Days Medical Aids Ltd. v Pihsiang Machinery Manufacturing Co Ltd.& Ors

On 4 January Mr Crowe wrote to Mr Wu, about (“you will know”) John Dalton’s retirement. He referred to John Dalton managing DMA’s business “in somewhat of a family business style” and to the opportunity “to introduce the same high standards of professionalism in sales and marketing that exist throughout the rest of the DCC Group”. Mr Wu also wrote to Mr Crowe on 4 January. He said Pihsiang “has taken our company public” and with a new plant near completion it needed to increase production. The letter continued:

“In 2001 we need to increase our production for the European market by 50,000 either through Shoprider units or through private label units. In 2002, production must increase an additional 50,000.

Pihsiang wants to offer DMA the first opportunity to commit to additional units….

To another subject- we have heard a rumor that there is a major management change taking place at DMA. Pihsiang needs to be kept current of all major changes taking place at DMA. We do not want any more situations like the 45% ownership of Merits to take place without prior permission from Pihsiang….

Pihsiang would like to hear back from you within seven days on the above subjects. Pihsiang will increase our volume either through Shoprider units or through private label units, with or without DMA. Pihsiang is giving DMA the first option before we take the next step for the increased volume.”

This letter was thoroughly disingenuous. I have no doubt at all that Mr Wu was well aware of the resignations and retirements at DMA. Increases in sales of 50,000 units would, as Mr Crowe said, have equalled the entire European market. In reality the letter was another attempt by Mr Wu to get out of or to vary the Agreement.

The next day Mr Wu spoke to Mr Teeters (who had recently visited Taiwan) on the telephone. Mr Teeters reported by Email to Mr Crowe on the conversation. Mr Teeters said, and his Email supports him, that Mr Wu did know about the management changes at DMA but was complaining about the lack of communication from DMA about them. Mr Wu had also told Mr Teeters that he had been consulting attorneys about the Agreement and believed he had a “defensible case in going to Europe direct if no partnership were reached” the case being built on non-performance in various European markets and the holding in Merits.

Mr Crowe was alive to Mr Wu’s manoeuvres. He arranged to accompany the new DMA team and Mr Teeters to Taiwan on 6 February (the renewal date) to make a presentation to Pihsiang over two days. He spoke to Mr Wu about this and wrote to him on 15 January. The items to be covered included the sales and marketing for Europe for 2001/2002 and the possible sale by DCC of its interest in Merits or the purchase by Pihsiang and DCC of all of Merits. Mr Crowe also asked for a copy of the full prospectus for Pihsiang’s planned flotation. Mr Wu accepted the plain fact that this letter was written on the basis that Mr Crowe was thinking the Agreement would continue but Mr Wu said he did not treat it seriously.

On the same day Mr O’Neill, newly appointed Managing Director of DMA, also wrote to Mr Wu. The letter included reference to the recruitment of Mr Hermolle and his very considerable experience in the industry and a 2001 forecast of sales of 14000 units.

On 19 January Mr Crowe wrote again to Mr Wu about the two purposes of the meeting in Taiwan: first to introduce the new team and present DMA’s sales and marketing plans for the coming year and second to learn of Pihsiang’s development plans and pricing. Mr Crowe said: “it is important for you to appreciate that, at this time of change in DMA as we move forward from a family managed business we have taken the opportunity to put a stronger team in place in Europe and to increase the level of professional marketing activity”.

Mr Mill submitted that this letter and Mr Crowe’s letter of 4 January were a recognition that DMA’s performance to date had not been adequate. I do not agree. It was an assurance to Pihsiang that DMA would continue to perform despite the departures of those in whom Pihsiang had apparently had confidence before.

Pihsiang held a Board Meeting on 30 January. Mr and Mrs Wu were both present. The meeting approved the procedures for the public listing of Pihsiang’s shares. Mr Wu was authorised to work with shareholders on the number of shares to be underwritten. The minutes, under the heading “other operational concerns” record that Pihsiang was to assess the feasibility of setting up a subsidiary or branch in the US and to assess the sales potential in mainland China. The minutes make no mention of the DMA Agreement.

However both Mr and Mrs Wu say that at the meeting it was made clear that the Agreement would not be renewed. Their evidence is supported by the evidence of Su-Chin Yang and Yu-Wen Wu: see paragraph 16(v). Indeed the latter produced a report made by him to his superiors of the meeting which records that “because the European distributor DMA failed to perform its obligation according to the agreement and the result of its operation in the market failed to meet the expectation Pihsiang will not renew the agreement after the agreement expires”. The report, like the witness statements, was, however, only provided in early September 2003.

Notwithstanding this report I have serious doubts about this evidence. I cannot understand how the minutes could omit such an important item whilst recording other matters of less immediate significance. Various explanations were offered: Mr Wu said the minutes only recorded what was required for Government purposes and that they only dealt with Agenda items. But there is no evidence of any relevant Government requirement; some of the recorded items hardly seem to have any relevance to any Government, and are of much less importance than termination of the DMA Agreement; the Agenda has not been disclosed (it is said Pihsiang do not retain Agendas once the minutes have been prepared) and Yu-Wen Wu’s note does not follow the numbering of the minute; and if the Agreement were to end that would have to be recorded in the Prospectus. Yu-Wen Wu himself, when giving his evidence, thought he had retained a copy of the Agenda but subsequently it was said that he had not. Moreover, as will be seen, subsequent events and in particular the facts that it is no longer even suggested that DMA was informed of this decision and that the March Prospectus referred to the Agreement in terms of its continued existence, are not consistent with this account.

On 3 February Mr O’Neill sent Mr Wu a fax letter. Pihsiang originally alleged that the fax was not received pointing to the omission of one digit in the fax number on DMA’s copy of the fax. That was exposed as an opportunistic irrelevance when it was proved that the method of sending the letter was speed dial using the pre-programmed and correct number. I am quite satisfied that the fax was received and seen by Mr Wu. No member of his staff who received it would have done anything other than bring it to his attention.

The letter was as follows:

“Dear Donald,

Further to our European SHOPRIDER agency agreement of February 1995, I attach a copy of a bank transfer paid yesterday Pihsiang Machinery Manufacturing, in the amount of USD100,000.00, for the renewal period of the next five years.

I look forward to seeing you next week as we discuss our plans to further build on the success of SHOPRIDER with DMA in Europe.”

The attached bank transfer was dated 2 February and did show the transfer of $100,000 from DMA to Pihsiang’s account at First Commercial Bank Hsinchu Branch.

Granted, as I find, that the fax was received by Pihsiang and Mr Wu it is concerning that Mrs Wu said she knew nothing about it. Finance was her area. The renewal of the Agreement would be a matter they would be bound to have discussed and to discuss as indeed she says they did. The evidence of Mr and Mrs Wu about this payment is wholly unsatisfactory. In his first statement (20 March 2003) Mr Wu at least implied that because of the erroneous fax number Pihsiang had not received the fax dated 3 February. He stated that as soon as he had discovered the payment he had instructed his employees to return it and he confirmed that he had only been informed of the payment after the meeting on 7/8 February. Mrs Wu said nothing about the payment in her first statement (21 March 2003). In his statement dated 8 May 2003, following statements by Mr Crowe and Mr O’Neill, Mr Wu denied that there had been any discussion about the payment at the 7/8 February meeting but otherwise made no relevant change to his previous statement.

In Mrs Wu’s statement dated 3 September she mentioned for the first time what was said to have occurred in relation to the Agreement at Pihsiang’s 30 January Board Meeting and said that following that meeting and having been warned about the $100,000 by Mr Wu shortly after it, she “was aware that the agreement would not be renewed and we would have to reject this fee if it were paid”. She said she asked the bank to notify her if it was paid and the bank did so on 5 February. She said she went to the bank the next day and completed an application to return the payment to DMA. There is in the papers an instruction dated 6 February bearing the signatures or seals of Pihsiang and Mr Wu stating that the remittance is “wrong” and asking that the amount be returned “directly”. Mrs Wu said she affixed the seals to this instruction. Mrs Wu believed she had first mentioned the repayment to Mr Wu at lunch on 9 February “after the DMA representatives had left”. Thus, if this was correct, contrary to his statement Mr Wu had given no instructions to the bank to return the payment and only learnt of it from Mrs Wu. Mr Wu’s statement dated 3 September said he had not recalled Mrs Wu’s role before “but having discussed it with her I believe this must have been what happened”. He described his first statement as “incomplete”: he was referring to a later repayment in August 2001 which he had instructed to be made. He said “what is clear in my own mind is that I did not know that the payment of $100,000 had been made and that this had already been returned when I met with DMA on 7 and 8 February 2001”. The payment was returned by Pihsiang’s bank on 7 February but only reached DMA’s bank on 12 February.

Thus, if they were to be believed, neither Mr nor Mrs Wu ever saw the 3 February fax. Mrs Wu instructed the return of the money using Mr Wu’s seal. Mr Wu was wholly ignorant of either the payment or its return until after the DMA representatives had left Taiwan. Granted, as I find, that Mr Wu did receive the 3 February fax he could hardly fail to have discussed it with Mrs Wu. Moreover I am sure Mr Wu did (see paragraphs 130-132) discuss the payment on 7 February with Mr Crowe and Mr O’Neill as they say he did. The changing accounts by Mr and Mrs Wu were all designed to distance Pihsiang from renewal of the Agreement of which the $100,000 payment was an obvious symbol and to enable Mr Wu to say that no reference to the payment had been made when DMA came to Taiwan. They were all false.

The DMA team duly arrived in Taiwan on 6 February and presentations were made over the next two days. The slides are available. Remarkably there is a stark conflict of evidence about the part played by Mr and Mrs Wu in the presentations. Mr Crowe, Mr O’Neill and Mr Teeters say the European presentation on the first day was a great success. Mr and Mrs Wu were present throughout along with (unusually) a number of Pihsiang staff. Mr Wu frequently stopped the presentation to translate what was being said. Mrs Wu took copious notes. The evidence of Mrs Wu (and Mr Wu) is that she was not present at all save for introductions as she had so much to do on the Prospectus. The evidence of Mr Wu is that he was constantly going off to do other things and was only present for a few minutes. Again, I have no doubt that Mr Crowe, Mr O’Neill and Mr Teeters were telling the truth about this and Mr and Mrs Wu were not. The importance of the meeting was that it is apparent from the presentation and context that DMA was acting on the basis that the Agreement had been renewed and those present must have appreciated as much. I have no doubt at all that (despite their evidence) Mr and Mrs Wu would not permit Pihsiang’s staff to attend such a meeting alone even if they would have had a sufficient grasp of English to do so. Moreover the notion that such a team from DMA would travel to Taiwan and make a presentation in the absence of the Wus is fanciful. The documents, both before and after the meeting, are again eloquent testimony to where the truth lies. For example Mr Crowe’s Memorandum to file on the visit dated 12 February records that Mr and Mrs Wu were present at the presentation on Europe.

