A Nelson & Co Ltd & Anor. v Guna SPA [2011] EWHC 1202 (Comm)

[2011] EWHC 1202 (Comm)Case No 2008 FOLIO 1157
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 16 th May 2011
Before
HIS HONOUR JUDGE MACKIE QC
Between
A NELSON & CO LIMITEDClaimantsBACH FLOWER REMEDIES LIMITEDClaimantGUNA SPADefendant
Mr Fergus Randolph QC and Ms Sarah Abram (instructed by Vertex Law) for ClaimantsMr Mark Brealey QC and Ms Jacqueline Reid (instructed by Baker & Mackenzie) for DefendantHearing Hearing dates: 28 February , 1 2 3 and 7 March 2011
Judgment
[1]This dispute follows the termination of a distribution agreement for homeopathic products in Italy. The Claimants seek the transfer of product registrations and claims damages for having been kept out of these since termination. The Defendant denies that the Claimants are entitled to the transfers or that their absence has caused the Claimants any damage which they could not have mitigated. The Defendant also contends that the distribution agreement is void and unenforceable as it contains restrictions which had as their object or effect the distortion of competition in Italy in breach of Article 101 of the Treaty of the Functioning of the European Union (“TFEU”).

Background

[2]The first Claimant is a manufacturer of homeopathic products based mainly in Wimbledon. The second Claimant, a wholly owned subsidiary, licenses its trademarks to the first Claimant. Both Claimants are members of the “Nelsons” Group. I will refer to them together as “Nelsons”. Nelsons started out as long ago as 1860 and is a leader in its field.[3]The Defendant (“Guna”) is an Italian company which manufactures and distributes homeopathic products mainly in Italy. Guna was founded in 1983 by Dr Alessandro Pizzoccaro and his wife Dr Adriana Carluccio to import, distribute and sell homeopathic and natural remedies in Italy. In 1989 Guna started to manufacture and is now a market leader in homeopathic medicine in Italy, distributing to 20 other countries as well.[4]Many of the complex facts are agreed or not much in dispute. I set these out before dealing with the trial and more contentious matters.[5]Both Nelsons and Guna sell a range of homeopathic products but this dispute is about flower remedies and in particular Bach flower ranges. Edward Bach was an English doctor who between 1928 and 1935 devised 38 remedies based on flower essences, as a means of counteracting negative states of mind. The categorisation of Bach flower remedies (“BFR”) as homeopathic medicines, cosmetics, food and/or food supplements varies between countries. BFRs are sometimes seen as homeopathic remedies and sometimes not. Guna has since the 1980’s imported BFRs from the Bach manufacturing centre in the UK which Nelsons acquired in 1993 (having manufactured under licence since 1991). Since 1992 Guna has manufactured its own BFRs by diluting products in Nelsons’ “Bach Original Flower Remedies” (“BOFR”) range and selling them mainly under the brand Fiori Di Raphael. During the period of this dispute sales were very low. BOFRs are often called “unitary” products because they each contain the essence of one flower such as clematis. Nelsons also produce a range of “complex” products containing a number of Bach flower essences under the “Rescue” brand.[6]Between 1991 and 1996 Guna imported BFRs produced by Nelsons without a formal distribution agreement. By an agreement dated 1 January 1996 but signed on 30 September the parties entered into a distribution agreement for 3 years terminable thereafter on 6 months notice. A second agreement was concluded on 23 April 2001 for 3 years from 1 January 2001. This dispute is mainly about the third written distribution agreement (“the 2005 Agreement”) which was made on 10 March 2005 for a period of 3 years from 1 January 2005.

The 2005 Agreement

[7]The 2005 Agreement was in similar form to those entered into in 1996 and 2001. The 2005 Agreement has to be read as a whole and in context but the most important relevant provisions are as follows. The agreement is between the two Claimants and the Defendant. The Territory is, in effect, Italy. The “products” are the 38 unitary BFRs and the “complex” items, Rescue Remedy, Rescue Remedy Spray and Rescue Remedy Cream. These are listed in Schedule 1. The agreement does not use the word homeopathic. By Clause 1 Guna is appointed the exclusive distributor for the re-sale of the Products in the Territory. The distributor is to purchase the Products only from the Manufacturer. By Clause 2.3, title to Products is not passed to the Distributor until the Manufacturer has received full payment. The Manufacturer is responsible for obtaining licenses and other documentation which can be issued in its country. By Clause 2.3.4, “the Distributor shall be responsible for paying all costs for transportation and for obtaining any documents other than those specified in Clause 2.3.3, necessary for the importation and sale of the Products in the Territory.” By Clause 2.6, the terms on which the Distributor sells the Product are to be approved by the Manufacturer. Clause 3 deals with the Distributor’s obligations.[8]The Distributor must amongst other things:- “3.1.5 not advertise for, canvass or otherwise seek orders for Products from customers outside the Territory; 3.1.6 not establish any branch, subsidiary or depot for the supply of Products outside the Territory; 3.1.7 inform the Manufacturer of any orders and enquiries it may receive for Products to be sold or exported outside the Territory; 3.1.8 not be involved directly or indirectly in the production, sale or supply of any products which compete with the Products in particular flower remedies; 3.1.13 comply with the Manufacturer’s reasonable instructions and act in its best interests; 3.1.14 conduct its business in accordance with all laws applicable in the Territory and at its own expense obtain all necessary permits and documents specified in Clause 2.3.4 to enter this Agreement and perform its duties with the Territory;” By Clause 3.8“The Distributor shall use its best endeavours to register or assist in the registration of the Products on behalf of the Manufacturer where requested to do so.” By Clause 3.8“The Distributor shall use its best endeavours to register or assist in the registration of the Products on behalf of the Manufacturer where requested to do so.”[9]Clause 5 authorises the Distributor to use special trade marks and other intellectual property but imposes restrictions and other obligations which are expressed to remain in force after termination of the Agreement. Clause 7 deals with termination. Clause 7.3 provides for what is to happen on termination. Clause 7.3.1 requires the Distributor, on termination, to stop using a variety of intellectual property rights and to cooperate with the Manufacturer to that end.[10]Most of the provisions I have referred to so far relate to the competition law defence under Article 101 as proffered at trial (although not in some respects as pleaded). The provision at the heart of this dispute is Clause 7.3.7:- “the Distributor shall as so far as possible assign or transfer the benefit of any permits, licenses or registrations obtained in respect of this Agreement pursuant to Clause 2.3.4 hereof or otherwise to the Manufacturer or, where legally possible, to another party as the Manufacturer may direct.”[11]Clause 7 also deals in conventional terms with termination for breach, for failure to meet targets and in the event of changes of ownership or control and if there is insolvency.[12]Clause 9 contains an assortment of standard provisions including an entire agreement Clause. By Clause 9.9 the agreement is to be governed by English law and the parties submitted to the jurisdiction of this court.

