Rossetti Marketing Ltd & Anor v Diamond Sofa Company Ltd

This is an appeal from a decision of Cranston J, determining certain preliminary issues arising out of a dispute between (i) Rosetti Marketing Limited (‘RML’) and Solutions Marketing Limited (‘SML’), and (ii) Diamond Sofa Company Limited (‘Diamond’). It represents yet another cautionary tale about the dangers of preliminary issues. In particular, it demonstrates that (i) while often attractive prospectively, the siren song of agreeing or ordering preliminary issues should normally be resisted, (ii) if there are nonetheless to be preliminary issues, it is vital that the issues themselves, and the agreed facts or assumptions on which they are based, are simply, clearly and precisely formulated, and (iii) once formulated, the issues should be answered in a clear and precise way.

Diamond is a company whose operation is based in Thailand, where it manufactures leather upholstery. Its furniture is aimed at what the Judge called ‘the middle of the market in quality and price’ – [2011] EWHC 2482 (QB), para 6. Diamond’s managing director is Panchanin Charoenyos, who set it up in 1999, after having worked in the upholstery business in the United States and the Far East.

SML was set up by Richard Willan and Martin Thomas in 2001 to represent Asian furniture manufacturers, and to assist them in penetrating the United Kingdom market. Mr Willan and Mr Thomas each had had considerable experience in that market, having worked for many years for a company called Christie Tyler, which was, as I understand it, the leader in the British furniture agency business.

In February 2004, following a meeting at a trade fair in Cologne the previous month, Mr Charoenyos orally agreed with Mr Willan that Diamond would appoint SML to act as its exclusive agent in connection with the sale of leather upholstery in the UK and Irish markets. While this arrangement was being negotiated, Mr Willan informed Mr Charoenyos that SML was already acting for two other manufacturers of upholstery known as Linkwise and ArtPeak. Mr Willan told Mr Charoenyos that the furniture range of each of those two companies did not ‘clash’ with Diamond’s range (by which I understand that he meant that their furniture was not aimed at ‘the middle of the market in quality and price’, or, possibly, that their furniture was in some other way aimed at a discrete and different aspect of the retail leather furniture market from Diamond’s furniture).

The agency arrangement between Diamond and SML was initially on a one year trial basis, but the parties thereafter continued it, not least because, as the Judge said, SML was ‘remarkably successful on Diamond’s behalf’ - [2011] EWHC 2482 (QB), para 20. Diamond’s UK turnover increased from just over $1m in 2004 to well over £15m in 2007.

In early 2008, the agency arrangement came to an end consensually, and Diamond appointed RML, which had been set up by Mr Willan to take over the clients of SML, in its place. Around this time, however, the parties were starting to fall out. Diamond was losing UK market share, at least in part because the Thai baht was appreciating against sterling. Mr Willan told Mr Charoenyos how he thought its product range could be improved, and Mr Charoenyos took the view that Mr Willan was trying to tell him how to run his business. As discussions progressed, the relationship deteriorated, to such an extent that Mr Charoenyos determined the agency arrangement on 4 June 2008. Subsequent attempts at reconciliation failed.

RML then brought these proceedings against Diamond seeking compensation under regs. 7, 8, 15 and 17 of the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (‘the Regulations’). The Regulations were brought into force to comply with Council Directive 86/653/EEC on the co-ordination of the laws of member states relating to self-employed commercial agents (OJNo L382, 31 December 1986, p.17).

In its defence, Diamond contended, inter alia, that the Regulations did not apply to its agency agreement with RML. More importantly for present purposes, Diamond contended that, although it was unaware of its right (or the relevant facts giving rise to the right) at the time it determined the agency arrangement with RML, it had in fact had the right to put an end to the arrangement on the ground of RML’s breach of duty. The alleged breach was that RML (and SML before it) had acted for two direct competitors of Diamond, namely a company known as Cassaredo and a company known as Creative.

I am not entirely clear whether it was accepted by RML and SML that Cassaredo and Creative did indeed compete with Diamond in the sense that their furniture range ‘clashed’ with that of Diamond, or whether it was to be left to be determined at the trial of the action whether the range of Cassaredo or of Creative competed with that of Diamond. I think that it must have been the former, as (i) it was put by RML’s counsel to Mr Charoenyos in cross-examination that those two companies made ‘essentially the same products’ as Diamond, and (ii) the Judge appears to have proceeded on the basis that Diamond may have been entitled to determine the agency agreement due to RML’s breach of duty.

In so far as it would otherwise owe any sums to RML pursuant to the Regulations, Diamond further contended that any liability was more than offset by the damages it could recover for breach of duty by RML (and SML) by acting for Diamond’s competitors. Because SML had been the agent for most of the relevant period, it was also a party to the proceedings.

As the proceedings developed, it became apparent that there were a number of different issues between the parties. Diamond applied for security for costs against RML, which was in a position to find £100,000, which was paid into court. Largely because this was regarded by Diamond as insufficient security for a trial of all issues, the parties agreed that there would be a preliminary issues hearing.

The parties then agreed nine issues which were thought to be fit to be determined preliminarily to trial. Almost each issue included sub-issues, so that, in total, they raised over thirty-five separate questions. Issue 1 concerned the reasons Diamond engaged SML, and whether any representation was made by SML and relied on by Diamond. Issue 2 raised points about the duration of the agency agreement and the terms as to notice of determination. Issues 3 and 4 raised questions about SML’s right to act for other furniture manufacturers, and Issue 6 concerned the connected question of whether SML owed Diamond a fiduciary duty. Issue 5 posed questions in connection with the applicability of the Regulations, and Issue 7 raised questions about the change of agent from SML to RML. Issue 8 was directed to SML’s rights to sell Diamond’s products, and Issue 9 included questions relating to the questions of breach of contract by SML and Diamond’s right to determine the agency.

