Good Earth Agricultural Co Ltd v. Novus International Pte Ltd and Another

HCCL 74/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 74 OF 2002

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BETWEEN

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Before : Hon Stone J in Court

Dates of Hearing : 4, 5, 6, 7, 11, 12, 15 December 2006

Date of Judgment : 25 January 2007

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J U D G M E N T

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Introduction

1.This case concerns the rather unhappy end to a long-standing distributorship agreement.  More precisely, the case is about the required period of notice of termination of such distributorship agreement, which had been in place with the 1^st defendant for in excess of eleven years, and in substance for considerably longer.

2.The plaintiff is a Hong Kong trading company.  It specializes in the purchase and sale of animal feed/nutrients of various types.  Hereafter I shall refer to it simply as ‘Great Earth’.

3.The 1^st defendant, which henceforth I shall refer to as ‘Novus’, is a Singaporean company. 

4.Novus is the wholly-owned subsidiary of the 2^nd defendant, ‘Novus International’, an American corporation.

5.In this action, Good Earth claims damages for wrongful breach of an unwritten distributorship agreement which it says initially came into being as long ago as 1978, when the plaintiff first became a distributor in South East Asia of the animal feed supplements known as ‘Alimet’, ‘MHA’, ‘Santoquin Liquid’ and ‘Santoquin Powder Mix’.

6.Although these compounds, and their chemical composition/usage, are somewhat complex, the underlying commercial structure whereby they were traded is tolerably straightforward, and at this stage it may be useful briefly to set the background scene.

The factual background

7.The plaintiff, Good Earth, is a family company owned and operated by a Hong Kong family.  It was founded in 1972 by the family patriarch, Mr Q N Wong, its Chairman, whose two sons, Edwin and Herbert, participated in the company at Managing Director level.  Each of these gentlemen gave evidence in this case.

8.In 1978 Good Earth entered into an oral agreement with the American corporation, Monsanto, to act as the exclusive distributor of certain animal feed supplements within South East Asia. 

9.In fact, the plaintiff acted as the exclusive distributor for Monsanto in respect of all accounts in Thailand, and in respect of certain accounts in Taiwan, Singapore, Indonesia and Malaysia, and was paid a commission of 8% on resales and 5% for indent sales – the latter, for present purposes, being regarded as sales in which the end user is supplied, upon the plaintiff’s introduction, direct from the manufacturer.

10.At the initial stages of this distributorship arrangement, therefore, Good Earth dealt solely with Monsanto. 

11.It is also fair to say that the principal focus of Good Earth’s animal feed business lay in Thailand, in particular with the entity which now has become one of the largest animal feed companies in the world, the Charoen Pokphand Group Ltd, whose Vice Chairman, Khun Eam, was a long time trading associate of Mr Q N Wong, the Chairman of Good Earth.  Khun Eam also gave evidence at this trial.

12.This commercial arrangement of Good Earth with Monsanto became varied in or about 1991, when two Japanese companies, Mitsui & Co. Ltd and Nippon Soda Co. Ltd, acquired Monsanto’s business of developing and marketing, in particular, Alimet and MHA. 

13.Consequent upon such acquisition, in June 1991 these two Japanese investors transferred to the 2^nd defendant, Novus International, a Delaware corporation which they owned, the animal feed business thus purchased from Monsanto.  At or about the same time, Monsanto appointed the 2^nd defendant as its exclusive sales agent for ‘Santoquin’ feed products.

14.The injection into Novus International of Monsanto’s feed business was followed, in July 1991, by the incorporation in Singapore of the 1^st defendant, a wholly-owned subsidiary of Novus International, whose primary task was to undertake the marketing and sale of the various animal feed supplements emanating from its headquarters in Delaware.

15.It seems clear – and indeed this has not been disputed – that the transfer of the feed business from Monsanto to Japanese interests, via the intercession of Novus International, had the effect simply of carrying on the same business under a different name; a press release issued by Monsanto, dated 6 June 1991, records that :

“…day-to-day management of Novus will be virtually unchanged from when the business was part of Monsanto…essentially all of Monsanto’s feed ingredients employees including the science, technical and sales teams, have been transferred to the company…The only change our customers will see is the name on the door.”

16.The significance to Good Earth of such corporate re-arrangement appears to have been relatively minimal in terms of what was happening on the ground; it is evident that the plaintiff’s existing role as South East Asian distributor of these animal feed products continued under the same terms as when Monsanto had been supplying the product.

17.This is not in dispute, and although on the pleadings there is placed in issue whether the existing distributorship agreement with Monsanto was novated, or whether a new agreement was entered into between Good Earth and Novus, at trial this point effectively has fallen away, Mr McLeish, on behalf of the defendants, sensibly recognizing that nothing turned upon it.

18.Notwithstanding the change in corporate ownership, it further is evident – and once more this is not in question – that Good Earth continued in its established distributorship role throughout the 1990’s, albeit since 1991 its point of reference primarily had become Novus, which was operating from its Singapore base, although contact continued with the staff of Novus International in Delaware.

19.Looked at in the round, the business relationship continued reasonably smoothly until problems between these parties began to arise in 1999, when a dispute arose as to the applicable rate of commission payments; this appears to have originated in an attempt by Novus to adjust downwards, from 8% to 5%, the relevant commission rate which was being paid to Good Earth.

20.It is probably fair to say that the desire to reduce the rate of commission to Good Earth coincided the efforts of Dr Giovanni Gasperoni, the Vice President of Marketing and Sales for Novus International, to rationalize the existing animal feed business in face of the difficult market conditions which then were being encountered by his company. 

21.It was in April 1991 that Dr Gasperoni had been appointed leader of the Novus marketing team, and at that time he had taken over direct responsibility for the defendants’ dealings with the plaintiff; in fact, this was the first occasion in which Dr Gasperoni had undertaken responsibility for dealing with/supervising the Novus Asian accounts.

22.Dr Gasperoni, a veterinarian turned business executive, also gave evidence in this case.

23.History records that save for a six month period between 1 July – 31 December 1999, when Good Earth had consented to a reduction in its rate of commission from 8% to 5%, the plaintiff consistently has declined to entertain any reduction in that which it considered the commission payments to which it contractually was entitled, a stance which appears to have engendered a certain amount of tension, perhaps even bad blood, between Good Earth on the one hand and Novus and its American parent on the other.

24.Meetings between the parties variously were held in an attempt to sort matters out, but despite extensive discussion nothing appears to have been resolved, with the result that the commission-level payment dispute rumbled on, and the tenor of the disagreement upon the issue escalated. 

25.Perhaps fortunately there is in this case no necessity to decide who said what to whom, and when; suffice it to say that the parties on each side may have cause to reflect that toward the other they acted in a vigorous and occasionally even rude manner at their meetings – certainly this now represents the respective perceptions.

26.It also appears clear that, in the absence of resolution of this ongoing monetary dispute, the defendants had started to flex their commercial muscle; for example, Novus began to contact the plaintiff’s customers directly, apparently with the intention of effecting direct supplies of Novus products, and further threatened to cut off supplies of product to the plaintiff, notwithstanding that fairly obviously this would have resulted in Good Earth being placed in contractual breach with its own customers.

27.An indication of the prevailing commercial climate, and of the reaction of Novus thereto, is evident from a letter dated 25 July 1991, written by Dr Gasperoni to Mr Edwin Wong, then Managing Director of Good Earth, wherein Dr Gasperoni writes as follows :

“As discussed in painful detail to you, your brother, your father and Mirinda, Novus is trying hard to reinvent itself like many other companies in order to survive this difficult time.  As shared with you, we are currently undergoing a serious and deep reorganization that is affecting everybody inside and outside the company.  Many friends have already left or retired, many offices were closed, and our staff have been significantly reduced.  These are just a few examples of how our organization is changing.  Needless to say, our relationship with our distributors around the world has to change as well.  Unfortunately, this applies to distributors like your company that have had a very good, long-standing relationship with our company and that have been very successful in implementing our Alimet strategy in the past.

It is not just a matter of changing the commission, but, with the help of Mitsui, we are trying to establish a new working relationship with distributors and customers around the world to increase our market penetration and reduce our costs.