One of the slides at the presentation gave an “overview” of the European market (including the UK) noting that the market was “fragmented” with significant cultural differences between north and south and differing social and regulatory considerations. The same slide said that Shoprider was the acknowledged market leader and continuing to gain market share. In Germany it was said that Shoprider’s market share had increased from 2% to 22% over the last five years. DMA/Casacare was said to have a network of 80 dealers and a sales force of 12.

In preparation for the meeting Mr O’Neill had prepared a document which was intended to show DMA’s investment in Shoprider over the first five years. It showed a total sum of £7.84m but that included the full cost of Casacare (£2.5m), which had other products, and some other items which could not be fully attributed to the Shoprider part of DMA’s business alone. But I do not doubt that a substantial part of this sum was properly attributable to the Agreement and the exclusivity and so security to invest which it provided for DMA.

Mr O’Neill wrote to Mr Wu on 18 February dealing with a number of commercial points which had arisen in Taiwan. He enclosed a letter sent to dealers “which will launch our new team and service levels as indicated in our presentation to you”. The enclosure said in terms in the first paragraph that at a recent visit to Pihsiang DMA had successfully renewed the exclusive agreement for a further five-year period. Mr Wu said he read this and was laughing and just passed it on to a sales girl.

There is a further stark conflict of evidence about the $100,000 payment. Mr O’Neill and Mr Crowe say (and Mr Teeters corroborates) that in a private conversation before Mr Wu took them out to dinner at the end of the first day Mr Wu acknowledged receipt of the money but said he would like the payment to be made to a private account of his wife in America of which he would provide the details. The $1.08m had been paid to such an account in 1996. There is no doubt that, in his own writing, Mr Wu later sent Mr O’Neill by fax details of such an account. Mr O’Neill said and I accept that this followed a telephone conversation on 14^th February in which Mr Wu had asked for Mr O’Neill’s home fax number so that he could send the details of Mrs Wu’s account. On 27 February Mr O’Neill sent a fax to Mr Wu (copied to Mr Crowe) marked “Strictly Private and Confidential” saying he had received “details re the first five year renewal of our European Shoprider agency agreement” setting out the details of Mrs Wu’s account as supplied by Mr Wu. The letter concluded by saying that DMA needed a signed written instruction on Pihsiang letter paper before DMA could “finalise this”. It is both Mr O’Neill and Mr Crowe’s evidence that Mr O’Neill had also made this clear in Taiwan when the matter arose. That instruction was never received. Between June and October the $100,000 went to and fro on a number of occasions.

Mr Wu’s evidence is that the only discussion about money in Taiwan related to Mr Crowe and Mr O’Neill’s personal interest in buying shares in Pihsiang from the Wus and that was why he had provided details of Mrs Wu’s account. He said they had raised the question with him whilst in Taiwan whether they could personally buy shares in Pihsiang prior to the flotation.

Both Mr Crowe and Mr O’Neill found it hard to hide their feelings about what Mr Crowe said was the enormity of this lie. I am not surprised at their reaction. It was a lie and a scurrilous lie too. It was told in the teeth of the documents. It was told because Mr and Mrs Wu both recognised that payment of the money and of course its receipt by Pihsiang could only be consistent with renewal of the Agreement.

Pihsiang’s Prospectus for the public listing of its shares was published on 16 March. The flotation itself took place on 21 March. In the context of the issues in this case it is a remarkable document. The responsibilities and sanctions in relation to such Prospectuses in Taiwan would readily be recognised both in this country and the USA. The sanctions for a Prospectus containing false information are both civil and criminal. They are also reflected in the terms of the Prospectus itself.

The Prospectus stated at the beginning that “Issuers shall be jointly and severally liable with the (auditors) if there is any misrepresentation or false statement in the financial reports…. The issuer (Pihsiang), the responsible persons of the issuer (Mr and Mrs Wu) and the signatories of this Prospectus (also including Mr and Mrs Wu) will be responsible for the misrepresentation or omission, if any, contained in this Prospectus”. The underwriters of the issue were Ta Hwa (Grand Cathay Securities Corp.). Ta Hwa prepared and included in the Prospectus an “Evaluation Report” dated 15 June 2000. The report states, as would be expected, that they had met with management from time to time to gain an understanding of the “business operation, future competition, prospective development and future development plans of the company”. The report referred to some of Dr Harrop’s work. It referred to rapid growth of sales in Europe of 30% over the last 3 years. The report explained the appointment of DMA on the basis that due to language and cultural differences it had not been easy for the company “to administer the distribution access”.

The body of the prospectus included a number of significant statements:

Mr and Mrs Wu sought to distance themselves totally from any involvement in the Prospectus. Mr Wu said he understood it had to be the independent work of Ta Hwa, it was handled by his wife and he was not involved with or consulted about it. He had not read it or sought to understand it but just signed it. Mrs Wu said it was all a matter for Ta Hwa and management was not allowed to influence them. They had not spoken to her. That evidence is belied by the responsibility statements and Ta Hwa’s Evaluation Report. It also defies commonsense. I reject it. Remarkably it is said by Mr Wu that Pihsiang has not kept any documents relating to the preparation and submission of the Prospectus other than the minimal disclosure in fact made. No one who was involved in the Prospectus, on Pihsiang’s case, gave evidence.

It does appear that much of the substance of the Prospectus and the matters to which I have referred were prepared in about April 2000 and undoubtedly the English version of the Prospectus gave the wrong dates for the (first) term of the Agreement. That mistake was repeated in two subsequent Prospectuses dated 7 September 2001 and 18 February 2002. Mr Wu suggested the error in the dates may have arisen from a translation failure of the dates of the different calendars and he may well be right about that. But, on any view, the terms of the March Prospectus represented the views of Pihsiang and, as I find, Mr Wu about the purpose and operation of the Agreement in origin and as at April 2000 and undoubtedly those views should have been corrected if they had changed by the date of publication.

There is no doubt that DMA conducted its business in the early months of 2001 on the basis that the Agreement was in force. Pihsiang did not. Nor had it done so since November 2000. As the year progressed DMA noted the disappointing level of scooter sales and the consequent high level of stocks. There is documentary evidence that by early July John Dalton was assisting RMA in its business. Indeed he also visited Taiwan with his son Simon in early July. Simon Dalton said that on the visit he did but his father did not visit Pihsiang and Mr Wu.

On 11 July Pihsiang, in a letter signed by Ginny Lin, wrote to Mr O’Neill. There can be no reasonable doubt that Mr Wu was the authority behind if not the author of the letter. The letter complained that the number of sales had not increased impressively and it complained that competitors were succeeding in entering the market. The final paragraph read:

“In order to have the biggest share in your market you should recalculate your profit margin to 3%, 5%, 10% etc. It is imperative that you reach the growing progress speed of (Pihsiang) as we are a public company now. Unless you can achieve the target we will be forced to take further action so as to increase the sales in your territory.”

This letter also was wholly disingenuous. Pihsiang was already selling to others in Europe and Mr Wu had recently told Simon Dalton he would sell direct to RMA, albeit disguising the sales by use of a nameplate company. The letter does however appear to recognise that but for the complaints Pihsiang could not act as it was threatening to act. Notwithstanding the threats Pihsiang continued to seek orders and forecasts from DMA.

DMA was receiving an increasing amount of information about Pihsiang’s activities. At a meeting in Taiwan on 8 June Mr O’Neill raised with Mr Wu sales by Pihsiang to Practicomfort and Mr Wu said it must be his Japanese customer who had made the supplies and he would investigate the matter. That was another lie. The inference on the evidence is that Mr Wu wanted to obtain as many orders as he could from DMA before switching to RMA once RMA had been able to establish a sales network. Deliveries to RMA appear to have started in August. Mr O’Neill raised the issue of breaches by Pihsiang of the Agreement with Mr Wu again at a meeting on 27 August at the Taipei office of Baker & McKenzie attended by Henry Chang. Their account of this meeting is plainly accurate and truthful, in particular Mr Wu said nothing about the Agreement being at an end or DMA being in breach of it but conducted the meeting on the basis (or apparently on the basis) that the Agreement had been renewed.

Pihsiang made a public share issue in September publishing a Prospectus on 7 September. Remarkably the DMA agreement was again listed as an important contract “in good validity … to expire within the proximate year” having a term of 6 February 1997 to 6 February 2002. Mr and Mrs Wu were also the “responsible persons” for this Prospectus.

On 11 September DMA’s solicitors wrote to Pihsiang for Mr Wu’s attention. The letter asserted breach of the Agreement by sales to RMA. RMA was written to in similar terms. The letters sought undertakings to abide by the Agreement. Mr Wu chose to write to Mr Crowe on 17 September. The letter if not a response was plainly a reaction to the letter from solicitors. It is revealing. It referred to tremendous pressure from Pihsiang’s board and shareholders which Mr Wu acknowledged, when giving evidence, was something he had made up. Indeed remarkably he described most of the letter in those terms, despite stating to the contrary in paragraph 20.5 of his witness statement dated 8 May 2003. The letter asserted that during the past 5 years and at the time “Shoprider has been losing both the market share and the reputation. After analysing thoroughly the board pointed out that DMA obviously failed to fulfil the existing (my emphasis) agreement terms as well as failed to make every effort to keep the European market share”. In fact the evidence is plain that during the 5 years Shoprider’s market share increased. The Merits conflict was again referred to. The letter is a statement of complaints about performance of an existing Agreement and nowhere even suggests there is no Agreement. Mr Wu’s attempts to explain this in cross-examination were unintelligible. Of course if it had been represented to Mr Wu that the Agreement would terminate if John Dalton ceased to be Managing Director of DMA Mr Wu could and I am sure would have said so at once. In fact not only was it not referred to but other matters were.

