Watson and Son Limited v Active Manuka Honey Association

[2008] NZCA 566

IN THE COURT OF APPEAL OF NEW ZEALAND

CA762/2008
[2008] NZCA 566

BETWEENWATSON AND SON LIMITED

Appellant

ANDACTIVE MANUKA HONEY ASSOCIATION

Respondent

Hearing:15 December 2008

Court:Glazebrook, Robertson and Arnold JJ

Counsel:R B Stewart QC and K A Van Houtte for Appellant

G W Hall and B N White for Respondent

Judgment:19 December 2008 at 10.30 am 

JUDGMENT OF THE COURT

A        The appeal is dismissed.

BThe appellant must pay the respondent costs for a standard appeal on a Band A basis plus usual disbursements.

REASONS OF THE COURT

(Given by Arnold J)

Introduction

[1]       This is an appeal from a decision of Panckhurst J refusing to grant the appellant interim orders: HC HAM CIV 2008-419-001495 5 December 2008. 

[2]       At the request of the parties, we heard the appeal as a matter of urgency.  As we indicated at the hearing, we consider that this is a case which should be settled by the parties given the commercial interests that each has at stake and the nature of the legal issues.  But if that is not possible, the case should go to a substantive hearing as soon as possible.  The issues in the case are not well suited to adjudication at this interlocutory stage, even on a preliminary basis.

Background

[3]       Briefly, the appellant, Watson & Son Ltd (Watson), produces manuka honey, most of which it exports, principally to the United Kingdom.  Certain strains of manuka honey are known to have medicinal qualities greater than those normally associated with honey, in particular antibacterial qualities.  The respondent, the Active Manuka Honey Association Inc (AMHA), owns the Unique Manuka Factor® and UMF® trade marks.  Watson has entered into a licence agreement with AMHA to use the UMF® mark.

[4]       AMHA, with the assistance of Professor Molan, developed a test to identify the antibacterial strength of manuka honey.  Licenced users may use the UMF® mark on their products, together with a number (or “factor”) indicating the antibacterial strength of the particular product (eg, UMF®10).  The factors go from 10 in increments to 30+, which indicates the honey with the strongest antibacterial properties.  Consumers are prepared to pay a premium for honey having such properties.

[5]       Honey is produced in batches.  Under the licence arrangement, samples are taken from individual batches for testing by a designated testing agency.  Depending on the result of the testing, the batch will be given a factor to indicate the antibacterial strength of the batch, and that will be included on the label of the individual jars of honey drawn from the batch.  There may be as many as 5000 jars from one batch.

[6]       Watson is a relatively new enterprise, which has expanded its operations rapidly.  It has had considerable success in United Kingdom markets.  It joined AMHA in 2006.  At that time, although AMHA tested for the antibacterial strength factor using Professor Molan’s test, it had sought a report from him about the test’s reliability.  Professor Molan recommended some changes to the test to improve its reliability in certain respects, but AMHA has not yet implemented them.

[7]       In November 2007 AMHA carried out a routine audit on Watson’s products in the United Kingdom.  The testing raised a concern that Watson was selling honey that did not conform to its labelled antibacterial strength factor.  Watson was advised of this and was asked to provide the test reports on which it had relied in labelling the honey.  Further testing in March 2008 gave rise to a similar concern and Watson agreed that it would recall three batches of its honey from its distributors (but not from retailers).

[8]       In August 2008 AMHA became concerned that this “soft” recall had not been carried out as agreed, and issued a notice requiring Watson to complete the recall within ten days.  A month later, dissatisfied with the steps Watson had taken, AMHA issued a notice of termination of the licence.  However, after some interaction with Watson’s solicitors, AMHA withdrew the termination notice and undertook further testing.  Many samples of Watson’s manuka honey were acquired from retailers across the United Kingdom and were tested.  According to AMHA, this testing revealed that about 65 per cent of the samples were not true to label, the tested strength factor being materially less than the labelled strength factor.

[9]       As a consequence, on 10 October 2008 AMHA issued a notice alleging that Watson was in breach of cl 9.1 of the licence and requiring it to rectify the breach within ten working days, failing which the licence would be terminated.   Specifically, the notice said:

3AMHA hereby gives Watson & Son notice of this breach [of cl 9.1] and pursuant to clause 18.1 of the Agreement requires Watson & Son, within 10 working days of this notice, to rectify the breach to the satisfaction of AMHA.  In that respect, AMHA considers that the only satisfactory manner in which the breach may be rectified is by effecting:

(a)A complete recall of those tested batches found not to comply with the Label Claim Rating, namely 08/116, 08/062; 08/049; NZL07/91228; 08/013B; and 08/003.

(b)Sample testing of every batch of Watson & Son’s honey which is currently in the market and bearing the AMHA Trademark.  If any of these tests show that any honey is not true to label, then Watson & Son must also effect a complete recall of these batches.