Contractual position after December 2007

[13]The 2005 Agreement expired on 31 December 2007. The parties agreed to continue to operate on the terms set out in a letter from Mr Dunne, Nelsons’ Group Finance Director to Dr Pizzoccaro dated 8 February 2008. That letter included the following:- “As you know, the 2004 Agreement between our companies expired on 31 August 2007 and the 2005 Agreement expired on 31 December 2007. On the basis that we are currently in a period of renegotiation as to the possibility of entering into a further distribution agreement in respect of the Bach Flower Remedies, Nelsons Homeopathic range and Spatone, we have continued to fulfil the orders placed by you since such expiry dates. We confirm that we are prepared to undertake negotiations with you for a period ending on 30 April 2008. During this period, as an interim measure, we propose that the trading relationship continue on the same terms as the expired agreements, save that the provisions as to duration and termination will not apply. We further propose that our current prices will continue until that date and price increases to be implemented will become effective on 1 June 2008. In the event that we are unable to negotiate the terms of a new distribution agreement that are acceptable to all parties by 30 April 2008, then the existing arrangements will finally terminate on 31 August 2008 unless expressly agreed in writing to the contrary. For the avoidance of doubt, the distribution agreement dated 21 April 2004 came to an end on 31 August 2007 and the distribution agreement dated 10 March 2005 came to an end on 31 December 2007. What is proposed in this letter is a quite separate arrangement to safeguard the parties interests and the trading relationship, pending the agreement of new terms.”[14]On 20 February Dr Pizzoccaro responded to the 8 February letter indirectly through Mr Bernd Rickmann of Nelsons in terms which included the following:- “I agree with your proposal to meet in March in order to, hopefully, find a fair solution regarding a new five-year distribution agreement which should cover, I agree, all the products. I appreciate your proposal to keep the condition of the existing contracts till June 1st 2008.” That arrangement was amended by a letter of 9 April 2008 extending the negotiation period to 30 June with the relationship otherwise finally terminating on 31 October 2008. When on 17 June 2008 Mr Dunne wrote terminating the relationship from 31 October 2008 these letters were described as the “Informal Arrangements”. Guna has described them in submissions as the “2008 Agreement”.

Legislation to harmonise the regulation of homeopathic products within the EU

[15]In 1992, Directive 92/73/EEC commenced a process of harmonisation of the regulation of homeopathic products in EU Member States. One aspect of this harmonisation was to require Member States to “ensure that homeopathic medicinal products manufactured and placed on the market within the Community are registered or authorised”. In response to Directive 92/73, Italy introduced Law 185/95 (the “1995 Law”). Having made provision for a “simplified registration procedure” at Articles 3-5, Article 7(1) of the 1995 Law provided as follows (quotations from Italian in the Judgment are taken from agreed translations) :
“For those homeopathic remedies produced in a country of the European Union and present on the Italian market on 31 December 1992, the authorisation to remain in commerce with the same presentation expires on 31 December 1997, as long as the party responsible for the entry into commerce, documents this presence to the Ministry of Health, within six months from the application of this decree.”
Guna complied with Article 7(1) of the 1995 Law on 29 November 1995, by documenting the presence on the Italian market of all the products which it was selling as homeopathic. These included Nelsons’ BOFR and Rescue products. Although Article 7(1) provided for the transitory regime to apply until the end of 1997, this date has been extended by a succession of further laws. Most recently, the period of application of the transitory regime has been extended until the end of 2015. Article 85(34) of Law 388/2000 (the “2000 Law”) provides as follows: “Within one hundred and twenty days from the date of commencement of this law, the firms which have arranged presentation of the documentation to the Ministry of Health pursuant to article 7, paragraph 1, of Legislative Decree n.185, dated March 1995 and subsequent modifications, must pay ITL 40,000 to the Ministry of Health for every homeopathic remedy notified… as a contribution for the management and control activity in the homeopathic sector”.[16]Guna wrote to the Ministry of Health on 29 November 1995 making registrations in its own name. Nelsons were aware of the registrations, took an interest and asked for copies of the relevant documents as is clear from a fax of 20 December 1995. The consequence of registration as Guna was to point out in September 1996 was that BOFR could only be sold as homeopathic medicines and through pharmacies. Nelsons and Guna later corresponded about registrations, particularly after the first distribution agreement had been entered into in 1996. On 27 April 2001 Guna made a payment to the Ministry of Health under the 2000 Law of Italian Lira 83 million of which sum 1.6 million was in respect of the starter ingredients used in Nelsons’ unitary products (and Guna’s Fiori di Raphael product) and in Nelsons’ complex Rescue products. Under the 2000 Law where a firm sold two unitary remedies using the same starter ingredient, it was allowed to choose whether to make a single payment for the starter ingredient or separate ones for each remedy. Guna made a single payment for the starter ingredient. So one single payment was made for the Nelsons’ unitary product and for Guna’s Fiori di Raphael. Separate payments were required, and were made, for the Rescue products. On 3 May 2001 Guna sent an invoice to Nelsons for the Italian Lira 1.6 million headed “Taxes, espenses for registration Nelson”. Nelsons paid it. On 28 April 2003 Guna, without asking Nelsons to contribute, paid Euro 52,425 under a 2002 Law which required an additional payment “as an advance on the tariffs owed at the time of first renewal of the authorisation…”. In the same year Guna notified the Italian regulatory body (“AIFA”) of the starter ingredient used in the Nelsons and Fiori di Raphael product. This, consistently with the single payments made in 2001 and 2003, did not distinguish between the products.