DMA’s solicitors replied to Mr Wu on 19 October. The letter referred to further breaches of the Agreement by Pihsiang including sales via another company in Taiwan and sales at lower prices than those charged to DMA contrary to Clause 6 of the Agreement. This letter produced a response from Mr Wu dated 3 November in which he did assert that “no … agreement exists” and that he was “fed up with letters from solicitors about an agreement that has come to an end”. On 26 November Mr Wu wrote to DMA again rejecting payment of the $100,000 and stating that “you know as well as I do that the previous contractual arrangements came to an end in February of this year”.

The exchange of correspondence ended with DMA’s solicitors’ letter dated 26 April in which DMA recognised the inevitable and “reluctantly” accepted that Pihsiang had no intention of abiding by the Agreement and that Pihsiang had repudiated it. By that time a claim had already been issued in which DMA had sought to enforce the Agreement. In early 2002 Pihsiang ceased supplying DMA altogether. Pihsiang also reduced the prices of scooters supplied to RMA and Practicomfort.

Perhaps the final irony came in April when RMA wrote to Mr Wu telling him of the extensive competition RMA was facing, how they needed a price advantage from him together with their own low gross profit margins to match and beat the competition, and how their organisation was already in place proved by the sale of 865 units in March alone despite DMA selling off its stocks at low prices. In a Questionnaire sent to Mr Wu on 3 April RMA spelt out the advantages of Pihsiang agreeing to an exclusive arrangement with RMA in almost the same terms as Mr Dalton had done for DMA in 1995: “confusion, especially with having several suppliers of the same products has caused problems in the past and we cannot go down that route again. As we have said many times, our emphasis should be on competing with and knocking out other manufacturers from this market and not compete Shoprider against Shoprider”.

DMA currently acts as distributor of scooters manufactured by Merits in the UK and recently commenced as a distributor for Kymco (Kwang Yang Motor Co Ltd) across Europe. Kymco is also a Taiwanese company. Casacare acts as a distributor of Pride scooters in Germany. This is the background to the issues which arise both as regards mitigation of the loss for which DMA claims and the costs it contends it has incurred or will incur in seeking to mitigate that loss.

As regards Merits the “costs of mitigation” were addressed by Mr O’Neill in his third witness statement and by Mr Ellison in Ellison 1(Section 14.4). The total is £591,000. Essentially the costs were incurred in the promotion and training required to enable DMA to market a new product in competition with Shoprider. Merits was seen as a short-term solution to replace Shoprider. Pihsiang accepts only a sum of £59,580 about which Mr O’Neill gave evidence but disputes the balance on the basis that DMA has not proved it. However DMA has disclosed some supporting documentary material and invited Mr Bolton to attend at Bridgend to inspect relevant records. In those circumstances, I see no reason to doubt the figures presented by DMA. Of the sum of £591,000, some £387,000 has already been spent and the balance will be spent by the end of 2004.

In relation to Kymco the “cost of mitigation” is claimed to be £600,000. On the day of closing speeches, DMA produced further documentation in support of this aspect of the claim showing expenditure of £703,000. $622,000 of that amount represents payments made ($266,000) and to be made to Kymco under a “product contract” dated 18 September 2003. The product contract was signed together with a “Collaboration Agreement” between Kymco and DMA. Both agreements are commercially sensitive and I will refer to their terms only so far as I think necessary to address the issues to which they give rise. The Collaboration Agreement provides for exclusive distribution rights for DMA in both Europe and the USA. The term of this agreement is 5 years with yearly renewals subject to 90 day written notice of termination by either party. Whilst Kymco retains intellectual property rights in the products DMA has ownership of the tools used to manufacture the products it has designed and, following termination of the agreement, the right on payment of a royalty to use the tools to procure the products from another manufacturer.

The investment by DMA in the agreement with Kymco is, however, the price not just for European exclusivity for 5 years but also for such exclusivity in the USA. It also “bought” the tooling. It follows, I think, that it would not be right for the total investment cost to be added to DMA’s claim. There is evidence that the European market was about 30% of the worldwide market but it was the European market which I think it is fair to infer explains DMA’s main interest in making the investment. In those circumstances and doing the best I can I think DMA can claim for 50% of the costs for which they do claim (£600,000) rather than the full amount. That reduction is also intended to reflect the fact that on my findings DMA would probably have had to seek replacement supplies in 2006 in any event albeit not in the “crisis” situation which in fact occurred.

The reason offered in a note by counsel for DMA for Casacare distributing Pride scooters in Germany rather than Merits is said to be that Merits scooters were and are not approved by the German regulatory authorities. Whilst Pihsiang objected that it had no opportunity to test this assertion it was made in answer to an equally unheralded suggestion by Pihsiang that DMA had failed to mitigate its loss by not continuing to supply or supplying Merits scooter to Casacare. In those circumstances I am prepared to accept that there is nothing of substance in Pihsiang’s submission, particularly so as Mr Ellison has included in DMA’s claim only the 5% contribution from Casacare sales represented by DMA’s sale price to Casacare and no claim for loss of the profits which Casacare itself might have achieved.

It was in September 2003, some 6 weeks before the trial was due to start, that the Defendants served the substantially amended Defence together with further witness statements from Mr and Mrs Wu and the statements of Yu-Wen Wu and Su-Chin Yang. Mr John Dalton’s first witness statement was served on 7 September. The amended Defence substantially revised the case in relation to competition law and restraint of trade and advanced the plea of non est factum on behalf of Mr and Mrs Wu for the first time. It was also alleged for the first time that because of misrepresentations by Mr Crowe the Agreement terminated when Mr John Dalton left DMA and that it could only be renewed by mutual consent. One of the consequences of the late development of the competition law case was that the evidence on the issues to which it gives rise was unavoidably incomplete and to some extent inadequate.

Finally, as regards the trial itself, whilst the parties are to be congratulated for the economy with which the evidence and oral argument was addressed and completed, it should also be recorded that the court had received very substantial written opening submissions and, after the conclusion of the evidence, closing written submissions on behalf of DMA of 263 pages and on behalf of Pihsiang of 227 pages followed by written reply submissions from both parties totalling some further 125 pages. It was the need for the court to absorb these and the 11 ring binders of legal materials and authorities which were also placed before it that accounts in large part for the time gap between the conclusion of the evidence on 17 November and the closing oral submissions on 9 December.

Pihsiang alleges that the Agreement infringes Article 81 of the EC Treaty. DMA contends, first, that the Agreement does not fall within Article 81(1) at all and would not have fallen within it even if the Agreement had persisted with successive renewals. Secondly DMA submits the Agreement would in any event have fallen within the block exemption Regulation 2790/1999 (“the Vertical Agreements Regulation”) and would therefore have received automatic exemption under Article 81(3) from the application of Article 81(1) and 81(2). Thirdly, even if the Agreement be held to fall within Article 81(1) and not to benefit from exemption under the Vertical Agreements Regulation, DMA submits it would nevertheless have benefited from individual exemption under Article 81(3) either retrospectively (had exemption been sought from the Commission) or prospectively from the national court under Council Regulation (EC) No 1/2003 (“the Modernisation Regulation”) as from May 2004 when that Regulation comes into force.

To put the evidence in the context of these submissions requires that I set out the relevant provisions of Article 81 and the Regulations along with certain other comments and explanations, before I summarise the expert evidence. It was to the issues which arise under Article 81 (and to an extent the common law) as well as quantum issues that the expert evidence was directed.

Article 81 (1) prohibits as incompatible with the common market:

“all agreements between undertakings…which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

(a)

directly or indirectly fix purchase or selling prices or any other trading conditions;

(b)

limit or control production, markets, technical development, or investment;

(c)

share markets or sources of supply;

(d)

apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e)

make the conclusion of contracts subject to the acceptance by other parties of supplementary obligations which, by their very nature or according to commercial usage, have no connection with the subject of such contracts.”

Article 81 (2) provides,

“Any agreements or decisions prohibited pursuant to this Article shall be automatically void”.

Article 81 (3) (the exemption provision) provides that Article 81 (1) may be “declared inapplicable” in the case of any agreement which:

“contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not;

(a)

impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b)

afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.”

Thus there are two positive and two negative conditions to be met.

It is Pihsiang’s contention that the Agreement fell within Article 81(1) both as a matter of its “object” and its “effect”. But Mr Beal, who dealt with this issue on behalf of Pihsiang, said the primary case was “object” not “effect”. It is not suggested that there was any infringement of Article 82 (abuse of a dominant position).

Article 2 of the Regulation provides:

“1.

Pursuant of Article 81 (3) of the Treaty and subject to the provisions of this Regulation it is hereby declared that Article 81(1) shall not apply to agreements or concerted practices entered into between two or more undertakings each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services (“vertical agreements”).”

The Agreement is a vertical agreement within the meaning of this Article. Pihsiang was the manufacturer supplier and DMA was the distributor in Europe.

Article 1(c) of the Vertical Agreements Regulation defines “exclusive supply obligations” as:

“any direct or indirect obligation causing the seller to sell the goods or services specified in the agreement only to one buyer inside the Community for the purposes of a specific use or for resale.”

By virtue of Clause 4 of the Agreement which obliges Pihsiang only to sell to DMA within the European Community, the Agreement between DMA and Pihsiang is an “exclusive supply agreement” within the terms of the Vertical Agreements Regulation.

Article 3.2 of the Vertical Agreements Regulation provides:

“In the case of vertical agreements containing exclusive supply obligations, the exemption provided for in Article 2 shall apply on condition that the market share held by the buyer does not exceed 30% of the relevant market on which it purchases the contract goods or services”

DMA contends that it did not have more than 30% of the “relevant market” namely DMA’s share of the wholesale market on which it purchased products from Pihsiang.

It is of course necessary, in order to address this question, to define the relevant geographic market and the relevant product market.

There are other provisions of the Vertical Agreements Regulation which also require to be considered. Article 4 provides that the exemption in Article 2 shall not apply to vertical agreements which directly or indirectly have as their object certain “hard core” restrictions such as price control. Article 5(a) provides that:

“The exemption provided for in Article 2 shall not apply to any of the following obligations contained in vertical agreements :

(a)

any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years. A non-compete obligation which is tacitly renewable beyond a period of five years is to be deemed to have been concluded for an indefinite duration.”

It is DMA’s submission that, in any event, at any point in time at which the validity of the Agreement might have been challenged it could have been notified to the EC Commission and given exemption. As from May 2004 the Modernisation Regulation will enable the High Court itself in a proper case to grant individual exemptions. The Agreement was not notified at the time it was entered into but DMA submits that it did not have to be, citing Council Regulation (EC) 1216/99 amending Council Regulation No. 17, and submitting that individual exemptions can be granted retrospective to the date an agreement is concluded.