An order was made by consent on 15 April 2011 by His Honour Judge Yelton, sitting as a Judge of the High Court, directing that these issues were to be tried as preliminary issues. They came before Cranston J, who heard evidence and argument over five days between 8 and 14 June 2011. He subsequently gave his judgment on 3 October that year. In that judgment (‘the first judgment’), he concluded that there was an agency agreement falling within the Regulations, initially for a term of a year, and thereafter on an indefinite basis. He held that the agent was initially SML, but that the agency was then ‘assigned’ to RML, at the suggestion of SML - [2011] EWHC 2482 (QB), paras 63-66.

In the first judgment, the Judge also found that ‘there was no express term about [SML or RML] acting for competing principals’, but that ‘there was an implied term at the outset of the contract that SML would continue to act for Linkwise and ArtPeak’ - [2011] EWHC 2482 (QB), para 56. In the next paragraph, he said that ‘[l]ater this implied term was varied by a course of dealing between the parties’, and in particular that ‘SML assumed agencies for Casserado and Creative; Diamond knew of this and did not object.’ However, he said that ‘nothing in the course of dealing meant that there was an implied term in the agency agreement enabling [SML or RML] to place orders with other principals at the expense of Diamond’. He then pointed out that the question whether that had happened was not one of the preliminary issues. Although the preliminary issues raised questions about the right of Diamond to terminate the agency, the Judge left those questions open, on the basis, as he put it in a later judgment on 25 November 2011 (‘the second judgment’) that the evidence he had heard ‘narrows considerably any findings which will have to be made in relation to termination at a future hearing’.

The first judgment ran to sixty-eight paragraphs, and in those paragraphs, the Judge did not expressly identify or answer the preliminary issues, although he did in practice address those issues. After he handed down the first judgment, there were arguments about various matters, including costs and an interim payment. The Judge held, for reasons given in his ex tempore second judgment, that Diamond should pay £300,000 on account of RML’s costs of the preliminary issues trial. He also concluded that Diamond should make an interim payment of £500,000 in respect of RML’s substantive claim. (The obligation to pay those sums has been stayed pending this appeal).

The parties then drew up an order which recorded the costs and interim payment decisions and, in an appendix, answered each of the preliminary issues (other than Issue 9), albeit sometimes solely by reference to paragraphs in the first judgment. Thus, Issue 1 was answered ‘[Diamond] engaged [SML] as its agent in the circumstances described in paragraphs 11-19 of the Judgment’, and, in answer to one of the sub-issues of Issue 7, it was stated that the assignment of the agency to RML, as found by the Judge, ‘came about in the circumstances described in paragraphs 26, 27 and 62 of the Judgment’.

With the permission of Rix LJ, Diamond now appeals against the orders made by the Judge. Diamond now accepts that it and SML, and then it and RML, were parties to an agency agreement to which the Regulations applied. However, it challenges the Judge’s conclusion that SML or RML was entitled to act as agent for Diamond’s competitors, and in particular for Cassaredo and Creative, at least if either of their product ranges clashed with that of Diamond. The other point arising from the Judge’s first judgment is Diamond’s challenge to the Judge’s characterisation of the arrangement, whereby RML replaced SML as Diamond’s agent, as an assignment of the agency arrangement. In addition, Diamond appeals the on-account £300,000 costs payment order, and the interim payment order for £500,000, as determined in the second judgment.

I propose to start by dealing with the issue whether RML and SML were in breach of their duty to Diamond by acting for Cassaredo and Creative (if their product ranges clashed with that of Diamond), first by reference to the agreement when it was made in 2004, and then by reference to what happened between 2004 and 2008. I shall then turn to the question of the effect of the replacement by RML of SML as Diamond’s agent. Next, I shall consider the appeal against the interim payment of order in the sum of £500,000. Finally, I shall address the costs order.

The Judge found that, when agreeing that SML would act as Diamond’s agent in January and February 2004, nothing was said expressly by Mr Charoenyos or Mr Willan as to whether SML could or could not act for any competitor of Diamond. However, in an email sent to Mr Charoenyos on 30 January 2004, shortly before the agency agreement was concluded, Mr Willan said that Diamond’s ‘product range does not clash with either of our upholstery companies Linkwise and ArtPeak who are both based in China’, and then went on to suggest that Diamond appoint SML as its agent for a trial period of a year.

As a general proposition, an agent occupies a fiduciary position vis-à-vis his principal. He owes what Millett LJ called ‘the single-minded duty of loyalty’ to his principal, so that he ‘must not place himself in a position where his duty and his interest conflict’, and he ‘may not act for … the benefit of a third party without the informed consent of his principal’ – Bristol and West Building Society v Mothew [1998] Ch 1, 18A-B. To the same effect, and more specifically to the present case, Lord Browne-Wilkinson, giving the judgment of the Privy Council in Kelly v Cooper [1993] AC 205, 214D, said that ‘it is normally said that it is a breach of an agent’s duty to act for competing principals’.

After the hearing of the appeal, we were referred by Mr Jones QC for SML to what Lewison LJ said in Ranson v Customer Systems plc [2012] EWCA Civ 841, paras 25-29. I do not think that that case takes matters much further here. At [2012] EWCA Civ 841, para 26, Lewison LJ quotes the well known observation of Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 97,that where, as here, a fiduciary duty is said to arise out of a commercial contractual arrangement, that duty ‘if it exists at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them’. In this case, given the exiguousness of the express terms of the contract, this principle appears to present no problems for Diamond’s argument based on the normal rule that an agent cannot act for two competing principals without their fully informed consent.

