Fearns (t/a Autopaint International) v Anglo-Dutch Paint & Chemical Company Ltd & Ors [2010] EWHC 1708 (Ch)

[2010] EWHC 1708 (CH)Case No HC05C01961IN THE HIGH COURT OF JUSTICECHANCERY DIVISION(INTELLECTUAL PROPERTY)Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 9 July 2010
Before
MR. G. LEGGATT Q.C.Sitting as a Deputy Judge of the Chancery Division
Between
GARY FEARNSClaimant(1) ANGLO-DUTCH PAINT & CHEMICAL COMPANY LIMITEDDefendants(2) DE BEER LAKFABRIEKEN BVDefendant(3) CHRISTOPHER WELCHDefendant(4) RICHARD JONGSMADefendant(5) MARCO VAN DER WOUDEDefendant(6) THEO WEMMERSDefendant
Alastair Wilson Q.C.and Giles Fernando (instructed by Bevans Solicitors) for ClaimantThomas Moody-Stuart (instructed by Faegre & Benson) for DefendantsHearing Hearing dates: 24–28 May, 17 June 2010
JUDGMENT As Approved by the CourtMr G. Leggatt Q.C.:

Introduction

[1]By a judgment given on 2 May 2007 (“the Liability Judgment”) and Order dated 25 May 2007 following a trial in this action, Mr Christopher Floyd QC (as he then was), sitting as a Deputy High Court Judge, held that the Claimant, Mr Gary Fearns, is entitled to damages for trade mark infringement, passing off and breach of contract. Judgment was also given for the Defendants on a counterclaim for the unpaid price of goods sold to Mr Fearns. The Judge directed that there should be an enquiry to assess the amount of the damages and other sums payable. This judgment follows the hearing of that enquiry. The central issue in the enquiry is whether the Defendants’ unlawful acts as found in the Liability Judgment not only deprived Mr Fearns of profits but also caused the collapse of his business.

Background

[2]Starting from scratch in the early 1980s, Mr Fearns built up a substantial unincorporated business trading under the name “Autopaint International”. As the name implies, the business involved selling paint (and ancillary products) for use in spray painting cars. “Autopaint International” is also a registered trade mark.[3]At all relevant times there were two parts to the Autopaint business: a chain of shops which Mr Fearns himself owned; and a network of distributors, referred to as “franchisees” (although they did not operate under formal franchise agreements). Sales to franchisees, although accounting for only around 30% of turnover, are said by Mr Fearns to have been significantly more profitable than sales through his own shops. Numbers fluctuated somewhat, in particular as Mr Fearns sold some shops and converted them to franchise status, but throughout the relevant period until June 2005 there were over 20 shops and more than 30 franchisees.[4]Most of the paints sold by Mr Fearns were not ready-mixed, but were so called ‘tinters’ which were mixed by the shop before sale to a customer in accordance with a prescribed formula to ensure that the paint was exactly the right colour for the car which the customer intended to spray. Mr Fearns sold two different ranges of tinter (topcoat and basecoat) which between them comprised about 60 different tinters in all. Some of these tinters were used in many different mixing formulations and, if they were out of stock at any time, the effect would therefore be particularly detrimental.[5]Mr Fearns bought the paint and other products which he sold under the Autopaint brand from various suppliers. But at all relevant times until events in 2005 to which I will refer, his main supplier was the First Defendant (“Anglo- Dutch”), which is the UK distributor of the Second Defendant (“De Beer”), a Dutch company which manufactured the products. The Third to Sixth Defendants are employees of Anglo Dutch or De Beer, and for the purpose of this action it is accepted by the Defendants that all are jointly and severally liable for the tortious acts of any Defendant.[6]From about 2000, if not before, Mr Fearns was constantly late in paying De Beer. At 31 December 2002 his debt stood at €826,000, of which €471,000 was overdue. In January 2003 Mr Fearns was placed on ‘pre-pay’ by De Beer – in other words he was required to pay in advance for new orders. Although Mr Fearns felt aggrieved at this decision, which he said was taken without warning and was inconsistent with De Beer’s previous attitude, there is no doubt that the action was one which De Beer was entitled to take. Thereafter De Beer also pressed Mr Fearns to take steps to pay off or reduce his outstanding debt. However, the debt remained high, with substantial sums constantly overdue. For example, at 30 April 2004 the amount owing stood at €827,000, of which €473,000 was overdue.[7]From around the end of June 2004 Anglo Dutch started to make sales of significant quantities of Autopaint branded products directly to Mr Fearns’ franchisees. A hotly disputed issue at the trial on liability in 2007 was whether Mr Fearns had consented to the making of such sales and, if so, on what terms.[8]On 6 June 2005 the Defendants held a meeting in Birmingham to which they invited all Autopaint’s franchisees. This meeting and some of the communications which preceded it are described at paragraphs 45 to 48 of the Liability Judgment. Although advertised as a conference on the effect of new legislation, the essential purpose of the meeting so far as the Defendants were concerned was to persuade the franchisees to commit themselves to buying all their paint and commodity products in future from Anglo Dutch. The offer made by the Defendants was to supply these products to the franchisees under the Autopaint mark. It appears that the franchisees or almost all of them decided to take up this offer and transferred their custom to Anglo Dutch.[9]When Mr Fearns heard about what had happened at the meeting he consulted solicitors, and on 27 June 2005 a letter before action was sent on his behalf. On 6 July 2005 Mr Fearns sent a letter to the franchisees in which he made it clear that Anglo Dutch and De Beer were not authorised to supply Autopaint products and that only he could do so. Despite this letter, it appears that few if any of the franchisees took up Mr Fearns’ offer to resume supplies.[10]After the letter before action of 27 June 2005 was sent, the Defendants stopped selling products under the Autopaint mark and introduced a new trade mark “Tempo” under which they supplied otherwise identical products to the franchisees. Initially this was done by putting sticky labels over the Autopaint logo on paint tins. Later new tins were used which were labelled “Tempo” instead of “Autopaint”.[11]After the loss of his franchisees Mr Fearns struggled on for as long as he could selling through his own shops but his financial situation became increasingly desperate. The last management accounts for his business were prepared in March 2006 and no annual accounts were prepared for the financial year to the end of April 2006 (or 2007). Finally, in November 2007 Mr Fearns entered into an Individual Voluntary Arrangement with his creditors.