We realize that you will also have to reinvent your company as you will lose in the short term an important part of the revenue stream from our products.  As we discussed at the airport, however, we are open to look at other ways that Good Earth can support our efforts in the region.  Warehousing, distribution, installation, construction and maintenance, as well as the possible distribution of new products, are the ones that seemed more promising…”

28.In the event the festering problems that had arisen within the ongoing commercial relationship ultimately never were resolved, and it is plain that Dr Gasperoni’s vision of the nature of the changed relationship between the parties was not shared by Good Earth, which refused to countenance any permanent alteration in terms of its commission payments.

29.This impasse finally was broken when, by letter dated 14 January 2002, Ms Cecilia Chan, Director, Finance & Operations of the 1^st defendant wrote to Mr Q N Wong of the plaintiff in the terms following :

“By this letter, we Novus International Ptd Ltd hereby terminate with immediate effect any and all agreements whether orally or in writing to which we and you, Good Earth Agricultural Co Ltd. are party.

Please arrange for immediate payment to us of all amounts due to us arising under the agreements between us which have been terminated pursuant to this letter….”

30.The absence of any period of notice, nor offer of monetary compensation in lieu thereof, on the part of Novus aggrieved Good Earth – hence its institution of these proceedings.

The shape of the claim

31.The substantially amended pleadings in this case are relatively lengthy, if not prolix within the context of a case which is long on historical detail but short in legal analysis.

32.In outline, the plaintiff seeks damages against the 1^st defendant for wrongful reduction of commission and wrongful termination of the distributorship agreement, together with an ancillary claim for a wrongful payment drawdown under a standby letter of credit, a point which in practice elides with the main damages claim, which in quantum terms is widely pleaded on the face of the Re-re-re-Amended Statement of Claim.

33.The Amended Defence takes a variety of points, some of which were not pursued, and at the end of the day the broad thrust of the defence as now put forward is that the 1^st defendant was entitled to terminate the distributorship agreement in the manner that it did on the basis of a contractual implied term – implied by reason of obvious inference and/or business efficacy and/or trade usage or custom – that the level of commission payable to the plaintiff was subject to review and revision by the 1^st defendant at its sole discretion in the light of prevailing market conditions (vide Defence, paragraph 10).

34.Additionally, waiver and/or estoppel are prayed in aid, and – perhaps most significantly in the context of this case – the plaintiff’s quantum is put to strict proof.

35.As against the 2^nd defendant, the Delaware corporation Novus International, and the parent of the 1^st defendant, the plaintiff claims in damages for conspiracy to injure the plaintiff’s business.  Whilst conceptually this represents a separate head of claim – in fact this is the only manner in which the 2^nd defendant is impleaded – in practical terms, as Mr Whitehead SC for the plaintiff made clear, the resultant damage asserted is commensurate with the claim made against the 1^st defendant for breach/termination of the distributorship agreement with the plaintiff, and thus this head of damages, even were it to be factually relevant, requires no separate consideration.

The evidence

36.In addition to the historical documentation which has been uncovered as a result of this litigation, 7 witnesses were called to give viva voce evidence.

37.Of this number, 6 were called on behalf of the plaintiff : Mr Q N Wong, Chairman of Good Earth, and his sons Edwin, Managing Director, and Herbert, Deputy Managing Director, Khun Eam (Eam Ngamdamronk), Vice Chairman of Charoen Pokphand Group Ltd, one of the plaintiff’s main customers in a commercial relationship stretching back to 1967, Scott Wang, an employee of Novus until May 2002, when he was the 1^st defendant’s regional manager in Asia, and finally Mirinda Wuttiattapong (Mrs Herbert Wong), the plaintiff’s marketing manager, who has been an employee of Good Earth since April 1997; this lady was the primary witness for the plaintiff in terms of quantum.

38.For the defendant but one witness only gave evidence, namely Dr Giovanni Gasperoni, Vice President of Marketing and Sales of the 2^nd defendant.

39.In the event, Ms Cecilia Chan, the 1^st defendant’s Director of Finance and Operations, who had written the letter of termination, and for whom a witness statement had been prepared, was not called.

40.Somewhat oddly, in a case so larded with detail, there are few, if any, conflicts of fact the determination of which is germane to the legal issues.

41.True it is that the parties disagree on certain matters – for example, was or was there not a post-meeting assault by one of the plaintiff’s directors on one of the 1^st defendant’s Thai employees? – but in real terms such assertion and counter-assertion is nothing to the immediate point, which simply is whether there was a breach of the terms of the distributorship agreement, and, if so, what is the quantum thereby arising?

42.Accordingly, there is no need specifically to assess the credibility of the individual witnesses on either side.  All of the witnesses struck me as fundamentally well-meaning and as endeavouring to reflect the situation as they perceived it, albeit they held strongly differing views, and no significant factual resolutions are required.

43.In essence, the factual history of the relationship between these parties is not in dispute, the point of departure between them focusing upon the desire of Novus to change the commercial terms of the existing relationship, and the rectitude of the plaintiff’s claim that it has suffered causative loss by reason of the 1^st defendant’s contractual breach and/or by reason of the alleged conspiracy by the defendants to injure the plaintiff’s business.

44.I turn, therefore, to the issues of liability and quantum.

The fundamental issue

45.At bottom, the primary liability issue for determination is whether, in acting in the manner that it did the 1^st defendant, Novus, was in breach of its distributorship agreement with Good Earth, in terms both of the unilateral reduction in the rate of commission paid and with regard to the manner of termination – this latter point, if decided against the 1^st defendant, in turn necessitating consideration of the period of notice which legally it was necessary for Novus to give to Good Earth in order legitimately to terminate their contractual relationship. 

46.In liability terms this is the only point of substance in this case.  I take each element in turn.

Was it open to Novus unilaterally to reduce the rate of commission?

47.Mr McLeish argues strongly on behalf of the 1^st defendant that his client indeed did have such a right unilaterally to reduce the rate of commission payable to Good Earth, and that this right arose as a matter of construction of the distribution agreement and/or by implication of a contractual term to that effect.

48.He maintained that in light of the circumstances and having regard to a distributorship of this nature, it must be a matter of obvious inference based upon business efficacy for the supplier of the product to have the ability to make reasonable adjustments to commission levels in face of prevailing market conditions.

49.Were the situation to be otherwise, he said, the supplier would be bound to continue supplying goods and paying commission at the originally agreed level no matter how adverse the market conditions; in this connection Dr Gasperoni’s striking metaphor of ‘the elephant in the room’ as representative of the strikingly low market price was appropriate, Mr McLeish argued, and the combination of circumstances in which the plaintiff’s commission was reduced for the first time as from 1 July 1999 were unprecedented, including the Asian economic crisis, acute competition and consequential price erosion.

50.Moreover, Mr McLeish submitted, the conduct of the plaintiff, Good Earth, from November 1997 onwards, including apparent acknowledgments at meetings and elsewhere of the principal’s right to review and to adjust commission levels, enabled the argument to be mounted that Good Earth indeed had accepted that such right was a term of the distributorship agreement, the very informality of which (retained at the insistence of Good Earth, which consistently had refused to enter a written agreement in line with other distributors) lending itself to this argument: the plaintiff’s ‘choice of uncertainty’, he said, came at the price of there being no obligation upon Novus to give any period of notice for the implementation of a (reasonable) revision in commission.

51.This latter argument struck me as an ingenious attempt to circumvent that which I regard as a basic flaw in the approach of Novus to this matter, and I reject it.

52.It is as plain as a pikestaff that at all times it was open to Novus to amend the relevant rate of commission upon the tendering of appropriate notice of such anticipated change; such commission rate was not set in stone, and as a matter of construction of the agreement that it is undisputed was in place, all that Novus had to in order to respond to adverse market conditions either was to give due notice of change of the relevant commission rate payable or – and this is to anticipate the main issue in this case – simply to give due notice of termination of the agreement itself, with the offer to Good Earth of entry into a new agreement upon different (and doubtless more specific) terms.

53.For some reason which remains unclear, although this may well have something to do with the disparate personalities involved, neither course in fact was adopted by Novus, with the result that the 1^st defendant is left to argue that it was open to it to change the rate of commission payable absent any period of due notice.

54.In my view this was not an option available to Novus.  The attempt by Novus to circumvent that which it did not attempt legitimately to achieve by the expedient of drawing down upon a standby letter of credit issued in its favour by Good Earth, in a bid to make good the shortfall between the customary 8% commission charged by Good Earth and the figure of 5% which Novus wished to implement without notice, in my view was flawed, and seems to me to represent no more than the carefully calculated exercise of commercial pressure.