Termination of the relationship between the parties and its consequences

[17]The 2005 Agreement had been due to expire on 31 December 2007 and there had been discussions about a possible renewal since about May 2007. Although, as I have indicated, the contractual arrangements were extended until 31 October 2008, Nelsons were clearly talking seriously with a proposed new distributor, Loacker Remedia at the end of December. There is recrimination between the parties about being misled. Nelsons complains about steps taken by Guna to seek to protect itself in the market when the relationship ended. Guna complains of being misled about Nelsons’ real intention to renew. Apart from the specific matters with which I now deal, the actions of both parties seem similar to what many companies would do in the same position.[18]A distribution agreement was entered into between Nelsons and Loacker on 21 July 2008. On 19 June Mr Rickmann and Dr Pizzoccaro had what appeared to be a constructive meeting. Dr Pizzoccaro then avoided responding to Mr Rickmann over the next 3 months about the proposed transfer of the product registrations to Loacker under Clause 7.3.7 of the 2005 Agreement. On 24 September 2008 Guna asked Nelsons to deal with their lawyers. Guna then declined to transfer the product registrations so Nelsons were unable to sell their BOFR and Rescue products in Italy as homeopathic. Some Nelsons’ products were sold in Italy through parallel imports but otherwise Nelsons was absent from that market until in May 2010, when it was able to re-enter the Italian market following the grant of an injunction in December 2009.[19]In December 2008 Guna used the registrations obtained under the laws of 1995, 2000 and 2002. It used the unitary registrations to launch a new range of products “Fiori di Bach”, a BFR range replacing Nelsons’ products. It also used the complex registration to launch “Resource” a complex product. Having heard Dr Pizzoccaro give evidence about the matter, it seems clear that the name Resource was chosen in the hope that potential customers would associate the name with the Rescue products which Guna could no longer distribute. While the position on unitary products is more complicated, it is clear that Guna used the registration for Nelsons’ Rescue range to launch Resource.[20]By October 2008 Guna was declining to transfer the product registrations mainly on the ground that if it did so it would be prevented from selling its own Fiori di Raphael products in Italy as a consequence of it having the same starter ingredients as Nelsons BOFR products. (Sales of Fiori di Raphael had always been low, reaching a peak in terms of turnover in 2000 at Euro 21,582 and steadily diminishing to Euro 8,674 in 2005, Euro 3,269 in 2006, Euro 1615 in 2007 and only Euro 28 in 2008.)[21]In November 2008 Nelsons applied for an interim injunction requiring Guna to transfer the product registrations. Although the application, which came before me, raised various complex issues, the main question was what, as a matter of regulatory law in Italy, the consequence of a transfer would be upon Guna’s right to sell its own products using the same ingredients as Nelsons. Rather than conduct an artificial exercise and reach what were likely to be unreliable conclusions about Italian regulatory law, I thought it better for the parties to be required to approach AIFA to try to procure a transfer which protected Guna’s rights to sell its own products. At that point I had difficulty in understanding what relevant EU or Italian Regulatory principles would in reality be offended by both companies selling their products. An application was then made to AIFA which led to a meeting of all parties on 7 May 2009 and later to a decision summarised in the following extracts from the letter of 1 October 2009:
“in 2001, Fiori di Raphael lost their specific identity because by paying £40,000 for homeopathic medicine, GUNA paid for flower strain and as Raphael and Bach flowers shared the same strain, albeit with differing dilutions, only a single payment was made… This position was confirmed when the second EUR 25 payment provided for by the 2002 Law was made… Based on this, the Office thinks it fit to show the favour legislatoris towards said owner/company of homeopathic products manifested in [2000 Law], which provide for a one off payment of £40,000 for homeopathic medicines, regardless of the number of related product formulations; if, in fact, the legislator had expected payment for each product formulation, the companies would have been required to pay conspicuous amounts. The above-mentioned concession was favourably received by companies which, in the majority of cases, proceeded to make a single payment per flower strain… [A]ctually AIFA has no legally authorized operational instrument capable of separating the Bach Flower Remedies and Fiori di Raphael, which were notified but never authorized, and are identified in all AIFA documents as unicum… We would also add that, in the past, AIFA has dismissed similar actions”
. The parties’ Italian lawyers have helpfully agreed a note of what was said at the May meeting. AIFA made it clear that the problem with fused registrations applied only to unitary and not to complex products. AIFA also indicated that “it could be possible for Nelsons to proceed with a new registration…[h]owever, all applications received as of today have been rejected by AIFA.”[22]On 1 December 2009 I granted an injunction for the reasons set out in my judgment and Guna was required to apply to AIFA for the transfer to Loacker of the registrations, permits or licences which authorised the distribution of BOFRs, Rescue Remedy and Rescue Cream, in Italy. That transfer process was completed on 21 May 2010.