An agent can act for two principals with conflicting interests in two types of case. The first is, as already indicated, where both principals agree. In such a case, it is for the agent to show that the principal not merely consented, but that the consent was given on a fully informed basis – i.e. that the agent had made full disclosure to the principal – see per Tuckey LJ in Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351, para 35 (approving a passage in the then-current edition of Bowstead & Reynolds on Agency, now in para 6-039 of the 19^th edition).

The second type of case where an agent can act for competing principals is where, as in Kelly [1993] AC 205, the principal must have appreciated that the nature of the agent’s business (in that case a residential estate agent) is ‘to act for numerous principals’. As Lord Browne-Wilkinson explained, ‘despite the conflict of interest’, residential estate agents ‘must be free to act for several competing principals; otherwise they will be unable to perform their function’ - [1993] AC 205, 214C.

In this case, it seems to me that there was no reason for concluding that the normal non-compete principle should not apply, when the agency agreement was made. Accordingly, it follows that SML could not act as agents for competitors of Diamond. It was certainly not agreed that SML could act for competitors of Diamond: as the Judge found, nothing was said about it. The email sent by Mr Willan to Mr Charoenyos on 30 January 2004, and quoted in para 19 above, supports this conclusion: Diamond was being told that the two named furniture manufacturers for whom SML acted had ranges which would not clash, or compete, with those of Diamond. That plainly supports, rather than undermines, the argument that Diamond would have expected SML not to act for any of Diamond’s competitors.

Mr Jones QC argued that SML was in the same position as a residential estate agent, as discussed in Kelly [1993] AC 205, and that therefore the normal conflict rule did not apply. In my opinion, in so far as that argument was run before the Judge, he was right to reject it. It is plain that residential estate agents could not sensibly carry out their function if the normal conflict rule applied, and any person instructing an estate agent must appreciate that fact. While there could be exceptions, residential estate agents must have a large number of properties on their books in order to survive in business; particularly as most such agents specialise in a particular locality, it would be impossible for them to operate if the ordinary conflict rule applied.

There are no obvious or inherent grounds for believing that the reasoning in Kelly [1993] AC 205 should apply to an agency for promoting, placing and selling furniture in Great Britain. If SML had wished to contend that the normal conflict rule should be disapplied, it would have had to establish a factual basis for its contention, and there was no such evidence in this case. Further, there was no evidence to suggest thatDiamond appreciated, or even ought to have appreciated, that the normal conflict rule should not apply to an agency such as SML’s. On the contrary: as the Judge said, Mr Charoenyos ‘had no knowledge of the UK furniture market, in particular whether agents acted for more than one manufacturer’ – [2011] EWHC 2482 (QB), para 12.

More generally, I agree with what is said in the 19^th edition of Bowstead & Reynolds (footnote 294 of para 6-045) that, particularly as ‘estate agents are only imperfectly agents and are known to act for many principals’, it is highly questionable whether the reasoning in Kelly [1993] AC 205should be extended to other cases of agency, at least in the absence of clear evidence to support such an extension. This view is also supported by a helpful article by Joshua Getzler, LQR, 2006, 122 (Jan), 1, 7, which commends the approach of the House of Lords in the subsequent case of Hilton v Barker Booth & Eastwood [2005] UKHL 8, [2005] 1 WLR 567. In that case, Lord Walker referred to ‘the content of the contractual duty of full disclosure being rooted in the fiduciary relationship’ between principal and agent (in that case, a solicitor).

It also seems to me that the 30 January 2004 email would have led Mr Charoenyos positively to think that SML would not act for competing manufacturers. Mr Jones QC argued that the email suggested that, while SML could not act for another manufacturer whose range of products was the same as that of Diamond, it could act for another manufacturer who competed with Diamond in relation to some products. Even if such a distinction could be sensibly made out (and I do not accept that it could), it would not help resolve the issue under consideration, namely whether Diamond gave informed consent to SML acting for manufacturers whose products competed directly with those of Diamond.

As I understand his judgment, the Judge decided that, at least at the time it was concluded, the agency agreement between Diamond and SML precluded SML from acting as agent for a competitor of Diamond, save that there was an implied term that SML could act for Linkwise or ArtPeak, at least if and so long as their product ranges did not ‘clash’ (to use Mr Willan’s word) with Diamond’s product range.

On behalf of Diamond, Mr Samek QC suggested that there was no need for an implied term in the agency agreement between Diamond and SML to enable SML to act for Linkwise or ArtPeak, so long as Diamond’s range of furniture did not ‘clash’ with their respective ranges, because, in such circumstances, there would be no conflict between SML’s duty to Diamond and its duty to Linkwise or ArtPeak. That may be right, but I am not sure that it is. The mere fact that the ranges of two furniture manufacturers do not ‘clash’ does not necessarily mean that an agent acting for both of them would have no conflict. For instance, if a retailer, with whom an agent was negotiating could only take one of the ranges, and was relatively indifferent as to which range it was, an obvious conflict could arise if the agent was acting for both manufacturers. However, the issue is fact-sensitive, and it does not seem to me that the judge made any direct finding on the issue (although his conclusion described in para 29 above that there was an implied term logically suggests that he took a different view from that advanced by Mr Samek QC). For the purpose of this appeal, we do not need to decide the point.

Mr Jones QC challenged the Judge’s conclusion that SML was not entitled to act for any other competitor of Diamond. In my view, however, the Judge was correct to hold that SML was precluded from acting for any other principal (except Linkwise or ArtPeak), at least if the furniture range of such a principal clashed with that of Diamond. This conclusion is supported by the email of 30 January 2004, which supports the conclusion that Diamond agreed that SML could act for Linkwise and ArtPeak on this basis.

