SETTLERS HONEY LIMITED v FIRST HONEY NZ LIMITED [2021] NZHC 2650

SETTLERS HONEY LIMITED v FIRST HONEY NZ LIMITED [2021] NZHC 2650 [6 October 2021]IN THE HIGH COURT OF NEW ZEALANDMASTERTON REGISTRYI TE KŌTI MATUA O AOTEAROAWHAKAORIORI ROHECIV-2021-435-7[2021] NZHC 2650BETWEEN SETTLERS HONEY LIMITEDPlaintiffAND FIRST HONEY NZ LIMITEDDefendantHearing: 21 September 2021Appearances: N Jessen for PlaintiffS J Iorns for DefendantJudgment: 6 October 2021JUDGMENT OF ASSOCIATE JUDGE LESTER[1] The plaintiff, Settlers Honey Limited (Settlers Honey) seeks summaryjudgment against First Honey NZ Limited (First Honey) in the sum of $648,254 beingthe 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, FirstHoney LLC (First Honey US), which has a close association with First Honey. Whileit was honey belonging to Settlers Honey that was exported and while Settlers Honeyinvoiced First Honey on terms requiring payment to be made to Settlers Honey, FirstHoney US paid the sum in issue to First Honey. First Honey has refused to accountfor the money received from First Honey US, in substance claiming it has a set-offagainst that amount.[3] Mr Iorns, counsel for First Honey, submitted a constructive trust claim was notapposite to what he submitted was "a straightforward debt claim whereby [FirstHoney] 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 itsagent. Settlers Honey relies on two causes of action: that First Honey holds the saleproceeds as constructive trustee with or without an agency relationship between theparties 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 directorand one of its shareholders. Settlers Honey owns land, which it uses along with landof third parties, for the placement of beehives. It harvests honey which it processes todifferent commercial grades. It describes itself as being involved in all aspects of theproduction, 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 ChiefOperating Officer of First Honey US and is Mr Watson's brother-in-law.[7] The commercial arrangements between Settlers Honey and First Honey areinformal. While Mr Matthews says he has known Mr Watson for about 10 years, it isapparently only in the last two or three years that a business relationship has developedbetween the companies.[8] I mention at this point a company called Land & Bee's Limited of whichMr Matthews is director and shareholder. Mr Watson describes Land and Bee's Ltd atone point having owed First Honey about $800,000 which was being paid at the rateof $6,500 per week. In respect of this indebtedness Mr Watson says: "the wash uparising from it is part of our broader dispute".[9] The business relationship between Settlers Honey and First Honey includedthe placement of beehives on each other's properties and the purchase of honey fromeach other's hives to fulfil orders. Mr Matthews says Settlers Honey often purchasedhoney from First Honey under this arrangement and, on other occasions, SettlersHoney 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 ashe can recall, there were only two previous sales and, on both occasions, they wereexport deals brought to Settlers Honey by Mr Watson. Mr Matthews says SettlersHoney relied on First Honey to specify the requirements for the purchase as broker.[11] In addition to the above arrangements, Settlers Honey also stored substantialquantities of honey contained in large drums on behalf of First Honey. I was told thesedrums typically hold 300 kg of honey and that Settlers Honey stored some thousandsof kilos of honey of different grades for First Honey during 2020.[12] The terms upon which Settlers Honey stored First Honey's honey are indispute. There is a document called "2020 Extraction Records" comprising theinventory held by Settlers Honey for First Honey as at 16 April 2020 sent by SettlersHoney to First Honey. Settlers Honey also sent a price list it prepared dated11 June 2020 recording the amounts Settlers Honey was prepared to pay for FirstHoney's honey held in its store (the June 2020 price list). The price varied accordingto the grading of the honey.[13] First Honey's position is it had not, in effect, made a standing offer to sell thestored honey to Settlers Honey at the prices in the 2020 price June list. First Honeyconsidered the prices were too low and treated the June 2020 price list as no more thanindicating the level at which Settlers Honey was prepared to purchase the honey. AsFirst Honey was not willing to sell at those prices, First Honey says no response wascalled for, nor did Settlers Honey contact it during 2020 offering to buy stored honeyat the price in the June 2020 price list.[14] Settlers Honey says in the 2018/2019 season it purchased all First Honey'shoney it had in storage and submitted there was a course of dealing that permitted itto 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 FirstHoney's stock cannot be resolved in this context. Had the arrangement been assuggested by Settlers Honey, then I would have expected that, as Settlers Honeyacquired First Honey's stock, it would have produced a buyer-generated invoice andsent 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 inthe 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 suitedit to do so. As will be developed below, Settlers Honey only accounted to First Honeyfor the honey it had acquired during 2020 when First Honey in late December 2020made arrangements to uplift all of its stock for storage elsewhere.