The Liability Judgment

[12]In the Liability Judgment given on 2 May 2007, on the issue of consent, the Judge found that there was an agreement made orally on the telephone between Mr Fearns and Mr Jongsma for De Beer and Anglo Dutch at the end of May 2004 that De Beer / Anglo Dutch could sell direct to franchisees when Autopaint was unable to supply a particular product. It was a further term of this agreement – which I shall refer to as the “Direct Sales Agreement” – that the proceeds of such sales (less a 10% handling charge) would be applied to reduce Autopaint’s outstanding debt to De Beer.[13]The Judge left over to this enquiry the question of what, if any, sales of paints were made by Anglo Dutch to franchisees which were not authorised by the Direct Sales Agreement. He held, however, that the Direct Sales Agreement did not go far enough to protect all the Defendants’ actions. In particular, the Judge found that the Defendants had acted unlawfully and are liable in tort to Mr Fearns in the following respects:(1) The Defendants infringed Mr Fearns’ trade mark by selling goods to franchisees under the Autopaint mark in circumstances where the sales were not authorised by the Direct Sales Agreement;(2) Such sales also involved passing off by the Defendants;(3) There was also passing off by the Defendants which took the form of supplying goods which were branded “De Beer” or “Octoral” to franchisees who had ordered Autopaint branded goods without informing them of the substitution (described by the Judge as “switch selling to the trade”);(4) A further form of passing off occurred as a result of the Defendants’ insistence that the franchisees to whom they supplied “De Beer” or “Octoral” branded products sell them as “Autopaint”, which was done by decanting the paint into Autopaint branded tins before supplying it to customers (described by the Judge as “switch selling to the public”).[14]In addition, the Judge found in favour of Mr Fearns on the following contractual claims:(1) The Judge found that there was an agreement between Mr Fearns and De Beer (“the tin agreement”) which allowed De Beer to manufacture paint tins in the Autopaint get-up but on the basis that such tins were to be supplied exclusively to Autopaint. The unauthorised supply of paint by the Defendants to third parties in Autopaint branded tins thus involved a breach of the tin agreement.(2) In 1998 Mr Fearns entered into an oral agreement with De Beer (“the Australia agreement”) to allow De Beer to supply Autopaint branded products in Australia to a business called “Issa Autopaints”. There was a dispute as to the terms of this agreement and in particular as to the level of the royalty payable by De Beer on such sales. Mr Fearns contended that the agreed royalty was 3% of turnover; De Beer that it was 0.5%. The Judge held in favour of Mr Fearns.(3) In April or May 2004 Mr Fearns made an agreement with De Beer (“the Malta agreement”) which the Judge found gave De Beer a continuing permission to supply Autopaint branded products directly to a distributor in Malta at the same price as charged by Autopaint. Under this agreement De Beer was obliged to account to Mr Fearns for 90% of the gross margin on such sales, with 10% being retained in respect of distribution costs.[15]Mr Fearns also claimed that the Defendants had committed the tort of intentionally inflicting economic harm by unlawful means. The harm alleged was the loss of Mr Fearns’ network of franchisees. The Judge considered that, rather than leaving the question over to an enquiry, he should in this context decide whether the Defendants’ unlawful acts of trade mark infringement and passing off were intended to cause and did cause this loss. He found(1) that prior to the meeting in June 2005 the Defendants’ activities, insofar as they were unlawful, were not sufficient to cause Mr Fearns to lose his franchisees, and(2) that it was impossible to say that the Defendants’ unlawful acts at the meeting were a real cause, or indeed any cause at all, of the loss of the franchisee network.[16]In his Order dated 25 May 2007, the Judge ordered that there should be an enquiry as to damages (or at Mr Fearns’s election an account of profits) in respect of the Defendants’ acts of passing off and trade mark infringement and an assessment of the damages suffered by Mr Fearns by reason of(a) breaches of the Australia agreement,(b) breaches of the tin agreement and(c) any breaches of the Direct Sales Agreement. In each case the Order provided that “[f]or the avoidance of doubt any loss to the Claimant arising from or attributable to the loss by the Claimant of his distributor network shall be excluded from” the enquiry / assessment.[17]Judgment was given for the Defendants on their counterclaim for a balance owing to them for goods sold to Mr Fearns in the sum of €595,000, but subject to any further credits found to be due to Mr Fearns under the Direct Sales Agreement.

The Appeal

[18]With the permission of the Judge, Mr Fearns appealed to the Court of Appeal on two issues:(1) whether Mr Fearns gave his consent to De Beer and Anglo Dutch selling directly to franchisees as the Judge found; and(2) whether the issue of causation of the loss of the franchisee network should have been decided at the trial. Judgment on the appeal was given on 19 February 2008. On the first issue (of consent) the Court of Appeal upheld the Judge’s finding. However, on the second issue (of causation) Mr Fearns’ appeal was allowed. Waller LJ, with whose judgment Arden and Toulson LJJ agreed, dealt with this issue at paragraphs 62 – 65 of the Judgment as follows:
“Causation 62. This aspect I can take quite shortly. There was no direction that there should be a split trial. Furthermore, if the judge had the evidence on which he could deal with one aspect of causation, the loss of the franchisees, there is no reason why he should not have dealt with it. So much indeed was clearly conceded by Mr Lissack quite properly at the trial. 63. The problem, as it seems to me, is that, until the court knows the extent of any infringements of Mr Fearns' trade marks and the extent of any breaches of the consent agreement reached in May 2004, the court cannot finally rule as to their effect. 64. It seems to me most unlikely that Mr Fearns will be able to establish that, if the agreement made in May had been adhered to by De Beer, he would have been able to maintain his business, including supplying his franchisees. But until the extent of the breaches are clear it does not seem to me that he should be prevented from seeking to establish that, if the agreement had been complied with by De Beer, he would have been able to survive and survive with his network of franchisees intact. Conclusion on causation 65. I would allow the appeal to the extent it prevents Mr Fearns establishing loss of his business flowing from breaches of the agreement reached in May 2004. But I stress that, in the light of what I have said in paragraph 64, Mr Fearns should not feel too encouraged by that decision.”

Conclusion on causation

[19]At this enquiry there was a dispute between the parties as to the scope of the Court of Appeal’s decision on the issue of causation, on which I was asked to rule on the first day of the hearing. The Defendants contended that the appeal on the issue of causation was allowed only to the extent that the Court of Appeal left it open to Mr Fearns to allege on this enquiry that the loss of his franchisees and of his business was caused by breaches of the Direct Sales Agreement. Apart from this, it was submitted, the Court of Appeal left the Judge’s findings on matters of causation undisturbed; in particular, it did not overturn the finding that the Defendants’ unlawful acts at the meeting in June 2005 were not a cause of the loss of the franchisee network. In support of this contention counsel for the Defendants, Mr Moody-Stuart, relied in particular on paragraphs 64 and 65 of the judgment of Waller LJ (quoted above) which refer only to “breaches” of the Direct Sales Agreement.[20]I do not consider that the decision of the Court of Appeal is limited in this way, for two reasons. First, the reason given by Waller LJ (in paragraph 63 of the judgment) for allowing the appeal on the issue of causation was, in essence, that it was premature to reach any conclusion as to whether the Defendants’ unlawful acts of trade mark infringement caused the loss of Mr Fearns’ franchisees until the extent of those unlawful acts had been determined – which is a matter for this enquiry. As a matter of logic, it seems to me that this reasoning must apply to the Judge’s findings as to the effect of what took place at the meeting in June 2005 as well as to what occurred before that meeting, since the effect of what took place at the meeting is not to be determined in isolation but against the background of the infringements which had preceded it. Indeed, if one asks what is meant by “breaches” of the Direct Sales Agreement, I would take this description to refer to any sale or offer of sale to franchisees of Autopaint branded products which was not authorised by the Direct Sales Agreement, and hence as including the offer made (and commitment sought) by the Defendants at the June meeting. Second, the Order made by the Court of Appeal provided that the appeal on the issue of causation was allowed (without any limitation) and also varied the Order of the Judge by deleting the words (quoted in paragraph 16 above) which excluded from the scope of the damages enquiry any loss arising from or attributable to the loss by Mr Fearns of his distributor network. As a matter of construction, it seems to me clear that the effect of the Court of Appeal’s Order is to set aside the Judge’s findings on the issue of causation altogether.[21]I have therefore concluded that I am required to decide all questions of causation afresh, on the basis of the evidence adduced and arguments advanced at the hearing of the enquiry.