Individual exemption requires that the Agreement satisfy the four conditions for exemption contained in Article 81(3): paragraphs 158 and 159.

ECONOMISTS

The evidence of Mr Burns and Mr Ridyard was directed to the competition issues which arise. Both gave their evidence fully in accordance with CPR Part 35.10 and the relevant practice direction.

Mr Burns considered that :

The key to evaluation whether or not a competitive distortion was likely to exist was to identify the relevant market and market shares concerned.

Product market. Mr Burns concluded, really relying on the reports of Dr Harrop and Mr Clay, that scooters and power chairs had “a clear difference of functionality”, were used by different types of customers, and that the introduction of power chairs had had no demand effect on sales of scooters. He concluded that there was “no compelling evidence” that he should widen the market definition beyond scooters.

Geographic Market. Mr Burns, on the basis that average prices in Germany and the Netherlands moved closely together but independently in the UK, demand trends were steady in the UK and Europe, and market shares in the main brands, except Pride, differed substantially in the 3 countries, concluded that the UK market constituted a separate geographic market. But the basis of his approach was to examine the market and prices at the end user retail level. Moreover Mr Ridyard pointed out that Mr Burns’ figures were in any event affected by short-term exchange rate fluctuations and, as average prices, ignored the different product mix in the countries.

Mr Burns’ evidence about market share was derived simply by applying Mr Ellison’s compounded annual growth rate (CAGR) for DMA of 14% against a total market growth of 7% estimated in a 1999 Frost & Sullivan Report and applying Dr Harrop and Mr Clay’s market share figures as well as a hybrid. These arithmetical calculations showed DMA’s UK market share exceeding 30% at the latest in 2005 and on two of the measures in 2002.

Mr Burns also concluded that the Agreement had an appreciable anti-competitive effect on the UK scooter market. But that was largely, if not entirely, the result of his conclusion that DMA’s market share at the retail level would exceed 30%. He also said there was evidence that prices had been low before the Agreement, rose during it, but fell again after it was terminated which itself was evidence the Agreement had an anti-competitive effect. However such evidence as there is suggests that the decline in prices was steady and constant and that the lower prices after the Agreement terminated were caused by RMA entering the market and DMA selling off stocks: paragraphs 145 and 146.

Mr Burns examined competition concerns in three respects, namely whether the Agreement

Those criteria as such are not seriously in issue.

Mr Ridyard’s report was a model of its kind and I found his evidence in particular to be both objective and compelling. He made the following points:

I accept these points substantially without qualification. There is really overwhelming evidence that the market (even be it only the UK market) was strongly competitive. Pride was able to enter and succeed. When the Agreement was made both Keep Able and Shoprider were able to find other supplies. When it came to an end, so was DMA. Any UK distributor could source supply from other manufacturers and, as the evidence shows, has often done so.

The volume market shares calculated by Mr Ridyard, on the basis of DMA’s share as a buyer for the European market and using DMA’s historic sales and Dr Harrop’s forecasts of future sales and total market size, had the Agreement remained in place, are set out in Figure 6. Whether or not power chairs are included the maximum share is 21% in the year 2015. A similar exercise using Mr Clay’s figures so far as they go and his opinion on the likely growth of DMA sales also indicated that DMA’s European market share would not have exceeded 30% in future years.

Mr Ridyard addressed the length of the Agreement in Section 5.2.2 of his report. As he (and Mr Burns) pointed out “single branding clauses” do not qualify for Block Exemption if they are for longer than five years regardless of the market shares involved. Whether Clause 10 was such a clause he rightly left to the court. Mr Ridyard considered that “from an economic standpoint the length of the Agreement” was “not problematic”. The reason for this opinion (apart from his overall views) was that any concern would relate to Pihsiang using its market power to the possible detriment of DMA and “as long as DMA had the option not to renew the contract after five years such concerns should not arise”.

Mr Ridyard also addressed the four conditions required to be met for individual exemption under Article 81(3) (see paragraph 170). Distribution was improved, enhanced inter-brand competition and improved distribution benefited consumers and there was no possibility of competition being eliminated as the market was not foreclosed and neither DMA nor Pihsiang had sufficient market power to foreclose it. The third condition was not so readily disposed of: “the restrictions are indispensable to the attainment of these objectives”. Mr Ridyard’s opinion that some exclusive supply obligation was indispensable to the achievement of the objectives is one which I think can readily be accepted. Moreover, granted the need to establish and develop the brand in Europe, I also think a 10 year term conditional on both a minimum sales figure and a best endeavours obligation to increase unit sales year on year can sensibly be so described. What is much more difficult in my judgment is to determine that such an obligation with potentially unlimited five year renewals could sensibly be said to be “indispensable” in the sense the test requires. Mr Ridyard, I think, felt the same difficulty. He wrote of “ a period of protection sufficient … to recoup the investment” of the “ongoing need for investments by DMA” and that “periodic renewal arrangements to cover the anticipated further distributor investments provide an appropriate instrument for safeguarding those investments”. None of those factors seem to me to provide a compelling case for the indispensability of a contractual right to renew unlimited in the times it can be exercised.

SCOOTER MARKET

I mean no disrespect to either Dr Harrop or Mr Clay, both of whom sought properly to assist the court, but I did not in the event derive any great assistance from their evidence other than in respect of matters of some generality. The factual basis of their evidence was on any view very limited; in effect market research among those willing to respond and with very little ability to verify such limited responses as were received. In both cases cross-examination exemplified acknowledged deficiencies in the evidence. As Mr Clay put it, in Clay 1, forecasting market performance beyond 2 to 3 years is very difficult. As Mr Ellison put it, the real or best experts were DMA and Pihsiang and their views on the market before the disputes arose were well documented.

Article 9 of the Vertical Agreements Regulation defines the relevant product market as including “goods or services sold by the supplier, which are regarded as interchangeable or substitutable by the buyer, by reason of the products’ characteristics, their prices and their intended use”. Dr Harrop regarded scooters and power chairs as forming part of the same product market for competition purposes. He did so because, in my summary, (i) they are “very similar and interchangeable products” bought by the same people who can walk at least short distances and can operate the vehicle on their own; (ii) they are usually manufactured supplied and sold by the same outlets; (iii) the prices of power chairs are within the range of scooter prices (iv) sales and promotional literature would commonly deal with both; (v) far more power chair users are able to use scooters than not; and (vi) the great majority of both scooters and power chairs were suitable for both indoor and outdoor use. Mr Hermolle, with his considerable experience, supported all these points. He said that for most potential users most power chairs and scooters were genuine alternatives.

Dr Harrop’s definition of a relevant geographic market was an area in which the “conditions of competition” were “sufficiently homogenous”. Dr Harrop regarded the relevant geographic market at the three different levels as:

Dr Harrop said the global and European markets were and would remain “highly competitive”.

Dr Harrop’s figures for European market growth based on units sold (not value) past and predicted appear in Table 1 of Harrop 1. By definition the predicted figures have a substantial error factor. The figures show 6% annual growth from 1995 to 1998 but much larger growth thereafter. That growth is attributed by Dr Harrop to the success of micro scooters in 2003 and later years, an increase in the number of the elderly and their disposable income, and better access for mobility vehicles in streets and shops and other buildings. He believed intense competition and improved manufacturing efficiency had resulted in price reductions over the years along the whole supply chain, albeit end users were not focusing primarily on price. It was Dr Harrop’s evidence or forecast that whilst the average price ex distributor had fallen and would continue to fall between 1995 and 2005 prices could be expected to stabilise thereafter. In Table 11A of Harrop 1 he set out his forecasts for DMA sales of scooters from 2001 onwards on the basis the Agreement had continued and his estimates of the size of the European market. The Table shows substantial increasing sales between 2001 and 2015 and a DMA European market share rising from 17% to 21% over the same period. The basis for these estimates was, as I think was revealed in cross-examination, very shaky. Dr Harrop’s estimate of DMA’s actual share of the European market in the years 1995 to 2001 rises from 5% to 17%. He also estimated that DMA grew market share in continental Europe from 2.9% in 1996 to 11.5% in 2000. The figures for actual unit sales in continental Europe made by DMA in the years 1996 to 2001 are to be found in Table 12A of Harrop 1. They are in each year starting in 1996, 603; 937; 1,798; 2,502; 3,207; and 3,558.

In Clay 1 Mr Clay expressed his view that the relevant product market was scooters alone because “the products are generally not substitutable and there is little competition between them”. Power chairs, he said, cater for “more serious disabilities”. In Clay 2 he made a number of further points on this issue. He said scooters were used almost entirely outdoors by the elderly or mildly disabled whereas power chairs were for the more seriously disabled who spend most of their lives in the chair in or close to home. That was reflected in their appearance and mode of operation .

Mr Clay agreed that the major European markets were the UK, Germany and the Netherlands. He said that other markets “remain relatively small and largely undeveloped”. The figures bear that out.

In the UK market Mr Clay considered unit sales between 1995 and 2002 had increased by 10% per year on average. He, however, expected growth to continue but to fall to 7% per year after around 2003 because the “market will become more saturated”. He also noted that “prices have continuously fallen since 1995 due to increased competition and a greater variety of scooters available”, but believed that they would not fall further after 2007. In his figure 4-1 he calculated revenue growth rates falling from 7% in 1997 to 4% on 2001, 3% in 2003 and rising to 5% in 2007.

Mr Clay’s evidence about UK market shares in Figure 4-2 of Clay 1 (Shoprider 30% in 1998 rising to 35% in 2002) was I think, and as he acknowledged, seriously exposed as lacking any real foundation. It was said to be based on “primary research” but the evidence of the research exhibited to Clay 1 was insufficient to justify any reliable conclusions. The difference in Dr Harrop’s and Mr Clay’s market share figures is largely explained by their different assessments of the size of the market. Mr Clay also based his figures on value not unit sales.

In Clay 2 Mr Clay addressed the relevant geographic market. He considered each country in Europe to be a separate market applying the same definition as Dr Harrop. The basis for this opinion was his view that average retail prices for scooters differed in the three main markets (albeit he acknowledged in Holland purchases were generally of higher specification product); sales were generally only made by local dealers; manufacturers and distributors had set up “local presences” to penetrate the markets; and many countries had seen little development because the terrain was not suitable to scooters and because of strong disability stigmas. But he accepted in cross-examination that the “big four” (DMA, Invacare, Sunrise Medical and Pride) distributed most of the scooters sold in Europe and at least three of them did so in each of the UK, Holland and Germany and his views, like those of Mr Burns, were focused on the retail market not the wholesale market.

