Watson & Son Ltd v Active Manuka Honey Association

[2009] NZCA 595

IN THE COURT OF APPEAL OF NEW ZEALAND

CA469/2009
CA470/2009
[2009] NZCA 595

BETWEENWATSON & SON LIMITED

Appellant

ANDACTIVE MANUKA HONEY ASSOCIATION

Respondent

Hearing:22 October 2009

Court:Arnold, Randerson and Allan JJ

Counsel:T J Cooley and K J Scott for Appellant

S S Cook for Respondent

Judgment:15 December 2009 at 3 pm 

JUDGMENT OF THE COURT

A            The appeal and cross-appeal are both dismissed.

B            Costs are to be fixed in accordance with [46] of this judgment.

____________________________________________________________________

REASONS OF THE COURT

(Given by Randerson J)

Introduction

[1]        This appeal and cross-appeal form part of ongoing litigation between the parties over trademark and associated labelling issues in connection with the sale of manuka honey.  The case is concerned with costs issues arising from two sets of interlocutory injunction proceedings already determined between the parties.  In particular, it raises issues about the scope and application of a provision for indemnity costs contained in a licence agreement between the parties which has since been cancelled.

[2]        As a result of research undertaken at the University of Waikato, it was discovered that New Zealand manuka honey contained an active ingredient with antibacterial properties.  A laboratory test to assess the level of the antibacterial activity was developed.  The level of that activity is expressed as a unique manuka factor (UMF) with a corresponding number e.g. UMF 15. 

[3]        The respondent, the Active Manuka Honey Association (the Association), was incorporated by a group of manuka honey producers and is the holder of the trademark UMF which has been registered in New Zealand and a number of other countries.  The Association has licensed a number of parties to use the trademark in consideration of the payment of licence fees and product levies.  The appellant, Watson & Son Limited (Watson), was one of those licensees until its licence was terminated on 21 December 2008.

[4]        The licence agreement contained elaborate provisions for the testing and labelling of honey sold under the licence.  As a result of a routine audit undertaken in November 2007, the Association asserted that Watson was selling honey which was not true to label.  In particular, the Association alleged that the level of antibacterial activity in the product was below that indicated on the label.  Further testing during 2008 did not resolve the issue and the Association took steps to terminate the licence. 

The litigation

[5] Watson issued proceedings against the Association on 27 October 2008 seeking, amongst other things, an interim injunction to restrain the Association from terminating the licence agreement. Panckhurst J declined the interim injunction in a decision delivered on 5 December 2008. This Court promptly dismissed Watson’s appeal from Panckhurst J’s decision on 19 December 2008: [2008] NZCA 566.

[6]        On the same day, Watson advised it was withdrawing from membership of the Association.  Then, on 21 December 2008, the Association advised Watson that it was treating Watson’s actions as a repudiation of the licence agreement.  The Association advised Watson that the licence was terminated with immediate effect and requested Watson to recall any product still in its control which had been distributed using the Association’s trademark.  Watson did not take any steps to recall product, maintaining that it had no obligation to do so in relation to product distributed before termination of the licence.

[7]        In January 2009 Watson wrote to its customers advising it would be using a testing method which it maintained was new and better.  It also began distributing its product under a label which the Association asserted was confusingly similar to its trademark.  The Association filed a counterclaim in the proceedings already issued by Watson and sought an interim injunction restraining Watson from using the Association’s trademark and from using the words “UNIQUE MANUKA FACTOR”.

[8]        In a decision delivered on 30 July 2009 Wild J granted the interim injunction sought by the Association: HC HAM CIV-2008-419-1495.  It is common ground that the Association’s counterclaim did not rely on a breach of the licence agreement since it had already been terminated.  Rather, the Association alleged infringement of trademark, passing off and breach of the Fair Trading Act 1986.  Wild J ordered Watson to pay the Association’s costs on a 3C basis.  He rejected the Association’s submission that it was entitled to indemnity costs from Watson under cl 16.2 of the licence agreement.

[9]        Shortly before Wild J’s decision was delivered, Panckhurst J delivered a decision on 8 July 2009 granting the Association indemnity costs against Watson in relation to his decision of 5 December 2008 declining Watson’s application for an interim injunction restraining the Association from terminating its licence.  The amount claimed was $72,856.37 including disbursements.  The Judge sought further information about the quantum of the Association’s costs.  Panckhurst J’s decision about the amount of the costs to which the Association was entitled was still pending at the date of the hearing before us.

The indemnity clause in the licence

[10]       The award of indemnity costs made by Panckhurst J was made under cl 16.2 of the licence agreement.  Clause 16 provided:

16          EXCLUSION, INDEMNITY AND INSURANCE

16.1The Licensee is responsible for ensuring compliance with all government regulations relating to Products for each country and jurisdiction where the Products are sold.