55.Accordingly, this submission on behalf of Novus fails : in my judgment Novus did not have the right unilaterally and absent due notice to reduce the plaintiff’s agreed rate of commission in light of changing market conditions, or otherwise.

Was Novus entitled summarily to determine Good Earth’s distributorship?

56.The foregoing conclusion as to the lack of entitlement of Novus unilaterally to change the rate of commission payable to Good Earth necessarily informs the consequential question of whether Novus was entitled summarily to determine the existing distributorship held by Good Earth.

57.Once again Mr McLeish argues that his client clearly was thus entitled so to do, which it did (or purported so to do) by its termination letter of 14 January 2002.

58.As I understand the argument, Mr McLeish says that the breaches of the agreement relied upon in order to justify such summary termination are represented by the failure by Good Earth to pay to Novus the revised commission rate upon goods supplied to C Pokphand, that is, the insistence on the contractual rate of 8% as opposed to the revised figure of 5% which Novus wished to implement.

59.Thus, Mr McLeish concludes, correctly, that the Novus case on wrongful termination “rises and falls” with their claim that Novus was entitled to ‘adjust’ the rate of commission payable from 1 July 2001 to 31 July 2001.

60.With respect, his analysis is unimpeachable, but the conclusion he pressed upon the court is not.

61.The short and ineluctable point is that if and in so far as Novus wished – for understandable commercial reasons – to terminate the distributorship, than it was incumbent upon it to do so upon the giving of due and reasonable notice, which clearly it did not do (and which on its own case it did not do).

62.In fact, this element of the liability equation effectively was put to bed during the evidence of Dr Gasperoni, whom in cross-examination conceded that Novus should have given a reasonable period of notice of termination :

“Q   …But you’ll also agree that you have to give the party reasonable notice of termination?  You agree to that, don’t you?

A.     Sure.

Q.     Yes.  But you didn’t, did you?

A.     No, I think I did.  I think we start to give him termination notice since 1997, and I think, actually, when I gave the termination notice was January, but the problem is that you need to deal with the customers, you need to deal with the environment.  You need to deal with customers, you need to deal with people that I have on the ground.  You’re right, in legal terminology you are right.  I should have written a note saying ‘Oh, you are terminated in three months, starts now.’  I couldn’t.  I try.  They were bully.  They were coming back on my people.  So that’s why we get there…”  (emphasis added)

63.That which actually occurred was that the letter of termination was written, and appears to have come to Good Earth without any warning, shortly after a most acrimonious meeting between the parties in Bangkok, the detail of which does not greatly matter given that no attempt is made on behalf of Novus to marshal anything other than the failure of Good Earth to accept the revised commission rate as justification for the purported termination without notice.

64.Accordingly the conclusion of the court upon this issue is in like terms to that relating to the issue of the commission revision.  In my judgment Novus was not entitled unilaterally to terminate the distributorship of Good Earth absent reasonable notice.

What is (or ought to have been) the period of ‘reasonable notice’ in this case?

65.In my view this is the salient question in this case, and only ever has been the real issue; I presume that it is this aspect alone which has stood in the way of settlement of this litigation, which no doubt has proved costly in terms both of legal fees and expenditure of executive time.

66.The defendants’ case in this regard – if and in so far as the court rejects (as now formally it has) the contention that there was an entitlement to summary termination – is that in all the circumstances of this case a reasonable period of notice of termination of the distributorship is a period of no more than 3 months: “plainly the outer limit” was how Mr McLeish pithily expressed his position.

67.To the contrary.  On behalf of Good Earth Mr Whitehead sets out his stall in terms of a reasonable period of notice in these circumstances being one year.

68.These, then, are the parameters of this aspect of the argument.  Who is correct?

Applicable principle : the relevant approach

69.It is common ground that, absent express provision (as is the case here), whether a commercial agreement for an indefinite period may be terminated depends on whether the agreement contains an implied term to such effect.  No argument has been advanced in this case that it does not; to the contrary, Mr McLeish would have it that such term as is to be implied goes so far as to admit of summary termination.

70.It is also common ground between the parties that what is considered to be reasonable notice must be evaluated in light of the circumstances prevailing at the time that the notice was given: see here the observations of Sachs LJ in Decro-Wall International SA v. Practitioners in Marketing Ltd [1971] 2 All ER 216, at 229h et seq :

“In this court it was…rightly conceded that the trial judge came to a correct conclusion in holding that reasonable notice was necessary.  His finding that 12 months’ notice was required is, however, challenged by the plaintiffs, who put forward three months as the correct period.  It has in this court also been rightly conceded on behalf of the plaintiffs that when determining the appropriate length of notice the court must look at the overall state of affairs in March 1970 (as opposed to the position in March 1967 when the contract was originally entered into), taking into account what led up to the position at that time.  By then, the defendants, by strenuous efforts and by the expenditure of large sums on promotion, having started from scratch, had built up a trade that required supplies on a scale to which reference has already been made.  The plaintiffs were, incidentally, well satisfied with the progress that had occurred…”

71.Mr McLeish further has drawn the attention of the court to the somewhat more recent case of Alpha Lettings Ltd v. Neptune Research & Development Inc [2003] EWCA Civ 704, wherein Longmore LJ noted that the particular reasons for the ending of a long-term relationship is nothing to the immediate point in terms of the necessity to give reasonable notice, wherein the judge said that (at para 34 of transcript of the judgment, dated 20 May 2003) :

“One matter which should not be regarded as important is the means of termination.  The ending of a long-term relationship will often occur for many different reasons some of which may be more legally reputable than others.  A termination with no notice or less than due notice will be a breach of contract and damages will be assessed appropriately.  But the fact that the termination may be a deliberate breach or may be accompanied by the telling of falsehoods, of which the court disapproves, ought not to affect the question of what the period of reasonable notice actually is.  The reasonable notice period will have to apply to both amicable and vitriolic parting of the way…”

In the same case the court further commented upon the relative dearth of authorities in this area, Longmore LJ observing (at paragraphs 30-31) :

“There is little authoritative guidance on the appropriate notice of termination of exclusive agencies or (as lawyers sometimes prefer to call them) distributorships.  One possible view is that the reasonable notice period should equate the time needed to find an alternative supplier and get a new product approved.  Another view is that it need only reflect the time required for an orderly winding down of the distributorship.  The only common ground between the parties was that, in the absence of any express term, the question, of what notice is to be taken as reasonable, must be determined as at the date of termination.

One very important consideration will be the degree of formality in the relationship.  A completely formal agreement would probably have its own provisions for termination so no problem about assessing a reasonable period for termination will arise.  But the more relaxed the relationship, the less likely it is that the law would imply a lengthy notice period…”

72.In Decro-Wall, op cit, Sachs LJ took the view that the appropriate approach for deciding the appropriate length of termination notice was for the court to put itself in the position of the two protagonists; in this regard he commented (op cit, at 230d) :

“Looking at it from the point of view of two reasonable businessmen deciding as between themselves what would be the appropriate length of notice required for determining a relationship of the nature already described and involving the work and expenditure just mentioned, it seems to me that no concessionaire would proceed unless he knew the concession could not be terminated by notice of less than 12 months; he might reasonably have stipulated even longer notice.  Similarly no reasonable producer of the product would have expected his concessionaire to carry on the business in this way except on the safeguard that he would not receive notice of less than 12 months…”

73.Conceptually this approach also has found some favour in Australian jurisprudence.  In this connection Mr Whitehead drew attention to the comments of Clarke JA in Crawford Fitting Co. v. Sidney Valve & Fittings Pty Ltd [1988] 14 NSWLR 438, at 456B-F, wherein in his dissenting judgment in that case Clarke JA said :

“I am attracted more by the approach of Sachs LJ which accords great importance to the need to have regard to the point of view of businessmen negotiating a commercial contract of the kind in question here.  As I understand this approach it requires the court to have regard to the parties’ dealings during the course of the agreement and then to answer the following hypothetical question – What would two businessmen negotiating a contract upon the assumed basis that the relationship would follow the proven course have stipulated as the period, reasonable to both parties, for which the notice must provide?…