Mr Clay also addressed DMA’s profit margins and, on the basis of Bolton 1, concluded that the gross profit margins ranged between 26% and 29.2% over the 5 years ending 31 March 2001. Mr Clay questioned whether the market was “highly competitive” rather than “competitive”. In Clay 2 he also set out in a Table in paragraph 6.3 the various estimates of the size of the European scooter market between 1995 and 2011 which demonstrates that for the years 2000 onwards his own and Dr Harrop’s figures part company radically with the gap ever increasing and with his own figures being vastly below those of Dr Harrop.

As I have already said, and as both experts acknowledged, the forecasting exercise they addressed is inevitably speculative. The court can, I think, safely conclude from their evidence only that (i) the European market was growing strongly and would continue to do so (ii) it was a strongly competitive market (iii) Pihsiang and DMA working together were well placed to take advantage of the growth and to tackle the competition as they had consistently out-performed the market, and (iv) the likely overall size of the market would fall somewhere between the figures given by the experts, each of whom had valid points to make in support of their approach.

On other issues, I preferred Dr Harrop’s evidence, (in particular read with the long and direct experience of Mr Hermolle) to the effect that power chairs and scooters were properly to be viewed as forming part of the same product market: the market itself treated them as such at every level, albeit to some limited extent I also accept that some disabilities could be assisted by a power chair where a scooter would not be appropriate. On the relevant geographic market I prefer the views of Mr Ridyard substantially for the reasons he gave: see paragraphs 180 and 181

FORENSIC ACCOUNTANTS

There was in my judgment a very marked difference in the quality of the expert accounting evidence. Mr Ellison prepared reports, in the case of Ellison 3 under very severe time pressure, which were thoroughly professional and objective. He gave his evidence in the same manner. Mr Bolton, I regret to say, appeared in some important respects to have as his target sustaining Pihsiang’s case with whatever arguments he could muster. Nor can his changes of view between his reports be explained as he sought to do on the basis of changes in the information available.

There was a measure of agreement between the experts which is set out in two documents dated 28 March and 24 October 2003. The latter also helpfully set out (as at that time) “matters disagreed”. They agreed the overall approach to the calculation of DMA’s loss of profits was to apply the applicable margin to forecast lost turnover from the sale of scooters and then deduct profits from mitigation. One of the major differences of approach to the forecast of future unit sales and prices was that Mr Ellison considered the actual sales figures in the first years of the Agreement and the parties’ own contemporaneous forecasts (such as to be found in DMA’s strategy documents and Pihsiang’s Prospectuses) to be basic and important sources of information whereas Mr Bolton, for reasons I found impossible to follow, gave very little weight to them. They agreed that unit sales would continue to increase but prices would decrease but as Mr Ellison said both scooter experts forecast the unit sales increase to be much larger than the forecast price decrease resulting in a substantial increase in forecast revenue. Mr Bolton in Bolton 1 described the pattern of growth over the period 1996 to 2001 as one of “growth and decline”. That was quite wrong. Apart from a “slight dip” in 1998/9 (probably attributable to Pride entering the market) Mr Ellison was plainly right to say that the figures showed consistent and rapid continuous growth with a CAGR of 24/22% depending on whether power chairs were included. Mr Ellison took as the appropriate profit margin for DMA unit sales 23% and 5% for sales to Casacare giving an effective rate of 20%. Mr Bolton’s figures had not been finalised at the time of the 24 October document.

The experts were agreed that any loss calculated after judgment date should be discounted to take account of the true value of money and risk. Mr Ellison put forward alternative figures for the court’s consideration (8%, 10%, 12%). Mr Bolton started at 6.9%, moved to 15%, and subsequently appeared to agree 10%. Mr Bolton thought, however, that the rate should be increased to reflect increased risks for further renewals. Mr Ellison said he had dealt with that by assuming no growth at all in his calculations after 2006 or 2011 as the case might be.

As regards the counterclaim, Mr Ellison considered no loss by Pihsiang had been demonstrated. Mr Bolton put forward a growth rate of 28.5% which, as Mr Ellison disarmingly said, sat oddly with his 8% rate (albeit for a different but immediately following period) in assessing the claim. Moreover Mr Bolton included lost sales in the UK in his original calculation when no claim was even made in that regard.

In Ellison 1, prepared before the scooter experts had reported, Mr Ellison restricted his calculations to a maximum of 3 renewals and so up to and including a fourth 5-year term of the Agreement ending on 5 February 2016. He did so on the simple and plainly realistic basis that the likelihood of renewals became increasingly speculative pointing out also that the effect of discounting made the sums involved in any later renewals much less significant.

Mr Ellison’s conclusions on his analysis of the historic information of actual sales and forecasts are set out in Section 9 of Ellison 1. His approach was cautious in excluding the initial historic surge in growth and he applied a CAGR of 14% for DMA. Mr Ellison’s sales price forecast appears in Section 9.3 and recognises that prices were falling. In Section 12 he analysed DMA’s margin on sales. Putting these figures together the loss calculated by Mr Ellison was set out in Figure 26 of Ellison 1 on two bases: one assuming no growth in sales after 5 February 2006 and the other no growth after 5 February 2011.

Mr Ellison also sought to assess the costs ‘saved’ by DMA through not making the sales of Shoprider which he had estimated. DMA had intended to build but in the event did not build a new warehouse to store Pihsiang’s goods. The contract value was £1.4m and he made allowance for the saving and for non-payment of the $100,000 renewal fees. Apart from those matters, it was his conclusion that DMA had not saved any costs by reason of the termination.

Mitigation of loss was addressed in Section 14 of Ellison 1. His assessment of the returns from sales of Merits scooters over the various renewed periods appear in Figure 31.

Mr Ellison’s total figures for the claim, with the various alternatives he addressed, are set out in Figures 34 to 37 of Ellison 1. His figures for the loss at 5 February 2006, including both scooters and power chairs and applying an 8% discount was £13.7m, and for two renewals £25.7m.

Mr Bolton, at paragraphs 3.66 and 5.5 of Bolton 1, using his mid-range profit margin for DMA of 12%, produced a figure of £3.099m for DMA’s loss to 5 February 2006. The major reasons for the difference were different views of growth in sales and prices and in the approach to DMA’s overheads which Mr Bolton took to be directly variable with turnover. The figure Mr Bolton then put on the counterclaim for DMA’s alleged sales failures was £4.278m.

At the time he prepared Ellison 2 Mr Ellison had Bolton 1, Harrop 1 and Clay1 and the other further information to which he there refers. As he said “his conclusions remain(ed) broadly unchanged”. Ellison 2 is sharply critical of Bolton 1. I agree with the criticisms. Mr Ellison made some small adjustments to his overall figures and also produced figures for scooters as well as scooters and power chairs. His revised figures are set out in Figure 4 of Ellison 2. These figures on the basis of one renewal, scooters only, and a discount rate of 8% and interest rate of 1% over base rate are £10.8m and for two renewals £23.1m. Mr Ellison also recalculated the claim based on both Dr Harrop’s and Mr Clay’s forecast figures for unit sales and average sale price growth. The comparable figures were £10.4m and £24.2m (Harrop) and £9.4m and £17.4m (Clay).

In Bolton 2, Mr Bolton addressed Ellison 1, Clay 1 and Harrop 1 and

That was the state of the expert accounting evidence when the hearing began. Bolton 3 was dated 6 November. Mr Bolton had Ellison 2 dated 27 June. In Bolton 3, Mr Bolton

It was this report which DMA’s witnesses had no opportunity to address and Mr Ellison had very little time to do so. However in Ellison 3 he made some trenchant criticisms pointing out that Mr Bolton’s position “on virtually every accounting aspect of the case” had changed. I, again, agree with Mr Ellison. In particular:

Mr Ellison also pointed out how difficult was the correct assessment of mitigation and in particular an assessment of DMA’s returns from the sales of Merits and Kymco scooters. The latest figures showed more sales than Mr Ellison had allowed for and he therefore believed his overall figures for quantum in Ellison 2 might be overstated by some 5%.

In Figure 6 of Ellison 3 Mr Ellison helpfully summarised his opinions which, with limited adjustments, remained unshaken in cross-examination and, in my judgment, entirely persuasive subject of course to the legal and factual issues which arise in relation to the number of renewals. In the course of his evidence Mr Ellison accepted, subject to the court’s views, a discount rate of 10% was appropriate (rather than 8% in his figure 6) and, as I have stated, the warranty element is now to be omitted. With these adjustments, and excluding any interest, Mr Auld prepared a short summary of Mr Ellison’s final views which he distributed on the final day of the hearing. It is my understanding that it is accurate as a representation of those views. It shows (in sterling) a cumulative loss to DMA:

Of the major issues which arose:

I would add that an interest rate of 1% over base rate would reflect the normal rate in this court for a claim calculated in sterling and so, if and where relevant, it should be applied. I have also decided that the Kymco costs of mitigation should be £300,000 not £600,000: paragraph 150.

DMA submits that the restraint of trade doctrine is of no application to the Agreement for any one of three reasons:

I will consider these submissions in turn, save that I propose to consider the Community law issue after I have considered the application of Article 81 itself.

The leading authority is the decision of the House of Lords in Esso Petroleum Ltd v Harpers Garage [1968] AC 269. The doctrine was applied to exclusive (tied) petrol supply contracts with two garages. Both contracts also contained resale price restrictions which were not in fact enforced. One was for a term of 4 years and 5 months; the other for a term of 21 years. The House held the agreements were in restraint of trade because the garages had given up their previous right to sell other petrol. The shorter agreement was nonetheless held to be valid because it was no longer than necessary to afford adequate protection to the legitimate interest of Esso in maintaining a stable system of distribution; the longer agreement was held to be void “in the absence of evidence of some advantage to (Esso) for which a shorter period would not be adequate”.

The agreements in Esso were, of course, operative at the retail level of the market and imposed restraints on parties operating in that market. The relevant restraints in the Agreement, as Mr Mill acknowledged, are those on Pihsiang at the wholesale level which limits Pihsiang from selling its scooters to any party but DMA for onward sales in Europe.