As already explained, it is rather less clear to me that SML would have been entitled to act for another furniture manufacturer whose range did not clash with that of Diamond, but, again, it is not possible or necessary to decide the point. However, the very fact that, before securing Diamond’s agreement to appoint it as its agent, SML considered it appropriate to inform Diamond that it acted, and would continue to act, for Linkwise and ArtPeak even though their ranges did not clash with that of Diamond, might be said to suggest that SML thought that, without Diamond agreeing, it might not have been open to SML, as Diamond’s agent to continue acting for Linkwise and ArtPeak.

Having rightly decided that, under the agreement made in February 2004, SML was not entitled to act for manufacturers who competed with Diamond (other than ArtPeak and Linkwise), or at least for those whose ranges clashed with those of Diamond, the Judge went on to consider whether the position subsequently changed. His conclusion, as expressed at [2011] EWHC 2482 (QB), para 57, was, as mentioned above as follows. (i) The implied term that SML could act for Linkwise and ArtPeak was ‘varied by a course of dealing between the parties’, so that SML could also ‘assume … agencies for Casserado and Creative’, and (ii) ‘[N]othing in the course of dealing meant that there was an implied term in the agency agreement enabling SML …to place orders with other principals at the expense of Diamond’.

The oral evidence established that, from 2006, Diamond knew about, and did not object to, SML acting for Cassaredo and Creative. However, it also seems that Diamond was led to believe that those companies’ products did not clash with those of Diamond. Accordingly, while there may be said to have been informed consent on the part of Diamond to SML acting for Creative and Cassaredo in relation to non-clashing furniture, such as motion furniture (i.e. furniture with moving parts – headrests, footrests etc), there was no informed consent to SML acting for those two companies in relation to furniture which clashed with that of Diamond.

This conclusion is supported by an email, which Mr Willan sent to Diamond on 18 October 2006. This email began by recording the fact that Diamond had confirmed that its factories would not ‘be ready to produce motion furniture … for some time to come’. The email then referred to the fact that SML had ‘an alternative source which we could develop in Viet Nam called Cassaredo’ and that ‘[y]ou [i.e. Diamond] said you would be happy for us [i.e. SML] to do this’. The clear implication of the email was that SML thought it right to ask Diamond’s consent before it acted for a manufacturer of a type of leather furniture not manufactured by Diamond (namely motion furniture), and that SML led Diamond to believe that Cassaredo’s product range (sc. motion furniture) would not clash with Diamond’s range.

Both Mr Jones QC and Mr Samek QC, for Diamond, referred to passages in the transcript of the evidence to support their respective cases as to whether Diamond, and in particular, Mr Charoenyos, knew or believed that Cassaredo and/or Creative had ranges of furniture which competed with those of Diamond. Having considered those passages, I am satisfied that there was no evidence which would have entitled the Judge to conclude that Diamond gave informed consent to SML acting for a manufacturer whose range of furniture clashed with that of Diamond. Mr Charoenyos specifically denied having given any such consent.

It is true that Mr Willan said that he told Mr Charoenyos that SML hoped to pick up more clients, but that would not have conveyed to Mr Charoenyos that any of those clients would make furniture which clashed with that of Diamond; anyway, that evidence does not establish that Diamond consented to SML taking on any new specific clients. Mr Willan admitted that he ‘didn’t say specifically we are planning to pick up more clients’ and that he ‘did not go into much detail about the other upholstery manufacturers SML represented’.

Mr Willan said that he told Mr Charoenyos that SML hoped to follow the business model developed by Christie Tyler, and there was no objection to this. But there is nothing to suggest that Mr Charoenyos knew what that meant; and, even if he had understood it, his silence would not have amounted to informed consent to SML acting for a specific competitor of Diamond. Mr Willan also said that there was evidence available to Mr Charoenyos which would have shown that SML were acting for manufacturers who competed with Diamond, but he accepted that Mr Charoenyos would have had to be looking for the evidence, and he also accepted that there was no document and no specific conversation which he could identify in which it was made clear to or by Mr Charoenyos that SML was acting for a competitor of Diamond.

In my view, it is clear that RML could not establish that Diamond’s consent (either at the time of the 18 October 2006 email, or thereafter) to SML acting for Creative and Cassaredo amounted to ‘informed consent’ to SML acting for either company in relation to furniture which clashed with that manufactured by Diamond. In that connection, Mr Samek QC made a fair point when he said that, even in its reply in these proceedings, RML contended that the furniture manufactured by Creative and Cassaredo did not compete with Diamond’s furniture. The fact that RML, which stands in SML’s shoes and has the same personnel as SML, took that line as recently as 2011, supports the notion that SML and RML would not have suggested to Diamond between 2006 and 2008 that either of those companies manufactured furniture which clashed with that manufactured by Diamond.

Subject to any further arguments, it would seem to follow that Diamond therefore consented to SML acting as agents for Creative and Cassaredo, but only in so far as their furniture did not clash with that manufactured by Diamond (if such consent was needed, as to which see para. 30 above). However, Mr Samek QC argued that Diamond did not consent to SML acting for Creative and Cassaredo at all, on the basis that their apparent consent was not effective in law, because (i) it was never in fact given, (ii) if given, there was no consideration for it, and (iii) if that is not right, then the consent did not operate as it was not given on a fully informed basis.