Food and Parallel Imports

[23]The Nelsons Bach Flower Remedy products are sold as food in Germany, Austria and Switzerland and as a food supplement in France, Belgium, Netherlands, Luxembourg, the Czech Republic and Poland. These products have also been sold as food in Italy by parallel importers who sell them not as homeopathic remedies (for which they have no registration), but in supermarkets and health food outlets. Although the 2005 Agreement does not refer to the products as being homeopathic, the parties always proceeded on the basis that they would be treated as such. The issue came up for discussion between the parties over the question of parallel imports. It seems that following Guna’s concerns about the impact of parallel imports, Nelsons encouraged Guna to deal direct with an Italian distributor of parallel imports Cabassi & Giurati and to supply them. There was some discussion of Cabassi & Giurati being provided with a separate food line and some indications in the documents that Guna recognised that having registered the products as homeopathic it might be illegal for it to be involved in their sale as food. Guna, for its part, contends that these events demonstrate that Nelsons was content for the product to be sold as food.[24]The issue arises because Guna says that if, which it denies, it is liable for breach Nelsons has failed to mitigate any damage it suffered by not causing the products to be sold as food. It is common ground that after the 2005 Agreement terminated Nelsons continued to arrange for Cabassi & Giurati to be supplied through third parties. Guna, after being required by the injunction to transfer the registrations, almost immediately started selling its own flower remedy range as food and has done so successfully. It sees no reason why Nelsons should not have done the same.[25]It is clear that Nelsons had no objections in principle to selling their products as food and they actively considered doing so with their proposed new distributor Loacker. Loacker, after making inquiries, advised Nelsons that their products could not lawfully be marketed in Italy as food. In April 2008 Mr Loacker met Dr Trovato the General Secretary of the Italian Association of Herbalist Sciences and Technology. She advised him that “a switch to food can however, only take place once you have obtained the registration ownership of the products as (homeopathic)… that Guna could demand from AIFA to stop with immediate effect the illegal distribution of a product which is currently classified (as homeopathic)”. In September 2008 Dr Loacker and Mr Rickmann of Nelsons met Dr Scarpa at the Italian Ministry of Health. He doubted that anything other than the homeopathic channel was appropriate if the products had been registered as homeopathic. He was not prepared to support any other approach. He also indicated that if anyone challenged Nelsons’ distribution of the products as food Dr Scarpa would not support Nelsons. Despite the urgings of Nelsons, Dr Loaker refused to allow the products to be sold as food for as long as Guna had not cancelled the registrations.

The Trial and the Evidence

[26]Nelsons called as witnesses Mr Michael Dunne, its Group Finance Director and Company Secretary, and Mr Bernd Rickmann, General Manager of Nelsons’ German Subsidiary, who has responsibility for most European markets. Guna called Dr Pizzoccaro, its President, co-founder and joint owner. Guna had also expected to call Dr Adriana Carluccio, Technical Director and co-founder and joint owner of Guna who is also Dr Pizzoccaro’s wife. Very unfortunately Dr Carluccio has become seriously ill and the parties agreed the unusual but very sensible course of Dr Pizzoccaro being cross-examined about her statements. The Court also had 16 volumes of documents.[27]There were very few disputes of primary fact and it is unnecessary for me to evaluate the evidence of the witnesses one by one. All three were honest witnesses trying to assist the court. Where I expressly or implicitly reject in the judgment points which witnesses have made it is generally where they have confused giving factual evidence with advocacy of their company’s positions. I bear in mind that Dr Pizzoccaro gave much of his evidence in English and that this is not his first language. I reject the suggestion that Mr Rickmann avoided difficult questions by relying on an interpreter. A considerable volume of evidence was deployed by both sides both about the background to the contract and the issues of mitigation. While it is understandable that the parties should wish to put forward all the evidence which they consider would advance their cases much of the material is of limited relevance, as I see it, or relates to matters not seriously disputed. I have read all the material but do not refer to that which seems to me to be irrelevant. I now turn to the disputed issues. Did the 2008 extension of the 2005 Agreement incorporate the transfer of registrations in Clause 7.3.7? – Submissions of the parties[28]Mr Brealey QC for Guna submits that it is common ground that the 2005 Agreement terminated on 31 December 2007 in accordance with Clause 1.4. What he describes as the “2008 Agreement” was stated to be a “quite separate arrangement” incorporating the same terms as the 2005 Agreement “save that the provisions as to duration and termination will not apply”. One of the terms of the 2005 Agreement which therefore became the 2008 Agreement was Clause 9, the entire agreement provision. Clause 7.3.7 is a provision as to termination and therefore formed no part of the 2008 Agreement. There is nothing commercially surprising about the result of applying the words used. The quite separate 2008 Agreement was of short duration. Some of the other detailed provisions in Clause 7 which are also outside the 2008 Agreement such as those relating to the trademarks and purchase of stock did not need to be carried forward because of the effect of the expiry of the 2005 Agreement and the operation of law.[29]Mr Randolph QC for Nelsons submits, first that this is a strained and artificial interpretation of the letter of 8 February. What Mr Dunne was saying was that Nelsons offered to extend the agreement to 31 August on the terms of the 2005 Agreement but the duration of the contract would not “bea term of 3 years” and the contract would not be considered already to have terminated by effluxion of time. He supports this by saying that Guna’s case must be that all Clause 7 must be excluded from the extended arrangement despite the fact that it covers the rights to terminate in the event Guna of being unable to pay its debts or going out of business and also deals with trademarks, other intellectual property and the return of stock. Secondly he says that the objective matrix of fact points to no change of circumstance between 2005 and 2008 from which one might infer an intention to discard Clause 7.3.7 and it would be extraordinary if Mr Dunne was by his letter of 8 February committing Nelsons to either renewing its agreement with Guna or in effect abandoning its business in Italy, in a context where the extended agreement was “an interim measure” to govern the relationship during “a period of renegotiation as to the possibility of entering into a further distribution agreement”. Moreover Dr Pizzoccaro’s response of 20 February 2008 accepting “a proposal to keep the condition of the existing contracts till June 1st 2008” support Nelsons position.

Approach to Construction

[30]The Court interprets a contract to decide what it means. What it means is what a reasonable person with all the relevant background knowledge of the parties at the time when the contract was made would have understood those parties to mean by the language they have used. The tools of interpretation include a consideration of the commercial affect of rival contentions. The approach, and the authorities upon which it is based, are well known. Mr Brealey accepts that the principles are as set out by Mr Randolph in his trial skeleton argument but of course disputes their application to the facts of this case. Those paragraphs include the following:- “a. As Lord Hoffmann put it in ICS Ltd v West Bromwich BS, “[i]nterpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.” b. The classic statement of the “background knowledge” to be taken into account is that of Lord Wilberforce in Reardon Smith Line v Hansen-Tangen:
“[i]n a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating… what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were”… c. Also from West Bromwich, “[t]he meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars: the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean… The “rule” that words should be given their “natural and ordinary meaning reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. d. Specifically, as Lord Diplock held in The Antaios, “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense”...”