There are no relevant restraints on the sales by DMA within Europe. DMA gave up the freedom it otherwise had to buy scooters from any manufacturer other than Pihsiang but DMA does not complain about that restriction on its business.

The House of Lords did not attempt to define contracts which are and contracts which are not in restraint of trade: Lord Reid at pages 298-9; Lord Pearce at page 324; and Lord Wilberforce at page 331-2. If one searches for clues they are somewhat limited in number and application. Lord Hodson (at page 318) said the basis of the doctrine “is the protection of the public interest”. Lord Pearce (at page 328) said “the doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract” and that when “the negative ties are only those which are incidental and normal to the positive commercial arrangements at which the contract aims, even though those ties exclude all dealings with others, there is no restraint of trade within the meaning of the doctrine and no question of reasonableness arises”. Lord Wilberforce (at page 331) said “the doctrine of restraint of trade is one to be applied to factual situations with a broad and flexible rule of reason”, taking into account “the wider aspects of commerce … as well as the narrower aspect of the contract as between the parties”. Whilst there was also unanimity of view that where experienced traders bargained on equal terms and agreed to a restraint which seemed good to them the court should be very slow in deciding that it knew better than they did what was in their commercial interest whether that was a factor to be applied at the “application of the doctrine” or “reasonableness” stage of the question is less clear.

In Panayiotou v Sony Music [1994] EMLR 245 Jonathan Parker J reviewed the authorities on the doctrine. As Jonathan Parker J said (at page 320) there is a public interest in freedom of contract as well as freedom of trade. There is also a potential tension between the two. As he also said (at page 321) the first question is whether the contract attracts the doctrine because it is “in restraint of trade” using that expression “as a term of art covering those contracts which are to be regarded as offending a rule of public policy” but (at page 327) “the right approach for the court, once it is satisfied that the contract before it is a contract which is (in ordinary parlance) in restraint of trade, is to consider whether in all the circumstances sufficient grounds exist for excluding that contract from the application of the doctrine”.

Armed with this avowedly uncertain guidance, I do not find the matter an easy one. It is open to question whether English public policy should concern itself at all with the restrictions agreed by Pihsiang. The Agreement itself is of a recognised and usual type intended for the mutual benefit of two equally astute commercial parties. It applied across Europe and so to countries which may well have no equivalent of English law in this area. DMA was investing a substantial sum to “buy” exclusivity and further sums to promote Shoprider for which exclusivity was the security. The target was successful inter-brand competition and brand development. Nor do I think that if the Agreement is to be construed as I have construed it (for a 10-year term) there is anything exceptional about its terms such as would justify the attraction of the doctrine. Indeed the contrary was not submitted. The restraint on Pihsiang would then have a finite and I think normal term for such a substantial undertaking and would come to an end with the Agreement.

But if the Agreement is to be construed as one entitling DMA to renew it every five years for the rest of time subject only to the conditions of Clause 10 then I think the conclusion that it not only contained a restraint on Pihsiang’s freedom to trade in the UK (as well as continental Europe) but did so in a manner which was unusual or exceptional is almost unavoidable. The Agreement would then in my judgment be subject to the doctrine and so require to be justified as reasonable between the parties. As Mr Mill submitted the right to renew was granted only to DMA and if exercised Pihsiang was under the positive obligation to supply scooters to DMA at all times and at the lowest price payable by any distributor (Clause 6).

It does not matter to the outcome whether the Agreement falls outside the application of the doctrine or satisfies the reasonableness test. In my judgment a 10-year agreement would satisfy the test. The court must assess the terms at the time the Agreement was entered into: see paragraph 237 below. It is for DMA to establish that the restraint is reasonable. Building a successful brand and meeting inter-brand competition required both time and the investment of money. DMA was entitled to protect its investment and to reap the rewards of success if it succeeded. That was a commercial deal about which the court should indeed accept that the parties were the best judges of their own interests in making it. Pihsiang’s own interests in making such an Agreement are spelt out in the March 2001 Prospectus. But I also think if the Agreement is to be construed as entitling DMA to renew every five years for the rest of time that goes much further than any legitimate interest DMA could have or was entitled to protect. It would be tantamount to imposing a lifetime restriction and potentially a way of avoiding the consequences of the greater legal distaste for restraints which apply after an agreement has ended.

It follows, therefore, that in my judgment the Agreement escapes the application of the doctrine of restraint of trade or is justified if the doctrine does apply to it only if it is a 10-year Agreement. If it is not, and DMA’s right to renew every 5 years is only circumscribed by the provisions preceding it in Clause 10 of the Agreement, then subject to questions of severance and compatibility with Community Law, the doctrine both applies and renders the Agreement void.

In relation to Clause 10, severance could, if available, achieve one of two results. If the final sentence of Clause 10 should be read as effective as it stands, it could be severed in its entirety, producing the same result as in my judgment (paragraph 82) arises as a matter of the application of the principles in Davies v Davies but by another route. It could, in the alternative, be severed simply by removing the last seven words producing the result of an unqualified (by any “law”) right of renewal for DMA every five years. Either result could be achieved by use of a “blue pencil”.

DMA has contended in its pleadings and submissions that the mutual exclusive obligations in Clauses 3 and 4 of the Agreement could themselves be severed. But I agree with Mr Mill, and indeed the whole tenor of DMA’s evidence, that exclusivity was the rationale of and central to the Agreement. Severance is not available to remake a contract or to change the character of a contract. It was exclusivity for which DMA agreed to make the capital payments.

DMA made no submissions directed to severance of the final sentence of Clause 10, albeit it is that sentence, if it is effective, which in my judgment brings into consideration the doctrine of restraint of trade and fails the reasonableness test. It is not exclusivity itself which is objectionable but the real potential for it to continue indefinitely. Absent any submission by DMA on Clause 10 I do not think it right to consider the matter further.

The terms of Article 81 and the material Regulations are set out in paragraphs 156 to 170. It is common ground that the Agreement had an actual or potential effect on trade between Member States.

Pihsiang submits that the Agreement had as its object “the prevention, restriction or distortion of competition”. To quote Pihsiang’s Closing Submissions (paragraph 146) “the main object of the Agreement was to confer absolute territorial protection on DMA within the very wide contract territory” and “a further object was to perpetuate the fragmented nature of the national markets within the EC, thus confirming the segregation of the dominant UK market”.

In my judgment, the second of these supposed “objects” derives no support at all from the terms of the Agreement, which apply indiscriminately to the stated European countries, and if the first was sufficient simply as so expressed it would mean that any European-wide vertical distribution agreement containing mutual exclusivity would be within Article 81(1), whereas I accept Mr Green’s submission that the competitive advantages perceived to derive from such agreements are such that at least prima facie far from having an anti-competitive object they are considered to be beneficial to competition: Delimitis v Henninger Brau AG [1991] ECR 1-935 at paragraphs 10-13. There was, moreover, nothing in the Agreement to prevent purchasers or sub-purchasers from DMA stocking or selling other brands of scooters nor from selling Shoprider scooters to any purchaser wherever situate at any price or on any terms. At that level of the market there was no restriction on intra-brand competition. Most of the authorities on which Mr Beal placed reliance were instances where an agreement sought to protect one part of the common market from another for example by preventing a distributor in France from re-exporting a product to Germany. Granted that the parties to a European-wide vertical agreement have a mutual interest in promoting sales of the relevant product and, in this case, the overwhelming evidence that inter-brand competition was strong and effective and the market open to new entry, I do not think the terms of the Agreement itself in its factual and economic context can properly lead to a conclusion that its object was within Article 81(1) whatever the proper construction of Clause 10. The Agreement contained none of the “hard-core” restrictions (on prices or production levels or the like) which may also lead to the application of Article 81(1). The target of both Pihsiang and DMA was to promote inter-brand competition.

It was, I think, in part recognition of this basic problem in Pihsiang’s case that at a very late stage in the proceedings it was submitted that DMA could not properly rely on the European scope of the Agreement because it would amount to an abuse of rights for it to do so. The basis for the submission on abuse of rights is the assertion that DMA was in reality seeking to protect the UK market (or the UK, Dutch and German markets) from parallel imports and the inclusion of the other European countries in the Annexe to the Agreement was an artificial construct created for no other reason than to secure that protection.

In case C-110/99 Emsland-Starke GmbH v Hauptzollampt Hamburg-Jonas [2002] E.C.R. 1-11569, the ECJ at paragraphs 52 to 54 stated:

“52.

A finding of an abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved.

53.

It requires, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it …

54.

It is for the national court to establish the existence of those two elements, evidence of which must be adduced in accordance with the rules of national law.”

The material evidence on DMA’s “subjective intention” has been set out in particular in paragraphs 27, 28 and 29 and 43 of this judgment and is to be read with the continuing efforts to increase sales in European countries recorded in Board Minutes and the level of success in fact achieved with such sales. I see no reason at all to doubt on this evidence that whether or not the origin of the Annexe to the Agreement was a desire to comply with European law DMA intended to do just that. Indeed the Agreement itself provided for DMA to do so with the risk of breach and non-renewal if it failed to do so. The very fact that Pihsiang acknowledges that DMA was or at least may have been concerned to secure the markets in Holland and Germany as well as the UK serves, I think, to demonstrate the unreality of the abuse submission. Mr Crowe said, and I accept, that DMA would not have paid $1.108m for exclusivity only in the UK. He also said and I accept that DMA’s objective was to establish a pan-European business.

In my judgment the Agreement did not have an anti-competitive “object” and DMA did not secure that conclusion by any abusive conduct or artificiality in the terms agreed.

Whilst it is not, I think, easy to draw a rigid line between “object” and “effect”, the former looks at least primarily to the terms of the Agreement; the latter more at the actual effect of the agreement in operation. It is also of potential significance that whilst Mr Beal may be right that in some circumstances if an Agreement is found to have an anti-competitive object it may be irredeemably void from the outset, the effect of an agreement may change with circumstances and thus fall within or without Article 81(1) according to those circumstances. An example might be where the parties achieved over time a market share which provided the power to operate anti-competitively. That, as Nicholls LJ noted in Apple Corps Ltd and Apple Computers Inc [1991] 3 CMLR 49 at paragraph 113, is in contrast to the common law of restraint of trade where the law requires the reasonableness of an agreement to be assessed at the time it is made and does not permit of an assessment of how it has worked in practice: see Gledhow Autoparts v Delaney [1965] 1 WLR 1366 at page 1377 where Diplock LJ said:

“It is natural … to tend to look at what in fact happened under the agreement; but the question of the validity of a contract in restraint of trade has to be determined at the date at which the agreement was entered into and has to be determined in the light of what may happen under the agreement, although what may happen may be and always is different in some respects from what did happen. A covenant of this kind is invalid ab initio or valid ab initio. There cannot be a moment from which it passes from the class of invalid into that of valid covenants.”