[16] This conclusion means I am satisfied that there is a reasonably arguable claimby 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 notrelevant 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 itunderstood it had stock on hand at Settlers Honey's premises to itself meet the exportorder 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 pricespecified in the June 2020 spreadsheet. First Honey's loss is therefore the differencebetween 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 touplift its stock, Settlers Honey paid out First Honey for the stock it had acquired earlierin 2020 at the rates in the June 2020 price list.[19] Accordingly, First Honey has already been paid the June 2020 price. On FirstHoney'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 makingup 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 anNPA (non-peroxide activity) of 11+. In Settlers Honey's June 2020 price list, honeywith a predicted NPA of around 11 has a value of $28 per kg . The export shipmentwas 17,266 kg so the loss is the $9 difference between the price paid to First Honeyby 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 thevendor for the export order. Settlers Honey says it was the vendor and that First Honeywas 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 theevidence. First Honey says it intended to meet the export order itself but could not doso 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 thenit missed out on selling its honey at $37 per kg, instead receiving the $28 per kg paidby Settlers Honey. First Honey does not say it had stock held elsewhere from whichit could have met the export order. On the other hand, if it was Settlers Honey thatwas going to meet the order from its own stock then the export price provides someevidence as to the loss of profit suffered by First Honey as a result of the "forcedpurchase" of its stock at an undervalue.[23] I find that the circumstances in which Settlers Honey acquired First Honey'sstock means First Honey has a reasonably arguable claim against Settlers Honey inthat regard. The real issue is whether that claim (worth just over $155,000) entitlesSettlers Honey to retain the balance of the nearly $650,000 it received as the proceedsof the export order.Money had and received[24] Mr Jessen, counsel for Settlers Honey, submitted that all Settlers Honey hadto show to succeed under this cause of action was that payment was made by mistakeby First Honey US to First Honey. Mr Iorns submitted this cause of action did not getoff first base as Mr Scarlet has deposed that, in a discussion he had with SettlersHoney, 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 agreementof Settlers Honey. While this evidence is not directly responded to, it is at odds withthe position Settlers Honey has adopted from the time it sent the invoice requiringpayment to be made to its account.[25] Assuming Mr Scarlet's evidence is correct, that evidence does not meanSettlers Honey, or even First Honey US, intended that First Honey would becomebeneficially entitled to the proceeds of the export shipment. It is clear beyond doubtthat Settlers Honey did not intend that to occur. If that is what Mr Scarlet had in mindthen First Honey and Settlers Honey were at cross purposes. On this basis, thepayment was made as a result of a mistake between Settlers Honey and FirstHoney US.[26] A qualifying stake for the claim of money had and received is that the payer atthe time of payment believed the recipient was entitled to the money. InOPC Managed Rehab Ltd v Accident Compensation Corporation, payment was madeby ACC of invoices raised by OPC.1 ACC made those payments because it believed1 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 paymentswere made. Subsequently, ACC determined it had overpaid the invoices and soughttheir 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 beable to retain the money received. Even if Mr Scarlet is correct and it was agreed thatthe money would be paid to First Honey, Mr Scarlet did not believe First Honey wasentitled to receive the money. Such is made clear by a text message dated1 March 2021, which resulted from Settlers Honey chasing payment from FirstHoney US. There, Mr Scarlet said all Settlers Honey needs to do to get paid is to raisean invoice to First Honey. That suggestion by Mr Scarlet can only mean that he alsosaw Settlers Honey as being entitled to payment from First Honey upon raising aninvoice. The text message from Mr Scarlet on 1 March 2020 said: "Hi Henry, ourunderstanding 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 afurther text, Mr Scarlet said: "The invoice needs to go to [First Honey] and have GSTadded".