Jayam NV v The Diamond Trading Company Ltd

This is an action about the supply of diamonds by the De Beers Group of Companies (“De Beers”) to one of its customers, or “Sightholders” as they are known in the trade, Jayam N.V. (“Jayam”). The defendant, The Diamond Trading Company Limited (“DTC”), is the sales and marketing arm of De Beers. The claimant, Jayam, is a firm of diamond manufacturers and jewellers based in Antwerp and has been a DTC Sightholder since 1974. The Chief Executive of Jayam is Mr Mahendra Mafatlal Mehta (“Mr Mehta”). The shares in Jayam are owned by Mr Mehta and members of his family.

Sightholders are so-called because DTC sells diamonds at periodic viewings known as “Sights” at which the diamonds allocated for sale are made available to customers for physical inspection. There are ten Sights in each calendar year, which is divided into two six month halves (called “selling periods”) running from January to June and from July to December respectively. These selling periods are known as H1 and H2, and there are five Sights in each. Thus the second Sight in the second selling period of 2004 is commonly referred to as Sight 7, H2/2004, and so forth.

The number of DTC Sightholders varies from time to time, but there are currently about 90 worldwide.

Historically, De Beers had a virtual monopoly in the production and sale of rough (i.e. uncut and unpolished) diamonds extracted from its mines in South Africa. In more recent times other sources of supply of diamonds have emerged, for example in Russia, Canada, Australia and Indonesia, but in 2002 De Beers’ share of worldwide diamond production was still well in excess of 50% and the European Commission took the view (with which De Beers apparently disagrees) that DTC had a dominant position in the worldwide market for the supply of rough diamonds.

Demand by Sightholders for rough diamonds usually exceeds by a substantial margin the supply which DTC makes available for sale. Accordingly, DTC has to choose between Sightholders when allocating diamonds in each selling period. Before 2000 Sightholders were selected at twice-yearly meetings of DTC’s executive committee. Allocations of rough diamonds were determined by a team of account managers and a committee of senior executives on the basis of applications received on a Sight-by-Sight basis from Sightholders. Decisions on allocation were ultimately made in accordance with commercial considerations. This system was not transparent, and, perhaps unsurprisingly, there were rumours about its integrity.

In 2000, following a strategic review by DTC of its operations, DTC announced the introduction of a new system of supply arrangements to be known as “Supplier of Choice” (“SOC”). The new arrangements were intended, in broad terms, to place DTC’s relationships with its Sightholders on a formal basis and to introduce a new contractual framework both for the selection of Sightholders and for the allocation of diamonds to Sightholders.

Although the introduction of SOC was announced in 2000, it was not in fact implemented until July 2003. The main reason for this delay was the need to ensure that the new arrangements did not infringe European competition law. The detail of the arrangements was developed over a period of 2½ years, in what DTC describes as “close consultation” with the European Commission, and what Jayam would prefer to characterise as a response to an investigation by the Commission whether DTC was abusing its dominant position contrary to Article 82 of the EC Treaty. For present purposes I do not need to decide which description of the process is the more accurate. What matters is that the proposals were notified to the Commission by DTC in May 2001, the Commission opened a formal investigation in July 2001, and a detailed examination of the proposals then ensued. In the course of that examination, various objections were raised by the Commission and had to be dealt with by De Beers. Eventually, on 16 January 2003 the Commission issued a letter of comfort to De Beers confirming that the examination of the case was now complete, and

“the examination of the above notified agreements no longer reveals the existence of any grounds under Article 81(1) or 82 for further action on the part of the Commission”.

The Commission’s letter went on to state that the file would now be closed, but the case could be reconsidered if the factual or legal situation changed in the future.

The formal SOC contractual documentation took effect in July 2003. I will describe it in detail in the next section of this judgment. For the purposes of this introduction, it is enough to say that it included an obligation undertaken by DTC, in paragraph 2.4 of a document entitled “Diamond Trading Company Sightholder Policy Statement”, to use “reasonable endeavours” to meet applications for boxes of diamonds placed by Sightholders at each Sight taking into account four specified criteria, including in particular “the requirements of DTC’s other Sightholders”. Jayam’s case is that DTC has breached this obligation and thereby caused it loss.

Jayam’s complaint centres on the use by DTC of a mechanism to cap applications for diamonds made by Sightholders based on actual purchases made by the Sightholders from DTC over the previous ten Sights. In paragraph 16 of Jayam’s Re-amended Particulars of Claim, the alleged breach of contract is pleaded in this way:

“In applying the Application Capping Mechanism to Jayam’s application, DTC acted in breach of contract and in breach of the terms of the SOC Documentation. The SOC Documentation made no reference to the Application Capping Mechanism and the terms of the SOC Documentation were not consistent with the application of the Application Capping Mechanism.”

The precise nature of the alleged breach is further explained and clarified in the Particulars of Breach which (after some discussion with Counsel on day 2 of the hearing, after the case had been opened on each side) I directed to be served before the start of the oral evidence. These Particulars (undated but served on 25 January 2007) make it clear in paragraph 3 that what is alleged is that:

Thus what is alleged is that DTC has failed to use the reasonable endeavours required by paragraph 2.4 because it has not had sole regard to the four specified criteria, but has instead taken into account a further and unauthorised criterion. That is the only breach of contract upon which Jayam relies.

Jayam goes on to say in paragraph 6 of the Particulars of Breach that the application capping mechanism cannot be justified as a fair and reasonable method of taking into account the requirements of DTC’s other Sightholders, which is of course one of the specified criteria, for a number of different reasons. In outline, those reasons are as follows:

The point about H2/2002, which I will need to elaborate later on, is that under the developing prototype capping mechanism which DTC was then using, as at least a persuasive factor in reaching its decisions on allocation, applications by Sightholders (including Jayam) were capped by reference to their prior purchases from DTC in a period of only four Sights, namely Sights 1 to 4 in H1/2002. The actual purchases by Sightholders in H2/2002 were then used, together with the purchases in H1/2002 (including again the purchases for Sights 1 to 4), in calculating the prototype cap for H1/2003, which was based (like its successors under SOC) on purchases in the previous ten-Sight period. Jayam therefore says that the use of a reference period of only four Sights for the purpose of calculating the cap in H2/2002 was not only in itself inherently too short and unrepresentative of the genuine requirements of Sightholders, but it had a knock-on, and indeed compounding, effect on the caps which followed.

For its part, DTC denies that it has breached paragraph 2.4 of the Policy Statement in the manner alleged or at all. In its Response to Jayam’s Particulars of Breach, served on 29 January 2007, DTC says that the applications capping mechanism is an essential component of the allocations model under SOC, and is a necessary and appropriate mechanism for the purpose of giving effect to the broad principles set out in paragraph 2.4 of the Policy Statement.

According to paragraph 5 of the Response:

“In particular, the Applications Capping Mechanism is necessary in order to assist in addressing the very real difficulty posed by the fact that demand for the DTC’s rough diamonds substantially exceeds the available supplies. Sightholders have traditionally made applications for many more rough diamonds than the DTC has available to supply. In order to make decisions as to which applications can be met and which must regrettably be refused, the DTC must employ some means of determining first which of the applications made by Sightholders reflect genuine requirements and which applications are tactical or represent attempts to “game” the Allocations Model.

6.

The Applications Capping Mechanism is a fair, reasonable, non-discriminatory and non-arbitrary method for determining the requirements of Sightholders (as required by paragraph 2.4(a) of the Policy Statement).”

Various features of the applications capping mechanism are then set out, which are said to support the above description of it, and in paragraph 10 the point is made that, in any event, the question whether there has been a breach of Jayam’s contract with DTC must be considered by asking whether the applications capping mechanism was unreasonable in Jayam’s case, and not whether it is potentially capable of producing an unreasonable outcome in a hypothetical extreme circumstance. It is then pleaded that, as a matter of fact, there were no truly exceptional circumstances in the relevant ten-Sight period used for the capping mechanism in H2/2003 such as to make that mechanism unreasonable, unfair, discriminatory or arbitrary in Jayam’s case, and again particulars in support of this allegation are set out.

I emphasise that the brief description of the rival contentions which I have given is not intended as a full or comprehensive analysis of the pleadings, but is merely intended to set the scene. In the next section of this judgment I will set out the relevant parts of the SOC documentation. I will then give a description of the SOC allocations model as it has operated since its introduction in 2003. I will then set out the background facts and describe in more detail the events which led up to the introduction of SOC, including in particular the capping mechanism that was operated, and the basis upon which allocations of diamonds were actually made, in the three selling periods immediately before the introduction of SOC.

The SOC documentation was first issued in draft in January 2003, and became contractually binding on DTC and Sightholders with effect from 7 July of that year. It consisted of the Policy Statement to which I have already referred, and the following further documents published by DTC at the same time:

Of these documents, the most important for present purposes is the Policy Statement. It is prefaced by the following introduction:

“DTC believes it to be in the interests of all those participating in the diamond industry to encourage long-term growth in the retail market and the sustainable increase of rough diamond demand. These objectives can only be attained if the industry meets the requirements and expectations of consumers. This Policy Statement is intended to reflect these aims and the means by which they can be accomplished by industry participants while building on the best traditions of the industry.”

