled to do so in the following season, or that Settlers Honey was entitled to acquire First Honey’s stock as and when it suited it to do so. As will be developed below, Settlers Honey only accounted to First Honey for the honey it had acquired during 2020 when First Honey in late December 2020 made arrangements to uplift all of its stock for storage elsewhere.
[16] This conclusion means I am satisfied that there is a reasonably arguable claim by First Honey against Settlers Honey for what First Honey has called Settlers Honey’s “forced purchases”. Whether this is seen as conversion or breach of bailment is not relevant for present purposes. I will return to the quantum of this claim below.
Whose honey was to be exported?
[17] The significance of these “forced purchases” is that First Honey says it understood it had stock on hand at Settlers Honey’s premises to itself meet the export order to First Honey US.
[18]Accordingly, First Honey says it missed out on the export transaction at
$37 per kg as Settlers Honey had acquired the honey it could have exported at the price specified in the June 2020 spreadsheet. First Honey’s loss is therefore the difference between the price Settlers Honey paid for the stock it “purchased” from First Honey, and the export price. When in late December 2020 First Honey said it was going to uplift its stock, Settlers Honey paid out First Honey for the stock it had acquired earlier in 2020 at the rates in the June 2020 price list.
[19] Accordingly, First Honey has already been paid the June 2020 price. On First Honey’s best case, it would have filled the export order entirely from its own product. I say on its best case as the affidavits refer to Settlers Honey and First Honey making up the order 50/50, but of course that did not occur.
[20] The key quality requirement for the export order was the honey had to have an NPA (non-peroxide activity) of 11+. In Settlers Honey’s June 2020 price list, honey with a predicted NPA of around 11 has a value of $28 per kg . The export shipment was 17,266 kg so the loss is the $9 difference between the price paid to First Honey by Settlers Honey under the June 2020 price list and the export price of $37 per kg, being $155,394.
[21] Much of the evidence and submissions concerned who was meant to be the vendor for the export order. Settlers Honey says it was the vendor and that First Honey was an agent/broker for which First Honey was to receive a commission of
$1.00 per kg. First Honey denies it was an agent or that it agreed to a commission. Whether an agency relation existed is subject to an unresolvable conflict on the evidence. First Honey says it intended to meet the export order itself but could not do so because its stock had been subject to the “forced purchase” issue already noted. I consider the real significance of the export order as being evidential.
[22] If the true position is that First Honey was to meet the export order itself then it missed out on selling its honey at $37 per kg, instead receiving the $28 per kg paid by Settlers Honey. First Honey does not say it had stock held elsewhere from which it could have met the export order. On the other hand, if it was Settlers Honey that was going to meet the order from its own stock then the export price provides some
evidence as to the loss of profit suffered by First Honey as a result of the “forced purchase” of its stock at an undervalue.
[23] I find that the circumstances in which Settlers Honey acquired First Honey’s stock means First Honey has a reasonably arguable claim against Settlers Honey in that regard. The real issue is whether that claim (worth just over $155,000) entitles Settlers Honey to retain the balance of the nearly $650,000 it received as the proceeds of the export order.
Money had and received
[24] Mr Jessen, counsel for Settlers Honey, submitted that all Settlers Honey had to show to succeed under this cause of action was that payment was made by mistake by First Honey US to First Honey. Mr Iorns submitted this cause of action did not get off first base as Mr Scarlet has deposed that, in a discussion he had with Settlers Honey, it was agreed that First Honey US would pay the money to First Honey. Accordingly, Mr Scarlet said the payment to First Honey was made with the agreement of Settlers Honey. While this evidence is not directly responded to, it is at odds with the position Settlers Honey has adopted from the time it sent the invoice requiring payment to be made to its account.
[25] Assuming Mr Scarlet’s evidence is correct, that evidence does not mean Settlers Honey, or even First Honey US, intended that First Honey would become beneficially entitled to the proceeds of the export shipment. It is clear beyond doubt that Settlers Honey did not intend that to occur. If that is what Mr Scarlet had in mind then First Honey and Settlers Honey were at cross purposes. On this basis, the payment was made as a result of a mistake between Settlers Honey and First Honey US.