The 2008 extension – Decision of the Court

[31]I am of course concerned with the meaning of the words used set in their context not with what the factual matrix might suggest reasonable terms to be. The 2008 extension is not contained in a legally negotiated agreement but in an exchange of correspondence between the parties. Looking at that correspondence as a whole, including Dr Pizzoccaro’s response, it is clear that the parties had nothing in mind beyond drawing a line under the 2005 Agreement except to the extent of permitting its terms to continue for a short period. There is a provision for “termination”, Clause 7. There is no explicit provision for “duration” beyond the automatic expiry provided for. It is unlikely in the circumstances and given the language used by Mr Dunne, that Nelsons intended or Guna believed, that Nelsons for the sake of a few months, extension would surrender the entirety of Clause 7 and with it the right to have the transfer of registrations it needed to pass the existing business to a new distributor or sell for themselves. It is possible that the parties could have reached such an agreement but clear words would have been needed to achieve such an improbable result. As I see it, “termination” refers not to the entirety of Clause 7 dealing with “Termination” but the terms of the 2005 Agreement continuing for a period but not for a new term of 3 years. The best point against that view is the fact that the proposal is described as “a quite separate arrangement” by Mr Dunne but the weight of that indication is overwhelmed by the other considerations relied upon by Nelsons.

Construction of Clause 7.3.7 – Submissions of the parties

[32]The Clause obliges Guna so far as possible to assign or transfer the benefit of “any permits, licenses or registrations obtained in respect of this Agreement pursuant to Clause 2.3.4 or otherwise to [Nelsons]”.[33]Mr Randolph submits that the entitlement which Guna had to sell Nelsons products as homeopathic in Italy, was a “permit, license or registration”. The products were registered for sale by Guna. Directive 92/73 requires the registration, authorisation of homeopathic medicinal products to which the 1995 Law gave effect. Article 7(1) of that Law required Guna to obtain an “authorisation to remain in commerce”. This authorisation falls within “permit, license or registration”. Guna itself described this as a registration – see a letter from Dr Carluccio in September 1996 repeatedly stating this and the description of the invoice for payment in May 2001. The 2002 Law expressly requires payment to be made as an advance on the tariffs owed at the time of first renewal of the authorisation, in advance of temporary registration numbers being attributed.[34]Despite some cross examination along that line and invariably characterising the event as “the 1995 notifications” Guna’s case is not advanced on distinctions in terminology. Guna contends that the Clause does not apply for two reasons. First the 1995 notifications were obtained by Guna before any distribution agreement between the parties was entered into. They cannot therefore have been obtained “in respect of” any agreement with Nelsons. Nelsons did not request, instruct or ask Guna to obtain the notifications. Guna dismisses, as I see it correctly, attempts by Mr Dunne in evidence to suggest that there was an arrangement involving Nelsons in respect of the 1995 notifications. Nelsons’ role was interested but passive. Guna relies on evidence from Dr Pizzoccaro that the arrangement by which Nelsons made a registration payment to Guna in 2001 was outside and separate from the then current Distribution Agreement.[35]Secondly Guna argues that the notifications do not fall within Clause 2.3.4 or any other provision of the 2005 Agreement. The 1995 notifications were not “necessary for the importation and sale” of the products in the territory. The products could be sold freely as food and without registration. Guna contends that against that factual background Guna should not be required to transfer registrations which it obtained for its benefit and on its own initiative so that it could sell Nelsons’ products in Italy.[36]Nelsons responds that the registrations in 1995 were obtained in the context of the close relationship which had flourished so that by the end of 1994 the parties were contemplating entering into an Agreement. Nelsons relies on its own involvement and concern about the registrations. The making of the payment in 2001, if it were otherwise than pursuant to a contractual obligation, would strengthen Nelsons’ case that the registrations were obtained and held on its behalf. All the factors demonstrate that the registrations were obtained by Guna in connection with its dealings with Nelsons and that the parties intended that they should be transferred, as one would expect with such an agreement, at the end of the relationship. However, Nelsons also points out that this factor only arises if the court finds that a “permit, license or registration” was obtained in 1995 but that the 2001 and 2003 payments did not relate to that. In reality, as the invoice made clear, there was a registration in 2001 in respect of “this agreement” albeit during the period of the very similarly worded predecessors to the 2005 Agreement. Without those payments the registrations would in effect have lapsed and Nelsons products could not have been continued to be sold as homeopathic. The suggestion that the parties could not have intended that Guna would not be able to market its own products at the end of the agreement presupposes that that is a consideration which could have been within their contemplation at the time of the 2005 Agreement. The consequence of the decision of Guna to make one unitary registration for both the Nelsons product and its own, and what in 2009 came to be recognised as an unrestorable fusion, could not have been in the minds of the parties at the time of entering into the contract in 2005. It is therefore irrelevant for the purposes of construction. Nelsons rejects the suggestion that the registrations were not necessary for the importation and sale in the territory. The parties could not have contemplated at the time of entering into the contract that the products would be sold as food. There is no evidence that at the time either party had in mind that the products could be freely and lawfully sold as food in Italy. Nelsons contend that the perception was that the reverse was true. The Clause encompasses a range of potential regulatory requirements not capable of precise definition at the outset and should be read broadly. These were registration licenses or permits within the meaning of the Clause.