Section 1 of the Policy Statement then sets out the qualifications which must be satisfied by Sightholders. In order to be eligible to be a Sightholder, both existing and future applicants must satisfy the Sightholder Criteria and the Diamond Best Practice Principles. DTC will determine the eligibility of applicants on the basis of this material, and may compare the levels of satisfaction of the relevant criteria achieved by different applicants.

The Sightholder Criteria and Other Considerations are broken down into eight numbered criteria, and certain other considerations defined as “Sightholder Considerations”. The eight numbered criteria are as follows:

The Sightholder Considerations are not separately numbered, but for convenience I will refer to them (as the Notes do) as Considerations 1, 2, 3 and 4. They are as follows:

Note A.1 to the Sightholder Considerations is headed “Availability of Supplies”, and includes the following:

“In relation to supply decisions, DTC recognises that there will be occasions when applications for a particular type of box exceed availability. In these circumstances, the DTC will have regard to applicants’ relative level of satisfaction of the Sightholder Criteria in determining to whom those boxes should be supplied.”

Reverting now to the Policy Statement, section 2 is headed “Supply” and provides, so far as material, as follows:

“2.1

Following consultations with Sightholders (which will, where appropriate, include giving Sightholders who purchase similar boxes a reasonable opportunity to view any proposed new category or description of box), DTC will provide a list of standard boxes (each distinctively described) to Sightholders from time to time.

2.2

In each calendar year, supplies to Sightholders will be made during two six month selling periods (“Selling Periods”), from January to June and from July to December. Commencing with the first Selling Period in the first full calendar year after this Policy Statement comes into effect, the Sightholder will, when requested by DTC, inform DTC of the aggregate value and nature of goods it believes it may wish (but shall not be obliged) to purchase during the subsequent Selling Period. At the beginning of each Selling Period, DTC will provide the Sightholder with an intention to offer (an “ITO”) indicating the aggregate level and nature of goods it intends to make available for inspection by (but shall not be obliged to supply to) the Sightholder during the subsequent Selling Period.

….

2.4

Subject to current market conditions, DTC will use reasonable endeavours to meet applications for those boxes placed by Sightholders at each sight taking into account

(a)

the requirements of DTC’s other Sightholders,

(b)

the Sightholder’s level of satisfaction of the Sightholder Criteria as compared with that achieved by other Sightholders,

(c)

the Sightholder Considerations, and

(d)

the aggregate value and nature of goods requested by the Sightholder and indicated by the DTC as those it intends to make available for inspection, pursuant to paragraph 2.2 above.

…

2.8

DTC’s Conditions of Sale, as amended from time to time, apply to all sales of boxes but this Policy Statement prevails if there is any inconsistency.”

I can now refer to the remaining provisions of the Policy Statement more briefly. Sections 3 and 4 deal with boxes and pricing, section 5 with information, section 6 with marketing, section 7 with support and training, and section 8 with brokers. Section 8.1 records that brokers “have customarily performed an important role in providing independent representation to, and a comprehensive, expert and unique service for, Sightholders”, and goes on to say that, in recognition of this valuable function and the objectives set out in the introduction to the Policy Statement, DTC welcomes the continued contribution to be made by brokers in providing services to Sightholders. It is convenient at this point to note that Jayam’s broker has at all material times been a firm called I. Hennig (“Hennig”).

Section 10 of the Policy Statement is headed “Force Majeure”. Paragraph 10.4 defines a “Force Majeure Event” as meaning, in short, any circumstances beyond the reasonable control of DTC or the Sightholder, and affecting (in the case of DTC) its ability to supply boxes or (in the case of DTC and the Sightholder) their ability to perform their obligations. Paragraph 10.1 provides that if a Force Majeure Event interrupts or prevents the performance of DTC’s or the Sightholder’s obligations to each other, “such obligations will be suspended for the period of the Force Majeure Event”; and paragraph 10.2 says that as soon as reasonably practicable after the occurrence of the Force Majeure Event,

“DTC and the Sightholder will discuss how best to continue their operations so far as possible in accordance with this Policy Statement”.

Paragraph 11.1 provides that Sightholders will be appointed for an initial period of 24 calendar months, and that the appointment can be terminated with effect from the end of that 24 month period by not less than 6 months’ prior written notice on either side. If such notice is not given, the appointment will continue for consecutive 24 month periods unless and until it is terminated on 6 months’ prior notice in writing to expire at the end of the relevant 24 month period.

Paragraph 14.4 is an “entire agreement” clause, which provides that the Policy Statement and the arrangements entered into under it supersede all prior agreements, arrangements and undertakings between the parties, and that they constitute the entire agreement between them “to the exclusion of all other terms and representations whether express or implied, written or oral.”

Paragraph 15 provides that the Policy Statement, and any arrangements entered into under it, will be governed and construed exclusively in accordance with English law. The paragraph goes on to provide machinery for the resolution of disputes. One way in which disputes may be resolved is by litigation in the English courts. Another way, if the dispute falls within the scope of the terms of reference of the SOC Ombudsman, is by reference to the SOC Ombudsman. I mention this alternative because Jayam made a complaint to the Ombudsman in September 2004 alleging that DTC had followed “improper procedures” within the meaning of the Ombudsman’s terms of reference in respect of the diamonds which it decided to supply to Jayam in the first six month ITO period following the implementation of SOC (i.e. H2/2003). The nub of Jayam’s complaint on that reference to the Ombudsman was essentially the same as the complaint which is made in the present action. The Ombudsman decided the complaint in Jayam’s favour in a Final Determination dated 9 March 2005, and required DTC to reconsider the allocation. However, DTC took the view that it was unable to alter the decision with retrospective effect, and informed Jayam that all it could do was to clarify the position for the future in a way which would afford Jayam no redress. The SOC Ombudsman is a distinguished lawyer and former Attorney General of the Republic of Ireland, Mr Dermot Gleeson. His Determination is not, of course, in any way binding upon me, but Jayam understandably relies upon it as providing strong persuasive support for its case.

There is no discernible disagreement between the parties about the way in which the SOC machinery for allocating diamonds to Sightholders has operated since its introduction in 2003. At the simplest level, applications by Sightholders at the ITO stage for each supply period are scaled down by reference to various criteria, including in particular the historic purchases which the Sightholders have made from DTC in the previous ten Sights. However, the process as a whole is much more complex and sophisticated than that brief description might suggest. It depends on the detailed interaction of three basic principles which DTC likes to refer to as the “three As”, namely the application made by each Sightholder, the assessment of each Sightholder’s ranking made by refererence to the Sightholder Criteria, and DTC’s forecast availability of goods. Although the main features of the system were clearly explained by DTC to Sightholders and their brokers, both in writing and at presentations in the run up to the introduction of SOC, the relevant computer programmes have never been published by DTC and remained unknown to Jayam and its advisers until access to the relevant software was agreed pursuant to the terms of a Consent Order dated 25 July 2006 and confidentiality undertakings given thereunder.

The process is described in the first report of the expert witness instructed for Jayam, Mr Martin Hall. Mr Hall is a Fellow of the Institute of Chartered Accountants in England and Wales who specialises in the provision of forensic accounting services. He has extensive experience of acting as an accounting expert witness in major commercial disputes and litigation over the last fifteen years.

The process is also described by DTC’s principal witness of fact, Mr Howard Rhys Davies, in his first witness statement. Mr Davies has worked at DTC since 1989, and from 2001 until the end of 2005 he was the senior analyst in the sales planning department. From the original conception of SOC in 1999 he was closely involved in the formulation, design, build, implementation and administration of all of the key systems and processes that support the sales side of SOC, including in particular the SOC Model (a Java-based computer programme that is used to select Sightholders and allocate rough diamonds to them) and the Proforma Allocations Model, a constituent part of the SOC Model which implements the ITO system.

In view of Mr Davies’ close personal involvement in the design and implementation of the system, I propose (with no disrespect to Mr Hall) to base my description of it mainly on Mr Davies’ account, although I have at some points also drawn on the evidence of Mr Hall. Mr Davies says that there are sixteen steps that make up the process, whereas Mr Hall refers to fourteen steps. Nothing turns on this difference, however, which as I understand it is simply a matter of labelling. The steps that are most important for present purposes, namely steps 3, 4, 5 and 6, are given the same numbering by both Mr Hall and Mr Davies.

Before each selling period, applicants submit an ITO application in which they indicate the bands of diamonds which they wish to buy in that period. A “band” of diamonds is a group of “boxes” which produce a broadly similar polished outcome. The rough diamonds which compose each box are a homogenous mix in terms of size, shape, quality and colour. There are thirty-three bands in total, ranging from bands composed of large, fine-quality stones at one extreme to bands composed of small stones of relatively inferior quality at the other extreme. There are also a number of mixed bands, containing a selection of diamonds of differing size and quality. Applicants are free to make a note in the comments section of the application template stating which boxes they would like to receive in each band and whether they are prepared to accept a substitute for a particular box if it is unavailable. The application template also stipulates the minimum quantity that can be applied for in a particular band.