Mr Burns and Mr Ridyard were agreed that whether or not a vertical exclusive agreement falls within Article 81(1) depended upon whether the exclusivity created substantial foreclosure to the market. The “foreclosure” test was emphasised in Delimitis and by Park J in Crehan v Courage [2003] EWHC 1510 (26 June 2003 at paragraph 150). The relevant market in this case, in agreement with Mr Ridyard, is, I think, the market for supplies by manufacturers to “top-tier” or main distributors: the wholesale distribution market.

The evidence is substantially undisputed. Manufacturers sell scooters on a global basis and top-tier distributors purchase on a global basis. There is no shortage of manufacturers. Most, if not all, the scooters distributed in Europe are manufactured outside Europe. The major distributors (some of which are also manufacturers) also sell throughout Europe. In his evidence Mr Ridyard framed the foreclosure question in these terms: “Does the fact that Pihsiang is obliged to supply its products only to DMA remove opportunities to other competing top-tier distributors to such an extent that they are unable to compete effectively in the marketplace?” That is not to ignore the downstream market but to focus on the level of the market where the relevant and in this case only restriction applies.

It is no surprise that Pihsiang placed less emphasis on “effect”. The evidence is overwhelming that the answer to Mr Ridyard’s question is “No”. The Agreement did not have any significant anti-competitive effect. The market (at all levels) was not foreclosed or difficult to enter. Competition was strong, effective and increasing throughout Europe. Prices were falling. There is no evidence at all that any potential market entrant was deterred by the existence of the Agreement. It is not suggested that DMA ever in fact achieved during the operation of the Agreement a dominant market share even in the UK let alone Europe.

Mr Beal submitted that an acid test of the anti-competitive effect of the Agreement was to examine the market before it was made and the effect of the Agreement upon that market and to repeat the examination when the Agreement terminated. But I do not think Pihsiang derive any assistance from such examinations. True, in 1996, the other UK distributors of Shoprider sought supplies from other sources but they duly obtained them. There is also evidence that when RMA began to replace DMA in 2001 it reduced the prices of Shoprider scooters. But Pihsiang reduced its prices to RMA and DMA was disposing of its substantial Shoprider stock holdings at reduced prices. Moreover DMA found a new short-term supplier (Merits) and was able to develop and now to market a long-term alternative with Kymco.

In my judgment therefore the Agreement also did not fall within Article 81(1) by reason of its “effect”.

It follows that I accept DMA’s submissions that Article 81(1) did not render the Agreement void.

If my conclusion on Article 81(1) is correct the question whether or not the Agreement would have benefitted from exemption under the Vertical Agreements Regulation (which came into force on 1 January 2000 and took effect from 1 June 2000) does not arise. Nonetheless I should address it not only because my conclusion may be appealed but also because the answer may affect the operation of the common law doctrine of restraint of trade.

It is Pihsiang’s submission that the court should first consider whether the Agreement complied with the Exclusive Distribution Block Exemption Regulation 1983/83. That was the Block Exemption (as amended) in force at the time the Agreement was made and which was replaced by the Vertical Agreements Regulation with effect from 1 June 2000. DMA has not sought to submit that the Agreement did comply with this Regulation but does submit that the question is of no relevance because if the Agreement was exempted by the later Regulation then there would be no Community law barrier to DMA’s claim which is for damages for losses in 2001 and subsequent years. That said, I accept Mr Beal’s submission that the Agreement did not comply with Regulation 1983/83 at least because of the inclusion in it of the restriction on Pihsiang from permitting any of its distributors outside the Annexe European territories from making supplies to the territory: Article 2(1). I also accept Mr Beal’s submission that the Agreement could not be saved from this conclusion by “severance”: the ability to sever is governed by national law. Article 2(1) was an essential commercial provision of the Agreement.

It was this submission by Pihsiang which in particular gave rise to questions whether, assuming it would apply to exempt the Agreement when it came into force, the Vertical Agreements Regulation could operate to “cure” an Agreement otherwise “automatically void” under Article 81(2). There is nothing in the Vertical Agreements Regulation itself which expressly addresses the question. Mr Beal submitted that DMA needed to establish “retroactive exemption” and Community law presumed legislation was not retroactive absent express words.

It is DMA’s submission that the Vertical Agreements Regulation itself, once in force, can validate the Agreement or terminate its invalidity and not that retroactive validation is necessary. In Passmore v Moreland [1999] 3 All E.R. 1005 the Court of Appeal held that a beer tie agreed with a publican which was assumed to be void under Article 81(1) whilst company A was landlord ceased to be so when company B became landlord and entitled to the benefit of the tie. Whilst it is true that there is no comparable change of party in this case, the reasoning of Chadwick LJ in my judgment is not so limited: see in particular pages 1014 to 1015 and 1020. Nor do I think, as Mr Beal submitted, that the decision is inconsistent with the ECJ’s decision in Courage Ltd v Crehan [2002] QB 507. Whatever the position during a period of invalidity this court is concerned with a period when, if it meets its terms, the Agreement would be valid pursuant to the Vertical Agreements Regulation which would not affect the rights of parties during any period of invalidity.

The question is, therefore, whether or not the Agreement was entitled to exemption under the Regulation. To be so the Agreement must meet the criteria I have summarised in paragraphs 165 to 168. In addressing the criterion of 30% of market share I have already concluded that the relevant product market is the market for scooters and power chairs and the relevant geographic market Europe (paragraph 197). On that basis DMA did not have and would have been unlikely to achieve a 30% European market share even had the Agreement continued in force: paragraph 180(vi). Indeed I think on the balance of the evidence the same would be true in relation to the UK market share alone.

The difficulty for DMA, however, arises from Article 5(a) (paragraph 168). On any view of Clause 10 the exclusivity restriction exceeded a period of 5 years as there defined: it was expressly renewable beyond that period. Mr Green submitted that the relevant “non-compete obligation” was to be found in Clause 3 of the Agreement whereby DMA could only sell scooters manufactured by Pihsiang and if necessary that obligation could be severed. I cannot accept that. Clause 3 was an essential commercial provision of the Agreement. It is for this reason, and only this reason, that in my judgment DMA has failed to establish that the Agreement would have been exempted from Article 81(1) by reason of the Vertical Agreements Regulation.

The provisions of Article 81(3) are stated in paragraphs 158 and 159 above. DMA’s submission is set out in paragraphs 169 and 170.

Exemption under Article 81(3) required notification until Council Regulation 1216/1999 came into force on 18 June 1999. That Regulation exempted all vertical agreements from the notification requirement. The jurisdiction to grant exemption presently lies with the Commission. It extends to retrospective exemption. From 1 May 2004 the domestic courts of this country will have jurisdiction to grant exemption. Mr Beal submitted, citing Delimitis at paragraphs 50 and 51, that in these circumstances there was no jurisdiction for this court even to address the issue of individual exemption at least unless the matter was one which the court concluded was not open to any serious debate. However that submission seems to me to ignore the fact that one of the issues in these proceedings involves an assessment of whether or not the Agreement was void under Community law, and, if it had been challenged as such, what the outcome would have been. I do not doubt that Mr Beal is right that if a decision of the Commission were sought today the Commission might well take the view that there was insufficient interest in addressing the question in relation to an Agreement which has terminated. Nonetheless, and at risk of trespassing, I think this court must still attempt to make an assessment of the likely outcome had individual exemption been sought. If it would have been granted as a matter of probability then I think DMA would be entitled to ask the court to take that into account in evaluating its claim.

But I am not satisfied that DMA has shown that the Agreement satisfies the four conditions for individual exemption. I accept Mr Ridyard’s evidence (paragraph 184) that the two positive objectives were met. I also think the second negative condition was met. But for the reasons expressed in paragraph 184 I do not accept that an unlimited right of renewal (if Clause 10 was such) on the exclusive terms of the Agreement can be said to be indispensable to the attainment of the positive objectives.

It follows that DMA’s case on Article 81(3) fails. The Agreement escapes Article 81(1) only because neither its object nor effect were anti-competitive. I am conscious that it can of course be said that there is an illogicality in these conclusions: if the Agreement does not satisfy the requirement of block or individual exemption that must be because the respect or respects in which it fails to do so involves anti-competitive effects (or objects). But, in agreement with Mr Green’s submission, I do not think that is so. The exemptions are not exclusive nor is it to be assumed that vertical agreements which do not satisfy their terms are by that very fact in breach of Article 81. For example it does not follow that where parties have a 35% market share a vertical agreement would necessarily infringe Article 81. The very fact that Article 81 addresses the “effect” of an Agreement must, I think, leave open an assessment of the operation of any particular agreement in the context in which the question arises.

It is this question which is perhaps of greater general interest. It would, I suspect, come as something of a surprise to many practitioners if it were the case that the common law doctrine of restraint of trade even in the non-employment field had been emasculated let alone trumped by Community competition law. But if my conclusions on the common law and Article 81 are right and the Agreement was subject to unlimited renewals the court is faced with an Agreement which infringes the common law but not Article 81 when, as it seems to me, the particular concern of the common law involved is indeed a restraint on trade in a context which may be said to be no more than earlier language for the restraint on competition at which Article 81 is aimed. As I have already said (paragraph 237) the fact that the common law examines the issue in the terms of possibilities at the date of the agreement but Community law permits a more pragmatic approach to the effect of an agreement in practice may and in this case in my judgment does result in a different conclusion. There is, I think, an artificiality about the “once and for all” common law approach which at least granted the agreement passes the “object” test Community law avoids.

Mr Beal submitted, citing the 11^th Edition of Treitel’s The Law of Contract at page 477, that the two laws had, at least in part, different objectives. The common law’s concern was the perceived public policy in ensuring personal freedom to trade and hence its distaste for long-term agreements. It was not a “competition law”. Community Law, in contrast, was concerned with competition and so recognised that agreements whilst restrictive on personal freedoms may nonetheless promote competition and so benefit consumers.