Witnesses

[22]At the hearing oral evidence was given by Mr Fearns and six further witnesses of fact called on his behalf: Ms Gillian Peach and Mr David Foran (who worked for Mr Fearns’ accountants, Grant Thornton); Mr James Christacos (in relation to the Australian sales); Mr John Fearns (a former franchisee); Mr Paul Bolton (a former employee); and Mr Mike Fowler (the Managing Director of the paint company Max Meyer). The Defendants called two factual witnesses: Mr Theo Wemmers (the Managing Director of De Beer) and Mr Michael Barnes (the former Financial Controller of De Beer Australia). Mr Christacos and Mr Barnes gave their evidence by video link. Each party also adduced expert evidence from a forensic accountant: Mr Adrian Godfrey for Mr Fearns and Mr Stephen Thompson for the Defendants.

The Issues

[23]The main issues to be decided on this enquiry are as follows:(1) What was the extent of the sales made by Anglo Dutch to franchisees which were not permitted by the Direct Sales Agreement and therefore unlawful, and what profits did Mr Fearns lose as a result of such sales?(2) What further credits, if any, are due to Mr Fearns for sales made by Anglo Dutch which were permitted by the Direct Sales Agreement?(3) Did the Defendants’ unlawful acts cause Mr Fearns to lose his franchisee network and thereby his entire business?(4) What further royalties are payable to Mr Fearns under the Australia Agreement?(5) What further sum is payable to Mr Fearns under the Malta Agreement?

Legal Principles

[24]In General Tyre & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 1 WLR 819, a case of patent infringement, Lord Wilberforce said (at p. 824) that there are two essential principles in valuing such a claim: first, that the plaintiffs have the burden of proving their loss; second, that, “the defendants being wrongdoers, damages should be liberally assessed but that the object is to compensate the plaintiffs and not punish the defendants”. I consider that these are the principles which I should apply in the present case.

Extent of unauthorised sales

[25]The first issue is to assess the loss of profits which Mr Fearns sustained as a result of sales made by Anglo Dutch to franchisees which were not authorised by the Direct Sales Agreement and which infringed the Autopaint trade mark and/or involved passing off. (Such unauthorised sales include those sales which were made in breach of the tin agreement, as to which no separate issue arises.) It is convenient to carry out this assessment in three stages: first, to determine the value of all sales made by Anglo Dutch to franchisees under the Autopaint brand; second, to determine the extent to which these sales were authorised by the Direct Sales Agreement; and third, to quantify the profits lost as a result of those sales which were not so authorised.[26]Based on analyses carried out by Mr Wemmers of the invoices issued by Anglo Dutch to franchisees, the Defendants’ expert accountant, Mr Thompson, has calculated the total value of all sales made by Anglo Dutch directly to franchisees under the Autopaint brand. When the hearing began, Mr Fearns did not accept the Defendants’ figures as accurate and was alleging that further sales had been made by Anglo Dutch to franchisees of which disclosure had not been given. This allegation was not maintained in closing submissions. A criticism was made that a number of products sold by Anglo Dutch to franchisees were said not to have been included in Mr Wemmers’ spreadsheets; but Mr Wemmers was not asked about the alleged omissions and no attempt was made to quantify or prove any sum which should be added to the calculations made by Mr Wemmers and Mr Thompson. On the evidence I am satisfied that the best available estimate of the sales made by Anglo Dutch directly to franchisees of products sold under the Autopaint brand is the figure of £494,466 given in Mr Thompson’s supplemental report dated 20 May 2010. I accordingly find that the total value of all such sales is £494,466.[27]As for what proportion of these sales were authorised by the Direct Sales Agreement, a submission was made in closing by Mr Wilson QC on behalf of Mr Fearns that the Court on this enquiry should find, based on evidence given at the trial and at this hearing, that it was a term of the Direct Sales Agreement that the prices charged to franchisees by Anglo Dutch were to be 10% higher than Autopaint’s prices. According to Mr Wilson’s analysis, the actual prices charged by Anglo Dutch were only about 2.5% more expensive in the case of tinters, while it is common ground that ancillaries were sold at lower prices than those charged by Mr Fearns. Accordingly, Mr Wilson submitted, all the sales made by Anglo Dutch were infringing sales. As this case was not pleaded, was not advanced in opening, and was not put to Mr Wemmers in cross-examination, I do not consider it open to the Claimant to make it. But in any event it seems to me clear that the question of what terms were agreed as part of the Direct Sales Agreement is not one which falls within the scope of the enquiry: it was a matter for determination at the trial, and the only question at this stage is whether the Judge found that the Direct Sales Agreement included such a term.[28]Paragraph 8(c) of the Order made following the Liability Judgment records the Direct Sales Agreement as being that De Beer and Anglo Dutch were permitted to supply to the franchisees Autopaint products directly, which the Claimant was unable to supply, “at the Claimant’s existing prices”. In addition, paragraph 56 of the Liability Judgment refers to sales of ancillary products at prices which “were not based on Autopaint’s prices” and involved discounted bonus schemes and describes such sales as “a contradiction of what the agreement was intended to achieve, not within it”. I conclude that the only term of the Direct Sales Agreement regarding the prices which were to be charged by Anglo Dutch was that such prices should be at least equal to Autopaint’s prices.[29]As mentioned, it is common ground that ancillaries were sold by Anglo Dutch to franchisees at lower prices than Mr Fearns charged and that all sales of ancillaries were unauthorised. Mr Wilson QC suggested that it was reasonable to estimate that ancillaries accounted for some 15% of total sales. In addition, Mr Thompson’s analysis of sales invoices indicated that around a third of the amounts invoiced by Anglo Dutch to franchisees related to Octoral and De Beer products and therefore fell into the category of “switch selling to the trade”. The Defendants did not take issue with these estimates. What is much harder to gauge is what proportion of the sales of Autopaint branded paints was unauthorised, since this depends upon whether Mr Fearns was at the relevant time able to supply the product.[30]The best evidence of what products Mr Fearns had in stock at any given time would have been the records of the monthly stock checks which were carried out at his Liverpool warehouse. However, these have been lost. The only stock record found and disclosed is one made in December 2005 following a major stock-take, carried out after paints purchased from De Beer had been recalled from Mr Fearns’ shops. Starting with this stock record Mr Fearns’ late father in law, Mr Ivor Wood who was an accountant, undertook a laborious exercise of seeking to reconstruct the stock history of each product. To do this, he worked backwards from the number of units in stock at December 2005 and prepared schedules showing each sale of the product made by Autopaint and each purchase of the product from De Beer. The schedules also show all sales of the product made to franchisees by Anglo Dutch, based on the invoices disclosed by the Defendants.[31]It is apparent from Mr Wood’s schedules that there were occasions when goods were supplied by Anglo Dutch to franchisees which Autopaint had in stock. Equally, the schedules indicate that there were other occasions when Autopaint had run out of a particular product, so that sales of that product by Anglo Dutch were authorised under the Direct Sales Agreement until such time as Mr Fearns purchased further supplies from De Beer. For the purpose of his closing submissions, leading counsel for Mr Fearns, Mr Wilson QC, carried out an analysis of the schedules from which he estimated that approximately 45% of sales were made when the product could have been supplied by Mr Fearns. The Defendants did not take issue with this estimate. On the assumption, which is probable, that the schedules include switch sales of Octoral and De Beer products, Mr Wilson calculated that, of the 85% of sales which relate to paints rather than ancillaries, one third (or about 28% of total sales) were of Octoral and De Beer products and 45% of the remainder (which equates to about 25% of total sales) were also unauthorised because the product could have been supplied by Autopaint. On this basis, it can be estimated that approximately 70% of all sales made by Anglo Dutch to franchisees under the Autopaint brand were unauthorised.[32]I accept this analysis as the best available estimate of the extent to which sales made by Anglo Dutch to franchisees under the Autopaint brand were unlawful. Applying a round figure of 70% to the total sales of £494,466, I find that unauthorised sales amounted to £346,126 and the remaining £148,340 of the sales were authorised by the Direct Sales Agreement.[33]It is common ground that damages in respect of the unlawful sales should be calculated on the basis that Mr Fearns would have made equivalent sales. That is a reasonable assumption to make in circumstances where, in the case of paints, the unlawful sales were, by definition, of goods which Mr Fearns could have supplied and, in the case of ancillaries, there is no evidence that Mr Fearns had supply difficulties. The point was made by Mr Wilson QC that, as Anglo Dutch sold ancillaries to the franchisees at lower prices than Mr Fearns, his revenue from such sales would have been higher than that of Anglo Dutch. However, no attempt was made to quantify this difference. Moreover, it is offset by the fact that the prices charged by Anglo Dutch for tinters were slightly higher than those charged by Autopaint. In these circumstances I think it reasonable to calculate damages on the assumption that Mr Fearns would have earned the same revenue from the relevant sales as Anglo Dutch actually received. It is common ground that Mr Fearns’ average gross profit on sales was around 47%. I accordingly find that the amount of profits lost by Mr Fearns as a result of unauthorised sales made to franchisees by Anglo Dutch is 47% of £346,126, or £162,679.[34]I would add that, although the debt due to De Beer for goods supplied to Mr Fearns was and is payable in Euros, it is clear that the currency in which Mr Fearns has suffered loss as a result of the Defendants’ unlawful acts, and in which it was reasonably foreseeable that any such loss would be suffered, is sterling – being the currency in which Mr Fearns conducted his business and in which the sales of which he was unlawfully deprived would have been made. The damages payable as a result of the unlawful sales must therefore be awarded in sterling: The Despina R [1979] AC 685.[35]In his closing submissions, Mr Wilson QC invited me to infer that after June 2005 when Anglo Dutch had stopped selling paint to franchisees under the Autopaint trade mark, franchisees would nevertheless have gone on decanting De Beer paint into Autopaint tins for a significant period until new “Tempo” labelled tins were provided. He submitted that such sales fell into a similar category as the “switch selling to the public” which occurred when franchisees were told to decant “Octoral” or De Beer paint into Autopaint tins, as found in the Liability Judgment. However, there was no evidence of the extent of any such switch selling. Furthermore, Mr Fearns would only be entitled to damages for profits lost by reason of any such sales if they are sales which he would otherwise have made. That raises the question, which I consider later in this Judgment, of whether the Defendants are responsible for the loss of the franchisees.