Once the applications have been received, the applicants for each band of goods are ranked in descending order according to their score under DTC’s assessment of the Sightholder Criteria. This exercise is performed separately for each band. The rankings are based on information supplied by Sightholders, initially in the Sightholder Profiles which they were required to complete before the introduction of SOC in 2003. Of the eight Sightholder Criteria, the first five (financial standing, strong market position, distribution ability, marketing ability and technical manufacturing ability) are scored on an individual basis, with the performance of each Sightholder being compared with that of the others; the last three (general business reputation, compliance with DTC best practice principles and full disclosure of synthetics etc) are scored on a simple pass or fail basis. The ranking of Jayam has at all times been relatively low, in the third quartile of Sightholders. I should add that to preserve confidentiality the names and individual ranking scores of Sightholders other than Jayam have not been disclosed, but their rankings relative to Jayam have been disclosed on a scale where Jayam is placed at zero.

I record at this stage that the relatively low ranking of Jayam is a matter on which DTC places considerable emphasis, submitting that it goes a long way towards explaining the disappointment felt by Jayam about the allocations which it has received under SOC.

Mandatory supplies are offered to cutting and polishing factories located in certain producing countries (e.g. Botswana and Namibia) under separate arrangements made with those countries. These arrangements fall outside the scope of SOC, and the mandatory supplies are removed at this stage from each relevant band of goods, thereby reducing the quantity available for other Sightholders.

The remaining applications are now capped (or, if they fall below certain levels, uplifted), by reference to the extent by which they exceed (or, as the case may be, fall short of) prescribed thresholds. For all supply periods since H1/2004, the thresholds for applicants with a history of purchasing from DTC (including Jayam) have been as follows:

It is important to note that, although it is described as a cap on applications, this step does in fact often operate by increasing a Sightholder’s application. The purpose of the step, viewed in isolation, is not merely to place an upper limit on applications, but also to introduce into the system a built-in allowance for what DTC considers to be reasonable expectations of future growth by Sightholders on an across the board basis. Thus (ignoring for the moment the smallest category) Sightholders may in effect apply in each selling period at a level which exceeds their average purchases in the last ten Sights by a factor of between 100% and 50%, depending on their size; and if, for whatever reason, they do not apply at or above this increased level, they are nevertheless treated at this stage in the process as if they had applied at the increased level. A further reason for the uplift in the case of the smallest category, that is to say applicants with average earlier purchases of less than $1 million per Sight, is that it is designed to allow small Sightholders to apply in sufficient volume to meet minimum band application thresholds. It is DTC’s experience that applications of less than $2 million per Sight run a significant risk (after subsequent scaling down) of falling below the minimum supply threshold of $0.8 million per Sight (see Step 10 below).

I would add the following observations about Step 3:

Where a band is more than 100% over-subscribed, applications for the band from Sightholders are eliminated in reverse order of ranking (i.e. the lowest ranking applicant is removed first) until the 100% over-subscribed level is reached. It is important to note that this step favours higher-ranked Sightholders at the expense of their lower-ranked competitors, and that a Sightholder whose application for a band is eliminated at this stage will receive nothing from the band in question. This in turn will reduce the Sightholder’s success rate for the selling period, and will pro tanto reduce the Sightholder’s purchases from DTC that are in due course taken into account under Step 3 for the next selling period. Conversely, a Sightholder which applies for a relatively unpopular band (including in particular the lower-grade bands) is most unlikely to be eliminated at this stage, and its success rate should be correspondingly higher. However, it is fair to say that these effects are more pronounced in theory than in practice, because experience has shown that only very few Sightholders are in fact eliminated from bands at this stage.

All remaining applications for a band are now reduced on a simple pro rata basis until they match the quantity that DTC has determined as the sales target for that band. This is the crucial stage which ensures that demand (as modified by the foregoing steps) will not exceed supply.

At this stage multipliers are applied which have the effect of benefiting, to a fairly modest extent, higher-ranked applicants for a band at the expense of lower-ranked applicants. From H2/2003 until H1/2005, the multipliers were as follows (based on the quartile allocation value in each band):

These steps check that DTC has not over-allocated to any individual applicant, either by reference to their original applications or within the different bands.

There is a minimum threshold for supplies from a band, which is communicated to applicants in advance on the ITO application form. At this step, any working allocation to a Sightholder which falls below the threshold is removed, and re-allocated to the remaining Sightholders pro rata. The purpose of this step is to ensure that supplies are made at the level which DTC regards as economically efficient, and to discourage Sightholders from making unfocussed or “scattergun” applications across a wide range of different bands. As at Step 4 above, a Sightholder whose allocation is removed at this stage will receive nothing from the band in question and its success level (and future purchase history) will suffer accordingly.

The minimum overall supply threshold ensures that applicants are allocated a total of at least $0.8 million per Sight (or $4 million per ITO for a supply period of five Sights). As at Step 9, any Sightholder whose overall working allocation is below this level is removed and its allocation is redistributed among the other applicants in the relevant bands.

Steps 11 and 12 reflect requirements imposed on DTC by the South African government under Section 59 of the Diamond Act 1986. Under this legislation, to the extent that any portion of De Beers’ production of rough diamonds is suitable for cutting in South Africa and is exported from South Africa for valuation and aggregation by DTC in London, an equivalent value of locally cuttable goods must be imported into South Africa by DTC for the local cutting industry to use. If the aggregate working allocation to the South African Sightholders is below this value, it is automatically increased at this stage by re-distributing allocations away from the non-South African Sightholders. Further adjustments ensure that any re-distribution at this stage from a non-South African Sightholder does not lead to the Sightholder in question suffering a reduction of more than $10 million overall in comparison with its previous ITO level.

At these stages the checking process is repeated, with as many iterations as are necessary, in order to ensure that any adjustments made at Steps 9 to 12 are taken into account and a stable outcome is achieved.

Finally, the non-SOC supplies which were taken out at Step 2 are added back into the overall allocations.

The ITO allocations are communicated to Sightholders, and subject to what I say in the next paragraph about ex-plan sales they form the basis of the allocations that are made to Sightholders at the five Sights in the ensuing selling period. A Sightholder will not normally be able to gain any advantage by applying for goods at a Sight in excess of its ITO allocation, because in practice (and subject to ex-plan sales) its application will be automatically scaled down to the ITO level.

Ex-plan sales arise in this way. As Mr Davies explains in paragraph 14.1 of his first witness statement:

“When planning an ITO, the overall value of the ITO is slightly below DTC’s sales target for that selling period. This is because the band sales targets that are set within the ITO are based on forecast availabilities rather than goods that are actually on hand for sale. Normally, the majority of goods that will be sold in fulfilling an ITO will not even have been extracted from the mines when the ITO planning process takes place. Despite the sophistication of the DTC’s forecasting mechanisms, a safety margin of typically 6-7% is built into the ITO sales targets to allow for forecasting fluctuations in case of unexpected supply challenges at the mining level. The remainder of DTC’s overall sales target is fulfilled by goods that are sold in addition to the ITO sales plans. These additional sales are called “ex-plan” because they fall outside the ITO plan. This category of goods feeds into the supply that is available to Sightholders on a Sight by Sight basis and is allocated for offer to Sightholders automatically by the same system that calculates the Sight allocations that fulfil Sightholders’ ITO sales plans.”

Mr Davies goes on to say that clients who are already receiving these goods as part of their ITOs will be given priority in the allocation of ex-plan goods, and any available ex-plan supply will be divided between them pro rata to their ITO sales bands, provided that they have applied for additional supply. Only when these applications have been satisfied, and only if more ex-plan goods still remain, will other Sightholders requesting them be offered a sale, according to their assessment ranking.

I will now set out the background facts, as I find them to be, concentrating in particular on the period leading up to the introduction of SOC when various prototypes of the fully-developed SOC applications capping mechanism which I have just described were being tested by DTC. The critical questions on which I will need to focus in due course are (a) whether the introduction and operation of the capping system by DTC from H2/2003 onwards involved any breach of DTC’s contractual obligations under paragraph 2.4 of the Policy Statement, that being the only breach of contract which is alleged, and if so, (b) whether such breach has caused Jayam to enter and become locked into the SOC model at too low a level (by which I mean a level lower than would have applied if DTC had not been in breach of its obligations under paragraph 2.4).

The witnesses of fact from whom I heard oral evidence were Mr Mehta for Jayam and Mr Davies for DTC. I am satisfied that they both gave their evidence truthfully and did their best to assist the Court. In addition, a further witness statement for DTC was provided by Mr Alan Campbell who is currently director of pricing and supply chain management at DTC, and was previously head of the sales planning department from 2001 until 2004. During Mr Campbell’s time as head of the sales planning department, Mr Davies reported directly to him. Mr Campbell’s evidence proved to be uncontroversial, and he was not cross-examined on it.

The Mehta Family Diamond Business

The history and growth of the family diamond business are described in detail by Mr Mehta in his first witness statement. I will not do more than summarise the main stages, which were as follows.

The founder of the business was Mr Mehta’s grandfather, Mohanial Mehta, who around 1900 started a business to serve the needs of the local jewellery trade in Bombay. The name of the business was Mohanial Raichand & Sons (“Mohanial Raichand”). Mohanial Mehta had two sons, who both joined the business. The younger son, Mafatial, was Mr Mehta’s father. He joined the business in about 1932.