I would, accordingly, seek to resolve the question of reasonableness broadly on the approach of Sachs LJ.  The question I would pose is whether reasonably minded businessmen carrying on business in the location in which the respondent operated would, in the circumstances proven in the case, have regarded six months as reasonable notice.  A most important factor for consideration would be the time required by the respondents for the deployment of their resources profitably elsewhere but that would not necessarily be the only relevant factor.  One important factor in this case was the duration of the relationships…”

74.However, in Crawford Fitting, op cit, the other two appellate judges seized with the issue, McHugh and Priestley JJA, seem not to have shared the like enthusiasm for this approach, preferring instead that which might be termed the ‘chief purpose’ test.   In this context McHugh JA (with whom Priestley JA agreed) observed (op cit, at page 444E, 448F) :

“When a contract is terminable on reasonable notice, the period of notice must be sufficiently long to enable the recipient to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner…

…the relevance of expenditure of money or effort cannot be confined to cases where the expenditure of effort occurs in the initial stages of the contract.  If, during a contract, a party, acting within the scope of the agreement, engages in extraordinary expenditure or effort, that factor must be taken into account in determining the reasonableness of any period of notice given.  The weight to be given to the factor will vary from case to case and the particular circumstances…On the other hand, recurrent expenditure or effort not being of an extraordinary nature would not seem relevant to the reasonableness of the notice period.  The expenditure of money or effort is simply part of the ordinary cost of doing business.  Once the business has existed for a reasonable period, the inability to profit from such work or expenditure is part of the business risk the agent or distributor takes in entering into an agreement which is terminable at any time.  Further, the prospect of obtaining profits in the future is not a relevant factor to be taken into account except so far as it is consequential upon the incurring of extraordinary expenditure or effort within the scope of the agreement.

The chief purpose of a notice for a reasonable period, therefore, is to enable the parties to bring to an end in an orderly way a relationship which, ex hypothesi, has existed for a reasonable period so that they will have a reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship…”  (emphasis added)

75.For my part I instinctively favour this latter approach, which in my view informs the equation with the requisite level of contemporaneous objectivity in order to arrive at any decision as to what is, or is not, fair in the particular circumstances of any given case.

76.In this connection I further accept the oft-voiced refrain in the cases on this subject that each case depends on its own facts, and that, as Clarke JA commented in Crawford Fitting (op cit, at 456F), that :

“…the great variety of contracts in which it is appropriate to imply a term requiring the giving of reasonable notice before a contract, which has not been breached, might be terminated and the great variety of factual circumstances which might be encountered render it highly undesirable that any attempt be made to lay down factors of universal application…”

a sentiment which also was quoted with approval in the Commercial List of the Supreme Court of Victoria : see Hansen J in The Wine Co Pty Ltd v. The Wine Co. Pty Ltd [1996] Vic Lexis 1047, at para 27.

77.I turn therefore to the arguments arising from the facts of the present case.

The present case : the competing arguments

78.In circumstances whereby it is clear from the evidence in this case that the erstwhile amicable working relationship between Novus and Good Earth so transparently had broken down, it is unsurprising that each party should hold strongly divergent views as to the appropriate length of any such notice period, if and in so far as this court has held (as it now has) that such notice of termination in fact was necessary.

79.On this contingent basis Mr McLeish strongly submitted that a notice period of 3 months was the maximum that realistically should be awarded should the court be against him on his primary contention.

80.In this connection he prayed in aid a number of factors which he maintained pointed in favour of a far much shorter period of notice than that sought by the plaintiff.  I will be forgiven, I hope, if I do no more than outline the more significant thereof.

81.As a starting point the relative lack of formality of the existing distributorship arrangements was emphasized, notwithstanding, as counsel pointed out, that Good Earth had been accorded ample opportunity to “fall into line” with the approach adopted by Novus with other distributors, and to enter into a formal written distributorship agreement : in this circumstance, the argument went, the plaintiff could not therefore complain if, absent such certainty, the court were to hold that the comparative luxury of such contractual fluidity mitigated against any lengthy period of notice, and that this particularly was so given that the 1^st defendant’s ‘standard’ written distributorship agreement which was sent to the plaintiff for adoption in 1992/93 provided for a minimum notice period of 3 months at the expiry of an initial 5 year period; at that time, Good Earth had asked for 6 months’ notice, but later apparently had not contested the 3 months’ provision, albeit such formal written agreement never was signed.

82.Moreover, said Mr McLeish, the main feed products sold under the distributorship, namely ‘Alimet’ and ‘Santoquin’, were and remain products readily substitutable by the methionine and ethoxyquin products of other producers within the animal feed market, and thus there was no question of end users, nor of Good Earth, being irrevocably ‘locked in’ to the use of Novus products.

83.The plaintiff, further, had maintained its customer connections intact throughout the period of its distributorship with Novus, which resulted in Good Earth dealing directly with its customers at all times – thus there was no question in this case of a loss of customer base by reason of the plaintiff having done ‘indent’ business; indeed, Mr McLeish argued, it was abundantly clear on the evidence which had emerged in this case that by reason of the excellent and long-standing relationship enjoyed between Mr Q N Wong of Good Earth and Khun Eam, of C Pokphand in Thailand, that the plaintiff had enjoyed, and continued to enjoy ‘preferred’ access to C Pokphand and the significant turn-over that the Thai market represented, so that the period of distributorship had had less of an impact on the plaintiff than otherwise might have been the case.

84.In addition, he contended, since there was no post-termination non-compete covenant in the informal distributorship existing between Good Earth and Novus, the plaintiff had been able to continue in the same business immediately following the termination, and thus the loss of the ‘Alimet’ and ‘Santoquin’ distributorship evidently had not had the effect of excluding the plaintiff from the market, not of preventing it from supplying its customers with the alternative products of Novus competitors; on the contrary, Mr McLeish pointed out that Good Earth had been able to supply methionine and ethoxyquin from other producers almost immediately the distributorship was terminated – vide the relevant invoices within the bundle of supplemental documents which had been discovered by the defendant during this trial.  It followed, therefore, that following the end of its distributorship the plaintiff had continued in the same business, in the process often supplying product to the same customers that Novus now seeking to service directly.

85.Mr McLeish accepted, as in my view he was constrained so to do, that the plaintiff’s business must have been adversely affected by the loss of the Novus distributorship, but he maintained that this was part and parcel of normal commercial life, and that the prospect of obtaining future profits was not a relevant factor absent the incursion of extraordinary expenditure or effort within the scope of the agreement, in this respect citing McHugh JA in Crawford Fitting, op cit, (at page 48) and Longmore JA in Alpha Lettings, op cit, (at para 32).

86.Modest recurrent costs aside, Mr McLeish stressed that there was no evidence of extraordinary capital expenditure on the part of Good Earth, nor indeed should there have been, given that it was Novus International which had supplied, installed and maintained the ‘Alimet’ delivery systems at various plants, whilst Good Earth’s role essentially had been marketing and sales.

87.What also should not be overlooked, Mr McLeish submitted, was that the very poor state of relations between Novus and Good Earth prior to the termination – for example, the altercations (“hard language”) in Bangkok in November 2001 and the total lack of contact in the six weeks prior to the termination letter of 14 January 2002 – had signposted, if such was not obvious already, that any viable working relationship between supplier and distributor clearly was fast breaking down.

88.Thus, at the time of the termination notice in mid-January 2002, he said, Good Earth had known for fully six months of the intention on the part of Novus to supply the larger customers directly – indeed the plaintiff had been so informed at a meeting at the Dusit Thani Hotel on 13 July 2001, and Good Earth had had sight of a letter dated 26 July 2001, forwarded by Khun Eam, wherein Khun Eam had been informed by Mr Thad Simons, Chief Operating Officer of Novus International, that Novus was “moving more towards direct selling to larger accounts and reduced commissions on other business”, which would include reducing commissions on sales to CP, that “In the near future…we would expect to sell directly to CP as do our competitors”, and that “We continue to hope to find an amicable way to change our relationship with Good Earth which would continue to have them as part of our distributor network”.