Credits payable to the Claimant

[36]It is agreed that that the difference between the amount of profit lost by Mr Fearns on any unauthorised sale and the amount of the credit to which he would have been entitled from the Defendants if the sale had been authorised is not sufficiently material to be worth arguing about and that, for practical purposes, the amounts can therefore be treated as the same. On this basis the amount of the credits which Mr Fearns was entitled to receive on the sales made by Anglo Dutch which were authorised under the Direct Sales Agreement was 47% of £148,340, or £69,720.[37]Because the credits were given in Euros, it was accepted by the Defendants that it is appropriate to convert this sum into Euros at the date when the credits were or should have been given. It was submitted, and I accept, that an appropriate exchange rate to use for this purpose is €1.45 to £1 which reflects the average exchange rate during the relevant period. At this exchange rate the amount of the credits payable to Mr Fearns was €101,094.

Alleged Loss of the Autopaint Business

[38]As I mentioned at the start of this judgment, the central issue on this enquiry is whether the Defendants’ unlawful acts of trade mark infringement and passing off, in addition to depriving Mr Fearns of profits, caused the collapse of his business. Mr Fearns’ case is that the unlawful acts of the Defendants, both before and at the conference on 6 June 2005 organised for the franchisees, induced the franchisees to stop buying from Mr Fearns and transfer their custom to Anglo Dutch. This, it is said, had a catastrophic effect on the profitability and viability of the Autopaint business and led ultimately to Mr Fearns’ insolvency. The Defendants, on the other hand, deny that their unlawful acts caused the defection of the franchisees, which the Defendants say resulted from Mr Fearns’ inability to supply the franchisees due to his cash flow difficulties. Furthermore, the Defendants contend that even if their unlawful acts did cause the loss of the franchisee network, the Autopaint business was already failing when the franchisees were lost and would have failed anyway.[39]There are thus two questions which I have to decide:(1) did the Defendants’ unlawful acts cause Mr Fearns to lose his franchisees; and(2) if so, what damage did the loss of the franchisees cause Mr Fearns? Of major importance in answering the latter question is whether the financial condition of Mr Fearns’ business when the franchisees were lost was such that it would have failed anyway.

Loss of the Franchisees

[40]The first question is whether the Defendants’ unlawful acts, before and at the meeting on 6 June 2005, caused Mr Fearns to lose his network of franchisees. Although the Court of Appeal allowed Mr Fearns’ appeal against the Judge’s findings on this issue on the ground that the issue could not properly be decided in advance of this enquiry, counsel for the Defendants, Mr Moody-Stuart, urged that I should nevertheless treat those findings as persuasive. In my view this would not be a correct approach. It seems to me that in circumstances where findings on a question of fact have been set aside by the Court of Appeal, albeit with a warning that Mr Fearns should not feel too encouraged by that decision, I must decide the issue afresh on the basis of the evidence adduced and arguments advanced on this enquiry.[41]I have made findings above as to the extent to which the Defendants made sales directly to franchisees which were not authorised by the Direct Sales Agreement. Most of the infringing sales were made during the year preceding the meeting on 6 June 2005. Mr Fearns contended that this unauthorised selling ‘softened up’ the franchisees by establishing the Defendants in their minds as preferred suppliers of Autopaint goods. However, it is difficult to give weight to this contention in the absence of any direct evidence to support it. Mr Fearns agreed in evidence that the Defendants, and in particular Mr Welch, had worked very closely with the franchisees for several years before the unlawful selling occurred and had, for example, organised training courses for them. He also agreed that the franchisees were well aware that the paints supplied to them under the Autopaint brand were manufactured by De Beer. Furthermore, after the Direct Sales Agreement was made the franchisees knew that they could obtain Autopaint branded paints direct from Anglo Dutch when Autopaint could not supply them. In all these circumstances I am unable to conclude that the additional direct sales made by the Defendants which were not authorised had a material impact on the willingness of the franchisees to transfer their custom from Mr Fearns to Anglo Dutch.[42]There is no doubt that the conference in Birmingham on 6 June 2005 was planned by the Defendants as an attempt to win the franchisees’ business for themselves. This move seems to have been prompted by the discovery that Mr Fearns was planning to move to a different paint mixing system using paints purchased from another supplier, Max Meyer. On 30 March 2005 Mr Welch, the UK Manager of Anglo Dutch, sent out a circular letter to the franchisees notifying them of the intention to hold the conference and enclosing a new price list for Autopaint branded goods. On 1 April 2005, in an internal email disclosed since the trial, Mr Welch wrote:
“Now we have lit the blue touch paper let’s see what happens.”
[43]At the conference the franchisees were asked to make a long-term commitment to purchase all their paint and ancillary products in future from Anglo Dutch and were offered financial incentives to do so. Part of the Defendants’ sales pitch was to emphasise that the terms offered depended on the franchisees making this commitment collectively. For example, the Defendants’ presentation materials included the following:
“How can [Anglo Dutch] help With your commitment to us now we can make plans to introduce the products you will need during the run up to 2007 and beyond Only with your joint purchasing power on all products … will make this a possibility for everyone to benefit. … EVERYONE OF YOU WILL HAVE THE SAME PRICE EVERYONE OF YOU WILL BE ANNUAL INDIVIDUAL VOLUME RELATED BONUS STRUCTURES”
EVERYONE OF YOU WILL HAVE THE SAME PRICE EVERYONE OF YOU WILL BE ANNUAL INDIVIDUAL VOLUME RELATED BONUS STRUCTURES”