Mohanial Raichand successfully developed connections in South Africa and Antwerp. After the Second World War DTC, or the Central Selling Organisation as it was then known, was looking for new clients because its traditional client base had been severely affected by the War. In 1948 Mohanial Raichand became a DTC Sightholder. It laid the roots of the modern Indian polishing industry by employing Flemish polishing experts from Antwerp to teach local craftsmen in India. Mohanial Raichand’s case to become a Sightholder was put forward on their behalf by Hennig, who were then, as they are now, diamond brokers based in London.

In 1960 Mr Mehta’s parents left India and moved to Antwerp. At this time Mr Mehta was attending college in Bombay. However, he now left college and joined the family business. Jayam was incorporated in 1960 and was one of the first Indian companies to open its doors in Antwerp. Jayam was originally a buyer of rough diamonds for the fledgling Indian diamond manufacturing industry. It also traded in both Belgian and Indian polished diamonds. Unlike Mohanial Raichand, Jayam originally had no contact with DTC and simply purchased rough diamonds from companies in Antwerp for export to India.

To assist in the development of the family business, and to take advantage of opportunities in India, a company called Samir Diamonds was established in Bombay in 1962. It was run by two of Mr Mehta’s brothers and became part of the family business.

In the following years Jayam experienced what Mr Mehta terms “phenomenal growth”. It became the biggest diamond company in Antwerp, and in 1974 Jayam became a DTC Sightholder. Initially the quantities of diamonds that Jayam purchased direct from DTC were relatively small, but De Beers continued to supply Jayam with large quantities of diamonds through Diamdel, a De Beers subsidiary that provides rough diamonds to the secondary market.

In 1975 Mr Mehta’s brother opened a New York office of the family business, which soon became the largest seller of Indian polished diamonds in the US market. In the late 1970s, following discussions with DTC and Hennig, Jayam decided to diversify into the polishing of better quality diamonds. Before this date Jayam had not itself been involved in polishing diamonds but had simply exported rough diamonds. In 1978, however, Jayam opened a modern factory in the Kempen district of Antwerp which is the traditional heartland of diamond polishing. The factory flourished, and Mr Mehta says that it was regarded as a show-piece by DTC.

In the early 1980s the diamond industry went through a difficult time, but the Indian industry continued to do reasonably well because it specialised in lower priced diamonds. Jayam therefore managed to survive because of its prominence in this area. In 1982 Jayam was offered an opportunity by DTC to take a large position in small sawn diamonds known in the industry as “melee”. It was explained by DTC to Mr Mehta that whichever Sightholder took a position in DTC’s sawn diamonds would be greatly assisting DTC. Mr Mehta agreed to do so, and since that date Jayam has had a reputation both for dealing in and for manufacturing melee diamonds. In 1985 the world wide diamond industry began to recover, and DTC continued to supply Jayam with large quantities of profitable goods as the market improved. Jayam established itself as one of the three largest Sightholders, and for the space of a few years Jayam was in fact DTC’s largest Sightholder. Between 1986 and 1989 the Jayam Group’s purchases from DTC exceeded $200 million per annum, reaching a peak of $280 million in 1988.

The next major development came in 1988, when Jayam closed its factory in Kempen and set up a diamond polishing factory in Thailand. The Kempen factory had proved too small to deal with all of the goods that Jayam was receiving, and it had become increasingly costly to manufacture small diamonds in Belgium. Since 1988 the factory in Thailand has been at the heart of Jayam’s operations and it currently employs over one thousand workers.

Between 1988 and 1991 Jayam continued to be profitable, although its purchases from DTC began to decline from the peak reached in 1988 and in 1992 were down to a figure of $124 million. After 1991 DTC raised its prices, and Jayam began to encounter difficulties. However, Jayam continued until 1996 to purchase in excess of $100 million of diamonds from DTC in each year, and according to Mr Mehta Jayam’s relationship with DTC “continued to be generally strong throughout the 1990s”. Moreover production at the factory in Thailand was increased throughout the 1990s, following training of the work force and the transfer of work from Antwerp.

In early 1997 Mr Mehta’s wife unfortunately fell ill, and Mr Mehta was severely distracted from work because of her illness. He had to spend an increasing amount of time caring for her, and in 1998 she had to go into hospital. This resulted in a sharp downturn in Jayam’s business and in those two years Jayam’s purchases from DTC fell to unprecedentedly low levels of $79 million and $34 million respectively. DTC was sympathetic to Jayam’s position, and understood why Jayam was applying for fewer diamonds during this difficult period. In 1998 the Chairman of De Beers, Mr Nicky Oppenheimer, assured Mr Mehta at a wedding which they were both attending in Bombay that Jayam would receive considerably increased allocations to assist it in rebuilding the business. By this stage Mr Mehta’s wife was happily beginning to recover from her illness. On his return to Antwerp Mr Mehta had a meeting with De Beers’ then Managing Director, Mr Gary Ralfe, at which it was again agreed that DTC would support Jayam in rebuilding its business and would provide it with increased allocations of profitable goods.

Jayam’s business therefore began to pick up again quite quickly in 1999, with the DTC purchases in that year increasing from the previous year’s low of $34 million to $72 million. However, Jayam did not receive all of the diamonds that it applied for, and Mr Mehta expressed his dissatisfaction on various occasions.

In 2000 Jayam increased its purchases from DTC to $80 million, which was approximately the same level as in 1997, the first year of Mrs Mehta’s illness. As in the previous year, however, Jayam had applied for more diamonds than it was allocated. Its applications in 2000 totalled nearly $132 million. Mr Mehta again expressed his dissatisfaction to DTC on various occasions.

On 12 July 2000 a presentation was given to Sightholders and brokers in London at which DTC announced for the first time its plans to formalise the sale of diamonds under SOC. On 13 July 2000 a letter was sent by DTC to Jayam and other Sightholders saying that SOC

“is designed to encourage long term growth in the retail market and the sustainable increase of rough diamond demand. A pivotal part of this initiative is the continued development of our business relationships with our Sightholders, with the aim of growing consumer demand. ”

Enclosed with the letter were first drafts of much of the documentation which was eventually to be introduced with contractual force three years later in July 2003, including a policy statement, revised conditions of sale, Sightholder criteria and considerations, and a statement of DTC diamond best practice principles. It was envisaged at this stage that the existing supply arrangements would come to an end in July 2001, or in other words that the new system would apply from H2/2001 onwards. However, this timetable had to be put back because of the reference by DTC of the arrangements to the European Commission and the Commission’s ensuing investigation, which as I have already said was not concluded until the issue of the comfort letter in January 2003.

In September 2000, Jayam submitted an initial Sightholder profile to DTC, providing detailed information on the various Sightholder criteria. In the same month the Jayam Group gave a presentation to DTC, which according to Mr Mehta went well until DTC’s then Sales Director, Mr Nigel Wisden, expressed the view that the Jayam Group was fragmented. Mr Mehta regarded this comment as untrue, but after the meeting Jayam’s business with DTC declined further and in 2001 Jayam’s purchases from DTC dropped by 37% to only $50 million.

The Years Leading up to the Introduction of SOC: 2001 – 2003

The large drop in Jayam’s allocations in 2001 to which I have drawn attention is in my judgment mainly attributable to a number of factors which Mr Davies refers to in his evidence.

First, Jayam’s actual applications for goods in 2001 ($110 million) were significantly lower than its applications in 2000 ($132 million), which is in itself a reduction of about 17%.

Secondly, general market conditions in the diamond industry were depressed in 2001, due to factors such as the “millennium effect” (i.e. over-stocking in 1999 and 2000 in anticipation of the millennium celebrations) and (in the second half of the year) the terrorist attacks of September 2001. This depression was reflected in DTC’s own sales, which were some 21.4% lower in 2001 than they had been in 2000.

Thirdly, Jayam’s allocations in 1999 and 2000 had been inflated by a one-off selling down of DTC’s stocks of sawn and small sawable diamonds, leading to a temporary glut of availability of diamonds in those categories of which Jayam was well placed to take advantage as its Bangkok factory specialised in the polishing of such stones. Jayam therefore received unusually high allocations of these diamonds in 1999 and 2000. In 2001 the selling off of the stock was still in progress, but was well past its peak as the figures in paragraph 4.16 of Mr Davies’ second witness statement demonstrate.

Finally, in a market where demand habitually exceeded supply, and at a time when DTC based its allocation decisions on its own assessment of commercial considerations, Sightholders were inevitably at the mercy of DTC for what they actually received. The pre-SOC system of supply was inherently opaque and discretionary in its operation. However, these factors could of course work in favour of Sightholders as well as against them, and Mr Davies’ evidence gives examples of instances in 1999 and 2000 where DTC took active steps to assist Jayam’s business, for example by phasing deliveries so that they were built up by monthly increments, by making generous supplementary allocations of highly profitable rough diamonds, and by providing bespoke assortments of sawn diamonds known as “Madhu mixes”. No doubt DTC, like any commercial organisation, was acting in what it perceived to be its own best interests when it took these steps; but the fact remains that they provided assistance to Jayam in rebuilding its business at a difficult time, and they also go some way to explain the sharp down turn in Jayam’s allocations in 2001.