Construction Clause 7.3.7 – Decision of the Court

[37]I reject the brave efforts of Nelsons to claim that their awareness and partial involvement and benefit from the registration means that in some way they were “obtained in respect of this agreement”. Despite the expression “in respect of” being elastic I consider that registrations obtained by Guna in 1995 cannot themselves have been obtained in respect of an agreement entered into afterwards.[38]It is not clear to me how far Guna was arguing that what they call the notifications were not permits, licenses or registrations within the Clause. It seems to me that they plainly were. Guna characterised them as such (in Italian as well as in English). Equally it seems clear that the registrations were necessary for the importation and sale of the products in Italy. Both parties are leading companies in the area of homeopathic products. Although the agreement does not define the products as being homeopathic the parties proceeded on the basis that they would be. Even before 1996 and the first agreement the relationship was conducted on the basis of it being one for homeopathic products. If either party seriously had in mind the sale of products for other purposes it would have been unnecessary for Guna to obtain registrations in the first place. While the parties discussed the sale of the products as food from time to time this was mainly in the context of parallel imports and sale by others and in terms which appeared to recognise that it would or might be illegal for someone holding a homeopathic license for a product then to sell it as a food.[39]But it is unreal to see the registrations as obtained only in 1995 and therefore not in respect of the 2005 Agreement. The registrations stayed active only because they were renewed. In substance they were obtained again in 2001 and 2003 and were obtained in respect of the agreements then in force. The registrations under discussion were obtained in 1995 but renewed in 2001 (with Nelsons paying) and again in 2003 (with Guna paying). Those are the registrations in question and they are plainly obtained in respect of the agreement.[40]That then leads to the question whether “this Agreement” can refer only to the 2005 Agreement and not its predecessors. The 1996 and 2001 Agreements both included versions of Clause 7.3.7. As I see it “this agreement” refers to the cumulative position in which each agreement has succeeded the last without any transfer back and the subsequent retransfer of the registrations which a literal construction and implementation would require. Otherwise the provision would make no sense. It follows that the registrations which are the subject of this action fall within Clause 7.3.7 and Nelsons has a right to have them transferred. The plight of Guna, unable to sell Fiori di Raphael as a homeopathic remedy in consequence of its decision to make a single unitary registration, is irrelevant to construction because this factor was not, and could not have been, within the contemplation of the parties at the time that the 2005 Agreement or either of its predecessors were entered into.

Mitigation

[41]Guna contends that if it is liable for breach of contract then there should either be no award of damages or these should be greatly reduced because of what it contends is a failure by Nelsons to mitigate its loss in three respects. First, Guna argues that Nelsons should have sold the product in Italy as food after the termination of the extension in 2008. Secondly, Nelsons should have enforced the obligations in the Loacker agreement or terminated it and found another distributor. Thirdly, Nelsons should have maximised other routes of supply into Italy through parallel imports.[42]It is not in dispute that as it was put in British Westinghouse v Underground Electric Railways [1912] AC 673 at 689 the law “imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent of the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps…”. The obligation to show failure to mitigate is on Guna. It is also useful to bear in mind the following well known passage from the speech of Lord MacMillan in Banco de Portugal v Waterlow [1932] AC 452 at 506, “[w]here the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.”

Submissions of Guna

[43]Mr Brealey QC contends that Nelsons BOFR products are not homeopathic but are properly characterised as food. He cites examples of flower products being perceived as not homeopathic by authorities, including those in the UK, and in some respects by Dr Trovato. Secondly he asserts that the regulatory risk of selling the product as food has been exaggerated. The practice is commercially acceptable on any objective assessment. Loacker was unreasonably risk averse until December 2008. Nelsons was willing to take the risk and should have gone on to do so. It is asserted that Nelsons became risk averse only after bringing the current action. As Loacker moved towards accepting indemnities from Nelsons and becoming willing to sell food, Nelsons looked more to its position within these proceedings than to mitigating its loss. Guna contends that Nelsons could have applied for the registrations but chose not to do so. To the extent to which authoritative sources advised Nelsons against selling the products as food this was because they were not provided with the material information. They should have been asked “is Nelson entitled to sell its products which are food and which are not homeopathic as food”?[44]Guna also contends that to the extent that Nelsons relied on the advice of Loacker it is responsible for its agent’s unreasonable stance. Mr Brealey relies on the judgment of the then Mr Nicholas Warren QC in Marionette v Visible Information Packaged Systems [2002] EWHC 2546 (CH) in which he said “[a] person who acts on the views of his advisers must, I consider, bear a responsibility, as against third parties, for the reasonableness of those views”. He also pointed out that simple reliance by a party on an expert is not enough if that expert has not been provided with all material facts. The first observation seems to have been made in context of the facts and not to have been intended as a principle of universal application. If it were so intended it must have limitations. For example someone may rely on an expert, for example a surgeon, whose views can later be demonstrated to be totally unreasonable but in circumstances where the claimant could not have known that.[45]Nelsons submits that it reasonably acted on the advice it obtained from its distributor who had every financial incentive to sell the product. There is no evidence to show that the advice Nelsons received was not reasonable. Dr Pizzoccaro in evidence himself described the issue as “not so easy”. He put forward apparently off the cuff, a claim that Nelsons could have sold the products as food if they had been relabelled as food products when manufactured in a laboratory to comply with health and safety requirements. He suggested Nelsons could have taken advantage of the change of the manufacturing site applied for in November 2008 by Guna. Nelsons also submit that the classification of BFR products in different countries is irrelevant. What matters is whether Nelsons should have sought to sell the products as food in light of the regulatory situation as it actually was in Italy in 2008. Nelsons disputes the significance of emails and other documents dealing with the perceptions of the parties before 2008. Nelsons rejects the suggestions that Dr Trovato and Dr Scarpa were either not expert or were poorly briefed. Nelsons contends that it was unnecessary for either to be given a very detailed briefing about Nelsons’ regulatory status in other countries. The only issue was whether Nelsons could sell its products as food where they were registered as homeopathic under the existing regime in Italy. Nelsons submits that it was not possible for it to have direct contact with AIFA because it was not the holder of the registrations that Guna was refusing to transfer and lacked standing to do so. Further Nelsons reasonably understood that AIFA was unlikely to consent to Nelsons selling the products as food. Nelsons disputes the relevance of the fact that competitors, who did not have homeopathic registrations, sold the products as food.