16.2The Licensee indemnifies AMHA against all actions and damages that may result from the Licensee’s operations in relation to the Products.

16.3AMHA is not liable to the Licensee for any damages caused to the Licensee through the Licensee’s, or any other Licensee’s, use of the Trademark.

16.4The Licensee must have insurance cover sufficient to meet the Licensee’s obligation to indemnify AMHA against all actions and damages that may result from the Licensee’s operations in relation to the Products.

[11]       Watson appeals against the grant of indemnity costs by Panckhurst J, while the Association cross-appeals against the refusal of Wild J to award indemnity costs in the interim injunction proceedings before him.

Panckhurst J’s decision

[12]       Panckhurst J recorded that the Association relied on r 48C(4) of the High Court Rules (then in force) in terms of which the court could order a party to pay indemnity costs if it was “entitled to indemnity costs under a contract or deed”.  (The corresponding rule is now r 14.6(4)(e)).  Five points had been raised by Watson in opposition to the Association’s application for costs.  These were:

(a)Clause 16.2 was ambiguous and should be construed contra proferentem.

(b)The reference to “all actions and damages” did not include legal costs.

(c)The clause covered only third party claims and not claims as between licensor and licensee.

(d)The contract should not be construed in a way which permitted one party to take advantage of its own wrong.

(e)It would be unreasonable to construe the clause as applicable in litigation taken by a licensee against the Association.

[13]       The Judge was satisfied that the litigation before him resulted from Watson’s “operations in relation to the Products” in terms of cl 16.2 stating at [12]:

In short, it was the sale overseas of honey bearing the UMF trademark which, when tested, was not true to label, which spawned the dispute.  The Association required Watson to remedy the breach, failing which it would invoke the termination clause contained in the licence agreement.  On this analysis, in my view, the subject-matter of the dispute was within the confines of cl 16.2.

[14]       As to the fourth and fifth contentions, the Judge considered the situation was conventional in the sense that the Association had succeeded in resisting the interim injunction application brought by Watson and the recovery of costs could not then be said to be unreasonable or amount to the Association taking advantage of its own wrong. 

[15]       The Judge regarded the essential point as being whether the absence of any express reference to costs in cl 16.2 meant that the Association could not recover.  He approached the issue of construction on the basis that cl 16.2 was to be viewed in context and in the factual setting in which it was concluded.  As it was a commercial contract, the Judge considered that “the clause must be interpreted as businessmen would do.”  The Judge then concluded at [17]:

… Nonetheless, in my view the wording is plain and unambiguous.  Clearly an indemnity in favour of the Association was intended.  That indemnity is “against all actions and damages” resulting from a licensee’s operations in relation to honey bearing the UMF trademark.  I see no reason to read down these words so as to exclude indemnification in relation to legal costs.  To the contrary, given the existence of an incorporated association, dependent upon licence fees paid by its licensees, there is every reason to interpret the words in cl 16.2 in accordance with their broad natural meaning.

Grounds of appeal

[16]       Mr Cooley for Watson submitted that:

(a)Clause 16.2 did not plainly and unambiguously state that legal costs were recoverable and should be construed strictly so as to exclude the recovery of legal costs on an indemnity basis.  The clause should also be construed contra proferentem. 

(b)Clause 16.2 related only to third party claims and not to claims brought by the Association against Watson.

(c)The Judge took into account an irrelevant consideration namely that the respondent is an incorporated association dependent on licence fees paid by its licensees.

(d)There was a residual discretion which the Judge should have exercised against the grant of indemnity costs in favour of the Association.

Discussion

[17]       Prima facie, costs are fixed on a party and party basis unless the party seeking costs on an alternative basis can establish an entitlement “either on some well-recognised principle, or under some contract plainly and unambiguously expressed”: Re Adelphi Hotel (Brighton) Ltd [1953] 1 WLR 955 at 961 (Ch). This general approach is reflected in Part 14 of the High Court Rules, under which costs are normally fixed on a party and party basis but may be increased or ordered on an indemnity basis under r 14.6.

[18]       Re Adelphi Hotel was cited with approval by this Court in ANZ Banking Group (NZ) Ltdv Gibson [1986] 1 NZLR 556 at 566. The Court was there considering a bank guarantee in terms of which the guarantors were liable for:

[A]ll costs and expenses in or for which the Bank is or may become liable or may charge against the Customer including all costs and expenses (computed as between solicitor and own client) of or incidental to obtaining or enforcing or attempting to obtain or enforce payment of all or any of such monies as aforesaid under or by virtue of this Guarantee or otherwise. 