EVERYONE OF YOU WILL HAVE THE SAME PRICE

[44]As found in the Liability Judgment, the impression given at the meeting was that franchisees were free to choose to obtain their supplies of Autopaint branded products from De Beer / Anglo Dutch over the long term irrespective of Autopaint’s ability to supply them, and that the Defendants were offering to supply the full range of such products. It appears that after the meeting all but two of the franchisees moved all their custom to Anglo Dutch.[45]I bear in mind that the issue is not whether the Defendants’ activities at the meeting on 6 June 2005 caused the defection of the franchisees but whether those activities which were unlawful did so. Whatever might be thought of their conduct as a matter of business ethics, it was not unlawful for the Defendants to invite all Mr Fearns’ franchisees to a conference, to offer to supply them direct with products identical in composition to those supplied by Autopaint, to undercut the prices charged by Mr Fearns or to seek a collective commitment from the franchisees to buy from Anglo Dutch. What was unlawful was to offer to supply and seek the long term commitment of the franchisees to purchase the products under the Autopaint brand, irrespective of Mr Fearns’ ability to supply them. Was this a factor which induced the franchisees to transfer their custom from Mr Fearns to Anglo Dutch? I have concluded that it was, for two principal reasons.[46]First, as a matter of commercial logic it seems to me that offering to supply the products which the franchisees had been buying from Autopaint under the same brand name must have substantially enhanced the attractiveness of the Defendants’ offer. Mr Fearns gave evidence, which I accept, that the Autopaint brand had been built up over some 20 years and had established a strong reputation for quality, reliability and value for money among the car repairers who are the end users of such products (referred to by Mr Fearns as “Fred in a shed”). Even though the franchisees themselves might have had equal confidence in equivalent paints sold to them by the Defendants under another trade mark, that confidence would not necessarily be shared by their customers.[47]Second, and more importantly, I do not have to rely on my own judgment to draw this inference. It seems to me telling that the Defendants chose to appropriate the Autopaint name in the way that they did, even though they knew that it was a trade mark owned by Mr Fearns. They must have calculated that, in order to induce the franchisees to make the commitment which they were seeking, it was necessary to offer to supply the products under the Autopaint brand. That calculation is explicitly evidenced in an email sent by Mr Welch to Mr Jongsma on 22 April 2005 in which, with reference to the type of label to be placed on the commodity products to be offered to the franchisees, Mr Welch wrote:
“If Blank I have a bigger problem than I first believed, for a short period I could convince them but this will affect sales and they may be happier to continue purchasing commodity products from [Autopaint], this will then make it harder to make the break away from Gary [Fearns] and give him the opportunity to switch them to [Max Meyer].”
In circumstances where the Defendants with their knowledge of the trade and of the franchisees made this judgment, it seems to me that I should be very slow to conclude that their deliberate decision to make unlawful use of the Autopaint trade mark was unnecessary and without causative effect.[48]The situation seems to me to be analogous to one in which a misrepresentation is made which is intended by the person making it to be relied on by the person to whom it is made and which is in fact followed by conduct of the kind intended. In such circumstances it is generally a fair inference that the conduct was induced by the representation: Smith v Chadwick (18840 9 App Cas 187 at 196. It is, furthermore, sufficient that the representation was one of the factors relied upon and not necessary that it should form the whole inducement: see e.g. JEB Fasteners v Marks Bloom [1983] 1 All ER 583.[49]On the evidence in this case I think it fair to infer that the unlawful use of the Autopaint trade mark was a factor which induced the franchisees in June 2005 to switch their business away from Mr Fearns and decide to purchase all their paint products from Anglo Dutch.[50]The letter which Mr Fearns subsequently sent to the franchisees on 6 July 2005 made it clear that he had not authorised the Defendants to supply Autopaint products and that they were not entitled to do so. The letter also acknowledged that “recently I have not been in a position to provide you with Autopaint products” but said:
“… I want to make it clear to you that so far as I am able I will now provide you with a full range of Autopaint International Products at the existing prices, to the extent that I am unable to source certain products then I can provide you with a full range of updated products and somebody to familiarize you with them if required.”
[51]After this letter was sent the Defendants made arrangements to supply identical products to the franchisees under a new trade mark, “Tempo”. At that point, therefore, the franchisees were faced with a commercial choice between buying all the products which they had decided to buy from Anglo Dutch but now under a new brand name, or returning to Autopaint on the basis that Mr Fearns would supply the products but with no guarantee of his ability to do so. The evidence indicates that they chose the former. The Defendants argued that in these circumstances it cannot be said that their unlawful acts induced the franchisees to purchase products from Anglo Dutch and not from Autopaint after this date.[52]I do not accept this. It seems to me that once the franchisees had made the break from Mr Fearns and committed themselves, as a group, to buying from the Defendants, they had crossed the Rubicon and it was bound to be extremely difficult to win them back. Furthermore, as Mr Wilson QC acknowledged, the letter sent by Mr Fearns was hardly comforting, offering as it did no assurance of his ability to meet the franchisees’ requirements. Yet had the Defendants not enticed away the franchisees at the June meeting, Mr Fearns would not have been placed in the situation of having to try to persuade them to return and the choice presented to the franchisees in July would not have arisen in the way that it did. In these circumstances it cannot in my view be said that this choice eclipsed the effects of the Defendants’ unlawful conduct.[53]What would have happened if the Defendants had not acted unlawfully as they did is a question to which I must return; but I am satisfied that in that event there would not have been the sudden loss of the franchisee network in June 2005 that in fact occurred and that no inference to the contrary should be drawn from the fact that the franchisees did not switch their custom back to Mr Fearns once it was made clear that only Mr Fearns and not the Defendants could offer to supply products under the Autopaint mark.

Was the Autopaint Business Already Doomed?

[54]I proceed then to consider what loss Mr Fearns suffered as a result of the departure of his franchisees. Critical to this question is the financial state of his business at the beginning of June 2005 and whether, as he claimed, it was or would but for the Defendants’ unlawful acts have been a viable business or whether, as the Defendants contended, it was by then a failing business which would in any event have failed.