In October 2001 Sightholders were asked for the first time to submit proforma applications for the supply period H1/2002. For its part, DTC determined a sales target for that period, based on forecast availability and anticipated global demand, and also determined a minimum box size for each box (at this date allocations were made by box, and not by band). The sales target fixed by DTC was $400 million per Sight, but the applications from Sightholders amounted to no less than $1044 million per Sight. In part this over- subscription (by a factor of nearly 2½ to 1) reflected an unexpected upturn in the market, but to a considerable extent it also reflected tactical over-application, even though DTC had been at pains to explain to Sightholders that their proforma applications should reflect their genuine core requirements for the period and should not be inflated. This problem of over-application, or “gaming”, was discussed by Mr Davies in a “log of outstanding issues” as at 6^th November 2001 which he wrote, and again in a position paper containing proposals for further discussion which he prepared in about April or May of 2002.

In the former of these documents Mr Davies identified the main problems posed by over-applications as being:

In order to address these problems Mr Davies explored some possible solutions, and came up with a prototype capping mechanism which established a broad bracket, based on a target figure for each Sightholder, within which applications would not be capped. The target was calculated on a sliding scale for small, medium and large Sightholders and was based on the higher of:

It is important to stress that this pro forma mechanism was purely internal to DTC, and Sightholders knew nothing about it. It is also important to note, although the significance of this point only fully emerged in Mr Davies’ third witness statement served after the trial had begun on 25 January 2007, that the outcome of the model did not in any event determine the allocations that were actually made to Sightholders at the five Sights in H1/2002. These were still determined, as they had been in earlier selling periods, by the key account managers and DTC’s sales director in accordance with commercial considerations. As Mr Davies said:

“The pro forma sales plans produced by the prototype model were reviewed by the [Key Account Managers] as indicative of the modelling approach under consideration at that time, and they were at liberty to take this information into account along with other commercial considerations. In the event, however, the pro forma sales plans produced by the prototype model bore little meaningful relationship to the commercial decisions that were eventually made.”

As I have already said, Jayam applied at the pro forma stage for $8.3 million per Sight. Its actual applications over the five Sights of H1/2002 then totalled $45.15 million, or an average of $9.03 million per Sight. Jayam’s actual purchases at the five Sights totalled a little over $28 million, a success rate of 62%. This compared favourably with Jayam’s success rates of 39.1% and 50.7% in the two immediately preceding selling periods. However, Jayam was very disappointed by the allocations which it received, and told DTC on a number of occasions that the allocations did not meet its requirements or those of its customers.

For H2/2002 it was no longer possible to use the same target criteria as in H1/2002 because the European Commission required DTC to stop obtaining information from Sightholders about their purchases from sources other than DTC. Accordingly applications could no longer be capped by reference to Sightholders’ total purchases from all sources. Mr Davies therefore revised the prototype capping mechanism so that it operated by reference to previous purchases from DTC only.

One might have expected that the period of previous DTC purchases used for this period would have been the previous ten Sights, as in H1/2002, but in fact the decision was taken to use only the first four Sights of 2002. In his third witness statement Mr Davies explains this decision in the following way:

“In summary, the decision to base the capping threshold for H2/2002 on the first four Sights of 2002 was taken in light of exceptional market conditions at the time. Aggregate applications from all Sightholders in H2/2002 were $1.352 million per Sight (greatly in excess of applications of $1.044 million for H1/2002) whereas availability in this period was $412 million per Sight. The prototype model had to be refined in order to cope with the considerable excess of applications over availability. Using the first four Sights of 2002 as a reference period for capping applications enabled the prototype model to operate on the basis of a more manageable set of applications data and ensured consistency of supply from H1/2002 to H2/2002.”

DTC’s forecast sales target for H2/2002 was 25% lower than the average sales in Sights 1 to 4 of 2002, so the further decision was taken by DTC to assume that the average Sightholder would buy 25% less from DTC at each Sight in H2/2002 than it had done in Sights 1 to 4 of that year. The way in which the model then operated was explained by Mr Davies in his oral evidence by reference to a series of spreadsheets. To summarise a complex process, applications were first of all scaled down to a level commensurate with the average of purchases in Sights 1 to 4 of 2002. This was done for all Sightholders alike, with no differentiation between large, medium and small Sightholders. The output at this stage was then adjusted or “smoothed” through a series of iterations until it approximated to the assumed level of reasonable Sightholder expectations, i.e. a figure 25% below the H1/2002 average. By this Procrustean method a final outcome was achieved which both ensured a broad consistency with the historic level of Sightholder purchases in the first four Sights of 2000 and which also implemented an across the board 25% reduction in supply by DTC. Even this, however, was not the end of the matter, because Mr Davies was at pains to emphasise that the final decisions on allocation were again taken by the key account managers in accordance with their assessment of commercial criteria. Mr Davies described the pro forma sales plans produced by the prototype model in H2/2002 as “non-binding templates for internal guidance only”.

A further major development in H2/2002 was the introduction for the first time of the ITO system. The ITO system was explained to Sightholders in a background note circulated in May 2002. From its inception it has operated in essentially the same way, with non-binding applications and allocations being made in advance of each selling period. In H2/2002 Jayam applied at the ITO stage for $55.5 million, and received an ITO allocation of $22.25 million following the operation of the capping system which I have described above. Jayam then applied at the five Sights in H2/2002 for goods to the value of $33.875 million and received actual allocations of $22.736 million, i.e. only some $0.5 million more than its ITO allocation. This represented a success rate of only 41.4% in comparison with the initial ITO application, the lowest rate that Jayam has ever recorded. I observe, however, that it is hardly surprising that Jayam’s success rate in H2/2002 was significantly lower than in H1/2002, given DTC’s decisions to reduce supply by 25% and to use the first four Sights of 2002 as the capping yardstick for H2/2002.

Jayam was understandably upset at the low level of allocations which it received in this period, and all the more so because it had expanded its factory in Bangkok to increase its sawing capacity, doubling the number of diamond polishers employed there from 550 to 1,050 and installing specialist machinery imported from Antwerp. DTC was aware of this expansion, because Mr Mehta had written to Mr Gareth Penny of DTC on 7 December 2001 informing him that the rebuilding would take about three months, and that Jayam’s supply requirements from DTC would increase gradually during Sights 1 to 3 of 2002 and should then be at a maximum level by Sight 4. A further memorandum from Jayam’s brokers to DTC in May 2002 gave details of the expansion and informed DTC that Jayam’s production would increase at least 40% by the end of September 2002. However, DTC made it clear to Jayam on a number of occasions that it could not expect any increase of supply from DTC merely because it had decided on its own initiative to expand the factory: see the internal file note of Jayam’s key account manager, Mr Ricky Ng, dated 23^rd May 2002 at page 238 of bundle F2.

As in earlier periods, Mr Mehta and his agents made Jayam’s dissatisfaction with the level of supplies known to DTC at regular intervals. Sometimes these complaints bore fruit, as even Mr Mehta was constrained to concede in cross- examination, but in general it is fair to say that Jayam felt frustrated and disappointed by what it considered to be DTC’s unreasonable refusal to increase its supplies to an acceptable level. A recurring burden of Mr Mehta’s oral evidence was that DTC was not treating Jayam with the consideration that its loyalty and long-term purchase record required. As he said at one point towards the end of his cross-examination (Transcript, Day 4, page 40):

“I have a rightful place in the history of diamonds since 1980 and I see no reason why that place was either curbed down or relegated.”

And more than once he said simply, “Where have my diamonds gone?” However, I should add that Mr Mehta also disclaimed any right to special treatment, saying (Transcript, Day 4, page 42):

“I believe only in my merit, in my performance, in my infrastructure.”

For H1/2003 the prototype model was further refined, and bore a much closer resemblance to the contractual SOC model adopted from H2/2003 onwards. For the first time applications and allocations in this selling period were made by reference to bands rather than boxes, because experience had shown that applications by boxes were inefficient to process and gave rise to a huge surplus of demand over supply for the most popular boxes. Sightholders now had to apply for particular bands, but could indicate preferences for particular boxes within the bands on the understanding that if DTC was unable to offer them their first choice they would be offered the closest available alternatives. The capping threshold was set by reference to allocations in the ten Sights of 2002, and as in H1/2002 there was a range of tolerance above and below the threshold within which applications would not be capped. Mr Davies confirmed in his oral evidence, and by subsequent reference to his records, that the range of tolerance was the same as it had been in H1/2002. In Jayam’s case application was made at the ITO stage for $9.95 million per Sight. Jayam’s target threshold was $8.58 million per Sight, and as the application exceeded the threshold by only 16% it was left uncapped. Thus in this period, as in H1/2002, the prototype capping mechanism had no effect at all on Jayam’s application. Furthermore, as in H1/2002 and H2/2002 Mr Davies emphasised that the final allocations made were ultimately governed by commercial considerations, and the input of the model was advisory only. His evidence was that in the event 25 Sightholders ended up with allocations more than 10% away from the pro forma model output.

Jayam itself made an original application of $49.75 million and received an ITO allocation of $25.75 million, or $5.15 million per Sight. It then made Sight applications of $43.75 million, and in the event received Sight allocations of $28.36 million, and made actual purchases (including ex-plan) of $29.104 million, which represented a success rate by reference to its original ITO application of 58.5%.