[28] It would seem that, notwithstanding the dispute as to whether the funds wereto go first to First Honey, it is common ground that Settlers Honey and Mr Scarletbelieved Settlers Honey was entitled to the money.[29] The other relevant factor that comes out of OPC ManagedRehab Ltd v Accident Compensation Corporation is that if a claim for money had andreceived can be established then it is characterised as a claim for a debt. The Courtsaid:2[54] In the result, we conclude that, if a payment is received incircumstances where the recipient is obliged to repay it, whether because ofa contractual or statutory provision to that effect or because the circumstancesgive rise to an obligation to repay on the basis of money had and received, theamount 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, theabove passage shows that the amount received by First Honey in circumstances where2 OPC Managed Rehab Ltd, above n 1.it was obliged to repay on the basis of money had and received means that a debt ispayable by First Honey.[31] Again, even on Mr Scarlet's view, First Honey would be paying the moneyreceived to Settlers Honey. As noted at [3], First Honey accepts that, but forestablishing a set-off, it would be liable to pay the funds to the Settlers Honey. Absenta right to retain the proceeds of the export shipment, First Honey was obliged to paythe money to Settlers Honey as again, First Honey does not assert a right to retainother than by way of set-off.[32] The analysis I have carried out in respect of the alleged set-off shows that FirstHoney only has an arguable set-off in respect of $155,394. I refer to the quantum ofthe set-off in more detail below. However, I am satisfied that Settlers Honey is entitledto judgment on the basis of its money had and received cause of action and I will enterjudgment under that cause of action below. Before doing so, I turn to Settlers Honey'salternative cause of action of a constructive trust.Clean hands[33] As Settlers Honey seeks to recover the proceeds of the US export order throughthe imposition of a constructive trust, Mr Iorns submitted:13. A party coming to equity must do so with clean hands. If [FirstHoney's] assertions are borne out, [Settlers Honey] created a situationwhereby [First Honey's] own product was unavailable to meet itsobligations to its sister company, forcing [First Honey] to expend itslabours to enable [Settlers Honey] to use its own product, profitingfrom both selling [First Honey's] honey for significantly less than[First Honey] was prepared to sell it for, and taking the entirety of theprofit from a deal that [First Honey] both found and oversaw withinthe [Settlers Honey] factory.14. To enjoy the benefit of the defence of clean hands, the alleged wrongof the plaintiff must be directly related to the equitable claim againstthe defendant.3 [First Honey] alleges that the wrong suffered on itcreated the circumstances which give rise to the claim the applicantmakes, ultimately enabling it to profit from its conversion of [FirstHoney'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 ofclean hands arising from First Honey's claim bars Settlers Honey from being able toseek any relief by way of constructive trust.[35] I do not accept that submission. For the defence of unclean hands to apply theconduct of the plaintiff said to trigger the defence must be directly related tothe 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, doesnot permit it to retain the balance of the export proceeds.[36] I have not overlooked that Mr Jessen, in effect, submitted that the "forcedpurchase" claim had nothing to do with the US export order. That submission wasmade because Mr Jessen submitted First Honey was aware at the time the export orderwas sent that none of its stock was included in the shipment. This submission is basedon the evidence of a Mr Eagle who is a production manager for First Honey. Heattended Settlers Honey's premises to assist in the processing of the export order andto assist with quality control. Mr Eagle's evidence is that before attending the site, heemailed Settlers Honey identifying 9,195 kg of honey from the list of drums ownedby 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 furthercorrespondence between Mr Eagle and Settlers Honey and in his affidavit Mr Eaglesays:At this stage the actual drums for the order had not been confirmed soI requested a list of inventory that they had available for us to purchasefrom.