[19]       This Court held at 566:

The undertaking in the guarantee for payment of costs of enforcement on a solicitor/client basis is in my view an extending provision intended to entitle the bank to indemnity with respect to legal expenses properly incurred by it in relation to a recovery action under the guarantee.  Clearly that contractual obligation is enforceable unless contrary to public policy and I am unable to see how this contractual arrangement could be said to impede the administration of justice or otherwise be contrary to any discernible public policy considerations.

[20]       The relevant principles were reiterated in succinct terms by Fisher J in the judgment of this Court in Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd (1994) 2 NZ ConvC 191,873 at 191,887:

The ANZ Banking case … established that in principle one party may contractually bind itself to pay the other party’s full solicitor–client costs.  In such a case the Court must decide what tasks attract a costs indemnity on a proper construction of the contract, whether the task undertaken in the instant case was one of those contemplated in the contract, whether the steps taken were reasonably necessary in pursuance of that task, whether the rate at which they were then charged was reasonable having regard to the principles normally applicable to solicitor–client costs, and whether any other principles drawn from the general law of contract would in whole or in part deny the claimant its prima facie right to judgment.  These are all matters of objective assessment.

[21]       A number of cases were cited to us in relation to indemnity clauses of this type but the result inevitably depends upon the true interpretation of the provision at issue and its application to the circumstances of the case.  We agree with Panckhurst J that a provision of this type is to be interpreted upon ordinary principles of construction which require consideration of the language used in the context of the agreement as a whole in its factual matrix.  If it is established that the provision for indemnity costs is applicable in the circumstances, then it is enforceable in accordance with its terms unless public policy considerations require a different result.  The amount of any costs so awarded must be objectively reasonable. 

[22]       We have no doubt that cl 16.2, properly construed, includes an award of legal costs on an indemnity basis.  The use of the term “actions or damages” plainly contemplates the possibility of court proceedings which may result in the Association incurring legal costs.  The extent of the indemnity is expressed in unqualified terms.  We see no reason why it should not extend to cover legal costs incurred by the Association in relation to actions and damages falling within the scope of the clause. 

[23]       The authority most in point is the decision of this Court in Beecher v Mills [1993] MCLR 19.  The case arose from a claim for legal costs under an indemnity given to the vendor in an agreement for the sale of shares in a company.  It was recognised that a third party might bring proceedings against the company.  The relevant clause of the agreement differs from that in the present case as it refers specifically to the possibility of a claim by a named party but it is relevant here since the indemnity made no specific reference to legal costs.  The relevant clause provided:

If any claim shall be made against the Company ...by one J R Arkley in respect of matters arising prior to this agreement the vendors indemnify the purchasers against all such actions claims or judgments by J R Arkley against the Company ... and the purchasers grant the vendor the authority on behalf of the Company ... to take all action necessary to defend such actions or claims.

[24]       The Court set out at 22–23 the general approach to the interpretation of indemnity clauses in similar terms to those we have stated above and found that the indemnity clause applied in accordance with its terms.  As to the extent of the indemnity, the Court said at 24–25:

The applicable rule is stated by Halsbury (Vol 20 para 314) [see now Halsbury’s Laws of England (5 ed) [1265]] as follows:

In all cases where there is a contract of indemnity the costs of legal proceedings properly incurred by the person indemnified are recoverable under the indemnity.

A distinction may be drawn between a person entitled by contract to an indemnity for costs and one who is simply recovering costs as damages (Great Western Railway Co v Fisher [1905] 1 Ch 316, 324). In the case of a contract it must in the end be a matter of determining what recovery is expressly or impliedly intended. In principle, anything less than a full indemnity for costs properly incurred must leave the indemnitee with part of the liability for which the indemnifier is prima facie responsible (Simpson and Miller v British Industries Trust Ltd (1923) 39 TLR 286, 289). In the absence of a contrary indication it is not to be assumed that the parties intended such a result. Nor can there ordinarily be any room for the exercise of a judicial discretion to order less costs and thereby erode the contractual protection the indemnity was intended to provide. A contractual obligation of that kind is enforceable unless contrary to public policy and, as in ANZ Banking Group (New Zealand) Ltd …, we are unable to see how requiring the Beechers in this case to meet all costs (calculated on a solicitor/client basis) properly incurred by Mr Mills in relation to the performance of the indemnity under cl 20 could be said to impede the administration of justice or otherwise be contrary to any discernible public policy considerations.