89.In addition, alternative ways of doing business had been discussed directly with the directors of Good Earth by Dr Gasperoni – for example, at the airport in Bangkok after the 13 July 2001 meeting, which had spawned subsequent correspondence of 25 and 26 July 2001 on the subject – and at that time Dr Gasperoni had hoped that these discussions regarding a change in modus operandi would prove fruitful; accordingly, Mr McLeish asserted, whilst these incidents in themselves did not amount to formal notice, they did serve to place Good Earth upon notice of a radical change to come, thus affording Good Earth an opportunity to consider how best to respond commercially in the obviously changing circumstances of the then existing distributor relationship.

90.For his part, Mr Whitehead SC took strong issue with that which he regarded as an overly restrictive approach by Novus.

91.His broad proposition was that the court should approach this case on the basis of the view espoused by Sachs LJ in Decro-Wall, op cit, namely, as to what would be the appropriate period of notice when looked at from the viewpoint of two reasonable businessmen in light of the relationship which existed, and given the work and expenditure involved therein.

92.Mr Whitehead emphasized the length of time during which the plaintiff had been involved as an exclusive distributor: Good Earth had taken up this role in 1978 with Monsanto, and in 1991 there had been no real change with the replacement of Monsanto by Novus, and the relationship had continued thereafter until January 2002.  It had been expressly recognized by Novus that the distributorship would continue on the same basis as had existed with Monsanto, and whether the court were to regard this distributorship as a 24 year engagement or an 11 year engagement, such clearly was of substantial duration; in this context Mr Whitehead further invoked the observations of Clarke JA in his dissenting judgment in Crawford Fitting Co., op cit, (at pages 458G-459B) :

“For my own part I regard the length of time during which these agreements operated as a most important factor in ascertaining a reasonable period.  For many years the respondents had used their best endeavours to promote sales of the appellant’s products…The fact that they had devoted all of their attentions to these contracts for such a long period would obviously serve to make more difficult their efforts at deployment.”

93.Moreover, he said, the plaintiff’s exclusive distributorship with the 1^st defendant clearly was the “lifeblood” of the company : the chart contained within Mirinda Wittiattong’s witness statement demonstrated that for the years 1993 to 2001 the plaintiff’s business with Novus products fell between 80.8% and 89.6% of annual turnover, the latter figure being the figure for 2001.  Accordingly, the summary loss of this business was a serious matter indeed for Good Earth, a situation Mr Whitehead was moved to describe as “catastrophic”.

94.Not only were the plaintiff’s fortunes “firmly wedded” to those of the 1^st defendant, Mr Whitehead submitted, but it should not be overlooked that in the present case this plaintiff (unlike the situation in Alpha Lettings, op cit) had made no profit from resales, instead simply taking a fixed commission on the amount sold; thus, if the 1^st defendant’s business were bad, there was a corresponding income shortfall for the plaintiff, thereby reflecting the long and sustained inter-dependence of supplier and exclusive distributor.

95.In addition, he said, the very exclusivity of the distributorship highlighted such obvious inter-dependence.  Until Novus had decided, at the end of the relationship, to alter commercial course, and to countenance sale of its products direct to its major customers, Good Earth had been its sole sales channel, which furnished a further comparison with the facts of Alpha Lettings, op cit, an authority upon which the defendants relied; in the latter case, for example, Alpha was free to sell products of other suppliers to their customers even if such suppliers were customers of Neptune, whose distributorship it had, and, moreover, in that case Neptune’s business had accounted for only 20% of Alpha’s turnover, a very different situation, he argued, from that presently before the court.

96.Nor, said Mr Whitehead, had the plaintiff in this case sold goods competing with the product of the 1^st defendant, and thus the absence of any such competitive product mitigated in favour of a longer period of notice of termination.  Moreover, the introduction of ‘Alimet’ into the market in 1982, of which Novus held the registered trade mark and the sale of which the plaintiff had been instrumental in pioneering, had necessitated the installation of sophisticated machinery by purchasers in order to process/dispense this feed product, and thus it was not easy for such customers simply to switch to alternative products; hence, this was a further factor pointing to a longer period of notice, he argued, given that ‘Alimet’ now was being sold direct to the existing customer-base by Novus.

97.As to the expenditure side of the equation, Mr Whitehead pointed out that in order to service Novus products, which amounted to 80-90% of the plaintiff’s business, Good Earth had had to maintain godown facilities and a transport system, and thus had had to incur considerable expense in servicing the Novus account.

98.The proof of this particular pudding, he submitted, came in the revenue numbers: the available figures showed that the plaintiff’s profitability went from $555,885 in 2001 to a loss of $335,139 in 2002, which was indicative of the necessity for a lengthy period of notice in order for the plaintiff financially to recover from the loss of this exclusive distributorship.

99.Thus, counsel concluded, in all the circumstances a ‘reasonably-minded businessman’ (to adopt the formulation of Sachs JA) would in the circumstances have regarded 12 months as a reasonable period of notice of termination.

The present case: conclusion as to relevant notice period

100.The answer to this question has necessitated pause for reflection, and I confess that I have not found this an easy matter fairly to resolve, a process not rendered the easier by the fact that counsel on each side has placed the best possible blush upon their respective cases.

101.Nor have I been greatly assisted by the various conclusions reached on this subject in the reported authorities; whilst naturally there is interest in terms of the application of broad principle, each of these cases is so dependent upon its own facts that what one particular judge may have decided in one particular situation is nothing to the immediate point : at bottom, it strikes me that the decision on this aspect of the matter essentially is impressionistic in light of the totality of the evidence before the court.

102.It seems tolerably clear on the facts of this case that the preferred answer of each side is a non-starter: the 3 months canvassed by the defendants I view as clearly insufficient in the circumstances, whilst the 12 months sought by the plaintiff appears equally over-ambitious at the other end of the spectrum.

103.Accordingly, the just and appropriate answer to this question seems to me to lie somewhere between these two parameters.

104.Whilst initially I was minded to err more on the side of the plaintiff in terms of the requisite period notice, it is fair to say that reflection upon the detail of this case has served somewhat to lessen that inclination.

105.True it is that this was a long-standing distributorship, and true it is also that a very considerable volume of the plaintiff’s business was tied up in this endeavour.  I do not think, however, that in itself this justifies the very extensive period of notice of termination now sought on the plaintiff’s behalf.

106.As earlier noted, as a matter of principle I am the more sympathetic to the approach canvassed by the majority, McHugh and Priestley JJA, in Crawford Fitting Co., op cit, than to that which I have referred to as the ‘Sachs LJ formulation’ in Decro-Wall, op cit.  In other words, that there should be afforded to the party whose distributorship is to be terminated a reasonable period in order to enable an orderly winding up of matters arising out of the existing, long-standing, relationship, and to accord the party terminated a reasonable opportunity to enter into alternative arrangements.

107.As McHugh JA, who was in the majority, noted in Crawford Fitting Co., op cit, at 453B-C, whilst the matter was near borderline in that case the appellant distributors had failed to establish that the notice given by Crawford was unreasonable, in this context remarking :

“…It is, of course, unnecessary that the recipient of a notice should do as well in his first years of new business as he did in his old business.  The termination of his business, whenever it occurs, is very likely to have adverse trading consequences for a substantial period.  However, that is the risk which a distributor, who enters into an agreement terminable at any time, inevitably runs.  Moreover, in determining whether the period of six months was reasonable, it is also necessary to bear in mind that the suggested two year period would be unlikely to make it any easier to set up the structure of a new business although it would have given the distributors a longer period in which to obtain agencies.

Although the matter is near the borderline, I have come to the conclusion that on the evidence the distributors have failed to prove that the notice given by Crawford was unreasonable.  Whatever period was selected, sooner or later the distributors had to undergo the difficulties of commencing new businesses…On balance, I do not think that they have shown that, if they had had two years notice or even twelve months notice, they would have been in a better position to “make alternative arrangements of a sort similar to those” which were terminated than they were with six months notice.”

108.In my view this case attracts a substantially similar train of thought.  I see no reason (and none has been advanced) why it could not have been the case that the plaintiff’s existing contractual commitments could have been serviced within a shorter period than the 12 months now asserted, and there appears to have been no question in this case that Good Earth would have been prevented, if duly accorded a reasonable period of notice of termination, from enjoying that which McHugh JA referred to as “the fruits of any extraordinary expenditure or effort or expenditure carried out within the scope of the agreement”.  Whilst I appreciate, as indeed McHugh JA recognized (op cit, at 448) that “the line between ordinary recurrent expenditure and effort and extraordinary expenditure and effort will not always be easy to draw”, there seems to be no question in the present case but that, in the later years at least, Good Earth had had to make no expenditure outside usual commercial parameters, the recovery of which an unreasonable notice period would serve to prevent.