[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 thatwe would either purchase the honey from [Mr Matthews] or swap with himhoney 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 thediscussions were with representatives of Settlers Honey. The impression given bythe evidence is that these were discussions within First Honey. Mr Eagle's evidenceconcludes:I was not aware of the specifics of the deal between [First Honey] and [SettlersHoney], but I understood that we would use half of the [First Honey] stockthat [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 Eagleassumed there would be some wash up or reconciliation after the event between theparties. Mr Watson's evidence was the intention at that time was the shipment wouldbe met on a 50/50 basis but that, as at the date of the shipment in December 2020, thevolume 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 ofthe export shipment from the stock it says was improperly taken by Settlers Honeyand 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 FirstHoney thought was in store, Settlers Honey (if it believed it was entitled to acquirethat stock at the prices in the June 2020 price list) would have replied that it hadexercised 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 whichthe stock was "acquired" by Settlers Honey are far from clear and that First Honeyhas established that it has a reasonably arguable claim against Settlers Honey inrelation 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 sumsowed 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 quantifyingthe various contributions from the multitude of contractual relationships.After much consideration and thought on the matter I sent Mr Matthews anemail on 12 March 2021 outlining my position on the various matters betweenthe 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 muchconsideration and thought", Mr Watson claimed that the $619,776.37 was made up asfollows: -$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 haveassessed on the export order, there is no explanation for the balance of the $247,130claimed. Other than the figure of $247,130, there is no attempt to establish that theJune 2020 price list did not represent fair value. The royalty payment mentioned inthe 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 tojustify the final item.[45] First Honey cannot seek to raise as a set-off a debt that it may be owed byanother entity.5 Mr Iorns pointed to some evidence that the parties had in the pastpooled inter-company balances to arrive at a net position. Assuming that had beendone for commercial convenience on the two occasions referred to by Mr Iorns, suchin my view is not enough to establish that Settlers Honey agreed First Honey wouldbe entitled to a credit for an amount a company related to Settlers Honey may owe toFirst Honey. If such a pooling of what was owed by different entities had been agreedI would have expected direct evidence of such.[46] While this is a summary judgment application and the documents are preparedunder 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 wayof a constructive trust was not available in these circumstances, as this was a debtclaim where imposing a constructive trust was not appropriate. Mr Jessen relied onElders Pastoral Ltd v Bank of New Zealand, which confirmed the circumstances inwhich a constructive trust is available and said:6A constructive trust is the formula through which the conscience of equityfinds expression. When property has been acquired in such circumstances thatthe holder of the legal title may not in good conscience retain the beneficialinterest, 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 itshould be able to retain Settlers Honey's money. Here, the defence was based onthe 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 FirstHoney. Given I am satisfied Settlers Honey is entitled to judgment for money had andreceived, and given I understand it has the benefit of an undertaking from a third partyto meet any shortfall in recovery from First Honey, I decline to enter judgment infavour of Settlers Honey in relation to the constructive trust cause of action withoutan understanding of First Honey's solvency.Decision[49] I am satisfied Settlers Honey is entitled to judgment for $492,860.01, on thebasis of its cause of action for money had and received and I enter judgment in favourof Settlers Honey in that sum. The judgment sum is the amount received by FirstHoney for the export shipment of $648,254.01 less $155,394.00, being the maximumloss of profit First Honey could have suffered in respect of missing out on the exportorder as set out at [20] above.[50] If First Honey is owed sums by Land & Bee's Ltd or other entities associatedwith 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, citingNeste 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 "forcedpurchases" at an undervalue, then it will need to quantify that claim by reference tothe stock that was taken and what it says was the true market value for that stock atthe 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 MoneyClaims Act 2016.Costs[52] I did not hear counsel on costs. I see no reason why costs should not followthe event on a 2B basis together with disbursements as fixed by the Registrar. If nomemoranda 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 fixedby 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 thestatement of claim will be required following this Judgment, if only to adjustthe quantum of the claims. If so, counsel are to liaise as to when that amendedstatement of claim will be filed._________________________Associate Judge LesterSolicitors:Cooper Rapley Lawyers, Palmerston NorthUpper Hutt Law, Upper HuttCopy to counsel: S J Iorns, Barrister, Wellington