[25]       We conclude in accordance with these principles and, in agreement with Beecher v Mills, that cl 16.2 provides an indemnity in favour of the Association in respect of legal costs incurred by it on a solicitor – client basis in respect of actions falling within the terms of the clause.  We are satisfied that the recovery of legal costs in these circumstances is necessarily implied as a matter of construction of the terms of the indemnity.

[26]       The next question is whether the legal costs were incurred by the Association as a result of “the Licensee’s operations in relation to the products.”  It is not in dispute that cl 16.2 is at least wide enough to include legal costs incurred by the Association as a result of actions brought against it by third parties resulting from Watson’s operations under the licence agreement in relation to the products as defined in the agreement.  Nor is there any issue that the honey sold by Watson during the currency of the licence agreement fell within the definition of “Products” under the agreement. 

[27]       The real question is whether the clause was intended to provide an indemnity in respect of legal costs incurred by the Association in respect of litigation brought against the Association by Watson.  On this issue, we find ourselves in agreement with Panckhurst J, substantially for the reasons he gave.  The only qualification to the broad scope of the indemnity in cl 16.2 is that the actions and damages must result from Watson’s operations in relation to the defined products.  It was the sale of honey by Watson otherwise than in conformity with the licence agreement which gave rise to the Association’s concerns leading to the Association’s requirement that Watson remedy the breach or face the termination of the licence.  When Watson brought the interim injunction proceedings against the Association, legal costs were necessarily and properly incurred by the Association in resisting (successfully) that application.  Like the Judge, we do not see any need to read down the clear scope of the clause nor construe it contra proferentem.

[28]       Mr Cooley submitted that cl 16.2 should be construed in the light of cl 16.1 relating to Watson’s obligation to comply with government regulations in respect of products sold for each country and jurisdiction concerned.  We see no necessary connection between cl 16.1 and 16.2.  If cl 16.2 had been intended to be read in the way contended for by Watson, then this could easily have been stated.  Instead, it was expressed in broad unqualified terms.

[29]       Mr Cooley submitted that if the indemnity were available as Panckhurst J found, then it would mean that the Association would be entitled to indemnity costs in any litigation with Watson arising from the latter’s operations under the licence even if the Association failed in the litigation.  The answer to this submission is that recovery by the Association in such circumstances would properly be denied on public policy grounds.  It could not ordinarily be appropriate to allow a party who loses litigation to recover its costs from the successful party.

[30]       We are not persuaded that the Judge took into account an irrelevant consideration when referring to the Association being dependent on licence fees paid by its licensees.  The Judge was entitled to consider the construction of the agreement in light of its factual matrix.  Plainly, the Association is not a major corporate entity and it was to be expected that it would wish to be protected from liability incurred as a result of its licensees’ operations in the sale of the defined products.

[31]       The last point relates to the issue of discretion.  Mr Cooley referred us to some decisions suggesting that there may be an overriding discretion to decline an indemnity for costs of the kind at issue. 

[32]       Reference was made to a judgment of Frater J in Pangani Properties Ltd v Owens Transport Ltd HC AK CIV-2001-404-2036 12 July 2004 at [24] and an oral judgment of Master Kennedy-Grant in Noma Oysters Ltd v S A Brown HC AK CP 35/96 24 February 1998.  However, we do not read either of those cases as supporting the contention that some form of general discretion is available.  Frater J’s reference to a discretion was qualified by her statement that a discretion might apply if the costs provision in the contract says as much.  However, construing the indemnity in the case before her, Frater J interpreted “all costs, charges ... and expenses...incurred by the Lessor... in order to remedy any breach of covenant by the lessee ... or in suing for ... any monies payable hereunder to the Lessor” as meaning “nothing less than all costs on a solicitor–client basis”: at [25]. 

[33]       In the Noma Oysters case, Master Kennedy-Grant did not refer to the existence of a discretion.  Rather, by applying what he described as the well-established practice of the Courts of Chancery as expressed in Re Aldephi Hotel, a clause in a debenture providing an indemnity in respect of “all costs and expenses that may properly be incurred by the Lender in enforcing or protecting the security hereby granted ...” did not cover solicitor–client costs.  For the reasons already stated, we cannot accept that interpretation. 

[34]       Mr Cooley also referred us to the decision of Stevens J in Boatspray Ltd v The Ship “Shengala” HC AK CIV 2009-404-002524 28 August 2009 at [54].  Stevens J stated that the Court had a discretion whether or not to award indemnity costs even if provided for, and to determine what is a reasonable sum citing Frater J’s decision in Pangani: at [54]. For the reasons given, we are unable to accept the correctness of that statement either.