April 2004

[55]In considering the viability of the Autopaint business the expert accountants focused on its condition at the end of its financial year to 30 April 2004, as it was not until after this date that the Defendants made significant direct sales to the franchisees.[56]Looking at the results of the business over the 10 years up to and including the year ended April 2004, its turnover had been extremely steady with sales of around £5½ million a year, year after year, albeit with no significant growth. Although sales had not grown, there had been an improvement during the period in the gross profitability of the business. Operating profits had been variable but in each of the three years ended April 2002 to 2004 had been between £300,000 and £400,000. On these measures the business appears to have been a good one.[57]It was clear from the evidence, however, and accepted by Mr Fearns’ expert, Mr Godfrey, that by April 2004 the Autopaint business was suffering from a shortage of working capital and was experiencing significant cash flow problems. The symptoms included the following:(1) Below the operating profit line, the business was incurring increasing financing costs. Bank and hire purchase interest costs rose from £40,000 at April 2000 to £80,000 at April 2004.(2) In the years ended April 2003 and 2004 Mr Fearns incurred VAT surcharges of, respectively, £102,000 and £73,000. According to Mr Godfrey, such surcharges are usually incurred when a business fails on two or more occasions to make its quarterly VAT payments on time and are an indication that cash is really short.(3) Trade creditors had been increasing, from £757,000 at April 2002 to £1,092,000 at April 2004, partly because Mr Fearns was taking longer to pay his suppliers, the main supplier being De Beer. In a joint experts’ report prepared before the trial on liability by the Defendants’ expert, Mr Thompson, and Mr Fearns’ then expert, Mr Ballamy, the expert accountants calculated that the average time taken by Mr Fearns to pay his creditors increased from 86 days in 2002 to 134 days in 2004. Mr Godfrey did not agree with the methodology used for this calculation and made a calculation on a different basis which nevertheless indicated that average ‘creditor days’ were 71 days in 2002 and had reached 94 days in 2004. Mr Godfrey’s experience was that periods of 70 to 90 days are not “completely unsustainable” for one or two years, but if continued for longer than this would ordinarily be expected to lead to the collapse of a business.(4) It was agreed in the joint experts’ report that one of the causes of Mr Fearns’ increasing inability over this period to pay his creditors on time was the level of his drawings from the business, which over the five years to April 2004 exceeded the net profits of the business by a total of more than £500,000.(5) Having reduced in the three years to April 2003 (to £810,000), stock levels increased to £1,363,000 at April 2004. This large stock increase reflected the fact that Mr Fearns was buying more stock from suppliers other than De Beer (after De Beer had placed him on prepay) who were willing to offer him credit; but the benefit of such credit was short term as the build-up of stock placed a substantial additional funding requirement on the business.(6) At the April 2004 year end the business had net current liabilities of £134,000.(7) Social security and tax creditors had increased from under £20,000 in the years to April 2001 to £334,000 at April 2004 – again evidence of insufficient working capital.(8) In April 2004 Mr Fearns owed £211,000 in respect of overdue personal income tax which, as Mr Godfrey agreed, would negatively affect his ability to reduce his drawings from the business.(9) There was a decline in sales in the year ended April 2004 from the level of £5.6 to £5.7 million achieved in all but one of the preceding eight years to £5.23 million. I think it likely that this decline reflected difficulties which Mr Fearns was having in maintaining supplies to his shops and franchisees, which in turn resulted from shortage of cash to pay suppliers and lack of available credit, particularly given the obligation to pre-pay for orders placed with De Beer.(10) There is other evidence from around this time of inability to maintain supplies. For example, in an email sent to Mr Jongsma on 22 May 2004 Mr Welch reported that he had been contacted by four of Mr Fearns’ shops and eight of his franchisees and that: “All are asking what is happening and have run out of fast moving tinters. London report that they are turning down customers and might as well close the shop. Many staff are looking for new jobs. There is no way Gary [Fearns] can pay us 50,000 a week with such low sales volumes.”(11) I have no doubt that it was the problems caused by his lack of cash and difficulty in supplying orders that led Mr Fearns to enter into the Direct Sales Agreement with the Defendants in May 2004, despite his natural reluctance to do so. As the Court of Appeal pointed out, he had the choice between losing the goodwill of the franchisees and possibly his business, or keeping their goodwill by allowing the Defendants to supply Autopaint products which he could not while at the same time paying off part of his debt. It is understandable that he chose the latter.[58]In April 2004 Autopaint’s accountants, Grant Thornton, prepared some business forecasts which were aimed at setting targets for future growth of the business. The forecasts assumed that cash flow and growth would be achieved by improving profitability, reducing stock levels and reducing Mr Fearns’ drawings from the business. However, Mr David Foran of Grant Thornton, who prepared the forecasts, was not informed of the fact that Autopaint had been placed on pre-pay by its main supplier, De Beer, nor of the amount and age of the debt owed to De Beer. Nor was he aware of the extent of Mr Fearns’ drawings from the business and unpaid income tax. Mr Foran said in evidence that, if he had known these matters, he would have had a different take on Mr Fearns’ working capital management and on what forecast assumptions to make. The fact that, as I find, Mr Fearns did not disclose to Mr Foran the extent of his cash flow difficulties is significant for two reasons. First, it undermines any reliance that might otherwise be placed on the forecasts as an indication of the future prospects of the business. Second, it confirms my impression that Mr Fearns was himself not facing up to the severity of the problems affecting his business and the consequent need for urgent remedial action.[59]Mr Godfrey, who gave expert evidence for Mr Fearns, maintained that the Autopaint business remained a going concern at April 2004. Indeed he valued its assets at that date, including goodwill calculated as a multiple of expected future earnings, at around £3 million. After deducting liabilities, he placed a net positive value on the business of over £1 million. However, it was also Mr Godfrey’s opinion that the business would not remain viable in the longer term unless its cash flow position was substantially improved, which in his view required Mr Fearns to take the following four actions:(1) reducing stock levels;(2) reducing the level of his drawings from the business;(3) reducing the salary of £40,000 plus mortgage expenses paid to Mr Fearns’ father (who took no active role in the business); and(4) injecting additional working capital into the business.[60]The Defendants’ expert, Mr Thompson, also expressed the opinion that as at April 2004 the Autopaint business was not sustainable without the injection of substantial working capital to get it back on its feet. Mr Thompson took issue with Mr Godfrey’s view that it was appropriate to value the business as a going concern. He agreed, however, that the underlying business was essentially sound and, if sufficient working capital was put in, was still at that stage capable of being rescued.[61]I do not think it right to conclude that as at April 2004 the Autopaint business was no longer a going concern and was bound to fail. However, it seems to me that it had reached a tipping point. I accept that the business still had a net positive value, but only on the basis that Mr Fearns or any new owner of the business was able and willing to inject substantial working capital into the business to reduce its liabilities, including its debt to its main supplier, De Beer, and to take other actions of the kind identified by Mr Godfrey to improve its cash flow. Unless radical and prompt action was taken, the strong probability was that the business would rapidly reach a point of no return at which failure would become inevitable.