4Unless Watson & Son provides AMHA with conclusive evidence to AMHA’s satisfaction that these arrangements have been made within 10 working days of this notice, AMHA reserves its right to immediately thereafter terminate the Agreement pursuant to clause 18.1.  In that event, AMHA also reserves its right to itself undertake a recall of the offending products and further testing of Watson & Son’s products generally with a view to ensuring that it meets its own obligations to consumers to ensure that the Watson & Son honey products that bear the AMHA trademark are true to label.

[10]     Watson issued the present proceedings on 22 October 2008.  Before describing them, we should note that Watson changed its mixing methods in May 2008.  As a consequence, Watson considers that its honey should test true to label in the future.  It notes that the batches of honey at issue in the present dispute with AMHA are pre-May 2008 batches.

Watson’s application

[11]     Watson’s statement of claim contains two causes of action:

(a)The first alleges an anticipated breach of contract.  Watson alleges that as a result of the unreliability of the testing method there is “no conclusive evidence” that the batches at issue do not conform to the labelled antibacterial strength factor.  Accordingly, Watson did not breach cl 9.1 of the licence, and is not required to recall the batches.  AMHA is not entitled to terminate the licence.  Watson seeks a declaration to this effect and damages.

(b)The second alleges improper interference with contractual relations.  Watson alleges that it has sold the honey at issue to distributors in the United Kingdom, who have in turn sold it to retailers.  It alleges that AMHA knows this and intends to interfere with the contracts to pressure Watson into effecting a recall, without lawful justification.  Watson alleges that this will cause it significant loss.  It seeks permanent injunctions and damages.

[12]     Mr Stewart QC, who has only recently become involved for Watson, said that the statement of claim might be amended to include a cause of action under the Fair Trading Act 1986.  However, we must deal with the case on the basis of the pleadings as they currently stand.

[13]     In conjunction with filing its statement of claim, Watson applied for the following interim orders:

1Active Manuka Honey Association (‘AMHA’) by its directors, employees, servants and agents or otherwise be restrained from:

aTerminating the Licence Agreement for Use of UMF Trade Mark granted to Watson and Son Limited (‘Watson & Son’) in or around May 2006 (‘the Licence Agreement’);

bContacting Watson & Son’s distributors and/or purchasers of Watson & Son’s products including but not limited to Lifeplan, Canners & Packers, Holland & Barrett, Tesco and Julian Graves (together ‘Customers’) and advising that Watson & Son is in breach of the Licence, and/or from making disparaging remarks about Watson & Son’s products to its Customers; and

cImplementing a product recall of Watson & Son’s products from any of its Customers.

High Court decision

[14]     Panckhurst J refused the application for interim orders.  He held:

(a)The essential issue underlying the dispute was the reliability of the Association’s testing methodology: at [23]. On that issue, the appellant had an arguable case “but hardly a strong one”: at [48].

(b)Ultimately, damages would probably not be an adequate remedy for Watson, essentially because of doubts about the ability of the Association to meet an award of damages: at [54].

(c)However, nor would damages be an adequate remedy for the Association given the difficulty of quantifying the damage to the value of the trade mark: at [56].

(d)As to third parties, although there were detrimental effects both ways, there might be significant damage to the value of the marks if the orders were made, and so to the other enterprises licensed to use them, and to New Zealand’s image more generally: at [58] – [59].

(e)The grant of interim orders until trial would incur greater risk of injustice than the denial of the orders.  The Judge was influenced in this assessment by the relatively narrow scope of the Association’s 10 October notice and the fact that, as a result of the change to its mixing methods in May 2008, Watson may have substantially resolved its difficulties, so that testing on post-May batches might reveal no significant problems: at [60] – [61].

Basis of appeal

[15]     Mr Stewart advanced three principal points.  He submitted:

(a)The Judge wrongly focussed on the issue of the reliability of the testing methods when considering whether there was a serious question to be tried.  There were other matters which the Judge should have considered (see [20] below).

(b)The Judge was wrong to hold that the reliability issue underpinned both causes of action.  In terms of the second cause of action, the appellant’s case was that the Association was not entitled to contact Watson’s customers to advise them that it was in breach of licence or to implement a product recall.

(c)In assessing the balance of convenience the Judge failed to take relevant matters into account and had regard to speculative or unproven matters.

[16]     AMHA gave notice that it supported the judgment on other grounds, namely:

(a)There was no serious question to be tried because under the licence the parties were obliged to use the test, so that its reliability or unreliability was irrelevant.  Further, if Watson’s product failed to conform by reference to the agreed test methodology, AMHA was entitled to contact Watson’s customers to advise them of its breach.

(b)Watson had not provided details of its financial position, so that the Court could not assess its ability to meet its undertaking as to damages.  This weighed heavily against the grant of an injunction.