There is a minor mystery about one aspect of Jayam’s application for this selling period. There is no doubt that Jayam’s original ITO application was for $9.95 million per Sight, and that this is the figure which was processed by the prototype model. However, there is an undated document in the bundles (Volume G, File 4, page 285) which appears to be an amended application for H1/2003 prepared by Hennig increasing Jayam’s ITO application to $10.9 million per Sight and also applying in eight bands rather than four. Mr Davies has no recollection of receiving this document, and DTC has no record of Jayam having amended its application. Furthermore, at a presentation given by Jayam at Jayam’s end of year meeting with DTC executives held on 12November 2002, one week after the expiry of the deadline for ITO applications, reference was made to Jayam having made an ITO application for $9.95 million per Sight for H1/2003. In my judgment the likeliest explanation is that Jayam’s ITO application for this period was indeed for $9.95 million per Sight, and it was not amended at the ITO stage. The undated document no doubt reflects internal discussions which took place between Jayam and Hennig, but I find that it was not transmitted to DTC before the deadline for receipt of ITO applications. In any event, even if it had been transmitted before the deadline, and even if it should have been taken into account by DTC, Mr Davies has calculated that Jayam would in fact have ended up worse off, mainly because the prototype model would have resulted in Jayam failing to secure any supply at all in the four extra bands applied for. Mr Davies’ conclusion is that the overall result would have been an ITO allocation for Jayam of only $4.56 million per Sight, instead of the $5.15 million which it actually achieved.

H2/2003 was the selling period in which SOC began. Sightholders knew nothing about any capping mechanism until March 2003, when a presentation was made by DTC explaining the principles of SOC; and even then Sightholders were not informed that a prototype capping process had already been used for three selling periods. Under SOC, as I have already explained, capping was based on purchases over the last ten Sights, which for H2/2003 meant Sights 5 to 10 of 2002 and Sights 1 to 4 of 2003. Those Sights therefore included H2/2002, in which the cap had been based on purchases in the first four Sights in H1/2002.

When Jayam completed its application form for H2/2003 it was aware that it would be restricted by a cap on applications and therefore only applied for $7.75 million per Sight. At the beginning of June 2003, Jayam was informed that its ITO was $26.15 million, or $5.23 million per Sight. Jayam then made Sight applications totalling $44.529 million, and received Sight allocations of $26.649 million. Its actual purchases for the period were $26.142 million, which represented a success rate of 58.7%.

I have already described the general nature of Jayam’s case on liability in the introductory section of this judgment. DTC is alleged to have breached paragraph 2.4 of the Policy Statement, by failing to use reasonable endeavours to meet Jayam’s applications at each Sight since the introduction of SOC taking into account the four criteria specified in paragraph 2.4. DTC is not alleged to be in breach of any other contractual provisions in the voluminous SOC documentation.

Jayam’s Particulars of Breach served on 25 January 2007 make it clear that Jayam’s basic complaint is that DTC has breached paragraph 2.4 by taking into account a further criterion not contained in paragraph 2.4, namely the application capping mechanism. This contention, on analysis, involves two propositions:

The first of these propositions is accepted by DTC, as DTC’s counsel (Mr Christopher Carr QC) expressly confirmed in answer to a question from myself during his final submissions. The second proposition, however, is in issue and the case turns on its resolution.

The way in which Jayam seeks to make good the second proposition is not by positively identifying one or more criteria which are inherent in the application capping mechanism and which fall outside the scope of the four specified criteria, but rather by pointing to various features of the application capping mechanism and submitting that in the light of those features the mechanism cannot be a proper application of one or more of the four specified criteria. In other words, the approach is negative rather than positive, and amounts to saying that the characteristics of the application capping mechanism are such that on no view can it form part of a reasonable method of meeting applications in a way that takes account of the four specified criteria and no others.

The advantage of this approach, from Jayam’s point of view, is that it absolves Jayam from the necessity of identifying specific criteria which fall outside the scope of the permitted four, and of explaining precisely why they do so. The disadvantage, however, is that it leaves it unclear precisely what Jayam is complaining of, beyond a general allegation that the overall structure and effect of the application capping mechanism are such that it must go outside the boundaries of the four specified criteria.

The characteristics of the application capping mechanism which, taken together, are said to demonstrate that it does go beyond the proper boundaries of paragraph 2.4 are identified in paragraph 4 of the Particulars of Breach. I will not quote them verbatim, but they are in substance as follows:

Paragraph 6 of the Particulars of Breach goes on to allege that “in the above circumstances” the application capping mechanism is not a method or mechanism to take into account the second, third or fourth of the specified criteria, because “it is not based in any way” on “the goods requested by the Sightholder”, on the Sightholder Considerations or on the Sightholder Criteria.

Paragraph 7 of the Particulars of Breach then focuses on the first of the specified criteria, namely the requirements of DTC’s other Sightholders, and alleges that the application capping mechanism also fails to take that criterion into account. Even if (which is not admitted) it is the aim of the application capping mechanism to ascertain genuine, i.e. non-gamed, requirements, Jayam says that “it is not a fair, reasonable, non-discriminatory or non-arbitrary method to achieve that aim”, and particulars broadly similar to those in Paragraph 4 are pleaded to support the allegation that the application capping mechanism is unreasonable, unfair, discriminatory and arbitrary in its operation.

Here again there are in my judgment at least two separate propositions wrapped up together, including the propositions:

Finally, paragraph 7 of the Particulars of Breach alleges that DTC has “refused and/or failed” to meet the applications of Jayam and other Sightholders by applying only the four specified criteria, and has instead “met all such applications based on the additional criterion contained in the application capping mechanism”. No attempt is made, however, to spell out what this “additional criterion” might be, and the particulars under the paragraph are largely confined to explaining how the application capping mechanism does in fact have the effect of limiting allocations to Sightholders.

It can be seen from this analysis of the Particulars of Breach that the foundation of Jayam’s pleaded case on liability is that DTC’s use of the application capping mechanism necessarily involves a breach of paragraph 2.4, because it goes outside the proper scope of the four specified criteria and instead applies one or more additional and unspecified criteria. I now turn to consider whether or not this allegation is well-founded.

I begin with some observations on the wording and context of paragraph 2.4 of the Policy Statement. The obligation on DTC is only to use “reasonable endeavours”. This is a relatively low hurdle, in the sense that no particular outcome for Sightholders is warranted and no particular methodology is prescribed. Provided that DTC makes reasonable efforts to meet applications in a way that takes account of, and does not go outside the scope of, the four specified criteria, it will not be in breach of its obligation. Subject to these relatively wide constraints, DTC has complete discretion as to the method of meeting applications which it chooses to adopt, and Sightholders are not entitled to complain merely because they think that a different or better system might have been chosen. I would add that the degree of latitude given to DTC is hardly surprising, bearing in mind that the new SOC system was being put forward by DTC, and that it replaced a previous system where allocations were made at DTC’s discretion based on their assessment of commercial considerations.

It is also relevant that paragraph 2.4 is contained in a document headed “Policy Statement”, which begins with a statement of the objectives which it is intended to reflect. Those objectives are “to encourage long-term growth in the retail market and the sustainable increase of rough diamond demand”. The introduction to the Policy Statement goes on to say that “These objectives can only be attained if the industry meets the requirements and expectations of consumers”. Thus there is a clear statement of the purpose which the Policy Statement is intended to promote, and the detailed provisions which follow should if possible be construed in a way gives effect to that purpose. The focus of the stated purpose is on the future rather than the past, and on the long-term encouragement of consumer-led demand in the retail market.

The next point I would make is that demand for rough diamonds by Sightholders normally exceeded supply, and sometimes did so by very large margins (as in H1/2002 and H2/2002). It was therefore impossible for DTC to meet the majority of applications in full, and some machinery for matching supply and demand had to be found. One way of doing this is by placing a cap on applications. There is no express reference to the capping of applications in paragraph 2.4 of the Policy Statement, and at an early stage in this litigation it appeared that Jayam was contending (as it had before the Ombudsman) that any application capping mechanism would automatically involve a breach of paragraph 2.4. However, Jayam subsequently resiled from this extreme position, and in his written and oral submissions to me leading counsel for Jayam, Mr Charles Hollander QC, made it clear that Jayam’s objection was no longer to the existence or application of any cap at all, but only to the particular cap that DTC has chosen to adopt. This concession was in my judgment clearly correct, because in a situation where demand exceeds supply it must at the very lowest be reasonable for DTC to take account of specified criteria (a) and (d) by imposing an application capping mechanism. The fact that there is no express reference to such a mechanism in paragraph 2.4 is immaterial, given the latitude which it affords to DTC on how best to meet applications.

Can it then be said that the application capping mechanism actually employed by DTC from H2/2003 onwards breaches the requirements of paragraph 2.4? Leaving aside for the moment the question of the initial entry level into the system, i.e. the level at which the initial cap was imposed in H2/2003, I consider that this question must be answered in the negative. In my judgment the application capping mechanism (which forms part of the full sixteen-stage process described by Mr Davies and set out earlier in this judgment) is in principle a perfectly reasonable method of matching supply with demand for DTC to have adopted. My reasons for reaching this conclusion are as follows.