Mitigation – Decision of the Court

[46]It is for Guna to show that Nelsons failed to mitigate. Nelsons had every reason to seek to return to the market in Italy at the first opportunity and would, as I find, have been content to do so selling the products either as homeopathic or as food. It is fanciful for Guna to suggest that Nelsons somehow avoided taking steps to make a profit in the hope that in some nebulous way this would improve its prospects in litigation. Nelsons’ pressure upon Loacker and its decision to offer a limited indemnity all show that it was keen to return to the market if it could. Guna has carried out a very detailed, highly skilled and posthumous analysis of the possibilities open to Nelson some of which are highly theoretical. The question is only whether Nelson took reasonable steps. Nelson tried to get back into the market and appointed a professional distributor whose qualifications and abilities had been carefully evaluated over many months. It was clear that Loacker had in turn taken advice from reputable sources and was deeply unhappy about the risk of doing something potentially unlawful. I am not satisfied that Loacker was anything other than a conscientious distributor. As one sees from an email from 30 April 2008 Dr Loacker went to Milan to clarify regulatory matters and consulted Dr Trovato whom he described as “an advisor to us for several years now and is an expert in the scientific-regulatory-pharmapolitical field of plant products in IT and the EU. She has good contacts to the Health Ministry and within AIFA. Most of all she has a clear and practical understanding and knowledge of the subject matter and has proved much more useful than statements from all types of lawyers”. This seems to me to be characteristic of a very careful and conscientious evaluation of risks and opportunities. On one view the approach of Loacker might be seen to be cautious or even over cautious. However Loacker knew the business and, like Nelsons would naturally seek profit where they could find it. Again both were aware that Guna would take all legitimate steps open to it to promote its own product at the expense of Nelsons’ future progress in Italy.[47]Moreover Guna as is clear from the way in which it used the registrations for itself and returned to the market, would do everything possible that was lawful to promote its own interests and harm those of Nelsons. Nelsons, an English company, would be aware of the risk of being reported to the relevant authorities by a well-informed local competitor for anything arguably untoward. The duty to mitigate does not require a claimant to take risks outside the normal way of business. In practice one sees the application of the duty to mitigate most regularly in relatively stable and un-dynamic contexts, where, for example, there is a ready market upon which a claimant can and should make good or reduce a loss. Similarly a claimant may suffer loss as a result of a defendant failing to complete a project in circumstances where he can readily find someone else to finish the job. In a fluid uncertain and complex situation such as that in this case it seems to me that the words of Lord MacMillan are particularly appropriate. Nelsons was in an unfamiliar situation with a range of reasonable options open to it. The course it took was well within that range and Guna’s claim that there was a failure to mitigate fails.

Infringement of Article 101 of the Treaty of the Functioning of the European Union (“TFEU”)