[17]     As to this last point, Mr Stewart submitted that Watson was able to provide detailed financial information which would establish that Watson had the ability to meet its undertaking as to damages.

Discussion

[18]     There was no dispute about the correctness of the approach adopted by Panckhurst J in dealing with the application (serious question to be tried, balance of convenience and overall justice).  As both parties acknowledged, the exercise of a discretion was involved.

[19]     Nor was there any dispute about the approach to be taken on appeal.  Given that the Judge exercised a discretion, the role of this Court is not simply to substitute its view for that of the Judge.  Rather, the Court must consider whether the Judge acted on a wrong principle, failed to take account of some relevant matter, took some irrelevant matter into account or was “plainly wrong”: see Novartis New Zealand Ltd v Aktiebolaget Hassle [2004] 2 NZLR 721 at [53] – [54] (CA) and Hadmor Productions Ltd v Hamilton [1983] 1 AC 191 (HL), per Lord Diplock at 220.

[20]     Mr Stewart argued that Panckhurst J was right to find that there was an arguable case that the test was unreliable.  But he said that there was also an arguable case on two further questions.  They were whether there was a breach of cl 9.1, which was the basis for the notice of termination, and whether, under the audit process provided for in the licence, AMHA was entitled to require Watson to recall product and, if it did not do so, to recall product itself.  Mr Stewart pointed out that there was nothing in the licence which explicitly gave AMHA that power.  Accordingly, Mr Stewart submitted, although the Judge was right to hold that Watson had an arguable case, he was wrong to hold that it was “hardly a strong one”.  To the contrary, Mr Stewart said, Watson’s case was strong.

[21]     As already noted, Mr Hall argued that the reliability or unreliability of the test was irrelevant as Watson had agreed in the licence to be bound by the specified testing regime and could not now dispute it.  As a result, there was no serious question to be tried on the reliability issue.  Further, while maintaining AMHA’s argument that cl 9.1 had been breached, Mr Hall submitted that in any event AMHA could have relied on another clause, cl 8.2, because it had clearly been breached.  He accepted that the licence did not explicitly give AMHA the power to require Watson to recall product that was not, or might not be, true to label, or to recall product itself, but said that such a power had to be implied into the licence.

[22]     There are difficult issues to be resolved at trial on the question of liability.  For example, at first sight there appears to be some force in AMHA’s contention that the parties have agreed a particular testing methodology and are bound by the results it produces.  Equally, however, there is clearly some doubt about AMHA’s power to order or undertake recalls given that the licence is silent on the point.  Consequently, both sides are at risk of adverse findings on particular points. 

[23]     That said, we do not consider that the issues can sensibly be addressed, even on a preliminary basis, at this interlocutory stage.  Overall, we are not persuaded that the Judge’s assessment on the serious question issue was one that he could not properly have made.

[24]     On the balance of convenience, two factors are of particular significance.  The first is that, even accepting that the testing method has deficiencies, there is significant evidence that some Watson product in the United Kingdom is not true to label.  This may, as Watson claims, be an historical problem, but that does not mean it is a problem that can be ignored.  Apart from anything else, there are the interests of consumers to be considered.   This is a powerful factor against granting the orders sought.

[25]     The second is that there is no evidence before the Court to show that Watson is able to meet its undertaking as to damages.  Mr Stewart said that an independent accountant, Mr Pettersen, had been given access to Watson’s financial data and was able to verify that Watson could meet its undertaking.  He said that the relevant material had not been made available in the High Court out of a concern about confidentiality, but it would be provided to us if we were minded to allow the appeal and make the orders sought.  That is an unusual approach.  The courts frequently deal with confidential material and we see no reason why Watson’s financial data was not made available in the High Court, with suitable arrangements to preserve its confidentiality.

[26]     We accept that there is no evidence to show that AMHA would be able to meet an award of damages if one were to be made against it.  Apparently, none of its members has agreed to indemnify it if such an award is made.  Plainly that is an important consideration in the balance of convenience assessment.  But Watson was the applicant in this case.  It sought orders in its favour, and so had the initial obligation to give an undertaking as to damages.  Given that its ability to meet its undertaking was not self-evident, it should also have provided sufficient financial information to enable the Court to assess the worth of the undertaking.  It did not do so.

[27]     Finally, we agree with the Judge (at [60]) that, if this is an historical problem given Watson’s adoption of a new mixing process, it may be that the concerns in AMHA’s 10 October notice can be met without major disruption to Watson’s operations.

[28]     In the result, we see no error in any aspect of the Judge’s analysis.  He was entitled to reach the view he did and to decline to make the orders sought.  In those circumstances we have no justification for interfering.

Decision

[29]     The appeal is dismissed.  The appellant must pay the respondent costs for a standard appeal on a Band A basis plus usual disbursements.

Solicitors:

Kensington Swan, Auckland for Appellant
Buddle Findlay, Auckland for Respondent