109.I am further attracted to the concept that whatever period of notice is selected, sooner or later the distributor will have to undergo the difficulties engendered by the necessity of finding/developing new business. 

110.In this connection I have been struck by the particular evidence that emerged that in this case to the effect that, notwithstanding the summary termination of 14 January 2002 by Novus, nevertheless, upon the insistence of Khun Eam, until 30 June 2002 Good Earth continued to receive commission payments from Novus upon feed shipments made directly from Novus to C Pokphand in Thailand.  Doubtless this was a consequence of the recognition by Khun Eam of the long-standing and very amicable business relationship between himself and Q N Wong of Good Earth, but the inevitable result of this arrangement was that C Pokphand thus bought time for the plaintiff to adjust to such termination as occurred.

111.Further, in so far as general commercial adjustment is concerned, I bear in mind also the sales representative agreement for C Pokphand offered to the plaintiff after termination, together with the fact that, by reason of the absence of any non-compete covenant after termination of the distributorship, Good Earth immediately was able to begin reinventing itself in the market using alternative generic products, and doubtless trading on the long-time business network established over the years by Q N Wong and his sons.

112.Accordingly, whilst I do not wish to minimize the effect of the loss of the Novus distributorship, it strikes me that, notwithstanding the immediate revenue loss incurred, the particular circumstances enuring at the time worked in the plaintiff’s favour and enabled Good Earth successfully to ride out the obvious difficulties caused by such summary termination; if this be right it cannot, in my view, properly be asserted that in its decision on the appropriate period of notice which should have been afforded by Novus that the court should err on the side of generosity towards the plaintiff.

113.At the end of the day, it seems to me that this question devolves upon ‘feel’ for the case in light of all the evidence, and having considered the issue at some length I have decided that the period of notice of termination which should have been afforded to Good Earth by Novus in light of all the circumstances is a period of 6 months.

114.Having thus far decided, therefore, that in fundamental liability terms it was not open to Novus unilaterally to reduce the rate of commission payable to Good Earth absent reasonable notice, and further, that a reasonable period of notice of termination in the particular circumstances prevailing was that of 6 months, I turn finally to three discrete matters which have been canvassed at this trial as part and parcel of the liability debate.

The issue of waiver

115.I raise this point only to reject it.

116.Mr McLeish has argued that even were this court to find (as it now has) that Novus was unable unilaterally to reduce the 8% rate of commission which Good Earth enjoyed under the distributorship – there was, of course, an agreed period of 6 months, from 1 July 1999 to 31 December 1999 when Good Earth had consented to a 3% reduction in commission – nevertheless for the period from 1 January 2001 the plaintiff’s conduct had been such as to warrant the inference that it had waived its right to object to the commission reduction imposed by Novus from 8% to 5%.

117.In support of this argument counsel for Novus relies upon that which is said to have transpired between the parties at meetings at the Grand Hyatt Hotel on 29 November 2000 and the Victoria Seafood Restaurant on 20 February 2001, in the sense that directors of the plaintiff are said to have raised “questions/objections” relating to the criteria for commission reduction rather than to the proposed reduction itself, and further relies upon the plaintiff’s conduct in the period from 1 August 2001 in not reserving its right to claim the 3% commission differential. 

118.Moreover, said Mr McLeish, in evidence Dr Gasperoni had asserted that the plaintiff indeed had accepted this reduction, and it is further argued that in reliance upon such acceptance, Novus had continued to supply the plaintiff’s customers on a resale basis notwithstanding that if this had been done on an indent basis a commission of 5% would have been payable; accordingly, on the basis of that which was described as the plaintiff’s “representations of acceptance”, it is now said that the 1^st defendant “did not give notice of termination of the distributorship agreement on the expiry of a reasonable period (as it was entitled to do) with a view to replacing it with one providing for a lower level of commission.”

119.Thus, concluded Mr McLeish, the plaintiff “should be held to its representation”.

120.I hope that this is an accurate summation of the so-called ‘waiver’ argument, which presumably also could be characterized as some form of estoppel/preclusion.

121.With respect, however, to a case which consistently was put up fairly on behalf of the 1^st defendant, this particular aspect struck me as ambitious and ill-founded; indeed, in terms of the alleged omission of the 1^st defendant to give notice of termination this particular argument seems to me to acknowledge the very fact so hotly otherwise disputed. 

122.Save for the consensual 6 month period, which is not in issue, there is no cogent evidence that those acting on behalf of Good Earth waived the mooted reduction in commission from 8% to 5%, as now is alleged, or that Good Earth otherwise should be held to be estopped or otherwise precluded in its present claim. 

123.To the contrary, Good Earth appears to have made it entirely plain in correspondence that their position was that it was intrinsically unfair to purport thus to reduce the level of commission: see, for example, the letters of 20 August 2001 from Q N Wong to the officers of the 2^nd defendant (including Dr Gasperoni) – wherein Mr Wong begins by asserting that Good Earth was “forced to agree to the reduction in commissions beginning August 1, 2001, due to Novus’ withholding shipments of customers’ orders”, and thereafter requests discussions – and also Mr Q N Wong’s second letter, of 30 October 2001, to the same officers of the 2^nd defendant, whereby he commences by noting that he is “disappointed” that Novus had been dismissive of all the points made in his earlier letter of 20 August 2001, and notes that he has “difficulty understanding your insistence” that commissions in respect of C Pokphand shipments are to be retrospectively reduced from 8% to 5% as from August 1, 2001, and once again requests discussion on the issue.

124.Further, in response to the allegation that the plaintiff had waived its right in continuing to place orders with the 1^st defendant for the CP Group for delivery up to 30 June 2002 without protest or reservation of rights, Mr Whitehead has submitted that it is evident that after termination on 14 January 2002 the plaintiff took steps to mitigate its damage, and also that it is clear from the evidence of the plaintiff’s witnesses that protest indeed was forthcoming; he also points out that the plaintiff’s solicitors’ letters dated 27 March 2002 and 18 June 2002 contained detailed written protest as to Novus’ actions, and that in its own letter to the 1^st defendant of 17 May 2002, Mr Herbert Wong, Deputy Managing Director of Good Earth, said in terms “Please note that our current business relationship with Novus does not constitute any waiver of our claim against your company for this wrongful conduct.”  I accept Mr Whitehead’s submissions in this regard.

125.In my judgment this ‘waiver argument’ is a bad point, and I reject it.  Implicit in this rejection, also, is the assertion of Dr Gasperoni that there was any agreement to the disputed Novus reduction in commission; in this context I suspect that the wish was father to the thought, and I have been able to discern no reasonable basis for this contention.

Legitimacy of the draw-down by Novus, in March 2002, upon the plaintiff’s standby letter of credit

126.This is a discrete point within the framework of this case, and in itself perhaps is not of great moment, given the overlap of this claim for the return of monies wrongfully drawn down under this credit with the claim for damages by Good Earth in respect of the 3% commission differential for shipments to the CP Group for the period 1 January to 31 July 2001.

127.In this connection Mr Whitehead has made it clear that naturally he does not seek double recovery, and that if he is correct in his submission as to the propriety of his claim regarding the commission shortfall, the separate claim relating to the return of monies drawn down under the plaintiff’s standby credit is not directly relevant.

128.Nevertheless, should this case go further a decision remains necessary on this issue.

129.In brief, the plaintiff, Good Earth, in September 2002 had put in place a standby letter of credit in favour of the 1^st defendant in the sum of US$200,000.

130.The terms of this credit, as advised to the 1^st defendant’s bank, Bank of America, Singapore, recited that the irrevocable standby credit as established could be drawn down against sight drafts drawn on Bangkok Bank, Hong Kong, for the account of Good Earth, on the basis of certification that “the amount of the draft(s) drawn thereunder represents the unpaid balance of indebtedness due to you in respect of goods supplied to applicant’s customers under applicant’s order entry to you, which have failed to repay you on demand to the extent of not exceeding USD200,000…”

131.In practical terms the matter arose in the following manner : when Good Earth had remitted to Novus the monies representing the feed products purchased by Good Earth’s customers, Good Earth had remitted only 92% of such monies, retaining 8% as commission, and not merely the 5% as was now being demanded by Novus; hence so far as Novus, and Dr Gasperoni, were concerned, the monies thus remitted contained a 3% shortfall.  Upon Good Earth declining to satisfy Novus debit notes proffered in this regard, after consultation with his company lawyers, in Hong Kong and in America, Dr Gasperoni decided that this situation should be remedied by drawing down on the standby credit which had been put in place by Good Earth in favour of Novus.