May 2005

[62]During the following year Mr Fearns did not take the remedial action which in the view of the expert accountants was necessary if his business was to survive. The value of stock shown in the accounts for the year ended 30 April 2005 was slightly lower than at 30 April 2004 but still remained very high at £1,123,000. Moreover, according to the evidence of Mr Fearns and Ms Peach of Grant Thornton, the April 2005 accounts reflected a write-off of stock previously valued at £358,491. It therefore appears that the quantity of stock being held by the business had actually further increased from the level of £1,363,000 at April 2004. Mr Fearns reduced his net drawings from the business in the year to April 2005 to £168,000 (compared with £219,000 in the year to April 2004); but this reduction was only achieved by remortgaging his house to borrow an additional £220,000 which must have been spent during the year, as it does not appear in the April 2005 accounts. There is no evidence that the salary paid to Mr Fearns’ father ceased. Crucially, very little if any working capital was injected into the business. In addition to the loan of £220,000 which must have been used to discharge personal indebtedness or other personal expenditure, Mr Fearns arranged a new loan of £511,000 from Barclays Bank; but most of this loan was required to refinance his existing bank borrowing and it appears that the additional funds advanced of £106,000 were used to pay outstanding tax liabilities.[63]The consequences of the lack of working capital can be seen in the results of the business for the year to April 2005. Turnover – which, as mentioned earlier, had been steady for many years – fell sharply, from £5,233,000 in the year to April 2004 to £4,085,000, a drop of about 30%. Even more disastrously, gross profits fell from £2,568,000 to £1,578,000, a drop of about 40%. Net current liabilities increased to £606,000, and the business suffered a net loss for the year of £454,000. Despite this net loss, Mr Fearns as mentioned drew £168,000 from the business. Further VAT surcharges of £46,000 were incurred during the year, and average creditor days rose to 179 days (as calculated in the joint experts’ report) or 157 days (as calculated by Mr Godfrey) – a level far above that which Mr Godfrey regarded as temporarily sustainable.[64]A factor which contributed to these disastrous figures was, as I have indicated, the writing off of stock previously valued at £358,491. The reasons for this stock write-off were not in my view satisfactorily explained in evidence. The write- off is said to have been of stock which had been purchased from De Beer and to have followed the major stock-take carried out in December 2005. I can understand how such stock could have been considered to have fallen in value by December 2005, more than six months after De Beer had stopped supplying Mr Fearns and he had switched to the Max Meyer system. However, it is not apparent to me and no explanation was given of why it was considered appropriate to write down the value of De Beer stock as at 30 April 2005 – when on the evidence Mr Fearns was at that time short of De Beer stock to meet the needs of his franchisees and shops and desperately keen to get hold of further supplies from De Beer. At all events, whatever the reasons for writing off De Beer stock at 30 April 2005, it has not been shown and I am unable to conclude that this was a consequence of the Defendants’ unlawful acts.[65]Even if the stock write-off is left out of the account, it is quite clear in my view that by May 2005 the Autopaint business was no longer a going concern and had a negative net worth. It had in Mr Godfrey’s words “fallen off a cliff”. The only question at this stage was how long Mr Fearns could manage to struggle on before his creditors forced him into bankruptcy.[66]It is necessary to consider whether this situation would have been averted if the Defendants had complied with the Direct Sales Agreement and had not made any unauthorised sales directly to franchisees. According to the figures given in Mr Wemmers’ fourth witness statement, which I accept as being the most reliable available, the total sales made by Anglo Dutch to franchisees in the year to April 2005 amounted to £328,796. On the basis, discussed earlier, that around 70% of these sales were unauthorised and would have been made by Mr Fearns if they had not been made by Anglo Dutch, Mr Fearns was deprived of sales of £230,000, which would have generated some £108,000 of gross profits. (In the previous year to April 2004 the amount of gross profits of which Mr Fearns was deprived by such unauthorised sales was only around £9,000.) Making every allowance for the fact that the cash received from these sales could itself have been employed to purchase further supplies of products, it is clear to me that even if these additional sales had been made by Mr Fearns they would not have made a material difference to the financial condition of the business in May 2005. I am thus in no doubt that if the Defendants had acted lawfully at all times and had adhered faithfully to the Direct Sales Agreement the Autopaint business would still by that date no longer have been viable and have been in terminal decline.[67]Nor can it be said that the fact that Mr Fearns did not take the remedial action which Mr Godfrey identified as necessary if his business was to survive was in any way due to the Defendants’ unlawful acts. As discussed, the effect of those unlawful acts was to deprive Autopaint of sales which it would otherwise have been able to make. But, if anything, the effects of the Defendants’ unlawful activities only made it all the more essential that Mr Fearns should inject substantial further capital into the business if it was going to be saved. The fact that he did not do so before it was too late may partly reflect his personal financial position and obligations. But it also in my view reflects the fact that Mr Fearns did not recognise just how critical the situation was and what actions he needed to take if he was to rescue his business. If he had given a full picture of his financial circumstances to Grant Thornton in April 2004, he might have received from them advice similar to the views expressed in hindsight by Mr Godfrey and Mr Thompson instead of a set of forecasts which were unrealistic. The fact that he did not suggests that his outlook at that time evinced the same optimism, or even wishful thinking, which was apparent in some of his evidence given in this action. Mr Wilson QC in his closing submissions described Mr Fearns as “a bit of a chancer”, who allowed his debts to build up too much but always pulled through. I consider this to be an accurate description of how Mr Fearns had conducted his business. However, by May 2005 his debts had built up to a point where, although he had not yet appreciated it, his chances had run out.[68]I accordingly conclude that the collapse of the Autopaint business was not a result of the loss of the franchisees in June 2005 or otherwise of the Defendants’ unlawful acts. At most those matters accelerated the process. But by the time the franchisees were lost the Autopaint business was no longer a viable business and would have failed in any event.

What Loss was Caused?

[69]Although I have concluded that the collapse of the Autopaint business was not caused by the loss of the franchisees in June 2005, this does not mean that the loss of the franchisees had no financial effect. Its consequence must have been to cause Mr Fearns to lose further sales and hence the profits on those sales, even though such profits would not have saved him from insolvency. In principle, as the Defendants accepted in closing submissions, Mr Fearns must be entitled to recover compensation for any such lost profits.[70]To assess what profits were lost as a result of the loss of the franchisees, it is necessary to consider what would have happened if the Defendants had acted lawfully and had not induced the franchisees to transfer their business to Anglo Dutch in June 2005. This necessarily involves a large element of conjecture. The need for such conjecture, however, is itself a consequence of the Defendants’ conduct. It seems to me that, as in cases where the Court has to form a view of what would have happened in hypothetical circumstances in order to evaluate a lost chance, the principle in Armory v Delamirie (1722) 1 Stra 505 applies. In essence, this requires the Court to resolve uncertainties by making assumptions generous to the claimant where it is the defendant’s wrongdoing which has created those uncertainties: see e.g. Browning v Brachers [2005] EWCA Civ 753, [2005] PNLR 44 at paras 204-212; Phillips & Co v Whatley [2008] Lloyd’s IR 111, 121 at para 45. This also accords with the second of the two principles stated by Lord Wilberforce in the General Tyre & Rubber Co case which I referred to earlier.[71]A key element in assessing what would have happened in the present case is to determine what the Defendants would be likely to have done if they had not acted unlawfully. On that hypothesis, I consider that they would not have held the conference which they organised in June 2005 with the object of winning the business of the franchisees since their strategy in doing so was predicated on an unlawful offer of continuity of supply to the franchisees under the Autopaint trade mark. I also think it unlikely that the Defendants would have introduced the Tempo brand, since that was only done as an expedient when Mr Fearns threatened legal action in response to the infringement of his trade mark: Mr Wemmers said in evidence that the Tempo label was later discontinued and that those franchisees who are still customers of Anglo Dutch are now supplied with Octoral or De Beer paint. However, I am also sure that once Mr Fearns stopped placing further orders with De Beer and started to convert his franchisees to a rival paint mixing system supplied by Max Meyer, as he was about to do when the June conference was held, the Defendants would no longer have been willing to supply Autopaint branded products to franchisees by way of back up to Mr Fearns under the Direct Sales Agreement. The rationale of that agreement from the Defendants’ point of view was that it allowed Mr Fearns to continue trading with them while assisting him at the same time gradually to pay off his outstanding debt. Once Mr Fearns had decided to move his business to another supplier, the Defendants’ interests no longer lay in helping him to keep trading so that he could buy more goods from them. Rather, their commercial interests lay in competing with Autopaint (and its new supplier) and capturing as much as they could of its business, whilst pursuing Mr Fearns for the outstanding debt.[72]In these circumstances I think it probable that the strategy which De Beer and Anglo Dutch would have decided upon in around March or April 2005 (when in actual fact the conference for the franchisees was planned) would have been to stop producing Autopaint branded products, and that they would have ceased to supply such products to Mr Fearns or to franchisees by the end of June 2005. Instead they would have sought to win the franchisees’ business for themselves by offering to supply them with Octoral or De Beer products, no doubt accompanied by incentives such as discounted prices for ancillaries and loyalty bonuses of the kind which were in fact offered.[73]As Mr Wilson QC was compelled to acknowledge, there was a good deal of evidence that many franchisees, by June 2005, were disaffected with Mr Fearns as a result of his unreliability over supplies. Faced with a choice between converting to a new paint mixing system in order to stay with Autopaint, with no assurance of reliable supply, or transferring their custom to Anglo Dutch or another supplier, I think it likely that many franchisees would have chosen the latter option. Some franchisees would have done so immediately; others would have stayed loyal to Autopaint for longer. But as Mr Fearns’ cash flow difficulties continued to spiral, and his ability to service his customers deteriorated further, the pressures to switch supplier would have mounted until, sooner or later, all the franchisees had been lost.[74]Precisely how quickly this would have happened is impossible to determine with any certainty. Weighing all the factors, however, and taking the most generous view to Mr Fearns that I regard as reasonable, I would assess the length of time for which the franchisees would have continued to purchase Autopaint branded goods from Mr Fearns after the end of June 2005 as an average period of six months.[75]Because the loss claimed by Mr Fearns was the loss of his Autopaint business rather than the more limited loss of profits which I have held is the proper measure of the damage caused by the Defendants, the parties have not addressed the way in which such lost profits should be calculated. A possible approach, which provisionally seems to me reasonable, would be to base the calculation on the sales made by Mr Fearns to franchisees in the year ended April 2005 (£944,000) and to add to them the additional sales which I have estimated that he would have made in the absence of the Defendants’ infringements (£230,000). This gives a figure of £1,174,000. Assuming, favourably to Mr Fearns, that he would have continued to make sales to franchisees at a similar rate during the further period of six months for which I have estimated that such sales would on average have continued, the quantum of lost sales would be valued at £587,000. Applying the gross margin of 47% which has been used in other calculations gives a figure for lost profits of £275,890. I emphasise, however, that this is only a provisional view. If either party wishes to make submissions on how this loss should be calculated, I will consider such submissions at the same time as other remaining matters are dealt with after this judgment has been handed down.