First, the use of a capping threshold based on historic allocations in the previous ten Sights, plus an uplift of between 50% and 100% (and more for the smallest applicants) to allow for growth, cannot in my view be stigmatised as inherently unreasonable or unfair. Special circumstances aside, a period of one year should in principle be long enough to allow for seasonal variations in requirements and allocations, while a period of more than one year would run the risk of focusing too much on past performance rather than providing a reliable indicator of the potential for future growth which the system was designed to encourage. The automatic uplift to allow for growth reflects the fact that businesses are not static and a Sightholder’s genuine requirements may well be significantly higher in the next selling period than they were in the preceding year. The limit on the uplift for growth is in turn a reasonable response to the problems of gaming and artificially inflated applications.

Secondly, at steps four and six in the process preference is given to higher-ranked applicants over lower-ranked ones, the rankings themselves being determined by reference to DTC’s assessment of applicants’ scores against the Sightholder Criteria. Again, this feature of the system is in my judgment unexceptionable, because the Sightholder Criteria and the rankings are clearly intended to promote and reward the qualities that DTC considers most likely to achieve the objective of long-term consumer growth. The extent to which the incentives at steps four and six actually translate in practice into enhanced allocations for higher-ranked Sightholders is far from clear, because neither of the expert witnesses (Mr Hall for Jayam, and Mr Jonathan Phillips of PriceWaterhouse Coopers for DTC) was able to discern any significant correlation between ranking and allocations. However, common sense suggests that, all other things being equal, higher-ranked applicants will do better than those at the lower end of the spectrum because of the incentives at steps four and six. There is certainly nothing to indicate that the incentives in fact have the opposite effect to what was intended and positively disadvantage higher-ranked applicants. The lack of correlation found by the experts is, I think, rather a reflection of the fact that a large number of different and inter-related factors are capable of influencing the final outcome of the application capping mechanism, and it is difficult, if not impossible, to isolate the effect of any one of them.

Thirdly, there is no suggestion, and still less any evidence to establish, that the application capping mechanism operates in a way which is irrational or unfair or arbitrary or in breach of anti-discrimination law as between different Sightholders, provided always that their initial entry into the system was at the “right” level. Nor can it be said, in my judgment, that Sightholders who do enter at the “right” level are then locked into the system without any reasonable opportunity of improving their level of purchases. The SOC system has a good deal of flexibility built into it and offers opportunities to Sightholders to improve their success rate by, for example, the automatic uplifts for growth, the incentives at steps four and six for those with higher rankings, and the freedom for Sightholders to apply for bands of their choice (with the chances of success obviously being higher in the less popular bands). The evidence shows, as one would expect, that the individual rankings and allocations of Sightholders have gone both up and down to a significant extent during the three and a half years that SOC has been in operation.

One criticism of the system which does at first sight appear to have some force is that no allowance is made for exceptional circumstances which may have temporarily reduced a Sightholder’s requirements in the preceding year to a level unrepresentative of its underlying business. For example, fire or flood may interrupt production at a key factory, or industrial action or government interference may have an adverse effect on the business. However, this problem is to some extent dealt with by the force majeure provisions in the Policy Statement. It will be recalled that paragraph 10.1 provides that if a force majeure event interrupts or prevents the performance of either DTC’s or the Sightholder’s obligations to the other, the obligations will be suspended for the period of the force majeure event. That provision only applies at a stage when the parties have obligations to each other, and there may therefore be little scope for its operation at the ITO stage when the application capping mechanism is employed. However, paragraph 10.2 is not subject to any such limitation. It provides that as soon as reasonably practicable after the occurrence of the force majeure event, DTC and the Sightholder “will discuss how best to continue their operations so far as possible in accordance with [the] Policy Statement”. “Force majeure event” is widely defined in paragraph 10.4 as meaning, in short, any circumstances beyond the reasonable control of DTC or the Sightholder.

In any event, the problem of exceptional circumstances is for present purposes academic, because no case based upon them is advanced by Jayam. It did appear at one stage that Jayam might be going to contend that the expansion of the Bangkok factory in 2002 led to a temporary disruption of existing production levels, and thus to applications being made by Jayam at unrepresentatively low levels H1/2002. However, in cross examination Mr Mehta candidly accepted that this was not the case, and the expansion of the factory had not led to any reduction in Jayam’s applications to DTC. As he said, he was expanding the factory, not closing it.

For completeness, I should also mention that Mr Davies gave evidence in his third witness statement about the steps taken by DTC in August 2006 in response to the serious flooding which took place at Surat in India when over 300 people lost their lives and the flood waters caused considerable damage to many low-lying manufacturing facilities. A number of Sightholders were affected, and DTC was concerned that they would be unable to take up their full ITO allocations in August and September 2006. Accordingly DTC offered the affected Sightholders the opportunity to reconfigure their ITO delivery schedules, so that they could receive reduced supply in August and September and increased supplies later in the year. This re-scheduling of supplies allowed DTC to hold suitable goods in stock until the affected Sightholders were in a position to purchase and manufacture them, without triggering the mechanism for ex-plan sales in the meantime. DTC bore the financial cost of holding these goods in stock for longer than had originally been anticipated, and the affected Sightholders responded favourably to the initiative.

I now move on to consider whether it can be said that Jayam entered the SOC system at too low a level in H2/2003, or (more accurately) whether the level at which Jayam entered the system is attributable to a breach by DTC of its obligations under paragraph 2.4. Again, I would answer this question in the negative.

The main factors relied on by Jayam in support of its case that DTC was in breach of its obligations, and that Jayam did as a result start off with too low a level of allocations, are

The Prototype Capping Mechanisms

I have already set out at some length how the prototype capping mechanisms operated in the three selling periods immediately preceding the introduction of SOC. The most important points which emerge are in my judgment the following:

In the light of the capping history summarised above, the only factor which might in theory have caused any prejudice to Jayam was the capping in H2/2002 by reference to purchases in a previous period of only four Sights. On DTC’s own evidence, use of a period of less than one year runs the risk of being unrepresentative because of seasonal variations in a Sightholder’s purchasing requirements: see paragraph 8.3 of Mr Davies’ first witness statement. However, the conclusive answer to this point was in my judgment also provided by Mr Davies, who calculated that if the ITO applications of Jayam and other Sightholders for H2/2002 had been capped by reference to average purchases in the previous ten Sights, Jayam would in fact have ended up significantly worse off. The accuracy of this calculation was not disputed by Mr Hall, and since I have already concluded that imposition of a cap by reference to purchases in the previous ten Sights is not inherently objectionable, it follows that Jayam can have no complaint about the use of a period of four Sights which actually worked to its advantage when compared with the obvious acceptable alternative. It further follows that Jayam cannot have suffered any adverse knock-on effect by reason of the inclusion of Sights 1 to 4 of 2002 in the ten-Sight period used for the cap in H1/2003, although the question is academic because Jayam’s applications in H1/2003 were in the event not capped at all.

Transition from a Discretionary System

It remains to consider whether DTC was in breach of its obligations under paragraph 2.4 by introducing a capping system which took as its starting point purchases made by Sightholders under the discretionary regime previously in force. In my judgment such a procedure cannot possibly be characterised as unreasonable, and still less as so unreasonable that it fell outside the range of options reasonably open to DTC. The obvious starting point for the new system was the status quo, if only to avoid disruption and to provide Sightholders with a reasonable expectation of continuity in their supplies. The object of SOC was to provide a new system for the future which would operate in a transparent way and by reference to objective criteria. The object was not to remedy possible past injustices. In my judgment clear and specific contractual language would have been needed in order to make it clear that DTC was obliged to start SOC with a fresh assessment of the requirements of Sightholders completely uninfluenced by their previous purchasing history.

I stress at this point that Jayam’s objection to use the of previous discretionary allocations as a capping yardstick for SOC is necessarily advanced at a theoretical level only, because it is not pleaded that any particular allocations made to Jayam resulted from an improper or unlawful exercise by DTC of its commercial discretion to allocate limited supplies as it thought fit, and no allegations of this nature were put to DTC’s witnesses in cross examination. Indeed, Mr Campbell was not cross examined at all.

For these reasons I conclude that Jayam has failed to make good its case on liability, and that this action must accordingly fail.

Although the Supplier of Choice Ombudsman did not in terms find that DTC had acted in breach of contract by using the application capping mechanism (which he referred to as the Initial Application Limit Mechanism) in H2/2003, he did find that DTC had followed an “improper procedure” by taking into account a matter which it should not have taken into account; and it is, I think, fair to say that his reasoning, if correct, must lead to the conclusion that DTC was in breach of paragraph 2.4 of the Policy Statement. It is therefore appropriate that I should briefly explain why I respectfully disagree with his conclusion.

At the beginning of paragraph 7.4 of his Final Determination dated 9 March 2005 the Ombudsman summarised his reasoning as follows (for ease of reference I have replaced his Roman with Arabic numerals):

“(1)

The Supplier of Choice documentation (“SOC Documentation”) does not refer to the existence of the Initial Application Limit Mechanism, let alone a mechanism which depends exclusively on the value of purchases in the recent past. Neither is there a reference to any mechanism designed to defeat attempts to manipulate the system by overstating applications for goods.

(2)

The Initial Application Limit Mechanism operates so as to introduce additional criteria supplementary to, and potentially conflicting with, displacing or cutting across (in the sense of reducing their significance) the four criteria listed in paragraph 2.4 of the SOC Policy Statement.

(3)

The SOC Policy Statement is part of the matrix of contractual provisions applying between Sightholders and the DTC. The language of paragraph 2.4 is clearly intended to specify the criteria by which the DTC will make supply decisions.