[48]Guna alleges in its Defence that the 2005 Agreement infringes Article 101 and its Italian law equivalent and is therefore void and unenforceable. The Defence alleges that Clause 3.1.5 is a restriction or limitation on the parallel trade between Member States and that Clause 3.1.8 prevented Guna selling products that competed with Nelsons’ products, despite it having been selling competing products since before 1995. It is claimed that the object of these Clauses was the restriction of competition. Guna also contends that the 2005 Agreement is restrictive of competition. The “relevant markets” are first the manufacture and secondly the distribution of Bach Flower Essence products as homeopathic products and as food supplements. It is claimed that the parties at all times have been competitors in these markets with Nelsons more significant in terms of bargaining power. It is claimed that Clauses 3.1.8, 5, 7.3.7 and/or 3.1.13 restrict, prevent or distort competition on the relevant markets. Clause 3.1.8 stops Guna competing by producing goods that compete with Nelsons products. If Clause 5 continues after termination of the 2005 Agreement, it is a perpetual commitment by Guna not to challenge the validity of Nelsons trademarks which include generic terms. Nelsons’ interpretation of Clause 7.3.7 prevents, restricts or limits competition. If Clause 3.1.13 has the effect contended for by Nelsons, competition is prevented. If Guna’s ability to operate in the homeopathic channel is eliminated or limited consumers are deprived of two competing homeopathic remedies ranges.[49]No further facts or details are given in the two pages which are devoted to Article 101 in the 23 page Defence. Nelsons complains that the competition law defence is wholly unparticularised, seriously deficient and unfit to be tried. Nelsons complained of this in its Reply and in a letter dated 3 March 2010 but without substantive response from Guna. During his opening Mr Brealey sought to refer to Clauses 3.16, 3.17, 2.1 and 2.6 despite their absence from the pleading. I pointed this out but there was no later application to amend. I was concerned that this defence might have the appearance of having been put together in general terms to take advantage of what might have turned up by the end of the trial. In addition to objecting to Guna going outside its pleading Mr Randolph says that the defence itself is deficient. He cites observations by the Chancellor in P&S Amusements Ltd v Valley House Leisure [2006] EWHC 1510 (Ch) in which he draws attention to the need to plead primary facts and not merely to assert, as in that case, that a given concerted practice has as its effect the distortion of competition within the United Kingdom. The requirement is for the setting out of primary facts not recitation of the statutory requirements. As the position was put by Roth J in Sel-Imperial Ltd v The British Standards Institution [2010] EWHC 854 (Ch):
“[t]o contend that a party has infringed competition law involves a serious allegation… A Defendant faced with such a claim is entitled to know what specific conduct or agreement is complained of and how that is alleged to violate the law… It is only through the clear articulation of each party’s position in its statement of case, with appropriate factual detail, that the other side can know what case it has to meet…”
[50]Mr Randoph complains not only about the lack of the detail but of the absence of anything from Guna about whether the 2005 Agreement “may affect trade between Member States”, the threshold test. He complains of the absence of a factual basis for assertions that the parties have been competitors on the relevant market and of the absence of any distinction between “actual” and “potential” competition. There are no details of why Nelsons is said to have greater bargaining power than Guna. There is an absence of any attempt to set out how and to what extent it is said that Guna’s ability to compete has been restricted as a result of Clause 7.3.7.[51]Mr Brealey does not address these criticisms in his closing written submissions but in oral argument he submitted that P&S Amusements was not decided on the pleading point. He also pointed out that despite articulating the principle, Roth J in Sel-Imperial did not strike out the pleading. He submitted that the pleading in this case does satisfy the relevant criteria. He submits that the product market and the geographic market have been pleaded, the first is the Bach Flower market and the second is Italy.[52]In evaluating Nelsons’ complaints, it is useful to see what position had been reached by the end of the trial. Guna’s position was that the market is the flower remedy market in Italy and that Nelsons had an extremely high market share, in excess of 30%. Its competitors in the Italian market were small in comparison and anyone trying to sell Bach Flower remedy products as homeopathic faced substantial regulatory constraints. Guna contends that the 2005 Agreement tied Guna to the Nelson brand thus restricting third parties from having access to Guna’s wide and well established distribution network. Guna was also a manufacturer and the competition Clauses, bolstered by legal threats if Guna grew the brand by developing Fiori di Raphael, further distorted the market. The 2005 Agreement had an effect actually or potentially on trade between Member States. It concerned the supply of products from the UK to Italy and the non-compete provisions affected interstate trade as third parties in other Member States, such as Healing Herbs in the UK, were prevented from supplying products. As a result, the non-compete restrictions rendered the whole 2005 Agreement unenforceable. There seems no reason why that should not have been pleaded at the outset so that it could then have been fleshed out. The evidence to support this case is general in nature and sketchy. There is no expert evidence. I am asked to reach important conclusions on the basis of what is often off the cuff recollection of a single witness for Guna and on extrapolation and surmise.[53]I accept Mr Brealey’s submission that the fact that “Euro defences” have proved unpopular in practice when brought before the English courts is not a relevant consideration. The cases make it clear however that these allegations are serious and need to be pleaded in detail so they can be defended but also, when appropriate, evaluated at an early stage by the court when deciding how far such extensive and expensive claims should be permitted go forward. As it was put by Rimer J, as he then was, in Chester City Council v Arriva Plc [2007] EWHC 1373 (Ch) the elements must be proved “in a cogent and principle way and [The court has] to be satisfied there is compelling justification for the case they seek to make”.[54]A good illustration of the importance of this point is made by Mr Randolph. The definition of a “relevant market” for these purposes is not straightforward as is clear from the first three paragraphs of the Introduction to the Commission Notice on the Definition of Relevant Market for the Purposes of Community Competition Law (97/C372/03):- 1. “The purpose of this notice is to provide guidance as to how the Commission applies the concept of relevant product and geographic market in its ongoing enforcement of Community competition law, in particular the application of Council Regulation No 17 and (EEC) No 4064/89, their equivalents in other sectoral applications such as transport, coal and steel, and agriculture, and the relevant provisions of the EEA Agreement (1). Throughout this notice, references to Articles 85 and 86 of the Treaty and to merger control are to be understood as referring to the equivalent provisions in the EEA Agreement and the ECSC Treaty. 2. Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which competition policy is applied by the Commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved (2) face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings’ behaviour and of preventing them from behaving independently of effective competitive pressure. It is from this perspective that the market definition makes it possible inter alia to calculate market shares that would convey meaningful information regarding market power for the purposes of assessing dominance or for the purposes of applying Article 85. 3. It follows from point 2 that the concept of ‘relevant market’ is different from other definitions of market often used in other contexts. For instance, companies often use the term ‘market’ to refer to the area where it sells its products or to refer broadly to the industry or sector where it belongs.”[55]It is clear from the cases that it is usual for evidence from economists to be adduced to enable the market to be identified by the court. Mr Brealey relies upon answers obtained in evidence as to the identity of the market but such material is not determinative and indeed may be irrelevant for the reasons given in paragraph 3 of the Introduction. There is no absolute requirement for evidence from economists because, as Mr Brealey points out, this adds greatly to the cost. It is clear however that an exercise of some sophistication is needed to identify the market. At the interlocutory stage the skeleton argument of Guna’s own counsel said this “(a) key issue in any competition law analysis is a definition of the relevant market. Definition of the relevant market (generally covering both ‘product’ market and ‘geographic’ market) is a complex economic process that will require a full and detailed assessment”. No such assessment has been carried out in this case.[56]It might be said that the relevant market is that for flower remedies sold only through the homeopathic channel in Italy in which case Nelsons share would no doubt be very high. The market might also be that for the same product through the food channel of distribution as well. Guna points to the fact that it has readily adapted its marketing to selling its products as food and has criticised Nelsons for failing to do the same. But on close analysis the relevant market might well turn out to be something else. Mr Dunne said that even on a conservative estimate his company’s market share constitutes 70% of the flower remedy market in Italy but this again begs the question of what the market is for the purposes of the Article 101 exercise. Other requirements for a claim under Article 101 have limited evidence to support them. Potentially complex issues arise as to the claims by Guna about the parallel importer Cabassi with whom, as it turns out, Guna not Nelsons had a contractual relationship. Guna’s evidence for the existence and market share of competitors is largely anecdote from Mr Dunne, Mr Rickmann or Dr Pizzoccaro none of whom has detailed or reliable information. Dr Pizzoccaro sought to provide more detail but this was drawn only from his own impressions, conversations with colleagues and other material of similarly limited assistance. The difficulty of proceeding without an economist or at least with reliable data was implicitly recognised by Mr Brealey having to fall back on the facts that Mr Dunne, had trained as an accountant and Dr Pizzoccaro had at some stage studied economics.[57]It is for Guna to prove its Article 101 case. It has failed to do so. The points taken by Nelsons are not mere “pleading” points. The case has developed in outline without being given flesh. It appears that for a very long period in the litigation no attention was given to this defence despite Nelsons drawing Guna’s attention to the lack of information provided. Nelsons was entitled to know precisely what case it had to meet so that expert and factual evidence could have been adduced accordingly. In the result it seems to me that the only redeeming feature of this defence is the admirable written submissions of Mr Brealey and Ms Reid which lucidly and comprehensively summarise the relevant principles in terms which are accepted to be common ground. The picture of the relevant facts on this aspect of the case is an extremely confusing and uncertain one as a result, as I see it, of allegations being made in such general and undetailed terms and of the absence of adequate congent evidence.

Conclusion

[58]It follows that the Claimants succeed on the issue of liability. I shall be grateful if not less than 48 hours before the hand down of this judgment, Counsel will let me have a list of corrections of the usual kind and a draft order, both preferably agreed, and a note setting out their position on any matters they wish to raise at the hearing.[59]I am most grateful to Counsel and Solicitors for their admirable presentation and preparation of this case.