[26] A qualifying stake for the claim of money had and received is that the payer at the time of payment believed the recipient was entitled to the money. In OPC Managed Rehab Ltd v Accident Compensation Corporation, payment was made by ACC of invoices raised by OPC.1 ACC made those payments because it believed
1 OPC Managed Rehab Ltd v Accident Compensation Corporation [2006] 1 NZLR 778 (CA).
OPC was entitled to the money at the time of the payments – that is why the payments were made. Subsequently, ACC determined it had overpaid the invoices and sought their recovery on the basis of money had and received by way of a statutory demand.
[27] Here, for the reasons given, Settlers Honey did not intend that First Honey be able to retain the money received. Even if Mr Scarlet is correct and it was agreed that the money would be paid to First Honey, Mr Scarlet did not believe First Honey was entitled to receive the money. Such is made clear by a text message dated 1 March 2021, which resulted from Settlers Honey chasing payment from First Honey US. There, Mr Scarlet said all Settlers Honey needs to do to get paid is to raise an invoice to First Honey. That suggestion by Mr Scarlet can only mean that he also saw Settlers Honey as being entitled to payment from First Honey upon raising an invoice. The text message from Mr Scarlet on 1 March 2020 said: “Hi Henry, our understanding was to pay First Honey NZ (Dan & Tim) who would then pay you. Have you raised a GST invoice to [First Honey] for the November shipment?”. In a further text, Mr Scarlet said: “The invoice needs to go to [First Honey] and have GST added”.
[28] It would seem that, notwithstanding the dispute as to whether the funds were to go first to First Honey, it is common ground that Settlers Honey and Mr Scarlet believed Settlers Honey was entitled to the money.
[29] The other relevant factor that comes out of OPC Managed Rehab Ltd v Accident Compensation Corporation is that if a claim for money had and received can be established then it is characterised as a claim for a debt. The Court said:2
[54] In the result, we conclude that, if a payment is received in circumstances where the recipient is obliged to repay it, whether because of a contractual or statutory provision to that effect or because the circumstances give rise to an obligation to repay on the basis of money had and received, the amount can be treated as a “debt due” for the purposes of [a statutory demand].
[30] Of course the present case does not concern a statutory demand. However, the above passage shows that the amount received by First Honey in circumstances where
2 OPC Managed Rehab Ltd, above n 1.
it was obliged to repay on the basis of money had and received means that a debt is payable by First Honey.
[31] Again, even on Mr Scarlet’s view, First Honey would be paying the money received to Settlers Honey. As noted at [3], First Honey accepts that, but for establishing a set-off, it would be liable to pay the funds to the Settlers Honey. Absent a right to retain the proceeds of the export shipment, First Honey was obliged to pay the money to Settlers Honey as again, First Honey does not assert a right to retain other than by way of set-off.
[32] The analysis I have carried out in respect of the alleged set-off shows that First Honey only has an arguable set-off in respect of $155,394. I refer to the quantum of the set-off in more detail below. However, I am satisfied that Settlers Honey is entitled to judgment on the basis of its money had and received cause of action and I will enter judgment under that cause of action below. Before doing so, I turn to Settlers Honey’s alternative cause of action of a constructive trust.
Clean hands
[33] As Settlers Honey seeks to recover the proceeds of the US export order through the imposition of a constructive trust, Mr Iorns submitted:
13.A party coming to equity must do so with clean hands. If [First Honey’s] assertions are borne out, [Settlers Honey] created a situation whereby [First Honey’s] own product was unavailable to meet its obligations to its sister company, forcing [First Honey] to expend its labours to enable [Settlers Honey] to use its own product, profiting from both selling [First Honey’s] honey for significantly less than [First Honey] was prepared to sell it for, and taking the entirety of the profit from a deal that [First Honey] both found and oversaw within the [Settlers Honey] factory.
14.To enjoy the benefit of the defence of clean hands, the alleged wrong of the plaintiff must be directly related to the equitable claim against the defendant.3 [First Honey] alleges that the wrong suffered on it created the circumstances which give rise to the claim the applicant makes, ultimately enabling it to profit from its conversion of [First Honey’s] own honey.