It was Mr Green’s submission that where Community law “allows” or “authorises” an agreement which does affect trade between Member States to operate free of regulation then any otherwise inconsistent national law is excluded. In other words granted an agreement of the present type falls within the jurisdiction of Community law under Article 81 only Community law can provide for its validity or invalidity.

Mr Beal also submitted that “mere non-application” of Article 81(1) would not oust the common law and even if the Agreement was (which I have held it was not) entitled to exemption the common law would only be incompatible with Community law if it prevented the exemption from having full force and effect. Insofar as Mr Beal re-iterated the “abuse of right” submission in this context it fails in my judgment for the reasons I have already expressed.

The starting point for these submissions is the decision of the ECJ in Case 14/68 Walt Wilhelm [1969] ECR 1 which established the basic principle of the supremacy of Community law in this field. Paragraphs 4 to 7 of the decision read:

“4 … it follows that in principle the national cartel authorities may take proceedings also with regard to situations likely to be the subject of a decision by the Commission. However, if the ultimate general aim of the Treaty is to be respected, this parallel application of the national system can only be allowed in so far as it does not prejudice the uniform application throughout the Common Market of the Community rules on cartels and the full effect of the measures adopted in implementation of those rules.

5.

Any other solution would be incompatible with the objectives of the Treaty and the character of its rules on competition. Article 85 of the EEC Treaty applies to all the undertakings in the Community whose conduct it governs either by prohibitions or by means of exemptions, granted – subject to conditions which it specifies- in favour of agreements which contribute to improving the production or distribution of goods or to promoting technical or economic progress. While the Treaty’s primary object is to eliminate by this means the obstacles to the free movement of goods within the common market and to confirm and safeguard the unity of that market, it also permits the Community authorities to carry out certain positive, though indirect, action with a view to promoting a harmonious development of economic activities within the whole Community, in accordance with Article 2 of the Treaty ….

6.

The EEC treaty has established its own system of law, integrated into the legal systems of the Member States, and which must be applied by their courts. It would be contrary to the nature of such a system to allow Member States to introduce or retain measures capable of prejudicing the practical effectiveness of the Treaty. The binding force of the Treaty and of measures taken in application of it must not differ from one State to another as a result of internal measures, lest the functioning of the community system should be impeded and the achievement of the aims of the Treaty placed in peril. Consequently, conflicts between the rules of the Community and national rules in the matter of the law on cartels must be resolved by applying the principle that Community law takes precedence.

7.

It follows from the foregoing that should it prove that a decision of a national authority regarding an agreement would be incompatible with a decision adopted by the Commission at the culmination of the procedure initiated by it, the national authority is required to take proper account of the effects of the latter decision.”

In Giry and Guerlain [1980] ECR 2327 the ECJ decided that an administrative letter informing an undertaking of the Commission’s opinion that there was no need for the Commission to take any action in respect of certain agreements and to close the file did not have the result of preventing national authorities from applying to the agreements provisions of national competition law which might be more rigorous than Community law. But the basis for the decision was that the letters were not themselves decisions either granting exemption or on the application of Article (then) 85: see paragraph 12. Walt Wilhelm was cited with approval but therefore not in point.

In Case C-70/93 BMW [1995] ECR 1 3439 Advocate General Tesauro identified as a potential issue whether an exempt agreement could nevertheless be prohibited under national competition legislation. The court itself decided the case on other grounds and expressly declined to answer the question. Advocate General Tesauro was clearly of the opinion (paragraphs 38 and 39) based on Walt Wilhelm that since the agreements there in question were liable to affect trade between Member States and therefore fell in principle within the prohibition in (then) Article 85(1) “the exemption granted to them cannot but prevent the national authorities from ignoring the positive assessment put on them by the Community authorities”. His opinion was the same whether the agreements were protected by individual exemption or an exempting regulation: “A national court is therefore bound not to take decisions which are incompatible with the provisions of an exempting regulation by extending its scope to cover agreements not covered by it or disregarding its scope in relation to the agreements which are covered by the exemption …”

Thus far, however, the key to incompatibility could fairly be said to require the positive approval of the agreement by way of a decision that they were exempted from Article 81. On my findings that would not assist DMA in this case.

However in Case C-266/93 Bundeskartellamt v Volkswagen and VAG Leasing Advocate General Tesauro addressed the question whether there was a conflict between Community and national competition law “not only where an exemption is granted … but also where the conduct at issue does not fall within the prohibition laid down in (then) Article 85(1)”. Once again, the ECJ did not find it necessary to answer the question. Advocate General Tesauro, in paragraphs 58 and 59 of his Opinion, wrote:

“In the present case it need only be noted that any assessment of compatibility with Article 85(1) would be the subject of the judgment of the Court and, as such, in my view, could not be called into question by the national court or by the competent national authorities. In other words, should the Court come to the conclusion that the conduct here in point, whilst it is liable to have an adverse effect on trade between Member States, does not constitute a threat to competition for the purposes of Article 85(1), it necessarily follows that such an assessment would have the same effect as an exemption, with the result that the national court would not, for the same reasons as those I have already set out with respect to exempted agreements, be able to prohibit the conduct in question.

59.

Such an interpretation is fully in accordance with the considerations underlying the judgment in Walt Wilhelm, frequently cited above. It would be inimical to the full effectiveness of Community competition law to accept that a national decision may conflict with and prevail over a judgment of this Court finding that the agreement in point does not fall within the prohibition under Article 85(1) because it does not constitute a restriction of competition.

In the result, whenever a particular case does not fall within Article 85(1) because there is no adverse effect on trade between Member States, the competent national authorities may well hold the agreement point to be anti-competitive in view of the harmful effect it has on the domestic market. Conversely a binding finding of the Commission, or a fortiori, a judgment of the Court, to the effect that the agreement does not adversely affect competition, precludes, in my view, its being penalised at the national level. In such a case, in my opinion, the requirements for asserting the primacy of Community law are satisfied.”

That Opinion in effect addresses the issue with which, on my findings, I am confronted. The logic of applying the same principles in a case to which an exemption applies to a case in which Article 81(1) is held not to apply at all because the relevant agreement is found not to have an anti-competitive effect and so not to ‘need’ exemption is to my mind inescapable.

Finally Article 3 of the Modernisation Regulation is entitled “relationship between Articles 81 and 82 of the Treaty and national competition laws”. Article 3 provides:

“1.

Where … national courts apply national competition law to agreements, decisions by associations of undertakings or concerted practices within the meaning of Article 81(1) of the Treaty which may affect trade between Member States within the meaning of that provision, they shall also apply Article 81 of the Treaty to such agreements, decisions or concerted practices ….

2.

The application of national competition law may not lead to the prohibition of agreements, decisions by associations of undertakings or concerted practices which may affect trade between Member States but which do not restrict competition within the meaning of Article 81(1) of the Treaty, or which fulfil the conditions of Article 81(3) of the Treaty, or which are covered by a Regulation for the application of Article 81(3) of the Treaty ….

3.

Without prejudice to general principles and other provisions of Community law, paragraphs 1 and 2 do not apply when the competition authorities and the Courts of the Member States apply national merger control laws nor do they preclude the application of provisions of national law that predominantly pursue an objective different from that pursued by Articles 81 and 82 of the Treaty.”

Although the Modernisation Regulation came into force only on 5 January 2003 and does not apply until 1 May 2004, Mr Green submitted and I accept that these provisions had their origin in Advocate General Tesauro’s Opinion in the Volkswagen Case and that, as subordinate legislation, they were required to reflect general Community law derived from the Treaty. The qualification in paragraph 3 of Article 3 was, he submitted and I also accept, aimed at consumer protection laws relating to unfair contract terms and the like. Whatever characterisation may be given to the common law doctrine of restraint of trade and despite Mr Beal’s submission to the contrary I do not think it can be said predominantly to pursue an objective different from Articles 81 and 82. A reflection of the close relationship of the two can be found in WWF v World Wrestling Foundation [2002] EWCA CIV 196 in the judgment of Carnwath LJ at paragraphs 64 and 66, and in Apple Corps Limited v Apple Computer Inc in the judgment of Nicholls LJ at paragraphs 109 to 113.

In my judgment, therefore, this court is precluded by Community law from applying the restraint of trade doctrine to the extent I have decided it would otherwise be applicable.

Addressing the Issues set out in Paragraph 6:

THE AGREEMENT

PARTIES

Mr and Mrs Wu were both parties to the Agreement exactly as recorded in its terms. No representations to the contrary were made by anyone on behalf of DMA and both Mr and Mrs Wu fully understood what it was both they and Pihsiang were signing: see in particular paragraph 41.

CONSTRUCTION

The prerequisites to renewal by DMA under Clause 10 were:

“Discharged its obligations” does not merit further definition. It raises a question to be answered as a matter of ordinary language in the light of the facts at the time of renewal.

The only obligations in Clause 11 which are relied upon by Pihsiang are 11(ii) and 11(iv). The obligation in 11(ii) (to keep Pihsiang informed of the identity of sub-distributors) could have been material and could have resulted in or contributed to a failure by DMA to discharge its obligations if it were persistent and such as to be likely to damage Pihsiang. The obligation in 11(v) to procure registration of the Shoprider brand in those markets in which DMA believed that to be necessary could result in or contribute to a failure by DMA to discharge its obligations depending on the circumstances including the gravity of any consequences of such a failure.

SCOPE/VARIATION

VALIDITY.

Restraint of Trade

Was the Agreement when made one to which the restraint of trade doctrine applied?

If so, has DMA established that the terms of the Agreement were reasonable as between the parties?

Article 81

PERFORMANCE OF THE AGREEMENT

. DMA had discharged its obligations under the Agreement at the time of renewal.

. There were no relevant breaches of the Agreement by DMA and none such as to deprive it of the right to renew under Clause 10.

RENEWAL

The Agreement is effective as but only as a 10-year agreement expiring on 5 February 2006: paragraphs 70-82.

DMA is entitled to claim damages for the breach and repudiation of the Agreement by Pihsiang for the period ending on 5 February 2006. Those damages are to be assessed as set out in my conclusions under Issue 5 (first two paragraphs).

If, contrary to (1), the Agreement is to be construed as entitling DMA to renew it at unlimited 5-year intervals then:

In those circumstances DMA would be entitled to damages assessed as set out in my conclusions under Issue 5 (last three paragraphs).

Whatever the proper effect of the Agreement Pihsiang’s counterclaim fails entirely: conclusion on Issue 6.