Even if Diamond’s consent was needed (see again para. 30 above) to SML acting for Creative and Cassaredo in relation to furniture which did not clash with that of Diamond, I would reject those arguments. As to argument (i), the Judge found there was consent. In any event, it must have been clear to Diamond from the October 2006 email that Mr Willan believed that Diamond would not object, and Diamond did nothing to disabuse him of that belief, upon which SML acted by taking on Cassaredo: if necessary an estoppel could, in my view, be founded by SML on that. The estoppel point may be made in answer to argument (ii); in addition, it is possible that, if Diamond had objected to SML acting for Cassaredo, SML would have stopped acting for Diamond. Argument (iii) is more powerful, but, in the end, it seems to me to go nowhere. Even if there was no effective consent, it cannot be right that Diamond could recover damages arising from SML having acted for Cassaredo (and, for the same reason, Creative) in so far as any loss was suffered as a result of SML acting as agent for non-clashing furniture, because Diamond had made it clear that it did not object to SML acting in that way. Whether the Judge was right in finding effective consent but only to non-clashing furniture, or Mr Samek QC is right in saying that there was no consent, therefore seems to me to make no difference to the outcome of these proceedings.

Accordingly, I conclude that, at no time was SML, or indeed RML, entitled to act for any manufacturer of leather furniture other than Diamond, except (i) Linkwise, ArtPeak, Creative and Cassaredo, but not in relation to their furniture which clashed with that of Diamond, and (ii) arguably, a manufacturer whose furniture did not clash with furniture manufactured by Diamond. I am not completely clear whether this conclusion is consistent with that of the Judge, as set out in [2011] EWHC 2482 (QB), para 57.

The judgment is somewhat Delphic on the point, as, in the concluding paragraph, [2011] EWHC 2482 (QB), para 68, the Judge said that SML ‘could act for a number of principals, and those principals could be in competition in the manner defined earlier in the judgment’. My uncertainty on the point is reinforced by the fact that, when this judgment was made available in draft to the parties in the usual way, each made strenuous submissions in writing to support the contention that my conclusion on this point differs from (per Diamond), or is the same as (per RSL), that of the Judge. Having read those submissions, I must admit to not being much clearer.

For Diamond, Mr Samek QC contends that what is said in the last paragraph of the judgment is a reference back to [2011] EWHC 2482 (QB), para 57, which I think is probably right. However, I do not consider that it is clear from that paragraph that the Judge was, contrary to my view, concluding that SML could act for Creative and Casaredo in relation to furniture ranges which clashed with that of Diamond.

The Judge held, at [2011] EWHC 2482 (QB), para 56, that there was an implied agreement that SML could act for LinkWise and ArtPeak, provided that their product ranges ‘did not clash with Diamond’s’. He then said in the next paragraph that ‘the implied term was varied so that SML could act for Creative and Casaredo’. But that does not necessarily mean that SML could act for them in relation to furniture ranges which clashed with Diamond’s, particularly in the light of what he had just said about LinkWise and ArtPeak. While he did not say in terms whether or not the implied term relating to Creative and Casaredo extended to clashing furniture ranges, he did say, as mentioned in para 15 above, that ‘‘nothing in the course of dealing meant that there was an implied term in the agency agreement enabling [SML] to place orders with other principals at the expense of Diamond’. If ‘other principals’ means ‘principals other than Diamond’, it is inconsistent with Mr Samek QC’s submission; if it means ‘principals other than Creative and Casaredo’, it is consistent with his submission.

My own reading veered towards the former meaning, partly because there was no reference to competing principals other than Creative and Casaredo, and partly because one would have expected the Judge to spell it out if the implied term in relation to Creative and Carredo was different from that in relation to ArtPeak and LinkWise. However, Mr Samek QC relies on the order which the parties agreed after Cranston J gave judgment. While his point has some force, I am not convinced that the agreed form of order is of very much help on the issue, as the crucial parts ultimately rely on what was said in paras 57 and 68 of the judgment. For instance, one of the paragraphs of the order states that RML’s principals ‘could be in competition with each other’, but there immediately follow the words ‘as explained in the judgment. Para 68’. Having said this, it is fair to add that, while RML’s written and oral submissions to this court have been somewhat equivocal on the issue, Diamond’s written and oral submissions appear to have been predicated on Mr Samek QC’s reading of paras 57 and 68 of the judgment.

As to my conclusion that SML and RML could not act for principals other than Diamond in so far as the ranges of furniture manufactured by those other principals clashed with that of Diamond, I feel some sympathy for SML and RML. The impression I get from the evidence provided to us on this appeal is that, so long as Diamond’s UK sales were going well and his personal relationship with Mr Willan was good, Mr Charoenyos was largely unconcerned about Diamond’s strict legal rights, and that this would have been appreciated by Mr Willan. Accordingly, it is not hard to understand how Mr Willan may have hoped that Diamond would accept that SML could act for a manufacturer whose furniture did not clash with that of Diamond without giving rise to any objection. Having said that, the sensible and proper course for SML to have taken if it wished to act for a manufacture of furniture which competed with that made by Diamond, was to inform Mr Charoenyos, and to obtain his consent. By not taking that course, SML, and then RML, took the risk that, when it appreciated what had occurred, Diamond would stand on its strict legal rights, and that is what has happened. Indeed, in the light of the two emails of 30 January 2004 and 18 October 2006, SML demonstrated that it was well aware of the risk that it was running.

It is right to mention that Mr Jones QC on behalf of RML argued thatthe evidence established that, around January 2008, Mr Charoenyos knew of the fact that SML and RML were acting as agents for principals whose ranges of furniture clashed with that of Diamond, and, accordingly, the arrangements were varied so that SML, and then RML, could so act. I do not accept that. First, the evidence shows that, while Mr Charoenyos started to appreciate that SML, and then RML, may have been so acting, it was by no means plain to him by the time the arrangement determined in June 2008. Secondly, the mere fact that a party to a contract, such as the arrangement in this case, may be aware that the other party may be breaching a term of that contract and does nothing about it for a few months, cannot without more operate as a variation of the contract.