132.Accordingly, the question which arises is whether such drawdown as it is accepted took place, on the back of the necessary certification presented to the bank, legitimately was made?  In other words, did the rubric of the credit encompass a drawdown in order to rectify the commission shortfall as now is claimed by Novus, but disputed and resisted by Good Earth?

133.At the end of the day this is a matter primarily of construction within the relevant factual matrix, although I note that on the evidence Herbert Wong of Good Earth said that the purpose of the standby credit was only to cover outstanding payment for goods supplied on ‘open account’, and not the CP account, because in relation to the CP Group letters of credit were opened directly in favour of the 1^st defendant, and, as Mr Whitehead also pointed out, in his evidence Dr Gasperoni had agreed this to be so.

134.In this connection Mr McLeish asserts that the terms of the credit spoke for themselves, and that so far as the defendants are concerned the reference to “in respect of goods” was sufficiently broad to cover the relevant debit notes issued by Novus for the commission overpayment, debit notes which the plaintiff had refused to pay, and indeed had returned to the 1^st defendant: see the fax letter dated 8 March 2002.

135.He accepted that if the court were to find, contrary to the defendants’ case, that the plaintiff was entitled not to pay the 3% commission differential, and to retain this sum, that the drawdown thus would be wrongful, and that in this instance the plaintiff would have suffered loss in the amount of the sum drawn down.

136.In my view it is tolerably clear that this standby credit was not intended for use other than to remedy, if remedy was necessary, any shortfall in payment for goods supplied to the end-user customer.

137.It follows, therefore, that I decline to accept the submission that the phrase “in respect of goods” was applicable to the attempt by the 1^st defendant to recoup the commission differential it considered it was owed by the plaintiff by the stratagem of drawing down upon the standby letter of credit.  It seems clear, both as a matter of primary construction, and in light of the evidence as to the provenance of the credit, that this was not its purpose at all.

138.In passing, I note the comments on this issue by the defendants’ legal advisers at the time when this possibility of draw down was being canvassed with them by Dr Gasperoni.  It is nothing to the point, but I am moved to say that the recorded observations upon the matter of Ms Sterkel, the American attorney, in my view were well-founded, and that she was correct to express the reservations that she did as to this proposed course of action.

139.Whilst I recognize that in commercial matters motive does not much matter if the course adopted otherwise is legitimate, in truth this drawdown upon the standby credit (following upon an earlier application to draw down, albeit not executed, a year earlier, in August 2001) in my view represented no more than a piece of calculated commercial self-help, part and parcel of such calculation presumably being that having drawn down upon the credit, and the disputed funds thus having been secured, the onus then would lie upon the plaintiff to attempt to redress the issue by instituting legal proceedings, with all the concomitant disruption and costs’ implications thereby arising.

140.Accordingly, if and in so far as this head of claim continues to have any relevance in light of my other conclusions in this case – not least, of course, that the 1^st defendant had no contractual right, absent reasonable notice, unilaterally to vary the rate of commission of Good Earth – I hold that its attempt practically to enforce its view by the drawdown on the letter of credit was wrong in law, and that, should such sum otherwise not have been recoverable, the plaintiff in any event would be entitled to restitution of the monies thus drawn down.

The claim against the 2^nd defendant

141.It is probably fair to say, given the manner in which this case has been fought, that as a matter of practical politics the defendants’ interests have been regarded globally, and that not a great deal of attention has been accorded to the specific claim mounted by the Good Earth against the 2^nd defendant, Novus International Inc., the parent of the 1^st defendant, its Singaporean subsidiary.

142.However, such claim in conspiracy is pursued against the American parent, apparently with potential judgment execution issues in mind; in response to a query from the Bench Mr Whitehead noted that, in the event that the plaintiff were to establish the pleaded claim that there was between the 1^st and 2^nd defendants a conspiracy to injure the plaintiff’s business, the liability of the 2^nd defendant would be joint and several, and thus any judgment rendered against Novus International rendered independently enforceable.

143.This may well be the case, but for my part I am unable to accord this plea the seriousness with which it appears to be mounted.

144.On the evidence it seems plain that the decisions to institute the changes in the plaintiff’s distributorship with the 1^st defendant from 1 August 2001 emanated from ‘head office’ in Delaware, and that the decision to draw down on the standby credit also clearly was directed by the 2^nd defendant, as was the final decision summarily to terminate the plaintiff’s distributorship by the letter dated 14 January 2002; indeed, Dr Gasperoni’s strong personality and management style is fairly obviously imprinted upon these events.

145.That said, I agree with the submission of Mr McLeish that there is a distinct air of unreality in characterizing that which occurred, and the decisions thus taken, as a ‘conspiracy’, in that the 1^st defendant is the wholly-owned subsidiary of the 2^nd defendant, and at all times clearly was subject to the orders/instructions emanating from head office.  As Mr McLeish commented, this is not a case of a plot being hatched behind the back of an innocent party, who comes to realize what is happening (or has happened) after the damage has been done; to the contrary, the defendants, in the person of Dr Gasperoni and his subordinates, plainly advertised their wishes and proposals as to their perception of the changes necessary in the existing distributor relationship with Good Earth, and the plaintiff was accorded the opportunity to discuss/debate these issues.  True it is that agreement was not forthcoming from Good Earth, which profoundly disagreed with the proposed changes, and true it is that, in my judgment, in taking the actions that transpired Dr Gasperoni and the defendants acted precipitately and wrongly as a matter of contract – but this strikes me as a far cry from establishing a ‘conspiracy to injure’, which is the cause of action now pursued against the 2^nd defendant.

146.Accordingly I dismiss this claim against the 2^nd defendant, which I note did not even merit a mention in Mr Whitehead’s closing written submission.

Summary on liability

147.In summary, therefore, on the issues of liability which have been raised the court has decided that :

i. the 1^st defendant did not have the right unilaterally and without due notice to reduce the plaintiff’s agreed rate of commission;

ii. the 1^st defendant was not entitled to determine the distributorship as existed with the plaintiff absent reasonable notice;

iii. a reasonable period of notice of termination in the circumstances prevailing was 6 months;

iv. there is no valid defence of waiver and/or estoppel open to the defendants;

v. the drawdown by the 1^st defendant upon the standby letter of credit established in its favour by the plaintiff was wrongful;

vi. no cause of action in conspiracy to injure has been established against the 2^nd defendant, and thus that this claim is dismissed.

148.It follows from these conclusions, therefore, that the plaintiff has established its case against the 1^st defendant only, and accordingly that the court now must consider the consequential issue of the quantum of damage.

Quantum : agreed parameters

149.On 8 November 2005 the plaintiff served upon the 1^st defendant Voluntary Particulars of Damages claimed, following the order of the heads of claim appearing within the Re-Re-Re-Amended Statement of Claim.

150.Such voluntary particulars now have become the framework for the submissions as to quantum of damage which have been placed before the court.

151.Happily, the task of quantum assessment has been considerably simplified.  Doubtless conscious of the perils of dealing with an innumerate bench, counsel have agreed upon the figures to be attached to the particular heads of claim, subject always to the court’s findings as to liability under the various heads.

152.Thus, all that it has been necessary now to do – and I am grateful for the effort which has been put in by counsel – is for the court simply to apply the contingently agreed figures, and thus to establish a quantum of damage consistent with its specific liability findings.

153.Accordingly, for present purposes I adopt below the headings set out in the closing skeleton argument submitted by Mr McLeish, which details the figures in question.

(a)     Commission differential on sales to C Pokphand (CP) for the period from 1 January 2001 to 31 July 2001

154.The amount claimed under this head is US$201,345.62.

155.There is no dispute over this amount, which represents the total sum of the debit notes for 3% of the price of goods supplied to CP during this period and for which Good Earth (which had resisted the purported diminution in commission) did not credit Novus, and which was drawn down by the 1^st defendant in March 2002 under the plaintiff’s standby letter of credit.