[35]       It is clear in principle and on authority that once it is established that the indemnity is applicable in the circumstances and that, properly construed, it includes solicitor–client costs, no discretion remains available other than on public policy grounds or as part of an assessment by the court as to whether the amount of the solicitor – client costs is objectively reasonable: see the passage already cited from Beecher v Mills at [22] above and also the observations of Fisher J in Frater Williams in respect of the assessment of the reasonableness of the amount of party and party costs at 191,887:

The object is not to exercise a discretion but rather to assess whether the solicitor–client costs sought are properly attributable to the exercise contemplated in the original contract and are charged for at a level which would be regarded as acceptable in a costs revision under the Law Practitioners Act. 

[36]       Fisher J was referring to the Law Practitioners Act 1982, which is no longer in force.  However, it is clear from his remarks that a discretion in the usual sense does not exist in this context.  In the absence of any countervailing public policy considerations, the court is concerned only with assessing the reasonableness of the amount of the solicitor–client costs incurred. 

[37]       For these reasons, the appeal against Panckhurst J’s award to the Association of solicitor–client costs is dismissed.

Cross-appeal

[38]       The cross-appeal by the Association can be dealt with briefly.  Mr Cook accepted on behalf of the Association that it did not rely on any breach of the licence agreement when seeking the interim injunction dealt with by Wild J.  He also accepted that it was not established in the proceedings heard by Wild J that the products at issue were produced before termination of the licence and, further, that there was no finding by the Judge of any breach of the licence during its currency. 

[39]       Mr Cook submitted nevertheless that the ability to rely upon the indemnity under cl 16.2 survived the termination of the licence.  He relied upon cl 3.2 of the licence agreement (an acknowledgement by Watson that ownership of the trademark and any rights thereto including goodwill arising from use of the trademark by the licensee remained vested in the Association) and on cl 18.2 (which provided that, on termination of the licence, Watson was obliged to stop all use of the trademark, return all materials and all intellectual property relating to the trademark, and remove the trademark from the products and promotional materials under its control). 

[40]       We accept Mr Cooley’s submission that the provisions of the licence only survived termination to the extent there was a breach of the licence by Watson prior to termination.  In the absence of proof of any breach of the licence during its currency, we are satisfied that the indemnity under cl 16.2 is not available.  The reference in cl 16.2 to “the Licensee’s operations in relation to the Product” relates to the licensee’s operations under the agreement.  The counterclaim was not based on Watson’s operations under the licence.  Rather, the counterclaim was based on Watson’s sales using its revised label after termination. 

[41]       The Association cannot rely on cl 16.2 for another reason.  It relates only to Watson’s operations in relation to the “Products”.  The “Products” are defined in cl 2 as meaning “the Product(s) listed in Schedule A that contain honey meeting the Quality Standard”.  Clause 2 of Schedule A provides:

2PRODUCTS

2.1For products consisting of 100% honey, the product must only contain Tested Honey.

2.2For manufactured products, the product must state the proportion of Tested Honey together for the Trademark including the number indicating the antibacterial strength of the “Unique Manuka Factor” (eg. “contains 25% honey of UMF^® 10”).

2.3Products consisting of both tested and non-tested honey must not be marked with the Trademark.

[42]       The term “Tested Honey” is defined by clause 2 of the definition as meaning “New Zealand honey that has been tested and shown to meet the Quality Standard”.  In turn, “Quality Standard” is defined in clause 2 as meaning the “Quality Standard for UMF^® New Zealand Honey, attached in appendix 2, as may be revised from time to time.”  Appendix 2 then sets out a test procedure and standards to be met.

[43]       Following termination of the licence agreement, it is plain that Watson was no longer undertaking “operations in relation to the Products”.  It was producing and selling product using a different testing process than that contemplated by the licence agreement and using different labelling.  The Association recognised it could not rely on any breach of the licence agreement by bringing instead proceedings for infringement of its trademark, passing off and breaches of the Fair Trading Act.

[44]       In these circumstances, we are satisfied that Wild J was correct to conclude that the indemnity under cl 16.2 of the licence agreement was not available in the circumstances. 

[45]       For these reasons, the cross-appeal is also dismissed.

Costs

[46]       The Association sought costs on a solicitor–client basis in connection with the appeal.  We see no reason why it should not be entitled to indemnity costs under cl 16.2 in successfully opposing Watson’s appeal against the costs award although recovery should be reduced to 80 per cent of the Association’s costs to reflect its failure on the cross-appeal.  The Association is to file and serve a memorandum as to the costs incurred on an indemnity basis within 14 days.  Watson will have 14 days thereafter to file and serve a memorandum in response.

Solicitors:

Kensington Swan, Auckland for Appellant

Buddle Findlay, Auckland for Respondent