The arrangement pursuant to which RML replaced SML as Diamond’s agent in early 2008 was described by the Judge at [2011] EWHC 2482 (QB), para 62. The arrangement was initiated by SML, who wished to transfer all its principals to a new company which had, it would seem, effectively the same ownership and directors as SML. As the Judge explained, Mr Willan feared that SML might be liable for injuries to some consumers of Linkwise’s furniture owing to the way in which the leather was treated, and wished to ensure that all future commission went to a new company, RML, which he set up for that purpose. Mr Chareonyos agreed to this arrangement, and so the agency agreement, reached in early 2004, between SML and Diamond was replaced by a new, but otherwise identical, arrangement between RML and Diamond.

Although the Judge concluded that the proper common law analysis of this arrangement was that it operated as an assignment of the agency by SML to RML, I am inclined to agree with Mr Samek QC that that is probably not the right analysis in common law. Assignment of a contract, in the sense of all the benefits and burdens, is not an entirely easy concept, either in theory or in practice. It seems to me that it is more consistent with the common law to conclude that there was in 2008 an arrangement that the agency between Diamond and SML would end, and that there would be a new agency agreement between Diamond and RML (impliedly on the same terms as that between Diamond and SML). Whether this could be called a novation (as I am inclined to think, but Mr Samek QC challenged) seems to me to give rise to an argument as to the meaning of ‘novation’ rather than raising any question of principle.

Further, I do not consider that it is necessary to reach a conclusion on that issue. It was apparently common ground in these proceedings that the express and implied terms of the agency agreement between SML and Diamond were impliedly replicated in the agency agreement between RML and Diamond, whether it arose from assignment, novation, or in some other way. Mr Jones QC was therefore right, in my view, to submit that the essential question for present purposes was not the domestic legal characterisation of the arrangement whereby RML replaced SML, but the effect of the arrangement on RML’s claim for compensation under the Regulations, and Diamond’s defence of set-off.

In that connection, the position (in very summary form) relating to compensation under the Regulations is as follows:

It will be appreciated that, if RML is not entitled to be treated as a successor to SML’s agency for the purposes of the Regulations, then it would only have been entitled to one month’s notice under reg. 15, whereas it would have been entitled to three months’ notice if it can be treated as standing in SML’s shoes. Further, the extent of the compensation under reg. 17 may well depend on RML being able to contend that it should be treated as having taken over SML’s agency.

If RML had had to argue that it should be treated as being a successor to SML’s agency by reference to the domestic law, it might have faced difficulties, as already discussed. However, the question obviously has to be addressed by reference to the autonomous terms of the Regulations. On that basis, I consider that RML has made out its case. This is apparent from reg. 18, which excludes reg. 17 compensation in three circumstances, namely:

In my view, reg. 18(c) clearly envisages that, where a principal agrees to instruct a new agent in place of an existing agent, in circumstances where the existing agent has transferred the agency business to the new agent, the new agent is to be treated as having taken an assignment of the existing agent’s rights and duties. The fact that the common law might treat the new agency as a new contract is neither here nor there. This conclusion appears to me to comply with the commercial purpose of the Regulations.

Given that conclusion, Mr Jones QC sensibly agreed that, if RML has the benefit of SML’s claims and rights under the Regulations, it also had to accept that, in so far as Diamond had any claims for sums which it could have set off against its liability to SML, it can raise those claims by way of set-off against RML’s claims under the Regulations. In effect, at least for present purposes, RML and SML have an identity of interest. Therefore, for instance, it is unnecessary to decide whether any compensation under regs. 7 and 8 which would be due to SML is to be treated as assigned to RML, as SML is a party to the proceedings.

In his second judgment, on 25 November 2011, the Judge had to consider whether to order Diamond to make an interim payment pursuant to RML’s application under CPR 25.7(1)(c). He accepted that it was ‘clear’ that RML was entitled to compensation under regs. 7 and 8.

So far as RML’s claim for compensation under regs. 15 and 17 was concerned, the Judge was faced with Diamond’s argument that it had been entitled to determine the agency agreement because RML acted for competitors, so that those regulations could not found any claim for compensation. The argument was based on the propositions that (i) the right to notice under reg. 15 must be read together with reg. 16, which provides that the Regulations ‘shall not affect the application of any … rule of law which provides for the immediate termination … because of the failure of one party to carry out all or part of his obligations under that contract’, and (ii) where reg 18(a), which is quoted in para 49 above, applies, there is no right to compensation under reg 17. In common law, a person can justify determining a contract on a ground which he did not know of at the time when he determined the contract, and so, argued Diamond, as it was entitled to determine the agency agreement with RML owing to RML acting for Creative and Cassaredo, regs. 16 and 18(a) applied, and RML accordingly has no right to compensation for not having had three months notice under reg.15 or for compensation under reg.17.

The Judge rejected that argument on the basis that he was bound to do so by the decision of Patten J (as he then was) in Nigel Fryer Joinery Services v Ian Firth Hardware Limited [2008] EWHC 767 (Ch). In my view, the Judge was not so bound. In that case it was common ground that the effect of reg. 18(a) did not allow a principal who had determined an agency contract for one reason (or for no reason) to invoke reg. 18(a) on the ground that he subsequently learnt of a good reason in common law for determining the contract, which he did not know of at the time. As the point was common ground, it was no part of Patten J’s reasoning. In any event, it does not seem to me to impinge on reg.16, and hence on reg. 15. Even if there was a decision of Patten J on the point, it would not be binding on us. I also note that Bean J, albeit obiter, was inclined to the opposite view in Cureton v Mark Insulations Limited [2006] EWHC 2279 (Admin).