(emphasis in original)
3 Moody v Cox [1917] 2 Ch 71 (CA).
[34]While the profit First Honey allegedly lost on the export order is nearly
$500,000 less than the amount it seeks to retain, Mr Iorns submitted the absence of clean hands arising from First Honey’s claim bars Settlers Honey from being able to seek any relief by way of constructive trust.
[35] I do not accept that submission. For the defence of unclean hands to apply the conduct of the plaintiff said to trigger the defence must be directly related to the equitable claim against the defendant.4 The fact that $155,000 of the nearly
$650,000 received by First Honey is, on its case, profit it should have enjoyed, does not permit it to retain the balance of the export proceeds.
[36] I have not overlooked that Mr Jessen, in effect, submitted that the “forced purchase” claim had nothing to do with the US export order. That submission was made because Mr Jessen submitted First Honey was aware at the time the export order was sent that none of its stock was included in the shipment. This submission is based on the evidence of a Mr Eagle who is a production manager for First Honey. He attended Settlers Honey’s premises to assist in the processing of the export order and to assist with quality control. Mr Eagle’s evidence is that before attending the site, he emailed Settlers Honey identifying 9,195 kg of honey from the list of drums owned by First Honey, which I assume to be the April inventory list referred to at [12] above. That occurred on 24 September 2020. On 5 October 2020 there was further correspondence between Mr Eagle and Settlers Honey and in his affidavit Mr Eagle says:
At this stage the actual drums for the order had not been confirmed so I requested … a list of inventory that they had available for us to purchase from.
[37] Mr Eagle then received from Settlers Honey what is called a “Blend Plan” which did not include any honey owned by First Honey. He says:
Due to time constraints in meeting this order we proceeded on the basis that we would either purchase the honey from [Mr Matthews] or swap with him honey of an equivalent value.
4 Charles Rickett Laws of New Zealand Equitable Defences: Clean Hands (online ed) at [284].
[38] There is merit in Mr Jessen’s submission that this evidence does not say the discussions were with representatives of Settlers Honey. The impression given by the evidence is that these were discussions within First Honey. Mr Eagle’s evidence concludes:
I was not aware of the specifics of the deal between [First Honey] and [Settlers Honey], but I understood that we would use half of the [First Honey] stock that [Settlers Honey] held for us, and half of [Settlers Honey’s] stock.
[39] Mr Eagle does not give the basis of this understanding, which is noteworthy, particularly when the Blend Plan did not include any First Honey stock. Mr Eagle assumed there would be some wash up or reconciliation after the event between the parties. Mr Watson’s evidence was the intention at that time was the shipment would be met on a 50/50 basis but that, as at the date of the shipment in December 2020, the volume supplied by Settlers Honey had still not been finalised.
[40] The high point of the argument for First Honey is that it could have met all of the export shipment from the stock it says was improperly taken by Settlers Honey and as a result it lost a profit of $155,000.
[41] I note here that if Mr Eagles had identified in his email of 24 September 2020, referred to at [36], nearly 10,000 kg of honey from the April inventory list that First Honey thought was in store, Settlers Honey (if it believed it was entitled to acquire that stock at the prices in the June 2020 price list) would have replied that it had exercised its option to purchase the stock and that the stock was no longer available. The absence of such advice reinforces my conclusion that the circumstances in which the stock was “acquired” by Settlers Honey are far from clear and that First Honey has established that it has a reasonably arguable claim against Settlers Honey in relation to its stock “taken” by Settlers Honey.
Quantification of the balance of the claimed set-off
[42] I have already referred to First Honey having referred in this dispute to sums owed to it by Land & Bee’s Ltd. In his affidavit of 20 May 2021, Mr Watson said:
Over the course of January 2021 various attempts were made at quantifying the various contributions from the multitude of contractual relationships.
After much consideration and thought on the matter I sent Mr Matthews an email on 12 March 2021 outlining my position on the various matters between the parties and stating that his various entities owed [First Honey]
$619,776.37.