(4)

This conclusion is reinforced by paragraph 14.4 of the SOC Policy Statement [i.e.the entire agreement clause].

(5)

Ancillary discussions between the DTC and the Commission, of which the Sightholders had no or insufficient notice and which were not, in any event, in any way incorporated or reflected in the SOC Policy Statement or other documentation, are immaterial.

(6)

For these reasons, the use of the previous ten Sights to cap initial applications constitutes the use of an Improper Procedure. ”

Of the above reasons, (1) and (2) are the most important. Reason (3) is, at least now, common ground between DTC and Jayam. As to reason (4), neither side has suggested that I should go outside the SOC documentation to determine the contractual relationship between DTC and Sightholders. Likewise, with regard to reason (5), DTC does not argue that the discussions between it and the European Commission are of any relevance in deciding whether DTC has breached paragraph 2.4. Finally, reason (6) is merely a statement of the conclusion which the Ombudsman has derived from reasons (1) to (5).

Reason (1) is of course correct in the sense that the SOC documentation nowhere refers to the application capping mechanism, but the relevant question is not whether paragraph 2.4 refers to it, but rather whether it is a reasonable method for DTC to have adopted in order to meet applications from Sightholders taking into account the four specified criteria. The Ombudsman, I think, recognised this when he went on in the main body of paragraph 7.4 in his Determination to consider whether the application capping mechanism could be justified by reference to any of the four specified criteria, and concluded that it could not. In particular, he said of criterion (a) that:

“[It] provides that the requirements of other Sightholders is a factor to be taken into account. I do not regard the Initial Application Limit Mechanism as applied to the requesting Sightholder as relevant to this factor. This factor concentrates on the other Sightholders. Further, even in relation to other Sightholders their requirements are what is in issue. It might be argued that requirements is wider than requests under sub- paragraph (a), but I consider that figures based on a formula using a Historical Allocation Level and a standard multiplier are not properly described as the Sightholder requirements. ”

I confess that I find this part of the Ombudsman’s reasoning difficult to follow, and I must respectfully say that I disagree with his conclusion. In circumstances where demand exceeds supply, there has to be some machinery for cutting down applications, and prima facie any reasonable machinery for that purpose will satisfy criterion (a). The choice between possible methods of achieving that end is for DTC alone, and as I have already pointed out paragraph 2.4 affords DTC a good deal of latitude. I agree with Mr Christopher Carr QC that the limits on what DTC may choose to do are set by considerations of reasonableness. As Mr Carr submits, what DTC has essentially done is to use each Sightholder’s purchases from DTC during the last 12 months as a proxy for its (genuine) requirements in the forthcoming selling period. This approach has the benefit of addressing the problem of gaming, or tactical over-application. It may also be said to have the possible disadvantage of curbing applications by a Sightholder whose genuine requirements in the forthcoming selling period are higher than they were in the last 12 months; but this possible prejudicial effect is mitigated by the growth allowance built into the application capping mechanism and also by the incentives at steps four and six of the model for higher-ranked Sightholders. It cannot be said, in my judgment, that this possibility of prejudice comes anywhere near making the whole system inherently unreasonable. I return to the point that, in the absence of more closely prescriptive language, DTC has a wide discretion how to proceed.

In short, I agree with the way Mr Carr QC puts it in paragraph 80 of his skeleton argument, where he says that:

“The Ombudsman’s central error was to assume (without analysis) that, because the application capping mechanism was intended to eliminate tactical application and gaming it could not have been adopted for the purpose of taking into account the requirements of other Sightholders.”

In view of the conclusion which I have reached on liability the question of quantum does not arise. Nevertheless, in a normal case I would go on at this stage to consider quantum, and make appropriate findings of fact, in case my conclusions on liability were wrong and were to be overturned on appeal. However, it is agreed on both sides that this is not a normal case so far as quantum is concerned, and that the quantification of damages, were liability to be established, would not only be a difficult exercise but would also depend to a considerable extent on the precise nature of the breach of contract which the Court held to exist. Since I am clearly of the view that there has been no breach of contract, it seems to me that I cannot sensibly proceed by making a hypothesis about the precise nature of the breach which would found an award of damages. It is better to take the matter in stages, and for the question of damages (and other relief) to be considered if and when it arises, in the light of a precisely identified breach of contract. This is perhaps another way of saying that, with the benefit of hindsight, I see considerable force in Jayam’s original contention that there should be a split trial, which was raised, but as I understand it ultimately not pursued, at the pre-trial review held on 8 November 2006 before Evans-Lombe J.

In the circumstances, I shall confine myself to a few fairly brief observations.

First, it was agreed on both sides that, if liability were established, the right approach to quantifying damages would be on the basis of a loss of a chance, i.e. the loss by Jayam of a chance to obtain higher allocations of diamonds in H2/2003 and subsequent selling periods by participating (together with all the other Sightholders) in a system of supply which was not tainted by an unlawful capping mechanism. The allocations that Jayam could reasonably have expected to obtain in such a scenario would of course depend not only on the precise nature of the breach of contract which has to be eliminated from the system – hence the critical importance of identifying the breach – but also on the level of applications which would have been made in those circumstances both by Jayam and by the other Sightholders.

Secondly, it was also agreed that the appropriate question for the Court to consider would be whether there is a “real and substantial chance” that, had DTC complied with its contractual obligations, Jayam would both have applied for and received more diamonds over the selling periods from H2/2003 onwards: see generally the analysis of “loss of a chance” cases by the Court of Appeal in Allied Maples Limited v Simmons & Simmons [1995] 1WLR 1602.

Thirdly, Jayam goes on to submit that, while there are many possible ways in which the SOC model could have been altered so that it complied with DTC’s contractual obligations, the Court does not have to form a view as to which precise mechanism would have been adopted. It is enough if the Court chooses a mechanism which reasonably reflects the real and substantial chance of which Jayam has been deprived.

Depending on the nature of the breach of contract, Jayam puts forward two broad alternative methodologies. The first methodology, which is said to be appropriate if the Court takes the view that a cap based on historic allocations is in principle permissible, but that the period used was too short and rigid, is to replace the period of ten Sights taken as a yardstick for capping applications with a period of five (or alternatively ten) years. The second methodology, which is said to be appropriate if the Court considers that a cap based on historic allocations is inherently unacceptable, is to cap applications by bands only, without any reference to historic allocations.

In his expert reports Mr Hall explains in detail how these two methodologies could in his opinion be applied, and produces figures for the extra allocations that Jayam could reasonably have expected to receive. He then goes on to calculate the extra profit that Jayam would have made with the benefit of those allocations. It is fair to say that the resulting figures are relatively modest, having regard to the scale and vast expense of this litigation. Under the first methodology, they range from about $910,000 to $2 million (depending on the profit margins that Jayam would have enjoyed) if a five year cap were employed, and from about $1.36 million to $3 million if a ten year cap were employed. Under the second methodology, Jayam’s loss of profit is estimated as between about $1.77 million and $4.3 million.

For its part, DTC does not advance any alternative methodologies of its own, but submits that both of Jayam’s chosen methods are fatally flawed and too speculative to be relied upon. The main criticism of the first methodology is that it focuses far too much on past performance and is at odds with the basic objective of SOC, which is to favour dynamic and successful businesses that will promote retail consumer demand. The main criticism of the second methodology is that it does nothing to discourage gaming and speculative applications, which it is one of the prime objectives of the SOC model to prevent.

A further general criticism advanced by DTC is that under each methodology Mr Hall only adjusts the applications that Jayam would have made. He does not attempt to make similar adjustments to the applications of all the other Sightholders. According to DTC, Mr Hall is therefore comparing apples with pears. It is submitted that no fair system could have operated in such a skewed fashion, and that the methodologies are for this reason alone inherently unreliable.

In response to this last point, Jayam says that the material is simply not available for adjustments to be made to the applications of other Sightholders, so nothing else can be done. The result is not likely to be seriously misleading, because the allocations by band actually made to Sightholders under SOC are likely to be the best indications available of their actual requirements.

As I have already said, I do not propose to go into these contentions in any further detail. I have set them out merely to give an indication of the areas of agreement and disagreement on quantum. I would, however, add that on a provisional basis I do see considerable force in DTC’s objections to Mr Hall’s methods, and I am also far from satisfied that a comparison can properly be made between corrected applications by Jayam and uncorrected applications by all the other Sightholders. Accordingly there is in my view a very real possibility that, even if liability were to be established, it could result in no more than an award of nominal damages to Jayam.

I am conscious that my decision on liability will be very disappointing to Jayam and Mr Mehta. In his oral evidence Mr Mehta made it clear that he mistrusts DTC and regards their professions of good faith as laughable. He gave his evidence clearly, courteously and with good humour; but I was unable to avoid the impression that he has become obsessed with his quarrel with DTC, and has allowed it to warp his better judgment. In the end, however, it is not my function to decide whether his wider complaints about DTC and its attitude towards Jayam are justified or not. I am solely concerned to decide whether DTC has acted in breach of paragraph 2.4 of the Policy Statement; and for the reasons which I have given in this judgment I have come to the firm conclusion that it has not.

In the result, therefore, this action must be dismissed.