In my view, the question whether the common law rule could be invoked in the present case by Diamond to justify its termination of the agency agreement with RML, and to defeat RML’s claims for compensation under regs. 15 and/or under 17, is not one we should determine at this stage. First, there has been no finding that, even in common law, any breach by RML in acting for Creative and Cassaredo would have entitled Diamond to determine the agency agreement. That was not one of the preliminary issues, although, as there was a preliminary issue hearing, it probably should have been. Secondly, the question whether reg 18(a), with its reference to termination ‘because of default’, can apply to a case where the default, and the facts giving rise to the default, were not known to the principal at the time of termination, is a difficult one, and may require consideration of the domestic law in other EU jurisdictions. It could, and quite possibly should, have been a preliminary issue, but it was not. Thirdly, the question whether reg. 16 can apply in such a case, and therefore override reg. 15, is a separate question which is also not straightforward, and could also have been a preliminary issue, but was not. Fourthly, the parties were not in a position to argue either point fully before us.

In these circumstances, taking the figures advanced by Mr Jones QC on behalf of RML (which figures were not specifically challenged by Diamond), the claims under regs. 7, 8, 15, and 17 are, respectively, in the region of £90,000, £600,000, £210,000, and £1.5m.

Against this, Diamond seeks to raise a set-off based on the profit which it lost as a result of RML and SML having acted for Creative and Cassaredo. The assessment of the set-off is essentially based on the sales of furniture made by those two companies through the agency of SML and RML, and the fact that Diamond’s profit margin was stated by Mr Charoenyos to be 10%. The evidence includes the sales of furniture made by those two companies through SML and RML in the years 2006, 2007 and 2008. Aggregating the sales for 2006 and 2007 in full and half the sales for 2008 produces figures of just over US$20m and rather over £2m. If one were to assume that all those sales would have been of Diamond’s furniture, if SML and RML had not acted for Creative and Cassaredo, that would represent a set-off of around $2m plus £200,000.

However, that would almost certainly be a very extravagant contention, as it assumes that SML and RML would have managed to persuade every purchaser of furniture made by Creative and Cassaredo to buy Diamond’s furniture. That seems very unlikely indeed, as it ignores (i) the fact that Diamond did not manufacture some of the types of furniture made by Creative and Cassaredo (e.g. motion furniture), (ii) the fact that Creative and Cassaredo may well have entered the British market anyway, using a different agent, (iii) the fact that some of the sales of furniture made by Creative and Cassaredo may have been instead of furniture made by a third party manufacturer rather than Diamond. There may well be other points as well which would serve to reduce Diamond’s claim. On the other hand, as Mr Samek QC said, Diamond may also have a claim for loss of future business, as they might well have been in a better market position in 2008 when the agency agreement ended, if SML and RML had not worked for two of their competitors.

An interim payment may be awarded under CPR 25.7(1)(c), where the court ‘is satisfied that, if the claim went to trial, the claimant would obtain judgment for a substantial sum of money … against the defendant’. And, by CPR 25.7(4), any interim payment cannot be ‘more than a reasonable proportion of the likely amount of the final judgment’.

In Revenue & Customs Commissioners v GKN Group [2012] EWCA Civ 57, [2012] CP Rep 20, Aikens LJ, with whom Ward and Lewison LJJ agreed, held that a court should only order an interim payment under CPR 25.7(1)(c), where it was satisfied, on the material put before it, that, on the balance of probabilities, if the claim went to trial, the claimant would obtain judgment for a substantial sum. At [2012] EWCA Civ 57, [2012] CP Rep 20, para 38, Aikens LJ pointed out that ‘the court must be satisfied … that the claimant would in fact succeed on his claim and that he would in fact obtain a substantial sum of money.’ He immediately went on to explain thatit would ‘not be enough if the court were to be satisfied … that it was “likely” that the claimant would obtain judgment or that it was “likely” that he would obtain a substantial sum of money’.

In the instant proceedings, RML has (i) a very strong case for saying that it will recover around £700,000 (under regs 7 and 8) and (ii) a more speculative case for saying that it will recover around a further £1.7m (under regs 15 and 17), whereas Diamond has (i) an outside possibility of establishing a claim for a sum getting on for £1.5m (for loss of profits, assuming an exchange rate of around $1.5 to the £), and, while it does not have a certain prospect of recovering anything, it will probably recover something, but it will probably be very much less than £1.5m, and (ii) a speculative and wholly unquantified claim for recovering a further sum (for loss of future profits).

In my view, on the basis of the arguments we have heard, and the evidence and figures we have been taken to, the position is as follows. First, it is quite possible that theoutcome of these proceedings will be that Diamond will owe a substantial sum (which may well run into hundreds of thousands of pounds) to RML. However, and secondly, particularly so long as RML’s claims under regs. 15 and 17 have not been established, it cannot fairly be said that RML will recover a substantial sum in these proceedings.

In conclusion on this issue, if RML’s claims for compensation under regs. 15 and 17 were as strong as the Judge concluded, then his interim payment order in the sum of £500,000 would have been very hard to assail. As it is, however, until the points discussed in para 60 above have been resolved, although the balance seems to me to be probably in RML’s favour, it cannot be said, at this stage, that it will (even on the civil test), as opposed to be likely to, be the net winner, once the set-off has been assessed. Accordingly, I would set aside the order for an interim payment, on the basis that RML can renew its application if and when it can establish that it has a stronger case, or, indeed, that Diamond has a weaker case, than currently appears.