156.Given that the court has found that the plaintiff is entitled to this 3%, the plaintiff is to have this sum of US$201,345.00.

(b)     Commission differential on sales to CP from 1 August 2001 to 31 December 2001

157.The amount claimed is US$113,016.20, which for convenience Mr McLeish suggests is rounded down to US$113,000.00, to which Mr Whitehead does not demur.

158.Accordingly, I grant US$113,000.00 under this head.

(c)     Commission differential on sales to non CP customers from 1 August 2001 to 31 December 2001

159.The amount claimed is US$46,200.00, although the 1^st defendant’s calculation places the figure at US$45,330.00.

160.Mr McLeish suggests US$46,200.00 should liability otherwise be established, and Mr Whitehead agrees.

161.I grant US$46,200.00 under this head.

(d)     Commission differential on sales to CP from 1 January 2002 to 30 June 2002

162.This is the first of the ‘post-termination’ heads of claim.  The amount claimed is US$169,612.56; the 1^st defendant’s calculation in this regard is slightly higher, and thus the figure of US$170,000.00 is agreed.

163.The alternatives under this head that Mr McLeish urged upon the court do not apply, given the findings on liability.

164.Thus, the sum of US$170,000.00 stands, which I grant under this head.

(e)     Commission foregone by the plaintiff on sales to CP from 1 August 2002 to 31 December 2002

165.The amount claimed under this head is US$293,878.55, being the 8% commission the plaintiff would have earned in one year on the average of the gross sales to CP for the previous 5 years, that is, from 1997 to 2001, less the commission the plaintiff actually earned on sales to CP in 2002, grossed up to 8%.

166.Mr McLeish accepts that the amount claimed is reasonable on this basis, but makes the point, correctly, that such sum would not be payable if the reasonable period of notice is found to be 6 months or less, that is, up to 30 June 2002 or earlier – which, of course, it now has.

167.It thus follows that no sum is payable under this head, in light of the court’s decision as to a period of 6 months representing the reasonable notice period.

168.This conclusion renders nugatory the consequential argument raised hereunder, which is that the 1^st defendant says that it is not reasonable to include within the calculation of the average gross sales to CP the “exceptional” year of 1997 : Mr McLeish points to the plaintiff’s own gross sales figures based on its monthly sales tables which show that sales of Novus products in 1997 of in the region of US$170 million contrasted with the annual average for the four years following of 1998-2001, of about US$110.5 million; and thus that the plaintiff’s gross sales of Novus products in 1997 were over 50% higher than the average of the following four years.

169.Regarded thus, said Mr McLeish, such “bias effect” clearly rendered it inappropriate to include 1997 in the average for projecting 2002 figures, and equally appropriate to conduct this exercise on the basis of the preceding four years, as the defendants contended.

170.Notwithstanding Mr Whitehead’s plausible ‘swings and roundabouts’ analogy, I agree in principle with Mr McLeish’s contention in this regard; it strikes me that 1997 was so ‘out of whack’ that any annual average containing this year will inevitably be skewed, and, for present purposes, skewed unfairly.

171.However, this was not the 1^st defendant’s only point in this context.  The 1^st defendant’s primary submission was that if, which was denied, the reasonable period of notice extended beyond 30 June 2002, the plaintiff’s loss under this head ought to be assessed on the basis of an applicable rate of commission of 5%, on the basis that, on the plaintiff’s own case, this was the direct sales rate (the ‘indent sales’ rate) wherein there was no direct sales involvement by the plaintiff.

172.Mr Whitehead did not, I think, take issue with this in principle, albeit he did, of course, press for a 12 month notice period, which in the event he has been unsuccessful in attaining.

173.At any rate, if this matter goes further, and if I be held to be wrong on issue of the 6 month notice period, I should have made the assessment on the basis of the exclusion of 1997 for averaging purposes, and I should also have acceded to the submission that post-30 June 2002 calculation would be on the basis of a 5% commission rate; in other words, that I would have decided in his favour upon both of these collateral issues as raised by Mr McLeish.

(f)      Commission foregone on sales to non-CP customers from 1 January – 31 December 2002

174.The amount claimed here is US$359,619.76.

175.In this regard Mr McLeish made the point that the plaintiff’s actual ‘loss’ of commission on sales to non-CP customers commenced on 14 January 2002; however, he said, the defendants accepted that, for ease of calculation, any loss under this head could be calculated from 1 January 2002, a concession which in my view was eminently sensible.

176.In terms of this claim, Mr McLeish noted that the basis for this amount again was predicated on an applicable rate of commission of 8%, and an average of the plaintiff’s gross sales over the preceding 5 years, and intimated that in this regard he relied upon the like arguments which he had mounted under the previous head of claim.

177.In turn, the court applies the like conclusions in terms of these arguments, that is, that the average to be adopted should be based on the preceding four years, that is, from 1998 – 2001, and that the applicable rate of interest should be 5%.

178.On this basis, therefore, the plaintiff’s loss under this head is in the sum of US$101,143.06 for the requisite period of 6 months, and I grant this amount.

(g)     Loss by Good Earth Agricultural (Thailand) Co. Ltd on potential on-sales of Novus products in 2002

179.The amount claimed under this head is US$95,944.06.

180.Mr McLeish submitted that the plaintiff is not entitled to make such a claim, given that GE Thailand is not a party to this action, and the fact that the plaintiff was the 40% owner of the issued share capital of this company at the material time gives the plaintiff no right of action against the defendants in respect of an alleged loss by its associate company.

181.I agree; indeed, Mr Whitehead did not seek to press this pleaded element of the case.

182.This obviously is a ‘parasitic’ claim, and is not sustainable as a matter of law.  Accordingly the claim under this head is rejected.

Credit for profit earned on substitute business

183.It is submitted on behalf of the 1^st defendant that credit must be given by the plaintiff for monies earned post-termination during that period which otherwise would have represented the 6 month notice period, since this was substitute (and not parallel) business which the plaintiff otherwise would not have performed during the currency of the distributorship agreement.

184.In effect, therefore, this is a function of the principle of law requiring reasonable mitigation of loss “out of the consequences of the breach and in the ordinary course of business” : see McGregor on Damages, 17^th ed., para 7-089/090.

185.Mr Whitehead accepts this in principle, and in this regard the amount of profit achieved by the plaintiff on its substitute business, that is, the selling of methionine and ethoxyquin products of the 2^nd defendant’s competitors in 2002, has been agreed between counsel at US$178,188.00, which on the basis of the 6 month notice period as now found amounts to US$89,094.00.  Accordingly, this is the amount which I find requires to be deducted from the sums otherwise calculated as representing the plaintiff’s loss.

Summary on Quantum

186.As the result of the foregoing, therefore, the following picture emerges :

Amount of loss calculated on the basis of a 6 month notice period (rounded down to the nearest dollar) :

(a)	US$201,345.00
(b)	US$113,000.00
(c)	US$ 46,200.00
(d)	US$170,000.00
(e)	Nil
(f)	US$101,143.00
(g)	Nil
	US$631,688.00
Less	US$89,094.00
	US$542,594.00

Order

187.It follows from the foregoing that judgment is to be entered in favour of the plaintiff against the 1^st defendant in this case in the sum of US$542,594.00.

188.I make an order nisi that interest is to run upon the said principal sum at the rate of 1% over US dollar prime from time to time prevailing from the date of the issue of the writ herein, that is, 31 October 2002, until the date of judgment herein, and thereafter upon the said principal sum at the judgment rate from time to time prevailing until payment.

189.I further make an order nisi that the costs of this action against the 1^st defendant are to be paid to the plaintiff by the 1^st defendant, such costs to be taxed if not agreed.

190.The action of the plaintiff against the 2^nd defendant is dismissed.

191.There is to be an order nisi that the costs of the action against the 2^nd defendant are to be paid by the plaintiff to the 2^nd defendant, such costs to be taxed if not agreed.

Finally

192.I wish to express my appreciation to both counsel, whose considerable efforts have been instrumental in rendering triable a tangled dispute which in other circumstances it would have been difficult, if not impossible, fairly to assess.

Mr Robert Whitehead SC, instructed by Messrs Barlow Lyde & Gilbert,  for the plaintiff

Mr Robin McLeish, instructed by Messrs Jewkes Chan & Partners, for the 1^st and 2^nd defendants