(emphasis added)
[43] In the 12 March 2021 email Mr Watson said he sent “[a]fter much consideration and thought”, Mr Watson claimed that the $619,776.37 was made up as follows:
•-$28,122.60 that you think I still owe you
•$247,130.04 still payable for your forced purchase of honey
•$300,768.93 payable on the Manuka Wilderness royalty
•$100,000 in my contributions to your business
[44] As to the “forced purchase of honey”, other than the loss of profit that I have assessed on the export order, there is no explanation for the balance of the $247,130 claimed. Other than the figure of $247,130, there is no attempt to establish that the June 2020 price list did not represent fair value. The royalty payment mentioned in the email above, given what Mr Watson says in his affidavit set out at [8] and [42] above, is owed by another entity and not by Settlers Honey. No attempt is made to justify the final item.
[45] First Honey cannot seek to raise as a set-off a debt that it may be owed by another entity.5 Mr Iorns pointed to some evidence that the parties had in the past pooled inter-company balances to arrive at a net position. Assuming that had been done for commercial convenience on the two occasions referred to by Mr Iorns, such in my view is not enough to establish that Settlers Honey agreed First Honey would be entitled to a credit for an amount a company related to Settlers Honey may owe to First Honey. If such a pooling of what was owed by different entities had been agreed I would have expected direct evidence of such.
[46] While this is a summary judgment application and the documents are prepared under some time pressure, it was for First Honey to properly quantify its set-off. Again, Mr Watson’s own evidence is that he quantified the set-off he now relies on “[a]fter much consideration and thought on the matter”.
5 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [38.4.10].
Availability of constructive trust relief
[47] Other than the defence of clean hands, Mr Iorns submitted that relief by way of a constructive trust was not available in these circumstances, as this was a debt claim where imposing a constructive trust was not appropriate. Mr Jessen relied on Elders Pastoral Ltd v Bank of New Zealand, which confirmed the circumstances in which a constructive trust is available and said:6
A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.
[48] First Honey knew the money it received did not represent the sale of its honey (other than claims of a set-off and clean hands), it did not advance a reason why it should be able to retain Settlers Honey’s money. Here, the defence was based on the clean hands argument being a “king hit” in respect of the claim for the full sum. The use of a constructive trust can have implications for other creditors of First Honey. Given I am satisfied Settlers Honey is entitled to judgment for money had and received, and given I understand it has the benefit of an undertaking from a third party to meet any shortfall in recovery from First Honey, I decline to enter judgment in favour of Settlers Honey in relation to the constructive trust cause of action without an understanding of First Honey’s solvency.
Decision
[49] I am satisfied Settlers Honey is entitled to judgment for $492,860.01, on the basis of its cause of action for money had and received and I enter judgment in favour of Settlers Honey in that sum. The judgment sum is the amount received by First Honey for the export shipment of $648,254.01 less $155,394.00, being the maximum loss of profit First Honey could have suffered in respect of missing out on the export order as set out at [20] above.
[50] If First Honey is owed sums by Land & Bee’s Ltd or other entities associated with Settlers Honey, then First Honey has its remedies directly against those entities.
6 Elders Pastoral Ltd v Bank of New Zealand [1989] 2 NZLR 180 (CA) at 185, citing
Neste Oy v Lloyd’s Bank Plc[1983] 2 Lloyds Rep 658 (Comm) at 665-666.
If it wishes to pursue a claim that its stock was converted or subject to “forced purchases” at an undervalue, then it will need to quantify that claim by reference to the stock that was taken and what it says was the true market value for that stock at the time it was taken less the payment actually received.
[51] Interest is awarded on the above sum in terms of s 10 of the Interest on Money Claims Act 2016.
Costs
[52] I did not hear counsel on costs. I see no reason why costs should not follow the event on a 2B basis together with disbursements as fixed by the Registrar. If no memoranda as to costs are filed within five working days of the date of this Judgment, then there shall be an order in terms of costs on a 2B basis plus disbursements as fixed by the Registrar in favour of Settlers Honey.
The future of the proceeding
[53] Settlers Honey’s counsel is to reflect on whether an amendment to the statement of claim will be required following this Judgment, if only to adjust the quantum of the claims. If so, counsel are to liaise as to when that amended statement of claim will be filed.
Associate Judge Lester
Solicitors:
Cooper Rapley Lawyers, Palmerston North Upper Hutt Law, Upper Hutt
Copy to counsel: S J Iorns, Barrister, Wellington
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