As mentioned above, in his second judgment, Cranston J decided that Diamond should pay a substantial sum, £300,000, on account of the costs incurred by RML in connection with the trial of the preliminary issues. In reaching that conclusion, the Judge rejected a contention by Diamond, based on the reasoning of this court in HSS Hire Services Group plc v BMB Builders Merchants Ltd [2005] EWCA Civ 626, that he should hold off making any order for costs as Diamond had made a Part 36 offer.

Given that the Judge had concluded that RML should be awarded an interim payment of £500,000, and that he was told (by agreement) of the amount of the Part 36 offer, which was considerably below that figure, I consider that he may well have been entitled not to follow the practice indicated in HSS Hire [2005] EWCA Civ 626. However, absent special circumstances, it should be emphasised that, where a judge finds for a claimant on liability, and he is told that the defendant has made a Part 36 offer, he should normally make no order for costs, unless he is reasonably certain that the claimant will recover more than the Part 36 offer. The test a claimant must satisfy in such a case is higher than that identified by Aikens LJ in relation to an interim payment in GKN Group [2012] EWCA Civ 57, para 38. After trial, there is no doubt but that the court can order an interim payment to be returned in whole or in part (although there is always the risk that, in practice, the claimant will be unable to repay). On the other hand, it must be questionable whether the court after the trial can vary or revoke an earlier costs order, and, if it can, it would require exceptional circumstances.

The other reason the Judge thought it right to make a costs order in favour of RML was that ‘a great deal of effort at the hearing’ was spent on Diamond’s unsuccessful argument that the regulations did not apply to its agency agreement(s) with SML and RML. The Judge may have been suggesting that, whatever the outcome of the action, this was a point on which the costs should be borne in any event by Diamond, as it was a discrete point, and one without merit. In principle, it is, of course, open to a judge to order that, irrespective of who was ultimately successful in the case as a whole, one of the parties should pay the costs of a specific issue.

In my view, the Judge’s decision on costs cannot stand, essentially for the same reasons that I would reverse his decision on the interim payment: while I think it is by no means unlikely, from what I know at the moment, that RML will recover a substantial sum from Diamond, I cannot be sure enough to say that RML will recover anything to justify an order for costs at this stage, as it is conceivable that what RML can claim under the Regulations will be exceeded by the set-off raised by Diamond.

However, in the light of what the Judge said about the time taken on Diamond’s contention that the Regulations did not apply in this case, I think that, rather than simply setting aside the order for payment of £300,000, we should invite further argument as to what order, if any, to substitute for it.

The Judge rightly said that, ‘having heard the case’, he was ‘not at all persuaded that the determination of preliminary issues was the right approach to handling the litigation’ – [2011] EWHC 2482 (QB), para 3. As he immediately went on to say, it ‘would have been far better to have had a trial to resolve all the issues’. Whatever the Judge decided on the preliminary issues, and irrespective of who won on those issues, it should have been obvious to those agreeing the preliminary issues that a trial would not necessarily be avoided. Further, it should also have been appreciated that it would be very likely that Mr Charoenyos and Mr Willan, both of whom gave fairly extensive evidence before Cranston J, would have to give evidence at such a trial, and that at least some of that evidence would duplicate the evidence on the preliminary issues.

Not only was this not a case for preliminary issues, but the preliminary issues which were agreed were both unduly complicated and defective. For instance, the simple issue of whether SML could act for competitors of Diamond, and if so which, was far too elaborately set out in a series of questions. Furthermore, the question whether Diamond had the right to determine the agreement because of RML’s breach, and two points concerning the interpretation of the Regulations, should have been raised if there were to be preliminary issues. In addition, the agreed and assumed facts were not spelt out: so, while it appeared to be an issue on the pleadings whether Cassaredo and Creative manufactured clashing furniture, it seems to have been implicitly assumed that they did, but nowhere is that explicitly stated.

I also consider that the way in which the issues were answered by reference to paragraphs in the judgment was not satisfactory. Further, it seems to me that some of the issues which were raised and purportedly answered were not in fact answered when they should have been – most notably, the question whether Diamond was entitled to determine the agency agreement on the ground of RML’s breach. The unsatisfactory nature of the answers to the preliminary issues is well illustrated by the rather lugubrious way in which the notice of appeal and skeleton arguments in this court were framed. As Rimer LJ said in argument, appeals are against orders not judgments.

The problems that these defects throw up are also well illustrated by the fact that I am not entirely clear whether I am in favour of allowing or dismissing Diamond’s appeal on the two substantive points arising from the first judgment. I am quite unclear whether my conclusion that SML and RML were in breach of duty to Diamond in so far as they acted for Creative and Cassaredo in relation to furniture which clashed with that manufactured by Diamond, but not in relation to other furniture, was effectively the same as the view of the Judge. As to my conclusion that, for the purposes of assessing compensation under the Regulations, RML stands in SML’s shoes at least in relation to arts 15 and 17, that seems to accord with the Judge’s conclusion, but perhaps for slightly different reasons, as I doubt that I agree with the Judge’s assessment of the common law position.

On Diamond’s appeal against two points in the Judge’s second judgment, I would (i) reverse the interim payment order made by Cranston J in the sum of £500,000, and (ii) direct that, when they make written submissions on consequential issues to this appeal, which will include the costs of this appeal, the parties provide submissions as to the appropriate order for costs in relation to the hearing before Cranston J, in place of his order for an on-account payment of £300,000.

We have had detailed submissions following the provision of this judgment in draft, primarily on the issues discussed in para 42 above, which has resulted in the addition of paras 43-47 above. In the light of what we now say, it is necessary to invite the parties to make yet further submissions as to the appropriate form of order and the appropriate order for costs, in the rather remarkable state of affairs in which we find ourselves.

I agree.

I also agree