Australia

[76]The Defendants disclosed invoices for sales of Autopaint branded products made to Issa Auto Paints in Australia in a total amount (expressed in Euros) of €1,229,065. Mr Wemmers, the Managing Director of De Beer, Mr Michael Barnes, the former Financial Controller of De Beer Australia who gave evidence by video link, and Mr Issa in a written statement adduced as hearsay evidence, all testified that these sales were the entirety of the sales made by De Beer Australia to Issa Auto Paints under the Autopaint mark and that the last sale was made in July 2005 (corrected by Mr Wemmers in his fifth witness statement to add 8 units of one product sold in September 2005). In addition, Mr Richard Reneman, the General Manager of De Beer Australia, confirmed in a written statement which was not challenged that Mr Issa was the sole purchaser of Autopaint products in Australia. Applying the royalty rate of 3% found in the Liability Judgment to these sales and giving credit for the royalties actually paid (at a rate of 0.5%), the Defendants have calculated that further royalties of €26,521 are due to Mr Fearns under the Australia agreement.[77]As in the case of sales made in the UK by the Defendants directly to franchisees, Mr Fearns did not when the hearing began accept that the Defendants had disclosed all the sales of Autopaint branded products which were made in Australia, and alleged that the true figure was substantially higher than that evidenced by the invoices which the Defendants have disclosed. Again, in the light of the evidence, this case was not maintained in closing submissions and no challenge was ultimately made to the Defendants’ calculation of royalties save in one minor respect. This was to contend that two further supplies made to Issa Auto Paints on 7 September 2006 and 13 November 2006 respectively should be added to the sales included in the Defendants’ calculation on the ground that these must also have been of Autopaint products, because the first delivery of Tempo branded products to Australia did not occur until March 2007. If correct, this contention would result in additional royalties payable of about £742. However, in my view it is not correct. The passage in the witness statement of Mr Barnes on which the point was based does not, as I read it, say that the first delivery of Tempo branded products to Australia occurred in March 2007 but only that there was a large annual price increase at the end of 2006; and Mr Barnes was not cross-examined on the point (nor was it put to Mr Wemmers). Furthermore, it is clear from other evidence that products began to be supplied to Issa Auto Paints under the Tempo label in August 2005, as designated on invoices by the letter ‘T’. The products listed on the two invoices dated 7 September 2006 and 13 November 2006 are all marked with the letter ‘T’, and I am satisfied that they were Tempo and not Autopaint branded products.[78]I therefore find that the sum payable to Mr Fearns as additional royalties under the Australia agreement is the amount of €26,521 calculated by Mr Thompson (and adjusted in Mr Wemmers’ fifth witness statement). Since the royalties that were in fact paid by the Defendants (at a rate of 0.5%) were credited in Euros, I infer that if the correct amount had been paid it would also have been paid in Euros and applied to reduce Mr Fearns’ debt to De Beer.

Malta

[79]Based on the finding made in the Liability Judgment, the Defendants were authorised to supply Autopaint branded goods to Malta but were obliged to account to Mr Fearns for 90% of the gross margin on such sales. The nature of any claim must therefore be for credits due to Mr Fearns rather than damages for lost profits. Mr Thompson has calculated that, in addition to the credits of €4,536 actually issued in respect of such sales, further credits of €6,012 are due to Mr Fearns. For the same reasons as in the case of the Australian royalties, it seems to me appropriate to award this sum in Euros.

Conclusion

[80]I have found that Mr Fearns is entitled to recover damages of £162,679 for infringement of the Autopaint trade mark and passing off in the period up to the end of June 2005 together with further damages for the loss of the franchisee network. These damages fall to be set off against the outstanding debt owed by Mr Fearns to De Beer. With regard to that debt, I have found that the amount of the credit which should have been given to Mr Fearns in respect of licensed sales made to franchisees is €101,094 and that additional sums of €26,521 and €6,012 are due to Mr Fearns under, respectively, the Australia agreement and the Malta agreement. The amount of €595,000 for which the Defendants have obtained judgment on their counterclaim therefore needs to be adjusted to take account of these sums.[81]The above sums do not include interest, which I will assess after this judgment has been handed down if it cannot be agreed.[82]In his closing submissions Mr Wilson QC argued that the movement in exchange rates since the events with which this action is concerned could have an unjust result if the amount due on the counterclaim remains payable in Euros, while the damages payable to Mr Fearns are assessed in sterling. He submitted that the only way to do justice in this case is to treat the amount for which judgment is given on the counterclaim as converted into sterling at the same rate (€1.45 to £1) as has been used in calculating credits due to Mr Fearns under the various agreements. Mr Wilson did not, however, identify any legal principle or authority which would justify such an approach, and I asked for further assistance from counsel on the relevant law. Mr Wilson has belatedly made further submissions in writing and cited a number of authorities in support of his contention, but only after I had already circulated this judgment in draft. In these circumstances I will leave over the question of the appropriate date of currency conversion to be dealt with at the same time as other consequential matters after this judgment has been handed down.

Cited in 13 later judgments

and 4 more of the most senior